Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyMemorandum from the Department of Energy and Climate Change (DECC) to the Delegated Powers and Regulatory Reform Select Committee

Introduction

1. This Memorandum identifies the provisions in the draft Energy Bill which confer power to make delegated legislation. It explains the purpose of the delegated power proposed; why the matter is to be dealt with in delegated legislation; and the nature and justification for any parliamentary procedures which are proposed.

2. Most of the delegated powers are to be exercised by the Secretary of State by statutory instrument. However the Bill also confers powers on the national transmission system operator.

3. The Bill contains 50 individual provisions for delegated legislation. The Annex provides a reference for all delegated powers in the Bill.

4. The descriptions of the powers are arranged in the order that they appear in the Bill. For completeness, the narrative presented in this Memorandum describes each part of the Bill. Where there are no legislative powers conferred on the Secretary of State or others under a particular part of the Bill that is noted in the text. Ofgem is the Office of the Gas and Electricity Markets, references to Authority in this document refer to the Gas and Electricity Markets Authority by which Ofgem is government.

5. Pre-Legislative Scrutiny on the draft Bill is being carried out by the Energy and Climate Change Committee; the draft Bill was published on 22 May and is available on the DECC website here: http://www.decc.gov.uk/en/content/cms/legislation/energybill2012/energybill2012.aspx .

6. It is the Government’s aim to introduce the Bill in November, this Delegated Powers Memorandum therefore refers to the version of the Bill that was published in draft and may be subject to change.

Background

Policy context

7. Energy is essential in almost every aspect of our lives and is fundamental to the success of our economy. The Annual Energy Statement, published in November 2011, set out the Government’s plan to support the transition to a secure, safe, affordable and low-carbon energy system, and mobilise commitment to ambitious action on climate change, internationally.

8. The Government is committed to achieving its climate change and renewables targets, including a 34% reduction in its CO₂ emissions by 2020 (relative to 1990); at least an 80% reduction by 2050; and ensuring that by 2020, 15% of the energy consumed in the United Kingdom comes from renewable sources.

9. Moving to a secure, more efficient, low-carbon energy system in a cost-effective way is extremely challenging, but is achievable. It will require major investment in modern technologies: to renovate our buildings; to provide for the electrification of much of our heating, industry and transport; and to move to cleaner power generation. It will also require major changes in the way energy is used by individuals, by industry, and by the public sector.

10. Through this Energy Bill, the Government aims to further its objectives to meet the UK’s decarbonisation and renewable targets, at least cost to consumers. The Government aims to ensure continued secure energy supplies whilst creating the right conditions for markets and private investment, through greater regulatory certainty and clarity. It will do this through its programme of Electricity Market Reform (EMR); through strengthening the regulatory framework by further clarifying the role of the regulator, Ofgem; and through establishing an Office for Nuclear Regulation (ONR). In addition, the Bill makes provisions ensuring developers of offshore generating stations can test and commission offshore transmission infrastructure to export power without committing a criminal offence, before transferring the infrastructure to an offshore transmission owner.

11. Finally, the Bill makes provisions for a measure to enable the sale of Ministry of Defence (MOD) held assets, which pump aviation fuel to United Kingdom and United States airbases as well as some civilian airports—the Government Pipeline and Storage System (GPSS).

Overview of the Bill

The Bill is in four parts:

Part 1: Electricity Market Reform (EMR). In Planning our electric future: A White Paper for secure, affordable and low-carbon electricity (July 2011, http://www.decc.gov.uk/en/content/cms/legislation/white_papers/emr_wp_2011/emr_wp_2011.aspx), the Government announced its intention to legislate for structural reforms to the energy market. This will ensure future electricity generation is affordable, secure, diverse and consistent with the UK’s obligations to reduce carbon emissions and increase the use of renewables. Key elements of the reform package include:

the introduction of new long-term contracts (Feed-in Tariff with Contracts for Difference) to provide stable financial incentives to invest in all forms of low-carbon electricity generation. A contracts for difference approach has been chosen over a less cost-effective Premium Feed-in Tariff;

a capacity mechanism to ensure future security of electricity supply (the December 2011 Technical Update set out the decision to develop a Capacity Market mechanism3);

an Emissions Performance Standard (EPS) set at 450g CO₂/kWh to reinforce the requirement that no new coal-fired power stations are built without CCS, but also to ensure necessary short-term investment in gas can take place; and

a Carbon Price Floor to reduce investor uncertainty, putting a fair price on carbon and providing a stronger incentive to invest in low-carbon generation now. The Carbon Price Floor was legislated for through the Finance Act during 2011.

12. Part 2: Nuclear Regulation. This establishes the Office for Nuclear Regulation with powers and responsibilities to regulate the safety and security of the next generation of nuclear power plants, as well as to deal with the transport of radioactive materials nuclear security and safeguards more generally.

13. Part 3: Government Pipe-Line and Storage System (GPSS). This makes provision relating to the government pipe-line and storage system, in particular: the rights of the Secretary of State in relation to that system; registration of those rights; compensation in respect of the creation of new rights or the exercise of rights; that the rights may be transferred; and, the application of the Pipe-lines Act 1962 (c.58) to the system.

14. Part 4: Miscellaneous and General. Comprising of a minor measure to ensure UK offshore grid constructors can build and test infrastructure to export power without committing a criminal offence, and provisions on review, commencement and extent.

Territorial Extent and Application

15. The draft Bill extends to the constituent nations of the United Kingdom as described below. We respect the Devolution Settlements and are working very closely with the Devolved Administrations, Territorial Offices and OAG to reach high level agreement on the application of the Bill within each respective administration.

16. Due to the complex technical nature of the provisions and ongoing development of the detail in secondary legislation, discussions will continue throughout the legislation process. Aside from regular engagement across the Bill, at a formal level, officials representing each Devolved Administration sit on the EMR steering board and we are considering if a Ministerial level group would be appropriate.

17. All provisions in the Bill extend to England.

18. All provisions in the Bill apply to Wales although the Government Pipe-line and Storage System is only located in England and Scotland.

19. All provisions in the Bill extend to Scotland.

20. Subject to final approval by the NI Executive, only the following provisions will extend to Northern Ireland:

Contracts for Difference (CFD) (Part 1, Chapter 1);

Investment Instruments (Part 1, Chapter 2);

Conflicts of Interest (Part 1, Chapter 4);

Contingency Arrangements (Part 1, Chapter 5);

Some aspects of the Renewables Transitional (Part 1, Chapter 6);

Emissions Performance Standard (Part 1, Chapter 7), and

Some aspects of Nuclear Regulation (Part 2).

21. CfDs, Investment Instruments, Conflicts of Interest, Contingency Arrangements, some aspects of the Renewables Transitional and Emissions Performance Standard relate to matters for which legislative competency has been “transferred” to the Northern Ireland Assembly. Accordingly a Legislative Consent Motion is being sought from their Parliament for Westminster to legislate on its behalf.

22. It should be noted that, due to timing issues, the Northern Ireland Executive have yet to provide final approval for the extension of all of the above provisions to NI. For this reason the draft Bill does not cover extension of all of the above provisions. However, these will be extended for Introduction, subject to NI Executive approval.

23. The remaining provision, relating to Nuclear Regulation, is an “excepted” matter.

PROVISIONS FOR DELEGATED LEGISLATION

PART 1—Electricity Market Reform

Chapter 1: Contracts for Difference

Overview

24. The Government set out in the EMR White Paper 10 in July 2011 its decision to provide increased revenue certainty to low-carbon generation through use of a Feed-in Tariff following the structure of a Contract for Difference (CfD).

25. CfDs will facilitate investment in low carbon generation through removing long term exposure to electricity price volatility. CfDs stabilise returns for generators at a fixed level known as the strike price. Generators receive revenue from selling their electricity into the market as usual. In addition, when the market price is below the strike price they also receive a top-up payment from suppliers for the additional amount. Conversely if the market price is above the strike price, the generator must pay back the difference. Low carbon generators will remain active participants in the wholesale electricity market.

26. The key elements and principles of the CFD scheme are set out on the face of the draft Bill, and in the wider Command Paper within which it is published. They are also laid out in the EMR Overview document which can be found here: http://www.decc.gov.uk/en/content/cms/meeting_energy/markets/electricity/electricity.aspx . Further detailed work will be undertaken to give effect to these provisions, and elements of the mechanism such as targets and support levels will need to be updated periodically over the lifetime of the mechanism. Therefore, the Department considers that it is appropriate to address the detailed design of the scheme in secondary legislation.

Clause 1: Power to make regulations about contracts for difference

Power conferred on:	Secretary of State
Power exercised by:	Regulations
Parliamentary procedure:	Negative Resolution

27. This power allows the Secretary of State to set out the detail of the CFD scheme in regulations. The regulations will include the provision about the terms of CFDs to be issued and provision about the operation of the scheme by the national transmission system operator who will administer the scheme.

28. Prior to making the regulations, the Secretary of State is required to consult electricity suppliers (who will be subject to the obligations imposed by CFDs) the national transmission system operator, Welsh and Scottish Ministers. Many of the generic CFD terms are not intended to change substantially over time, but the terms will be of some detail. It is necessary to retain some flexibility to change terms. For example, the duration of CFD instruments may be changed where technological developments meaning the economic life of a particular station has changed or the financing sector has grown sufficiently to allow repayment over longer periods allowing savings to consumers. Industry would be consulted on any such changes.

29. It is our intention to change the level of support which will be available in CFDs periodically (such changes would only apply to CFDs issued after such changes), making a change where there is evidence of a change in costs for the technologies. For example marine is currently developing and advancing through its learning curve, we would therefore expect significant savings over the next few years, but it is not possible to accurately predict when these may happen. Allowing support levels to be set through secondary legislation allows Government to be responsive to these changes and realise any savings as quickly as possible. Equally if costs rise we would expect to be able respond to this if necessary.

30. The regulations may also confer functions on Ofgem to monitor CFDs and make certain determinations (see Clause 7). Ofgem has a number of duties under the existing Renewables Obligation, Renewable Heat Incentive and Small Scale FITs to monitor eligibility of generation stations, audit metering date, ensure biomass sustainability etc. It may be appropriate for them to continue these functions in relation to the CFD scheme.

31. The Department judges that the negative procedure is appropriate for these matters, as it strikes the right balance between giving Parliament opportunity for scrutiny, whilst recognising the powers requested allow Secretary of State to change the detail—rather than the overall purpose—of the scheme allowing maximum flexibility to respond to changing circumstances in the future in a timely manner.

Clause 2: Issuing a CFD

Power conferred on:	Transmission System Operator and Secretary of State
Power exercised by:	CFD Instrument
Parliamentary procedure:	None

32. These are powers enabling the transmission system operator and Secretary of State to issue CFDs (found in Clause 2(1) and 2(2) respectively). These powers enable support under the scheme to be given to individual projects. As such it is akin to a licensing power and is not directly subject to parliamentary control. However, exercise of this power will be subject to provision set out in the CFD regulations (made under Clause 1) and functions conferred on the transmission system operator (such functions conferred by way of licence modification under Clause 10) both of which are themselves subject to parliamentary control). It is intended that for the majority of generation projects the national transmission system operator will issue CFDs, with the Secretary of State only issuing in respect of a limited number of projects which may require individual negotiation of terms.

Clause 8: Order for maximum cost and targets relating to CFDs

Power conferred on:	Secretary of State
Power exercised by:	Order
Parliamentary procedure:	Affirmative Resolution

33. This power enables the Secretary of State to set out the maximum cost of the CFD scheme by setting a financial cap on the ability of the national transmission system operator to issue CFDs. It also provides for a power to direct the national transmission system operator not to issue CFDs if the Secretary of State determines that doing so would exceed the cost cap. The Order may also set out targets to be met with respect to the number of CFDs issued. This may assist with ensuring compliance with decarbonisation and renewables targets.

34. The need to introduce a maximum cap on costs of the CFD scheme is necessary to ensuring financial control over the scheme.

35. This power may also be used to allow technology specific targets to be set consistent with wider Government targets.

36. The manner of implementing a cost cap will be somewhat technical. Over time it is highly likely that any cap will need to be changed to reflect future circumstances.

37. The Department judges that the Affirmative procedure is appropriate as this power limits the cost of the CFD scheme and determines how the scheme is controlled to ensure Government achieves wider targets such as Carbon and Renewables targets. We believe it appropriate that Parliament should have a greater level of control over this Order making power which sets out financial limits and targets for the scheme than the regulations under Clause 1 which deal with the technical detail.

Clause 10(1): Licence Modifications for the purpose of CFDs

Power conferred on:	Secretary of State
Power exercised by:	Modification of Electricity Licence Conditions
Parliamentary procedure:	Negative Resolution

38. This power enables the Secretary of State to amend transmission and supply licences and documents (and documents maintained in accordance with those licences (such as codes) in Order to give effect to duties and obligations.

39. The powers are necessary to make amendments to the Balancing and Settlement Code (BSC) to enable the BSC company (Elexon) to assist suppliers and generators in settling payments due under CFDs.

40. The provision is also likely to be used to make amendments to transmission licences to confer some functions on the national transmission system operator necessary to allow it to issue CFDs and carry out the administration of the scheme.

41. It is necessary to have some continuing flexibility to make such changes over the course of the scheme to ensure account is taken of changes to the scheme, and ensure that the settlement mechanism remains appropriate over the course of the life of CFDs.

42. The Department has identified that there is precedent for use of this form of negative procedure for modifying licenses in this manner in section 32 of Energy Act 2010 and section 89 of Energy Act 2008. The Department judges that it is appropriate to use this procedure as the provision is of an administrative nature.

Chapter 2: Investment Instruments

Overview

43. There is a significantly high risk that investors/developers will fail to invest in low carbon electricity generation projects (particularly in relation to nuclear new build, large renewable energy projects and early stage Carbon Capture and Storage plant) in the UK until after the CFD regime established by the provisions in Chapter [1] comes into force and the regime is implemented; or indeed fail to invest in the UK at all because of the uncertainty as to the investment environment pending the implementation of that regime.

44. Given the time it will take to progress the legislation underpinning the CFD regime, transitional arrangements are needed to address this issue. The powers set out below will enable the Secretary of State to issue early investment instruments which are similar to the CFDs that will be available under the CFD regime. These instruments will be used to provide investors/developers with a sufficient level of certainty on CFDs at the right point in time to enable them to make positive final investment decisions (FIDs) in relation to low carbon electricity generation projects in advance of the main CFD regime being implemented, thus ensuring that there is not a hiatus in low carbon electricity development between now and then.

Clause 15: Secretary of State duty to issue an investment instrument

Power conferred on:	Secretary of State
Power exercised by:	Investment instrument
Parliamentary procedure:	None

45. Clause 15(1) provides for a duty on the part of the Secretary of State to issue investment instruments in certain circumstances. Inherent in that duty is a power to issue such instruments. This power will enable revenue support under the investment instruments to be given to individual projects.

46. Exercise of this power will be subject to a set of conditions (as set out in Clause 15 (2), (3) and (4)) being satisfied.

47. The power inherent in this duty is needed in order to provide investors and developers with a sufficient level of certainty about the investment instrument to enable FIDs to be made pre-enactment. It is inherently time limited as it can only be exercised in relation to investment instruments for which the necessary conditions set out above have been met during the course of the passage of the Bill.

48. The power will be exercised by the Secretary of State issuing the investment instrument, in a similar manner to CFDs issued under the CFD scheme. As with that power, this power is to be used to enable support to be given to individual projects. As such it is akin to a licensing power and is not directly subject to parliamentary control. However, it is intended that the Secretary of State will only issue investment instruments in respect of a limited number of projects which may require individual negotiation of terms.

49. Although negotiation of the terms of the instrument will take place between Government and electricity generators on a project by project basis, the scope of the terms and conditions of the investment instruments will be likely to include provisions covering the matters referred to in the supplemental power in Clause 14.

50. As is the intention in relation to CfDs, a generator and all licensed suppliers will be parties to a CFD instrument. The terms of the instrument may be enforced by the parties against each other. The instrument will require payments between suppliers and generators (and vice versa). The support level will be linked to wholesale electricity prices. When prices are low, a generator with a CFD will receive payments from suppliers, but when prices are high generators will have to make payments back to suppliers.

Clause 16: Secretary of State power to issue an investment instrument

Power conferred on:	Secretary of State
Power exercised by:	Investment instrument
Parliamentary procedure:	None

51. This is a power for the Secretary of State to issue investment instruments. The power enables revenue support under the investment instrument to be given to individual projects. Exercise of this power will be subject to a set of conditions (as set out in Clause 16).

52. As with the provisions in Clause 15 this power is needed in order to provide investors and developers with a sufficient level of certainty about the investment instrument to enable FIDs to be made in advance of the CFD regulations coming into force.

53. The power will be exercised by the Secretary of State issuing the investment instrument, in a similar manner to CFDs issued under the CFD scheme. As with that power, this power is to be used to enable support to be given to individual projects. As such it is akin to a licensing power and is not directly subject to parliamentary control. However, it is intended that the Secretary of State will only issue investment instruments in respect of a limited number of projects which may require individual negotiation of terms. The power is time limited as it can only be exercised until 31^st December 2015 or the date on which the CFD regulations first confer a power on the Secretary of State to issue a CFD.

54. Negotiation of the terms of the instrument will take place between Government and electricity generators on a project by project basis The scope of the terms and conditions of the investment instruments will be as per Clause 14.

Clause 17: Licence modifications for the purpose of investment instruments

Power conferred on:	Secretary of State
Power exercised by:	Modification of Electricity Licence Conditions
Parliamentary procedure:	Negative Resolution

55. This power enables the Secretary of State to amend transmission and supply licences and documents (and documents maintained in accordance with those licences (such as codes)) in order to give effect to duties and obligations necessary to support investment instruments. It is only intended to be used in the event that the Bill becomes law, but the main CfD regime is not implemented; in which case any investment instruments issued would not be able to rely on the CfD regime to support them, but would require their own regime to be implemented.

56. The powers are necessary to make amendments to the Balancing and Settlement Code (BSC) to enable the BSC company (Elexon) to assist suppliers and generators in settling payments due under investment instruments.

57. The provision is also likely to be used to make amendments to transmission licences to confer some functions on the national transmission system operator necessary to allow it carry out the administration of the investment instrument scheme.

58. It is necessary to have some continuing flexibility to make such changes over the course of the scheme to ensure account is taken of changes to the scheme, and ensure that the settlement mechanism remains appropriate over the course of the life of investment instruments.

59. The Department has identified that there is precedent for use of this form of negative procedure for modifying licenses in this manner in section 32 of Energy Act 2010 and section 89 of Energy Act 2008. The Department judges that it is appropriate to use this procedure as the provision is of an administrative nature.

Clause 19: Regulations for the purpose of investment instruments

Power conferred on:	Secretary of State
Power exercised by:	Statutory Instrument
Parliamentary procedure:	Negative Resolution

60. This power allows the Secretary of State to make regulations containing further provisions about investment instruments.

61. The power will be exercisable by statutory instrument, subject to the negative Resolution procedure in both Houses, and subject to consultation with the electricity generator and all electricity suppliers (who will be subject to the obligations imposed by the investment instruments), the Gas and Electricity Markets Authority and such other persons as the Secretary of State considers appropriate.

62. The negative procedure is considered appropriate as it strikes the right balance between giving Parliament opportunity for scrutiny, whilst recognising the powers requested allow SoS to make necessary arrangements in connection with (for example) settlement and other functions in relation to investment instruments.

Chapter 3: Capacity Market

Overview

63. The draft Energy Bill will enable the Secretary of State to establish a Capacity Market. A Capacity Market is an intervention in the electricity market designed to ensure that sufficient reliable electricity capacity is in place. This will operate alongside the electricity market.

64. The Capacity Market is proposed to address the significant risks to security of electricity supply that we face in the medium term as around a fifth of existing capacity is expected to close over the next decade and more intermittent (wind) and inflexible (nuclear) low carbon generation is built to replace it.

65. These changes to our market create an investment challenge, in particular for plant such as gas. This is because low carbon plant has lower operating costs, meaning fossil-fuel plant will operate less often than now and be less certain of its revenues. This could lead to under-investment and uncomfortably low levels of reliable capacity. A Capacity Market provides an insurance policy against the possibility of future blackouts—for example, during periods of low wind and high demand—with the aim of ensuring that consumers continue to benefit from reliable electricity supplies at an affordable cost.

66. The draft Bill sets out the broad framework to enable the implementation of a Capacity Market, and confers powers on the Secretary of State to implement this through regulations and any necessary changes to electricity licences and industry codes. This will enable the Secretary of State to set out the detailed rules about matters such as the eligibility criteria for capacity providers, the process for deciding how much capacity should be contracted for in a capacity auction, how capacity auctions are to be run, and how financial incentives will be calculated.

67. A significant part of the detail of the Capacity Market design requires the Department to work closely with the national transmission system operator, the Gas and Electricity Markets Authority, and industry to ensure that the mechanism is effective and fully integrated with the complex arrangements governing the operation of the current electricity market. The Department expects to undertake a formal consultation on the detailed rules governing the Capacity Market in late 2013. As such, the Department considers it necessary to implement the detailed rules through regulations.

68. In addition, it is necessary to retain flexibility on the detailed rules in order to respond to changing circumstances within the electricity market, such as the emergence of new electricity generation technologies and changes in the scope for demand reduction. Such flexibility is also required to ensure that the Capacity Market can be adapted to take account of experience gained when the mechanism has been in operation.

69. The Department therefore believes it is appropriate to set out the detail of the mechanism in secondary legislation, with amendments to licences and industry codes as necessary. The Department further considers it appropriate to enable the Secretary of State to make consequential amendment to primary legislation in order to ensure that, when the Capacity Market is implemented, it fits effectively within the existing legal framework for the electricity market.

70. Given the importance of an effective fit with the existing regulatory framework, Clause 29 confirms that where Capacity Market functions are conferred on the Secretary of State or the Gas and Electricity Markets Authority (GEMA) the principle objective and duties set out in sections 3A to 3D of the Electricity Act 1989 apply as they apply to functions of the Secretary of State and the Authority under Part 1 of that Act.

Clause 20: Power to make regulations about capacity payments

Power conferred on:	Secretary of State
Power exercised by:	Regulations
Parliamentary procedure:	Affirmative Resolution in the first instance, negative Resolution for future changes

71. Clause 20 enables the Secretary of State to make regulations for the purpose of providing capacity to meet the demands of consumers for the supply electricity in Great Britain (“electricity capacity regulations”). As stated in subsection (4), the Secretary of State can use this power to make provision about: the issuing of, and obligations under, capacity agreements (Clause 21); the running of capacity auctions and the process for deciding how much capacity will be required (Clause 22); the conferring of functions on the Authority in relation to the Capacity Market (Clause 23); the obligations of capacity market participants and persons carrying out functions under the Capacity Market (Clause 24); information requirements, including for its provision, publication and protection (Clause25); and enforcement and dispute Resolution, including appeals (Clause 26).

Clause 21: Capacity agreements

Power conferred on:	Secretary of State
Power exercised by:	Regulations
Parliamentary procedure:	Affirmative Resolution in the first instance, negative Resolution for future changes

72. This Clause enables the Secretary of State to make provision in electricity capacity regulations about capacity agreements.

73. Subsection (2) sets out that a “capacity agreement” is an instrument that places certain requirements on certain persons. It places requirements on the holder of the agreement, known as a “capacity provider”, to provide capacity. The capacity agreement also places requirements on all electricity suppliers to make payments for the benefit of capacity providers, and for capacity providers to make payments to, or for the benefit of, electricity suppliers.

74. Subsection (3) enables the Secretary of State to set out the meaning of an electricity supplier. This flexibility is important so that the Secretary of State can, if necessary, exclude suppliers who do not hold electricity licences, or who serve only a very small number of customers, from the obligation to make capacity payments to providers of capacity. This subsection also enables the Secretary of State to allow for situations that arise where a person ceases to be an electricity supplier, or becomes a new supplier, in order to address issues in relation to how the respective liability of each supplier is calculated.

75. Subsection (4) describes the particular provision that the Secretary of State may include in regulations with regard to a capacity agreement. This includes in particular the terms of a capacity agreement and its duration, who may be a capacity provider, the circumstances in which capacity must be available, the means for calculating capacity payments and capacity incentives, arrangements for the settlement of these, the enforcement of terms and settlement of disputes, termination and variation, and assignment and trading. It is essential that these matters can be designed to be a good fit with market circumstances and can be adjusted over time as the particular security of supply requirements change and the Capacity Market evolves. For instance, the length of capacity agreements may need to be adapted over time to allow the mechanism to be as effective as possible according to the prevailing market conditions.

76. There may be circumstances where not enough capacity is being contracted through the Capacity Market as a result of insufficient investment in new plant. Lengthening the duration of capacity agreements is likely to encourage new investment to be brought forward. The Secretary of State may additionally need to allow for different length contracts in different situations: for instance, long-term contracts may be necessary to provide the level of certainty required for new plants to participate in the Capacity Market.

77. Subsections (4)(b) and (5)(b) also enable the Secretary of State to set out in regulations the circumstances in which, and the process by which, a capacity agreement may or must be issued, including provision about the outcome of a capacity auction. Subsection (5)(a) enables the Secretary of State to provide for the national transmission system operator to issue these agreements. These provisions enable the Secretary of State to ensure that capacity agreements are issued in a way which is consistent with the process for determining who may be a capacity provider (referred to as capacity auctions).

78. Subsections (5)(c) and (d) enable the Secretary of State to require potential capacity providers to satisfy certain conditions, or satisfy the national transmission system operator as to certain matters, before entering an auction or becoming a capacity provider.

79. Subsection (6) confirms that regulations can include provision about the inspection of plant or premises. It is likely to be necessary for the Secretary of State to require that potential capacity providers demonstrate that they can deliver the required capacity, perhaps through physical tests of the plant, or by presenting credible financial plans and planning consents to put capacity into place. In addition, providers may need to demonstrate that they will be able to meet payments when entering into capacity agreements, for example through the demonstration of financial collateral. It is important that eligibility criteria are, and will continue to be, aligned with prevailing market conditions to support the effectiveness of the Capacity Market mechanism. There are likely to be circumstances that will require the eligibility requirements to be amended that will only become apparent during the operation of the mechanism. For instance, the Secretary of State might consider when first implementing the Capacity Market that physical testing of all plant is necessary in order to ensure that that reliable capacity is delivered, but over time it may be possible to run the scheme without such rigorous inspection requirements.

80. The Department considers that it is necessary for provision about capacity agreements to be made through secondary legislation, licence and code modifications in order to ensure that the provision fits with the existing electricity market (including through consultation with affected persons, as is required by Clause 30(2)) and to ensure that the mechanism can respond to prevailing market conditions.

Clause 22: Capacity auctions

Power conferred on:	Secretary of State
Power exercised by:	Regulations
Parliamentary procedure:	Affirmative Resolution in the first instance, negative Resolution for future changes

81. This enables the Secretary of State to make provision in electricity capacity regulations for the determination on a competitive basis of who may be a capacity provider (referred to as a capacity auction). It is intended that capacity auctions will be administered centrally by the national transmission system operator and will be used to contract the capacity required for a particular delivery period.

82. This Clause enables the Secretary of State to set out in regulations the process by which decisions will be taken with regard to the volume of capacity to contract for in a particular auction. Any decision about how much capacity to contract for requires the decision maker to balance the risk of there being insufficient capacity in a particular delivery year (which could result in blackouts) with the cost of protecting against this. It is necessary to establish a process which enables the necessary trade-offs to be made, on an auction by auction basis, but which still gives market participants sufficient information to enable them to bid into the capacity auction. The Department considers that it is necessary for the Secretary of State to set out this process in regulations, to enable a process to be established to allow these complex trade-offs to be made. In order to ensure that there is sufficient certainty as to the way in which his powers are to be carried out, subsections (2)(f) and (4) enable the Secretary of State to make provision about such matters as the frequency with which he will take decisions, consultation and the matters which he is to take into account. However, the Department believes that it is not desirable to set these out in primary legislation as it may be necessary for these matters to change over time.

83. This Clause also enables the Secretary of State to require the national transmission system operator to run capacity auctions and to set out in regulations how auctions are to be run, including the circumstances in which they are to be held and at what intervals, the process which is to be followed and the amount of capacity required. It is important that the Secretary of State has flexibility to ensure that capacity auction design can properly reflect any technical considerations that may be raised during consultation with industry. Particular considerations include how matters such as the location of capacity and the type of capacity are to be addressed in the auction (including whether separate auctions should be carried out for different locations or types of capacity).

84. In addition to the need to be able to consult before implementing any capacity auction design, ongoing flexibility within the auction process is needed to respond to changes in the electricity market. This could include innovation within generation or non-generation technologies. For example, while demand side response (DSR) currently makes up a small part of the current market, it may make up a larger part as a result of technological advances or further development in the market for aggregation of DSR. Furthermore, there may be changes to the European market: the extent of interconnection that GB has with other countries, and/or the development of the rules on how interconnection is treated in national markets would necessitate amendment of the auction design.

85. In addition to the particular requirements set out in the regulations, subsection (3) enables the Secretary of State to make provision in regulations requiring the national transmission system operator to prepare and publish rules or guidance about capacity auctions, in accordance with any process set out in the regulations. This will enable the national transmission system operator to set out the technical arrangements through which the auction is to be run, including in particular such matters as the application process for persons bidding into the auction (for example, by describing what documentation must be completed and the timeline for doing so) and how the auction will be conducted. The Department considers that this provision is necessary in order to enable the national system operator to ensure that the way in which auctions are run, and the application process, can be adjusted readily, and tailored to a particular auction if necessary (eg if different auctions are used to contract for different types of capacity). Given the technical and logistical nature of these rules and guidance, we consider it is appropriate for this power to be delegated to the national system operator, provided that it complies with any process specified by the Secretary of State under subsection (3)(b).

Clause 24: Other requirements

Power conferred on:	Secretary of State
Power exercised by:	Regulations
Parliamentary procedure:	Affirmative Resolution in the first instance, negative Resolution for future changes

86. This Clause enables the Secretary of State to make provision to impose other requirements, in addition to those arising in relation to capacity agreements, on licence holders, persons carrying out functions under the Capacity Market and any other person who is, or has ceased to be, a capacity provider.

87. Subsection (3) confirms that such requirements may, in particular, include requirements relating to the manner in which functions are to be exercised, restrictions on the use of generation plant and participation in a capacity auction and the inspection of plant or property.

88. In relation to restrictions on the use of generation plant and participation in a capacity auction, the Secretary of State may need to impose obligations on the holders of generating licences to ensure that market power is not abused. It may be necessary to impose restrictions on the way in which generators must operate any plant which is not subject to a capacity agreement. Without such restrictions a person who owned more than one generating plant could potentially withhold some capacity from the capacity auction in order to drive up prices in the auction and allow their other plant to benefit. This would increase the costs of the Capacity Market, which would ultimately be passed down to consumers, without contributing to security of electricity supply. Due to the complex trade-offs associated with such requirements, the difficulties in identifying the potential for market power to be exercised, and the potential impact on the way in which existing generating stations are operated, it is necessary to consult with interested persons—including, in particular, those who will be affected by the requirement—before implementing such requirements.

89. In making provision regarding the manner in which functions are carried out, the Secretary of State may require a person to follow particular processes (eg for the national transmission system operator to seek input from the Authority in preparing particular advice), to have regard to certain matters when exercising a function, or to comply with requirements regarding a particular format (eg to provide advice, or report on activities). The requirements may change with time. The need to consider certain matters, or to seek input, when preparing advice regarding the operation of the Capacity Market may also change as the market changes, for example, as different types of technology increase their role in the provision of capacity.

90. Equally the format of any report may need to be aligned with similar documents produced in relation to other aspects of energy policy (for example Contracts for Difference (CfDs)), and so the requirements for this may change as those policies develop. It is also essential that requirements on the holders of generating licences may be changed to reflect the evolution of the Capacity Market. If—as is likely—the Capacity Market does evolve with experience gained through its operation, the opportunity for exercising market power and the appropriate means to mitigate this risk by imposing requirements on generators is also likely to change.

91. In relation to the inspection of plant or property, this provision supplements the provision in Clause 21(6), by enabling the Secretary of State to require compliance with inspection requirements otherwise than as a condition of entry into an auction. Such a requirement may be needed, in particular, where a person has ceased to be a capacity provider (eg if they have assigned or traded their capacity agreement) in order to determine whether they complied with their obligations while they held that agreement. Such a requirement may also be needed in order to verify matters associated with any restrictions regarding the use of capacity (described above). The Department considers it necessary to take delegated powers to achieve this in order to enable the Secretary of State to consult affected persons before imposing any such inspection requirements, and to enable these requirements to be developed over time as the Capacity Market evolves.

Clause 25: Information

Power conferred on:	Secretary of State
Power exercised by:	Regulations
Parliamentary procedure:	Affirmative Resolution in the first instance, negative Resolution for future changes

92. This Clause allows the Secretary of State to make provision in regulations for the provision, publication and protection of information, in particular requirements that information be provided to the Authority, the national transmission system operator, the Secretary of State or any other person specified in regulations.

93. It will be necessary for the Secretary of State to seek advice and information to inform his decisions on whether to begin auctioning for capacity and how much capacity to contract for in the first and subsequent auctions, and any other functions conferred on him by electricity capacity regulations. Such advice and information will be based on complex modelling forecasts of available capacity and electricity demand. The information required, and the form in which it is required, may also change as better and more sophisticated modelling and improved data become available. Changes to provisions may also be needed as new and existing technologies (such as storage and DSR) take a larger part in the Capacity Market.

94. There are other examples where particular information will be needed by the Authority, the national transmission system operator and/or the Secretary of State in order to effectively carry out responsibilities under the Capacity Market. In particular, the collection and sharing of information about whether capacity providers complied with requirements to provide capacity when required under their capacity agreement will be essential to the effective operation of the Capacity Market. In addition, the gathering and processing of up to date information about the market share of electricity suppliers will be essential to the determination of the extent to which each supplier must contribute towards the cost of capacity payments.

95. Specifying precisely what information is required for processes such as the ones described above requires complex analysis of the way in which the Capacity Market will operate alongside the electricity market, and will require careful consideration and consultation with the Authority, the national transmission system operator and across the industry. It is therefore necessary for these arrangements to be put in place through regulations in order to enable full consultation before these obligations are implemented, as provided for in Clause 30.

Clause 26: Enforcement and dispute resolution

Power conferred on:	Secretary of State
Power exercised by:	Regulations
Parliamentary procedure:	Affirmative Resolution in the first instance, negative Resolution for future changes

96. This Clause enables the Secretary of State to make provision in regulations for functions to be conferred onto the Authority, any public body or any other person in respect of the enforcement of the rules of the Capacity Market, including imposing financial penalties and making provision for appeals and dispute resolution.

97. Provision for enforcement, appeals and disputes must be designed to work within the existing market. The electricity market currently provides for various different enforcement, dispute resolution and appeal mechanisms, depending on the particular nature of the obligation. This includes the enforcement regime set out in sections 25 to 28 of the Electricity Act 1989, which enables the Authority to impose enforcement Orders and fines on licence holders and certain other persons. The Electricity Act provides for the Authority to act as a dispute resolution body in certain cases (eg in relation to connection disputes, under section 23). That Act also provides, in relation to other matters, for appeals to the Competition Commission, and formal and informal disputes processes are set out in industry codes, including in particular reference to arbitration. Given the need to ensure that the Capacity Market operates effectively in this context, careful consideration and consultation with industry is important before provision is made as to these matters, which is best achieved through using secondary legislation.

98. The Secretary of State needs the flexibility to set out the detail of the arrangements governing the Capacity Market in regulations so that the views of interested persons can best be taken into account and in order to ensure that the Capacity Market operates effectively in parallel with the complex and technical electricity market. In addition, flexibility is needed to ensure that these arrangements can be amended over time to account for experience gained in running the Capacity Market and developments in the relevant technologies taking part, as well as wider energy policy.

99. Subsection (5) of Clause 30 provides that the first set of electricity capacity regulations should be made subject to the Affirmative Resolution procedure. The Department judges that due to the scale of the initial intervention in the electricity market and the potential significance of the regulations, which will set out in detail the key elements of the scheme. However, once the Capacity Market has been implemented through the first electricity capacity regulations, such intensive Parliamentary scrutiny will become unnecessary as such changes are expected to be technical and incremental, reflecting developments within the electricity market and the Capacity Market, and are unlikely to give rise to issues of broader interest.

100. Subsection (6) therefore provides that subsequent electricity capacity regulations should be made subject to the negative Resolution procedure (unless they amend or repeal an enactment, in which case the Affirmative Resolution procedure must be followed). We note that a similar approach has been taken in the past, including in particular in section 48 of the Climate Change Act 2008, where provision was made for the first regulations made under Part 3 of that Act to be subject to the Affirmative Resolution procedure (subsection (4)), but for subsequent regulations to be subject to the negative Resolution procedure (subsection (5)). Section 43 of the Welfare Reform Act 2012 is another example of this approach, as regulations made under subsection (3) are subject to the Affirmative procedure on the first exercise of the powers, while subsection (2) provides for later regulations to be subject to the negative Resolution procedure.

Clause 27: Licence modifications for the purpose of the capacity market

Power conferred on:	Secretary of State
Power exercised by:	Licences
Parliamentary procedure:	None

101. This Clause enables the Secretary of State to modify the conditions of generation, supply, transmission, distribution and interconnector licences granted under the Electricity Act 1989, and industry codes and agreements which are maintained under those licences. The power may only be used for a purpose related to provision that may be made by or under the chapter.

102. Licences granted under the Electricity Act 1989 and industry codes form a core part of the existing arrangements governing the GB electricity market, and the Department anticipates the various amendments will be required to licences and codes in order to effectively address the complexity of full integration of the Capacity Market with existing electricity market arrangements.

103. In addition to the modification of existing codes, it may be necessary for the Secretary of State to require the creation and maintenance of a new industry code, as anticipated by subsection (2)(a) and (b). In particular, it is envisaged that the Secretary of State may wish to use a new code (or amend an existing code) to set out the technical arrangements governing matters such as the settlement of money payable under the Capacity Market. Such codes are currently used to set out detailed arrangements relating to the electricity market—for example, the Balancing and Settlement Code does this in relation to the balancing of the national transmission system by the national transmission system operator (including, in particular, the way in which sums payable under the balancing arrangements are to be settled). The use of a code as a vehicle to set out particular technical obligations in relation to participants in the Capacity Market is likely to be appropriate in order to fit with current industry practice.

104. Subsection (5) requires the Secretary of State to consult the holders of any licence being modified, the Authority and other persons the Secretary of State considers appropriate before making any changes under this power. Subsection (7) further requires the Secretary of State to publish details of modifications after these have been made. This is consistent with the requirements set out in section 8A of the Electricity Act 1989, which set out the procedure which the Authority must follow before making any changes to the conditions of licences issued under that Act.

105. The Department considers Parliamentary scrutiny is not required for this power. The Department recognises that Parliamentary scrutiny is being provided for in relation to licence and code modification powers in other aspects of this Bill. However, the Department considers that it is appropriate not to provide for such scrutiny here given the detailed, technical nature of the modifications to licences and industry codes which are envisaged in order to ensure the effective implementation of the Capacity Market, and the provision which is being made for electricity capacity regulations to be subject to the Affirmative Resolution procedure.

106. The Department considers that there is no reason in principle that Parliamentary scrutiny should necessarily be required for licence and code modifications, and that it is necessary to consider the powers being taken on a case by case basis to determine whether scrutiny is required. The Department notes in particular that the powers taken to modify licences and codes in sections 17 to 20 and 76 to 98 of the Energy Act 2011 do not provide for such scrutiny. It may also be noted that the Authority would be able to make equivalent provision using its powers under section 8A of the Electricity Act 1989 without being subject to Parliamentary scrutiny.

Clause 28: Amendment of enactments

Power conferred on:	Secretary of State
Power exercised by:	Regulations
Parliamentary procedure:	Affirmative Resolution

107. This Clause allows the Secretary of State to amend or repeal section 43ZA of the 1989 Act regarding the annual report by Gas and Electricity Markets Authority on security of electricity supply; amend section 172 of the Energy Act 2004 regarding the Secretary of State’s annual report on security of energy supplies; amend section 25 of, and Schedule 6A to, the Electricity Act 1989 regarding enforcement of obligations of regulated persons; and to make consequential amendments (or repeals or revocations) to any other enactment as the Secretary of State considers appropriate.

108. In relation to paragraphs (a) and (b) of this Clause, the current reporting requirements of the Electricity Act 1989 and Energy Act 2004 require that the Authority provide a report to the Secretary of State on the capacity required for electricity security of supply. This informs the Secretary of State’s own assessment of what electricity capacity is required, which is published. The information contained in the Authority’s report, and the views expressed in the annual report, will be very similar to the information which the Secretary of State will need to exercise functions conferred on him by electricity capacity regulations, including in particular when deciding the amount of capacity which should be contracted for in a particular capacity auction. However, it is likely that the Authority’s statutory reporting requirements and the annual report will not continue to be fit for purpose as the capacity market is implemented and evolves, potentially leading to duplication and confusion. This Chapter therefore makes separate provision to enable the Secretary of State to require the provision of advice and information (see Clause 25).

109. For example it may be more appropriate for the national transmission system operator, as the administrator of the Capacity Market, to be required to provide information rather than the Authority. Therefore the provisions in (a) and (b) would be used to amend the Acts to avoid duplication and contradiction. In relation to section 43ZA of the 1989 Act in particular, it is possible that it will not be possible to amend that section in a way that is compatible with the Capacity Market. If so this Clause will enable the section to be repealed, and the relevant information and advice requirements will be set out in electricity capacity regulations.

110. It is critical that the information requirements described above support the process by which the Secretary of State would take decisions, and exercise any other functions, conferred on him by electricity capacity regulations. As a result, flexibility is needed to update requirements on the scope of information provided as this decision-taking process develops to ensure that reporting requirements feed in appropriately.

111. Paragraph (c) allows for the amendment of the Electricity Act 1989 to ensure that certain obligations of participants in the Capacity Market can be enforced by the Authority under the civil enforcement regime set out in the 1989 Act. Making provision for Schedule 6A to be changed for this purpose, rather than making provision in regulations, will increase transparency for market participants as it will allow them to readily see what obligations the Authority can enforce through its civil enforcement regime. We anticipate that Schedule 6A of the Electricity Act will need to be amended so that the persons subject to the enforcement regime are listed in here, referencing the particular obligations they are subject to. For example, providers of Demand Side Response (DSR) are not subject to the current civil enforcement regime and so are not currently mentioned in section 25 or Schedule 6A of the Electricity Act.

112. These amendments could not be set out in primary legislation before the Secretary of State makes electricity capacity regulations setting out the obligations of Capacity Market participants. Consequently it is appropriate for a delegated power to be given to the Secretary of State to use regulations to make any necessary amendments to the existing legislation (or to repeal it in relation to the provision in Clause 28, if this is required) for effective implementation of the capacity market.

113. This is a Henry VIII power and therefore the Affirmative Resolution procedure is considered to be appropriate.

Chapter 4: Conflicts of Interest

Overview

114. 4A robust, transparent and credible institutional framework is crucial to the success of EMR, and is important to provide investors with the confidence they need to invest. The Government, the System Operator and Ofgem will have clear and distinct roles to ensure effective delivery of EMR:

Government will retain control of the policy approach and decisions; such as the CfD strike prices during administrative price-setting, and then auction volumes during competitive price setting; as well as any security of electricity supply objective and the volume of capacity to contract for the Capacity Market (these mechanisms are explained in more detail later in this document). Government will also be responsible for defining the terms of the System Operator’s delivery role.

The System Operator will provide evidence and analysis to inform Government’s decisions. The System Operator will also administer the CFD and the Capacity Market and report to the Government on delivery.

Ofgem will regulate the System Operator and oversee its performance in delivering the CFD and Capacity Market, to ensure value for money and incentivise effective performance. Government proposes that the System Operator recovers its administrative costs through a system which builds on the existing incentive regime.

115. Further details on the respective roles and responsibilities of the Government, the System Operator and Ofgem will be set out later in the Autumn and in secondary legislation in 2013–14. The further definition of the roles will take into account the joint work by DECC and Ofgem to assess synergies and any potential conflicts of interest for the System Operator in delivering EMR policies and to devise any necessary mitigations.

116. This Chapter gives the Secretary of State powers to address potential conflicts of interest. In conferring the delivery functions of the Contracts for Difference and Capacity Market on the national transmission system operator, a private company (National Grid), there is a potential risk of conflict of interest arising between its new EMR functions and its existing role and interests in the energy market, including its ownership of transmission infrastructure. These powers may be needed because the role of the national transmission system operator in administering Contracts for Difference, Investment Instruments and the Capacity Market could give it influence over the type and location of future electricity generation infrastructure.

117. The potential for such conflicts of interest and any appropriate mitigating measures is subject of a joint project between DECC and Ofgem which will report in late 2012, after the Bill has been introduced.

Clause 31: Transmission licences: new licence for system operation

Power conferred on:	The Secretary of State
Power exercised by:	Order and licence/code modifications
Parliamentary procedure:	Affirmative; Negative and None

118. Clause 31 gives the Secretary of State power to amend the licensable activity of “transmission” in the Electricity Act 1989 in order to separate the activities of transmission and system operation into two separate licensable activities. These powers give the Secretary of State the option of reinforcing the legal separation between National Grid’s system operator business (including the national transmission system operator’s obligations to administer the CFD, Investment Instrument and capacity mechanism) and its other activities by creating a new licensable activity for system operation. As set out above, the need for such measures is subject of a joint DECC/Ofgem project which will report by the end of 2012, after the Bill has been introduced. Use of the power will depend on the outcome of that project.

119. Clause 31 sets out that any Order making changes to primary legislation, for example the Electricity Act 1989, to amend the category of transmission licence and create a licensable activity for system operation will be subject to the Affirmative procedure. The Clause sets out that an Order amending or repealing secondary legislation, or making such provision together with standard licence conditions for the new system operation licence or other licence and code modifications would be subject to the negative procedure.

120. Clause 31 provides that there would be no parliamentary procedure for any instrument which set out only the standard conditions for a new system operation licence and any modifications to other electricity licences and industry codes. In line with the above, the Department considers that Parliamentary scrutiny of the standard licence conditions, and licence and code modifications made through these powers is not necessary. The key measures to amend the Electricity Act to separate the licensable activity of transmission will be subject to Affirmative parliamentary scrutiny. Any licence and code modifications made in a separate instrument would be limited in scope and very technical in nature. They would be concerned with separating out the standard conditions applicable to system operation from those which are applicable to transmission, and making other transitional and consequential changes to other electricity licences and industry codes which may be necessary as a result of the removal of system operation activities from a transmission licence.

Clause 32: Modifications of transmission licences: business separation

Clause 33: Section 29—Supplementary

Power conferred on:	The Secretary of State
Power exercised by:	Licence and code modifications
Parliamentary procedure:	None

121. Clause 32 provides that the Secretary of State may modify the conditions of electricity licences and codes for the purposes of imposing business separation measures between: a) the national transmission system operator, EMR and system operation functions (or any combination of these); and b) any other functions, where this is necessary or desirable as a result of the conferral of new functions on the national transmission system operator to deliver Contracts for Difference, Investment Instruments and the Capacity Mechanism. Subsections (2) to (4) set out the scope of the power and make clear that it is limited to business separation measures which may be needed as result of the conferral of functions in relation to the Contract for Difference, Investment Instruments and the Capacity Mechanism. Subsection (5) gives a non-exhaustive list of the types of measures which might include, for example, requiring functions to be carried out in a separate location or on separate IT systems. The power is therefore clearly prescribed in the primary legislation.

122. Clause 33 requires the Secretary of State to consult the holders of licences of the type being modified, Ofgem and any other persons that the Secretary of State considers appropriate before making any modifications. There is also a requirement to publish any such modifications as soon as reasonably practicable after they are made.

123. The Department considers that parliamentary scrutiny of licence or code modifications made through these powers is not necessary. This approach has been followed in respect of similar powers to modify licence conditions and industry codes. For example, the powers to make licence modifications in relation to (i) offshore transmission or distribution (section 90 Energy Act 2004), (ii) establishing new electricity trading and transmission arrangements (sections 133 and 134 of the Energy Act 2004), (iii) access to transmission systems (sections 84 to 86 Energy Act 2008) and (iv) schemes for reducing fuel poverty (section 12 Energy Act 2010) are not subject to parliamentary scrutiny.

124. There have been some cases in the Energy Acts of 2008 where licence modifications have been subject to a level of parliamentary scrutiny which is equivalent to the negative procedure. This has been included in cases where it has been considered that the modifications are of particular public interest, and where a policy has been implemented primarily through licence modifications. These have included modifications relating to the introduction of a feed-in tariff (sections 41–43 Energy Act 2008) and smart meters (sections 88–90 Energy Act 2008).

125. In this case, the Contract for Difference and Capacity Market schemes are set out in legislation and subject to parliamentary scrutiny. The licence and code modifications made through the power in this section will simply address any conflicts of interest associated with the carrying out of these functions. The modifications will be limited in scope and technical in nature, primarily affecting the transmission and national transmission system operator, National Grid, who will be consulted.

Chapter 5: Contingency Arrangements

and

Schedule 1: Transfer schemes in connection with Orders under Section 34

Overview

126. This chapter provides the Secretary of State powers to act in cases where the national transmission system operator becomes unable to continue delivery of the capacity mechanism and the contract for difference schemes. These powers enable the delivery functions to be conferred on a new delivery body in place of the national transmission system operator in circumstances such as insolvency, change of ownership and where the national transmission system operator is failing to carry out the functions properly.

Clause 34: Power to transfer EMR delivery function

Power conferred on:	The Secretary of State
Power exercised by:	Order
Parliamentary procedure:	Negative

and

Schedule 1: Transfer schemes in connection with Orders under section 34

Power conferred on:	The Secretary of State
Power exercised by:	Transfer Scheme
Parliamentary procedure:	None

127. Clause 34 confers a power on the Secretary of State to transfer the EMR delivery functions from the national transmission system operator to a different delivery body. The power is exercisable by Order subject to the negative Resolution procedure.

128. Chapters 1 and 3 of the Bill confer functions, or enable the Secretary of State to confer functions, on the national transmission system operator to perform delivery functions under the CFD and capacity market schemes. The national transmission system operator—currently National Grid Electricity Transmission plc—has the role of coordinating the flow of electricity across the high-voltage transmission networks of Great Britain, and is licensed to perform that role under section 6 of the Electricity Act 1989 and regulated by the Gas and Electricity Markets Authority.

129. The Department considers that the national transmission system operator is particularly well-suited to carry out the role of delivery body for the CFD and Capacity Mechanism schemes. However, it is possible that circumstances may change, and the department considers it prudent to be able to confer the EMR delivery functions on a different delivery body if necessary, in order to ensure that the EMR schemes are successful.

130. This power therefore enables the Secretary of State to transfer the functions to another, consenting, delivery body. The functions may be transferred to the Secretary of State or to any other public or private sector body the Secretary of State considers appropriate. In Order to give practical effect to the transfer of the functions, Schedule 1 confers on the Secretary of State a power to transfer property, rights and liabilities in connection with a transfer of the functions.

131. The power may only be exercised in four situations—

where the national transmission system operator has become insolvent;

where there has been a change of ownership of the national transmission system operator and, as a consequence, the Secretary of State considers that it is necessary or desirable to transfer the functions;

where the Secretary of State considers that the national transmission system operator is failing to perform its functions effectively and efficiently; and

there the Secretary of State considers that it is necessary or desirable to transfer the functions in order to further the purposes of the EMR schemes (for the CFD, the purpose of encouraging low carbon investment; for the capacity market, the purpose of providing capacity to meet the demands of electricity consumers).

132. The power also enables the Secretary of State to make consequential amendments to legislation. It is envisaged that these would be used to amend the provisions in the Chapters 1 and 3 of the resulting Energy Act, and any subordinate legislation made using the enabling powers conferred by those sections; it is not obvious that any other enactments would need to be amended as a result of a decision to transfer the EMR delivery functions to a different person.

133. The department cannot foresee a time when it would definitely want the EMR delivery functions to a different body, only situations where it might wish to. Similarly, the department cannot be sure which EMR delivery functions might need to be transferred in such a situation. Finally, it cannot tell in advance which person will be in the best position to take over the EMR delivery functions.

134. The need for an exercise of discretion, tailored to the facts at the time, means that the department considers that that the Secretary of State should be given a power to determine the most appropriate way to deal with the situation if it should arise.

135. It is also likely that, in any one of the situations described in the power, the department will wish to take action more quickly than would normally be compatible with the timetable primary legislation allows. That likelihood of the need for a quick response also suggests that a delegated power is appropriate. The power to make transfer schemes cannot be exercised independently of the power to make in an Order under Clause 34.

136. It is similarly fact sensitive, and it is not possible to know at this stage what property rights and liabilities may need to be transferred to perfect the transfer of the functions. In addition, transfer schemes tend to be highly technical in nature and it is appropriate for the function of drawing them up to be delegated.

137. The power is exercisable by Order under the negative Resolution procedure. The department considers that this is an appropriate procedure because it balances the need for proper scrutiny with the potential need for the power to be exercised quickly in certain circumstances.

138. The power is a Henry VIII power insofar as it enables the Secretary of State to make consequential amendments to primary legislation; however, the department considers that the nature of that Henry VIII power is particularly narrow, because its main use is likely to be limited only to allowing the Secretary of State to make the very amendments envisaged by the granting of the power itself. In other words, the granting of the power to transfer EMR delivery functions contains within it the natural implication that references “the national transmission system operator” in Chapters 1 and 3 would be changed to some other words.

139. So, while Henry VIII powers are usually subject to the Affirmative Resolution procedure, in this particular case the department considers that the potential need to act quickly—particularly in a situation where the national transmission system operator were to be become insolvent or were subject to a significant change of ownership—outweighs the desirability of debate before any amendments to primary legislation could be made. Parliamentary debates cannot in practice be arranged during recess or prorogation, and that might limit the Secretary of State’s power to act quickly to ensure the effective delivery of the schemes if an event were to take place at a time incompatible with Parliamentary timetable.

140. As is usual, the power to make transfer schemes is not subject to any parliamentary procedure. Transfer schemes are technical and often contain detail that is commercially sensitive, confidential or which are personal data. It is therefore usually inappropriate for transfer schemes to be published, laid before Parliament and scrutinised.

Chapter 6: The Renewables Obligation: Transitional Arrangements

Overview

141. This Chapter contains new powers for a Certificate Purchase Order which is intended to replace the existing Renewables Obligation Order (ROO) for the final 10 years of its operation from April 2027 to March 2037. The Certificate Purchase Order will impose an obligation on the Gas and Electricity Markets Authority or the Secretary of State to purchase certificates which have been issued to generators of renewable electricity. The Order will replace the current Renewables Obligation on designated electricity suppliers with a levy which will be used to fund the purchase of the certificates. The Order will fix the price of the certificates. This is intended to provide confidence in the final ten years of support for those generating stations supported under the Renewables Obligation (RO) following its closure to new generation in March 2017. This confidence is important for potential investors and developers taking long-term investment decisions, in order to encourage the construction and operation of renewable electricity generating stations.

142. In summary, this chapter confers new powers on the Secretary of State for the transition from the Renewables Obligation to a Certificate Purchase Scheme. The powers are for the Secretary of State to make a certificate purchase Order which imposes a certificate purchase obligation on the Authority or on the Secretary of State; to make provision generally in relation to the certificate purchase obligation; to provide for a certificate purchase levy which is charged in respect of supplies of electricity; to provide for the issue of fixed price certificates and to make various other provision.

Clause 35: Renewables Obligation—Transition to certificate purchase scheme

and

Schedule 2: The Renewables Obligation: certificate purchase scheme

Power conferred on:	Secretary of State
Power exercised by:	Order
Parliamentary procedure:	Affirmative Resolution

143. The Electricity Act 1989 contains existing powers in Section 32 to 32M for the Secretary of State to make a Renewables Obligation Order. This Clause uses many of those powers as a model for the powers to make a certificate purchase Order, but with changes and additional powers to reflect the different characteristics of a certificate purchase scheme. Some of the powers that differ from the powers for the renewables obligation are mentioned below.

144. The Clause includes power to impose a levy in respect of supplies of electricity (s.32AC), and for the funds raised by the levy to be used to enable the discharge of the Certificate Purchase Obligation by the Authority or by the Secretary of State (s.32AD). The levy would act as a replacement for the Renewables Obligation which is currently imposed on electricity suppliers.

145. The Clause includes power to require electricity suppliers to make up shortfalls in the amounts due to be collected by the levy in cases of insolvency or missed payment (s.32AC(9)). This is considered appropriate as electricity suppliers can currently be required to make up shortfalls in the amounts due in respect of the Renewables Obligation (s.32G(5) of the Electricity Act 1989).

146. Schedule 2 includes power to impose restrictions and conditions on the transfer of fixed price certificates (s.32CA(3)). This may be necessary to prevent fraud. The Schedule also includes power to provide for sums to be repaid to the Authority if a certificate has been wrongly issued and subsequently purchased by the Authority or by the Secretary of State, and if it is not possible to refuse the issue of another certificate in its place. This is necessary to prevent the operator of a generating station from benefiting from a certificate that they should not have been issued with.

147. The schedule includes power to specify the amount of electricity that has to be generated in order to receive a certificate, and for a banding review to be carried out before making subsequent Order containing such provision. The need for a banding review will not apply if the effect of the subsequent Order is to preserve the effect of the earlier banding provision in a Renewables Obligation Order or in a certificate purchase Order (s.32EA(4)). This will enable a transition from the RO to the certificate purchase scheme without changing the levels of support for grandfathered generating stations.

148. The schedule includes power to make the operation of a banding provision conditional upon the repayment of a grant (s.32EA(7)). The interest rate and period on the amount repayable may be determined in accordance with the Order or by a person. Given the range of persons that may have paid the grant, this will enable the Order to confer the function on the person who paid the grant, or on some other appropriate person.

149. The powers for a Certificate Purchase Order are put in place alongside the existing powers for the Renewables Obligation Order as it is intended to make a certificate purchase Order far in advance of it coming into force in 2027 in Order to provide greater certainty for investors in generating capacity.

150. The Department believes that it would not be appropriate to set out the detail of the certificate purchase scheme on the face of the Bill. As with the Renewables Obligation Order, the detailed design of the Certificate Purchase Order is suited to secondary legislation as it involves technical issues and ones where consultation on the detail will be necessary.

151. As with the Renewables Obligation Order, we consider Affirmative Resolution is appropriate for a certificate purchase Order given its impact on investment decisions for renewable generating capacity. Another relevant factor is that a certificate purchase Order may impose a levy.

Chapter 7: Emissions Performance Standard

Overview

152. The Emissions Performance Standard (EPS) will limit emissions from new fossil-fuelled power stations and CCS plant associated with them, reinforcing the existing policy (set out in National Policy Statements under the Planning Act 2008) that no new coal-fuelled plant should be built unless equipped with CCS.

153. The Chapter establishes the EPS as an annual limit on emissions, equivalent to 450g of CO₂ per kilowatt hour of electricity for a plant operating at baseload. This is below the level expected of new coal-fuelled plant when operating unabated, which is nearly 800g/kWh. It is, however, above the level of modern combined cycle gas-fired power stations, which operate below 400g/kWh.

154. The provisions establish a method of excepting plant which form part of the UK’s CCS Programme or benefit from European Union or Contract for Difference (under Chapter 1 of Part 1) funding for commercial scale CCS. Providing exceptions for such plant reduces regulatory risk and, therefore, supports the development of CCS technology.

155. The Clauses provide for the making of regulations about monitoring and enforcing compliance with the limit, with a view to basing both monitoring and enforcement arrangements on those for the EU Emissions Trading System, so as to minimise regulatory duplication. Provision is also made to apply the emissions limit duty with or without modification in a range of non-standard scenarios.

Clause 36(5)(a)—Duty not to exceed annual carbon dioxide emissions limit

Power conferred on:	Secretary of State
Power exercised by:	Regulations
Parliamentary procedure:	Affirmative Resolution

156. The powers to make regulations under Clause 36 serve two principal purposes. In the first place, it is necessary to make provision about the precise scope of the emissions limit duty set out in Clause 36(1) and its application in a range of scenarios; secondly, it is necessary to provide for compliance with the emissions limit to be monitored and enforced. In both cases, the level of technical detail involved in such provisions and their close relationship to provision made in respect of similar matters in other legislation make them appropriate for inclusion in secondary legislation.

157. Clause 36(5)(a) specifically provides the Secretary of State with the power to make regulations relating to the interpretation of the emissions limit duty imposed by Clause 36(1). Subsections (6) and (7) provide particular details that the regulations can cover.

158. Subsection (6)(a) and (6)(b) provide for regulations to determine the emissions from fossil fuel plant and whether they are attributable to the use of fossil fuel.

159. Subsection (6)(c) makes reference to the use of fossil fuels for ancillary purposes. This is partly to ensure that incidental use of fossil fuels by biomass or energy from waste plant does not cause them to be regarded as fossil fuel plant for the purposes of the EPS and partly because gas and coal fuelled generating stations may sometimes include small generating units used eg for emergency purposes, that are separate from the main plant and whose emissions would not otherwise require separate monitoring.

160. Subsection (6)(d) provides for regulations to determine when plant ceases to be, or to be part of, fossil fuel plant.

161. Subsection (6)(e) provides for regulations to specify the meaning of “installed generating capacity,” relevant to calculating a plant’s emission limit under 36(1), “fuel produced by CCS plant”, and “constructed pursuant to a relevant consent.” This will provide flexibility for technology development and to clarify the position where a plant is built in stages or under a series of different consents.

162. In order to minimise administrative burdens on operators, the specification of the scope of the emissions limit duty in regulations may make reference to the requirements of regulations that implement the EU Emissions Trading System (EU ETS) from time to time (subsection (6)(f)) for example, in ensuring that the same emissions that count towards the retirement of EU ETS allowances count towards the emissions limit duty established in this chapter. It is important, therefore, that there is sufficient flexibility to adapt the requirement where there is a change in the EUETS requirements.

163. Subsection (7) provides for regulations to include provision to exclude emissions associated with the use of fossil fuel for heat supply from the calculation of a plant’s emissions. Good Quality (ie efficient) use of combined heat and power (CHP) in combustion generating stations will be a key technology in helping to deliver our carbon budgets while the electricity generation sector decarbonises, and will still play a pivotal role in providing secure and cost-effective energy supplies, particularly for industry. The Government will therefore continue to promote the development of Good Quality CHP in the UK, and it is important that the EPS make allowances for the fuel used to generate useful heat when calculating allowed emissions to ensure that CHP facilities are not penalised.

164. Accordingly, the Clause provides for emissions attributable to CHP to be excluded from the calculation of a plant’s emissions for the purposes of determining its compliance with the emissions limit duty. The Department believes it appropriate to define these in secondary legislation as it may be necessary to reflect developments in technology and changes in the CHP Quality Assurance (CHPQA) programme, which provides the benchmark of what counts as “good quality” CHP.

165. Given that the scope of the emissions limit duty is a central point of EPS policy and that the matters involved in its specification, although quite technical, may also not be wholly uncontroversial, the Department believes it appropriate to apply the Affirmative procedure.

Clause 36(5)(b): Duty not to exceed annual carbon dioxide emissions limit

Power conferred on:	Secretary of State
Power exercised by:	Regulations
Parliamentary procedure:	Affirmative Resolution

166. The objective of this power is to give the Secretary of State the ability to apply or modify the emissions limit duty contained in Clause 36(1) in the circumstances contained in Part 1 of Schedule 3, relating in particular to the installation of new boilers at existing power stations, where CCS plant is associated with more than one generating station, the application of the regime to plant which does not export power to the grid, and adjustments to the emissions limit in the first and last years of a plant’s operation.

167. Provision is made in relation to new boilers because it is possible that if the main boiler of an existing coal-fuelled plant was replaced, its refurbishment would increase its operational life by a period similar to the life of a completely new plant.

168. The Department believes it appropriate to define these arrangements in secondary legislation as we will need to consult on specific provisions, including whether and how to apply the EPS where only one of a plant’s main boilers is replaced, and how to apply the EPS in respect of an extension, all of whose emissions do not pass through a single separate exhaust stack from those of the rest of the plant.

169. It is very rare for plant of the size to which the EPS regime applies (50MW or more) not to export power to the Grid (or at least the local distribution network). However, should such a rare case arise in future, it may be necessary to adapt the regime to the special circumstances of such plant (particularly if, in order to avoid the incidental use of fossil fuels for start up and stabilisation purposes by biomass plants from causing them to be subject to the EPS, emissions resulting from generation while a plant is not exporting have been deemed not to count for EPS purposes, as we expect to be the case).

170. In the case of CCS plant associated with more than one generating station, in the future it is possible that plants will be built which extract fuels that do not produce CO₂ when burnt (eg hydrogen) from fossil fuels such as coal, with a view to supplying those non-CO₂ emitting fuels to power stations that will burn them to generate electricity. In some cases these extraction plants are likely to be fully integrated into a power station complex, and to supply the non-CO₂ emitting fuels wholly or mainly to the on-site power station. In other cases, the gasification plant may be physically separate, and under different management, from any power station they supply (and they may also serve non-power station customers). However, they would still be potentially large emitters of CO₂ whose emissions would be related to the generation of electricity, ultimately from fossil fuel sources.

171. The Clause, together with paragraph 3 of Schedule 3, gives the Secretary of State the power to make regulations, by way of Affirmative procedure, to apply a suitably adapted version of the EPS regime to such gasification plants where they are serving more than one power station. The modifications necessary may include provision to apply to such plants different annual emissions limits (or limits calculated in a different way) from those set out in the EPS Clauses. It is not possible to include full provision for these plants in the Bill Clauses because we do not yet have (nor do we expect to have at any stage prior to Royal Assent) a sufficiently clear picture of how they will operate, or interact with generating stations. The purpose of taking a power is therefore in essence to ensure that they can be regulated in line with the policy behind the EPS regime if and when the need to do so arises—and to discourage industry from regarding the use of separate gasification plant as a potential “way round” the EPS regime.

172. In the case of generating stations which start or end commercial operation part way through a calendar year, it will be necessary to adjust the limit to reflect the fact that plant will only be operating part of the year, to ensure that they are not given the full limit for the entire year.

173. The Clause, together with paragraph 4 of Schedule 3, allows the Secretary of State to make regulations to provide for such adjustments. This is a technical but important point which sits naturally with the other matters, referred to above, that flesh out the details of the emissions limit duty. It is therefore appropriate to include provision for it to be dealt with in the same kind of regulations as those other matters.

Clause 36(5)(c): Monitoring and enforcement

Power conferred on:	Secretary of State
Power exercised by:	Regulations
Parliamentary procedure:	Negative Resolution

174. The objective of these powers is to define the arrangements for monitoring and enforcing the EPS.

175. The Clause gives the Secretary of State powers to make regulations by way of negative procedure to make provision for monitoring the compliance of relevant operators with the emissions limits laid down in the legislation, and to provide for enforcement provisions in the event that operators do not comply with the limit.

176. It allows the Secretary of State to determine which authorities will be responsible for the monitoring and enforcement, impose requirements for the provision of information, and for a charging regime to fund the monitoring and enforcement functions. It also provides for the Secretary of State to confer specific enforcement powers on the designated regulator.

177. All plants which are subject to the EPS regime will also be subject to the EU Emissions Trading Scheme, for the purposes of which they will have to measure exactly the same CO₂ emissions as will be subject to a limit under the EPS. The Government’s intention is therefore that the monitoring and enforcement mechanisms for EPS should be aligned as closely as practicable with those of the EU ETS. Since the latter are laid down in EU legislation, they may be subject to change from time to time in ways that cannot now be predicted. Providing for monitoring and enforcement rules to be the subject of secondary legislation is consistent with the approach taken under other Acts regulating emissions (for example the Pollution Prevention and Control Act 1999); with the need to consult on these matters against the background of clear primary legislative proposals for the main elements of the EPS regime; with the level of technical detail potentially involved; and with the need to have the flexibility to keep pace with relevant EU ETS developments as and when they happen, so as to avoid duplication of regulatory burdens where possible.

178. Getting the technical detail of these regulations right will be very important, and the Clauses provide for consultation before they are made. Once the parameters have been set by the relevant Bill Clauses (eg as regards what kind of powers to impose sanctions for non-compliance can be conferred under the regulations), the underlying policy intentions will be clear and the drafting of the regulations should not involve significant policy choices. It is therefore considered that the negative procedure would be most appropriate for the monitoring and enforcement regulations.

Clause 37: Exception for CCS demonstration projects

Power conferred on:	Secretary of State
Power exercised by:	Order
Parliamentary procedure:	None

179. Demonstrating Carbon Capture and Storage (CCS) for commercial-scale electricity generation is a key priority for the Government. The Government is undertaking a funding programme for CCS projects, and support may also be available for them from EU funds and through contracts for difference. A typical sized coal plant (around 1.6GW) would not be capable of meeting the EPS (without a significant impact on its load factor) with the amount of CCS that is likely to be supported through the UK’s CCS programme. Further, given the current state of the technology, some flexibility may be needed for the operation of the technology without undermining the host-power station’s ability to operate within the power market.

180. One approach would be for the Bill simply to exclude from the EPS regime those plants which would otherwise be subject to it, but whose construction or operation of CCS is being wholly or partly supported by the above sources of funding, in the interests of developing the CCS technology. However, the Government does not consider that such a blanket exclusion would be appropriate.

181. By introducing a delegated power to apply the exclusion in individual cases or to particular classes of a plant, it becomes possible to take appropriate account of individual circumstances, and in particular to provide not only that the exception applies subject to compliance with certain conditions but also that it will terminate at a defined point in the future or when certain criteria are fulfilled (for example, it would be inappropriate for the exemption to apply indefinitely if the technology has been successfully demonstrated and commercialised at a point when it would be reasonable to expect that it could be retrofitted to a larger proportion of the plant’s capacity). Conferring the exception through the exercise of a delegated power would allow the Secretary of State to take full account of all the relevant factors in each case. The objective of these powers is, therefore, to provide for individual plant to be excepted from complying with the EPS, so as to allow the possibility to demonstrate CCS across the range of technologies, and for individual projects to be selected based on their contribution to the programme, as opposed to dictating this at the outset with the EPS.

182. The Department believes it appropriate to apply exceptions in this way, as the development CCS programme develops over time. The exact projects, and need for and shape of any exception, will depend on the outcome of the project selection process, and in some cases it be some time after the passage of the Bill before all the relevant details of the plant involved and the kinds of exception to be conferred are known. In practice, the process of formulating exception Orders is likely, at least in part, to be very closely linked to the negotiation of commercial terms for public funding of the CCS projects to which the exceptions will apply.

183. The Clauses provide for Orders to be the subject of consultation before they are made and for the Secretary of State, in making them, to have regard to a statement of policy on criteria for the award of exceptions which has been consulted on. The making of an exception Order is therefore envisaged as an executive, rather than a legislative act. It is the Government’s view that although they will be susceptible to judicial review (for example, if the Secretary of State fails to have regard to the published statement of policy), it would not be necessary to subject the Orders themselves to parliamentary control.

Chapter 8: Strategy and Policy Statement (SPS)—Overview

184. The new statutory Strategy and Policy Statement will set out the Government’s strategic priorities for energy policy; describe the roles and responsibilities of Government, Ofgem, and possibly other relevant bodies; and define policy outcomes that Government considers Ofgem to have a particularly important role in delivering. Both the Secretary of State and Ofgem will have to act in the manner best calculated to further the delivery of these policy outcomes, subject to fulfilling the principal objective ie protecting the interests of existing and potential consumers. The strategy and policy statement will replace existing guidance for the regulator on social and environmental matters. These provisions implement the recommendations of the Government’s review of the Gas and Electricity Markets Authority (“the Authority”) published in July 2011.

Clause 40: Designation of statement

Power conferred on:	Secretary of State
Power exercisable by:	Designation of statement
Parliamentary procedure:	Affirmative Resolution

185. Clause 40 enables the Secretary of State to designate a strategy and policy statement. This is a statement which sets out:

the strategic priorities, and other main considerations, of Her Majesty’s Government in formulating its energy policy for Great Britain,

the particular outcomes to be achieved as a result of the implementation of that policy, and

the roles and responsibilities of persons involved in implementing that policy or who have other functions in connection with it.

186. The need for this power stems from a review of the Gas and Electricity Markets Authority (“GEMA”) carried out by the Department for Energy and Climate change in July 2011. One of the findings of this review was that, as GEMA’s role has become more complex, there has been a blurring of responsibilities between Government and GEMA. There is a need for Government clearly to take responsibility for setting and communicating strategic direction and for GEMA to take independent regulatory decisions as a logical and coherent part of this broader strategic framework. The provision of a power to designate a strategic policy statement addresses this recommendation.

187. GEMA, and the Secretary of State, will be under a duty to carry out regulatory functions in the manner considered best calculated to further delivery of policy outcomes contained in the strategy and policy statement. It is considered appropriate to give Parliament an opportunity to comment actively on the statement through an Affirmative Resolution procedure, given how the new duty in relation to it fits into the framework which governs how the Authority and the Secretary of State take energy-related decisions.

188. The Bill will also place a duty on the Secretary of State to consult extensively on the draft statement before laying the statement before Parliament for approval by Affirmative Resolution. Once approved, there will be a duty on the Secretary of State to publish the strategy and policy statement in such a manner as he/she considers appropriate.

189. The statement will be reviewed every five years (subject to earlier review in particular circumstances, eg Parliamentary election). If, following a review, the Secretary of State wants to amend the strategy and policy statement, any amended statement will follow the same procedure, including requiring approval by Affirmative Resolution before it can take effect.

Clause 46: Reporting requirements

Power conferred on:	Secretary of State
Power exercisable by:	Secretary of State direction
Parliamentary procedure:	None

190. This enables the Secretary of State to direct the Authority not to publish a document setting out the required information in relation to the Strategy and Policy Statement. Normally, the Authority will be required to include this information in its forward work programme for each financial year. There may be occasions when it is known before the publication of the forward work programme that the Strategy and Policy Statement will be revoked either before, or a short time after, the beginning of the financial year to which the work programme refers (although after the publication of the forward work programme for that particular financial year). This power will give the Secretary of State the flexibility to ensure that the Authority does not incur unnecessary cost or time by directing it not to include the information related to the statement in the work programme for that year.

PART 2—Nuclear Regulation

191. The provisions in the draft Energy Bill will consolidate the current nuclear regulator, the Office for Nuclear Regulation (ONR), onto a statutory footing. The intention to create the ONR as a statutory body was announced by the Government in February 201115. Pending legislation, the ONR was established as an agency of the Health and Safety Executive (HSE) in April 2011.

192. As a statutory body, the ONR will retain the best of current practice, whilst creating a modern regulator, based on the better regulation principles of transparency, accountability, proportionality and consistency. The ONR will build on its current strengths as a world-class regulator. The legislation will ensure that the ONR will be better placed to respond quickly and flexibly to current and future regulatory challenges while retaining its focus on the protection of people and society from the hazards of the nuclear industry.

193. The Energy Bill will set out a clear governance model for the statutory ONR, giving it responsibility for five key areas: nuclear safety; nuclear security; nuclear safeguards; the transport of radioactive material by road, rail and inland waterway; and health and safety on nuclear sites. This will enhance the effectiveness of the civil nuclear security regime. The ONR will play a key role in addressing some of the top risks outlined in the National Security Strategy17 which are directly relevant to the sector.

Chapter 1: The ONR’s Purposes

Overview

194. Chapter 1 sets out the purposes of the Office for Nuclear Regulation (ONR). These define the ONR’s roles and responsibilities and cover each of the core areas in which the ONR will be able to exercise its functions.

Clause 51: Nuclear security purposes

Powers conferred on:	Secretary of State
Powers exercised by:	Regulation
Parliamentary procedure:	Negative Resolution

195. The purposes of the ONR will include its nuclear security purpose—which relates, among other things, to ensuring the security of nuclear material, see for example clause 51(1)(b) and (g) which relate to the secure use and storage and transportation of nuclear materials. Subsection (3) provides a definition of “nuclear material” which covers certain types of fissile material specified on the face of the Bill (ie plutonium and uranium metals, alloys and compounds) and any such other fissile materials specified in regulations made by the Secretary of State. In addition, subsection (4) provides that regulations may modify the definition of “nuclear material” which appears in subsection (3).

196. The approach here has precedents in section 77(7) of the Anti-terrorism, Crime and Security Act 2001 (ATCSA) and in section 71(1) of the Energy Act 2004, where in both cases the definition of nuclear material may be added to by prescribing in regulations additional categories of fissile material (on top of those which already expressly constitute such materials on the face of the legislation). We consider it is a precedent in the case of section 77(7) of the ATCSA because the provision there enables the Secretary of State, through delegated legislation, to decide which additional fissile materials are to be subject to security regulations under that section. In the case of section 71(1), because it enables the Secretary of State to expand the responsibilities of the Civil Nuclear Constabulary (see section 52 of the 2004 Act) in relation to the security of nuclear materials (to include additional fissile materials).

197. In both cases the powers are subject to the negative Resolution procedure, see section 77(6) of the ATCSA and section 71(4) of the Energy Act 2004.

198. The underlying reason for these powers of delegated legislation is the need for flexibility to respond to developments at an international level about the definition of nuclear material and to changes in security threats. For example, the definition of nuclear material in the Bill was drawn-up to take into account international guidance and best practice in relation to the security of nuclear material (such as recommendations made by the International Atomic Energy Agency in its publication The Physical Protection of Nuclear Material and Nuclear Facilities (INFCIRC/225/Rev.4)). Should international guidance or best practice change in future the Secretary of State may consider it appropriate to amend the definition in clause 51(3) to give effect to international commitments and to give the ONR a core role here.

199. We believe that a negative Resolution procedure is justifiable because of the precedents above (as well as section 7(1) and (3) of the Northern Ireland Arms Decommissioning Act 1997). In addition, the powers are narrow because, in the Department’s view, they could not be lawfully used to expand the ONR’s purposes beyond the security concerns listed in clause 51 which relate to nuclear materials nor to include non-nuclear materials.

Clause 52: Notice by Secretary of State to ONR specifying sensitive nuclear information

Powers conferred on:	Secretary of State
Powers exercised by:	Notice
Parliamentary procedure:	None

200. Amongst the ONRs purposes are its nuclear security purposes (see clause 51) which relates to, amongst other things, ensuring the security of sensitive nuclear information (see subsection (1)(f)). “Sensitive nuclear information” is principally defined in clause 51(3) as information relating to, or capable of use in connection with, the enrichment of uranium—ie the treatment of uranium that increases the proportion of isotope 235 contained in it (isotope 235 is fissile and can be used in the production of a nuclear weapon).

201. Clause 52 permits the Secretary of State, by notice to the ONR, to expand on the definition of “sensitive nuclear information” in connection with activities at or relating to nuclear premises and thus the purpose of the ONR in ensuring the security of such information. Similarly, a notice under clause 52 would result in the Secretary of State’s regulation-making powers in clause 55(1)(b) changing.

202. The power is intended principally to provide for flexibility—to enable the Secretary of State, and therefore in turn the ONR, to respond to new security threats quickly. However, the power can only be exercised where the Secretary of State considers information should be protected in the interests of national security (see subsection (1)). The Secretary of State must also consult the ONR before issuing such a notice; this is to ensure that the ONR’s civil nuclear security expertise is fed into any additional definition of sensitive nuclear information. Therefore, the powers are constrained and indeed relate to one aspect of the ONR’s responsibilities in the area of nuclear security. In the Department’s view the powers could only be lawfully used to deal with issues concerning information connected with nuclear premises and are therefore, relatively narrow in scope.

203. There is currently a regime for civil nuclear security found in Part 8 of the Anti-terrorism, Crime and Security Act 2001 and regulations made under section 77. That regime covers “sensitive nuclear information” which includes information (see section 77(7)) which the Secretary of State has concluded needs to be protected. The Department considers it prudent to, following this approach—ie creating a legislative system which permits the Secretary of State to decide what additional information needs protecting in the interests of nuclear security but which does not constrain that power by making it subject to a Parliamentary procedure.

Clause 54: Transport purposes

Powers conferred on:	Secretary of State
Powers exercised by:	Regulation
Parliamentary procedure:	Negative Resolution

204. Clause 54 of the Bill defines the ONR’s transport purposes by reference to the risks of harm arising from the transport of radioactive materials and by reference to the need to ensure their security whilst transported. In turn “radioactive material” is defined in terms of its meaning in three international agreements relating to the carriage of dangerous goods and to which the UK is a party, see subsection (2). These agreements, covering road, rail and inland waterway and known in short as ADR/RID/AND, are as follows:

“ADN”: the Regulations annexed to the European Agreement concerning the International Carriage of Dangerous Goods by Inland Waterway (signed at Geneva on 26 May 2000);

“ADR”: Annexes A and B to the European Agreement concerning the International Carriage of Dangerous Goods by Road (signed at Geneva on 30 September 1957); and

“RID”: the Annex to Appendix C to the Convention concerning International Carriage by Rail (signed at Berne on 9 May 1980) (the Regulation concerning the International Carriage of Dangerous Goods by Rail).

205. Clause 54(4) provides a power for the Secretary of State to amend the definition of “radioactive material” in subsection (2) by means of regulations, which would be subject to the Negative Resolution procedure.

206. The reason for this power is to provide for flexibility. The definition of “radioactive material” is linked to the three international agreements, referred to in paragraph 6, which are currently implemented in England, Wales and Scotland by the Carriage of Dangerous Goods and Use of Transportable Pressure Equipment Regulations 2009. It is not possible to foresee how these agreements might be amended or replaced in the future and therefore the power is intended to allow for regulations to take account of such developments. Regulations could amend the definition to take into account new agreements, or else to ensure that the definition does not replicate any amendments to existing agreements which are not appropriate for the ONR’s transport purposes.

207. It is the Department’s view that this power should be subject to a Negative Resolution procedure. We consider that this approach is appropriate for a variety of reasons. First, the power is inherently constrained and would not permit regulations to be made expanding the ONR’s transport purposes to cover other modes of transport, for example, the carriage of radioactive material by air. Moreover, given the context of the power it would not, in the Department’s view, be lawfully used to confer functions on the ONR to cover materials that are not radioactive or which do not pose a risk or whose transport does not have security implications. Second, the international agreements in question have been given effect to by the 2009 Regulations referred to above which were made subject to the Negative Resolution procedure. The underlying motivation here is to give appropriate effect to such agreements where they relate to the transport of radioactive materials. Finally, the principal powers used to make the 2009 Regulations (sections 15 of and paragraph 3 of Schedule 3 to the Health and Safety at Work etc Act 1974) may be used to confer functions and create a system for the regulation of the transport of radioactive substances.

Chapter 2: Nuclear regulations

Overview

208. Chapter 2 confers power on the Secretary of State to make nuclear regulations. This power will enable flexibility in the regulation of the civil nuclear industry and to confer powers on the ONR to react effectively in an evolving area.

Clause 55: Nuclear regulations

Powers conferred on:	Secretary of State
Powers exercised by:	Regulations
Parliamentary procedure:	Negative Resolution except where amendments or repeals are made to the Nuclear Installations Act 1965, where the Affirmative Resolution procedure is required.

209. Clause 55 would confer on the Secretary of State the power to make regulations for any of the following purposes—nuclear safety, nuclear security, nuclear safeguards, and the transport purposes, as defined in clauses 49, 51, 53 and 54 respectively. These regulations are referred to in the Bill as “nuclear regulations”.

210. The clause, together with Schedule 4, elaborates on the types of provision that may be included in nuclear regulations. For example, regulations may make provision applying to acts outside the United Kingdom by a United Kingdom person (see subsection (7 )(a)) such as imposing duties on UK nationals in relation to sensitive nuclear information when outside the UK, or in relation to UK ships carrying nuclear materials and operating anywhere in the world (see clause 51(1)(g). Or in the case of schedule 4, provision may be made imposing requirements about training, document and record keeping, or necessitating that approvals must be sought and given before certain activities can be undertaken.

211. Criminal offences may be created under nuclear regulations, see subsection (5), but the power here is circumscribed in two ways. Purely indictable offences cannot be created under the regulations and the penalties which may be imposed under nuclear regulations for a conviction are curtailed.

212. There would also be civil liability for breaches of nuclear regulations, see clause 56, consistent with the position under section 47(2) of the Health and Safety at Work etc Act 1974 (“the 1974 Act”). Though nuclear regulations may provide for exceptions to that rule and for defences to be available (akin to section 47(3) of the 1974 Act), see subsection (3) of clause 56).

213. Subsection (10) and (11) require any nuclear regulations which contain provisions made exclusively for the safeguards or the security purposes, or exclusively for both, to include provisions to identify where this is the case. The reason for this is to provide for clarity in relation to those provisions in the Bill which do not apply in relation to provisions in nuclear regulations made only for the safeguards or security purposes. See, for example, the powers for inspectors to issue improvement or prohibition notices under Part 2 of Schedule 6 which are prescribed by paragraphs 3 (1) and (5) and 4(1) and (5) of that Schedule.

214. A person who wishes to appeal against an improvement or prohibition which they have been served with may do so within such period (after the notice has been given) as is set out in regulations made by the Secretary of State under this clause (see Schedule 6 paragraph 6(2)).

215. It should also be noted that clause 84 which contains provision about how notices are to be properly served, provides for the provisions contained in that clause to be subject to any provisions contained in regulations (see subsection (12)). Therefore nuclear regulations may, for example, if they impose requirements about notices needing to be served on ONR inspectors, derogate from the provisions in clause 84 to provide that such notices cannot be validly served at an inspector’s last known home address.

216. We consider that delegated powers are appropriate in this case because they enable regulations to be made to empower the ONR to act quickly and effectively in the areas covered by the purposes. In addition, it is not possible to predict how the nuclear landscape will change, even in the short term (for example the events in Fukushima could have caused significant regulatory upheaval). Also, the pace of change in technological developments is very high, as is the pace of change in the level of international understanding about how best to protect people from the effects of radiation arising from nuclear power stations. Much of the regulation required here, to give effect to international obligations and provide for controls in the relevant areas, can be very detailed and technical.

217. We believe that there are precedents for this approach in relation to the purposes for which nuclear regulations can be made—and precedents which permit subordinate legislation to be made subject to the Negative Resolution procedure. For example, regulations may be made under section 15 of the Health and Safety at Work etc Act 1974 covering the subject matter of a number of the purposes here, for example the transport of radioactive materials (see paragraph 3 of Schedule 3 to that Act). Another example is section 77 of the Anti-Terrorism, Crime and Security Act 2001 which permits regulations to be made by the Secretary of State relating to civil nuclear security.

218. The clause does contain a Henry VIII power in subsection (4)(a) to modify certain provisions in the Nuclear Installations Act 1965 (sections 1, 3–6, 22 and 24A). This power is required because the Nuclear Installations Act provisions will be “relevant statutory provisions” enforced by the ONR under the Act. Therefore, these provisions may need to be amended, from to time, to take into account developments in the nuclear regulatory landscape. It is important to emphasise that if it is used the regulations will subject to the Affirmative Resolution procedure (see clause 88(2)).

219. There is a precedent for such a power in the 1974 Act, which provided for regulations to be brought forward to replace provisions of a number of Acts to allow for the modernisation of health and safety legislation (see section 1(2) of the 1974 Act). Provisions of the Nuclear Installations Act 1965 were covered by this power, although regulations have never been brought forward to amend that Act and those provisions remain largely unchanged. Despite this, to allow for such modernisation, the power to amend that Act to bring in nuclear safety regulations is in the Department’s view clearly one which needs to be retained in the Bill.

Chapter 3: Office for Nuclear Regulation

Overview

220. Chapter 3 sets out how the ONR will be structured and explains how it will operate, including: the constitution of the ONR; how the organisation will report and be accountable for its activities and delivery of its objectives; and its financial arrangements.

Clause 58: The Office for Nuclear Regulation

Schedule 5: The Office for Nuclear Regulation, paragraph 26 Payments, grants and borrowing

Powers conferred on:	Secretary of State
Powers exercised by:	Order
Parliamentary procedure:	Affirmative Resolution (in the House of Commons only)

221. Clause 58 establishes the ONR as a body corporate. Details about the constitution and related matters are set out in Schedule 5, The Office for Nuclear Regulation, which subsection (3) provides for.

222. Paragraph 26 of the Schedule includes arrangements for the ONR to borrow money. The Secretary of State may amend the amount (currently set at £35 million) by Order that the ONR can borrow, up to a limit of £80 million.

223. The level of detail required is not appropriate for primary legislation, and sufficient scrutiny of any proposal will be undertaken by means of an Affirmative Resolution procedure.

224. It is the Government’s view that the Affirmative procedure is appropriate because the clause is concerned with the amount of public money the ONR is able to borrow. However, we propose that it should be considered in the House of Commons only since it is a financial matter.

Chapter 4: Functions of the ONR

Overview

225. The provisions in this chapter enable the ONR to undertake all its functions. The functions reflect the various roles of the ONR; it is primarily the regulator of the civil nuclear industry in the areas set out in its purposes, but it also has a role in maintaining public trust in the regulation of the nuclear industry.

Clause 60: Codes of practice

Powers conferred on:	Secretary of State consent required for the ONR to issue codes of practice
Powers exercised by:	Code of Practice
Parliamentary procedure:	none

226. This clause enables the ONR to issue, revise or withdraw codes of practice with regard to the relevant statutory provisions; section 7 of the Health and Safety at Work etc Act 1974, which covers general duties of employees at work, so far as it relates to the relevant statutory provisions; and health and safety regulations made for nuclear site health and safety purposes. The ONR must consult any government department or person as directed by the Secretary of State or that it considers appropriate. It must then seek consent from the Secretary of State, or the Health and Safety Executive if the Code of Practice relates to health and safety regulations. The ONR must publish the Code of Practice, publish any revisions to it or publish a notice that a Code of Practice is being withdrawn.

227. We believe that having no parliamentary procedure is appropriate as codes of practice will be essentially technical documents based on the requirements of existing legislation. Furthermore the consent of the Secretary of State, who is answerable to Parliament, is required before the ONR can issue, amend or revoke a Code of Practice. There is precedent for this approach in section 16 of HSWA 1974.

Clause 63: Inspectors

Schedule 6: Appointment and powers of inspectors

Powers conferred on:	Secretary of State
Powers exercised by:	Regulations
Parliamentary procedure:	Negative Resolution

228. Clause 63 of the Bill gives effect to Schedule 6 which is concerned with the appointment and powers of inspectors by the ONR to investigate and enforce the regulatory regime for which the ONR will become responsible. Amongst the evidence gathering powers which may be conferred on inspectors is the power to take samples, see paragraph 13(2). Paragraph 6(2) of Schedule 6 contains a power for the Secretary of State to prescribe by regulations the period within which a person may appeal an improvement or prohibition notice given under Schedule 6 to the Bill. Paragraph 13(3) of Schedule 6 contains a power for the Secretary of State to prescribe by regulations the procedure to be followed by inspectors when taking samples and how samples are to be dealt with.

229. Section 24(2) of the Health and Safety at Work etc. Act 1974 provides a precedent for the approach in paragraph 6(2) of Schedule 6 to the Bill—where it was considered appropriate to leave this detail to regulations and to subject such regulations to the Negative Resolution procedure (see section 82(3)(b) of the 1974 Act). Paragraph 6(2) of Schedule 6 to the Bill is a re-enactment of section 24(2) of the 1974 Act as it currently applies to the civil nuclear industry in relation to matters of nuclear safety. We believe that it remains appropriate for this detail to be left to secondary legislation as it provides flexibility for the future in determining the period within which such appeals should be brought.

230. Section 20(3) of the Health and Safety at Work Act 1974 provides a precedent for the approach in paragraph 13(3) of Schedule 6 to the Bill where it was thought appropriate to leave this detail to regulations and to subject such regulations to the Negative Resolution procedure (see section 82(3)(b) of the 1974 Act). This provision re-enacts, with some modifications, section 20(3) of the 1974 as it currently applies to the existing ONR. Modifications are made to reflect the transfer of additional functions to the statutory ONR that is proposed in the Bill.

231. We believe that it remains appropriate for the subject matter of these regulations to be left to secondary legislation because they may cover, for example, such detailed matters as marking samples, giving notices, taking records when samples are taken, or specifying that inspectors must follow certain steps when taking samples from specific types of materials.

Clause 65: Inquiries

Powers conferred on:	Secretary of State
Powers exercised by:	Regulations
Parliamentary procedure:	Negative Resolution

232. Clause 65 confers powers on the ONR to hold an inquiry into any matter related to its purpose with the Secretary of State’s consent. Any such inquiry must be held in accordance with regulations made by the Secretary of State, with there being a requirement to hold the inquiry in public and to publish the report of the person holding the inquiry unless regulations specify otherwise, see subsection (3). Subsections (3), (4) and (5) confer the powers on the Secretary of State to make the necessary regulations which will be subject to the Negative Resolution procedure. For example, the regulations may confer powers on the person holding the inquiry (or any person assisting them) to require witnesses to attend and to enable them to enter premises to gather evidence and to take evidence under oath. Also, the regulation-making powers would enable the Secretary of State to derogate from the rule that a public inquiry should be held in public where the evidence being heard may raise implications relating to national security.

233. We consider that it is appropriate for there to be delegated powers here because the regulations are likely to contain detailed provision about the conduct of inquiries which is normally left to secondary legislation (see, for example, section 14(3) and (4) of the Health and Safety at Work Act 1974 and section 323 of the Town and Country Planning Act 1990—which in both cases are regulation-making powers which are subject to the Negative Resolution procedure).

234. Clause 65 re-enacts with modifications section 14 of the 1974 Act as it would apply to the Health and Safety Executive in its current role as regulator of the civil nuclear industry. Modifications are made to reflect the transfer of additional regulatory functions to the statutory ONR from the Secretary of State.

Clause 70: Provision of information or advice to relevant authorities

Powers conferred on:	Secretary of State
Powers exercised by:	Regulations
Parliamentary procedure:	Negative procedure

235. Under this clause a duty is imposed on the ONR to provide certain information or advice if it is requested to do so by a Minister of the Crown, the Devolved Administrations, the Health and Safety Executive, the Health and Safety Executive for Northern Ireland, the Civil Aviation Authority or the Office of Rail Regulation (see subsections (1) and (8)).

236. The ONR may require a person to whom information is provided under subsection (2)(b) or advice is provided under subsection (4) to pay a fee in respect of the costs that were reasonably incurred by the ONR in providing the information or advice. The Secretary of State may by regulations provide that the requirement to pay such a fee will not apply in particular cases or classes of case or in particular circumstances.

237. It is the Government’s view that Parliamentary procedure should be aligned with the approach taken for clause 81 (fees and charges) which is Negative Resolution. This approach is also in line with the procedure in the Health and Safety at Work etc Act 1974 for fee making regulations (sections 43 and 82).

Clause 73: Directions from Secretary of State

Powers conferred on:	Secretary of State
Powers exercised by:	Direction
Parliamentary procedure:	None

238. Clause 73 would provide three powers that would enable the Secretary of State to give directions to the ONR. The first power, which is in subsection (1), is a power of direction (either to give specific or general directions) that may be exercised for any purpose. However, the power here cannot be used to confer new functions on the ONR nor may it be used to direct the ONR in relation to the exercise of any regulator function in any particular case. An example of a direction under this subsection would be where, the Secretary of State directs the ONR to undertake a general review of the appropriateness and effectiveness of nuclear site licensing conditions.

239. The second power which is contained in subsection (3) is a power to make directions for the purpose of national security. Again whilst this cannot be used to direct the ONR in relation to regulatory functions in a particular case, it can be used to confer functions. For example, in the event of a significant release of pathogens from a research or manufacturing plant, Secretary of State might direct the ONR to contribute its expertise to the arrangements to deal with the risk to the UK.

240. Finally, the third direction-making power (subsection (6)) allows the Secretary of State to issue directions in a specific instance with regard to a regulatory function, if he or she is satisfied that there are exceptional circumstances relating to national security and only for nuclear security purposes. The Department considers that there is a need for the Secretary of State to have exceptional powers here in relation to regulatory functions because security is dependent on the State’s “risk appetite” and intelligence on risk levels which are largely Government-generated. For example, the power might be used if the Secretary of State received advice that security measures proposed by the ONR for a particular nuclear site were inconsistent with the Secretary of State’s view of the nature of the threat.

241. Any directions made under this clause must be laid before Parliament to facilitate transparency. This is subject to the exception where the Secretary of State considers that a direction under subsection (6) should not be made public for reasons of national security and in which case a memorandum reporting that a direction has been made and its date must be laid instead, see subsection (8).

242. We consider that the direction-making powers here may be legislative in nature because they enable ONR functions to be modified or new functions to be conferred. There is a precedent in this respect to be found in section 12(2) and (4) of the Health and Safety at Work Act 1974 which, in the Department’s view, permits for directions under 12(2)(b) to confer functions on the Health and Safety Executive.

243. We believe that the approach of not having any Parliamentary scrutiny in case of these direction-making powers is justifiable. Generally, direction-making powers are not made subject to Parliamentary approval, in part because they are often administrative in nature but also because they are very specific in their application. Therefore, we think that many of the powers here should not be contentious. Secondly, in the more unusual case of the direction-making powers to modify or confer functions, these may only be exercised under circumstances relating to national security (and are thus clearly circumscribed) and are to some extent required because the ONR will be a body corporate. In other words the ONR cannot do something unless it has express or necessarily implied powers to do it. Furthermore, in the fundamentally important area of national security, it is important that neither the ONR nor the Secretary of State should be constrained in this respect to take appropriate action.

244. Finally, there is an argument about the suitability of all directions here being made subject to Parliamentary approval or subject to the Negative Resolution procedure. First, that may inevitably require publication of directions—which might not be right in all cases where there are national security implications. Secondly, a number of the powers relate to situations where there is a need for the executive to act quickly and decisively (specifically in the case of the powers in subsections (3) and (6)). Evidently, with the Affirmative Resolution procedure the time for debates needs to be arranged in advance (which may make it too late to deal with the national security issue) and in the case of the Negative Resolution procedure, whilst a direction may cease to have effect it is potentially likely that the situation that needed to be dealt with will have passed.

Clause 74: Compliance with nuclear safeguards obligations

Powers conferred on:	Secretary of State
Powers exercised by:	Notice
Parliamentary procedure:	None

245. Clause 74(1) imposes on the ONR obligations to take such action, as it considers is best calculated, to ensure compliance by the United Kingdom with safeguards obligations and to facilitate compliance with these obligations by Ministers of the Crown.

246. “Safeguards obligations” are principally defined in the clause in relation to Articles 77 to 85 of the Euratom Treaty and two international agreements made in connection with the Treaty on the Non-Proliferation of Nuclear Weapons. The safeguard obligations provide confidence that states do not use nuclear material from civil nuclear programmes to manufacture nuclear weapons. The obligations require the UK Government to provide information to the International Atomic Energy Agency and the Euratom Community about nuclear material held within the UK and the use of technology linked with the processing or enrichment of nuclear material.

247. However, there are other existing safeguard obligations which it is intended that the ONR will take responsibility for ensuring compliance with. We do not think that it is necessarily desirable to list all these obligations on the face of the draft Bill having set out the principal obligations. Furthermore, there may be developments in safeguards obligations at either the European or international level as neither international nor European law is likely to remain static. Therefore, clause 74(2)(d) contains a power for the Secretary of State to expand on the duty in subsection (1) to ensure that the ONR has the ability and duty to facilitate the UK’s compliance with any new safeguards obligations, as well as those pre-existing obligations which are not listed on the face of the draft Bill.

248. As way of example, existing safeguard obligations that would be expected to be included within the initial notice, on creation of the ONR, might include the:

Agreement of 25 February 1998 between the United Kingdom of Great Britain and Northern Ireland and the Government of Japan for Co-operation in the Peaceful Use of Nuclear Energy;

Agreement of 24 July 1979 between the United Kingdom of Great Britain and Northern Ireland and the Government of Australia concerning Nuclear Transfers between the United Kingdom and Australia; and

UK commitments under the International Atomic Energy Association (IAEA) Guidelines for the management of plutonium (1997).

249. New obligations that might be added to the definition of safeguards obligations in the future by notice could arise from a number of sources including; new co-operation agreements with other States; new agreements with the IAEA to safeguards guidelines or a new international treaty.

250. The power here is exercisable by notice to the ONR but only after consultation with it (see subsection (4)) and any notice must be published.

251. This approach broadly replicates the current arrangements for defining safeguards obligations whereby the Secretary of State notifies the interim ONR of the relevant safeguards obligations via a Memorandum of Understanding.

Clause 81: Fees

Powers conferred on:	Secretary of State
Powers exercised by:	Regulations
Parliamentary procedure:	Negative

252. This is a new free standing power to make various cost recovery provisions in secondary legislation including, for instance, how the costs will be recovered and from whom. The majority of such costs are already recoverable through existing charging provisions including section 24A of the Nuclear Installations Act 1965. The power enables the ONR, in accordance with regulations made for this purpose by the Secretary of State, to recover fees for or in connection with the performance of its functions, as well as to recover charges in respect of those expenses which are not recoverable under other enactments relating to fees or charges. These other provisions include provisions of the draft Bill itself that enable the ONR to recover some of its costs directly, as well as existing provisions such as the Nuclear Installations Act and regulations made under section 43 of the Health and Safety at Work etc. Act 1974.

253. The intention is that where possible the fees should be charged to particular duty holders, including nuclear site licensees, in connection with whom the relevant costs are incurred. Where it is not possible to link expenses directly to work done for particular duty holders then the intention is that these costs will be apportioned in a fair manner between the various groups of people to be regulated by the ONR. It is the intention that expenses which are recoverable under other existing fees and charges provisions will not be recoverable under regulations made under subsection (2) of this clause.

254. Specified categories of person, in particular employees, will be exempt from fees and charges under the legislation. The detail required for the fees legislation is such that it is more suitable for inclusion in secondary rather than primary legislation. In addition secondary legislation provides the Government with flexibility to amend the regulations should it be required to reflect the rapidly evolving nature of the nuclear industry. The ONR must carry out consultation before submitting proposals for regulations under clause 81 to the Secretary of State (clause 61(3)).

255. We believe that it is appropriate for this clause to be under a Negative procedure in order to be aligned with the procedure for fees regulations in the Health and Safety at Work etc Act 1974 (sections 43 and 82).

Chapter 5: Supplementary

Overview

256. This chapter covers a range of diverse areas not included in the previous chapters. These include staff and property transfers, offences and minor and consequential amendments.

Clause 86: Crown application: Part 2

Powers conferred on:	Secretary of State
Powers exercised by:	Order
Parliamentary procedure:	None

257. This clause provides that Part 2 of the draft Bill applies to the Crown with certain exceptions set out in the clause. It also makes provision for the Secretary of State to exempt the Crown, by Order, from any provisions in Part 2 that would otherwise bind the Crown—see subsection (5). Therefore, for example, inspectors powers of entry may be curtailed in relation to Crown property.

258. The Order-making power is not subject to either the Affirmative Resolution procedure or the Negative Resolution procedure, consistent with the position under section 48(4) and (5) of the Health and Safety at Work etc Act 1974.

259. As a general rule an Act will not bind the Crown unless express provision is made to that effect or it can be necessarily implied from the terms of the Act. Clause 86 would reverse this normal rule and the power, therefore, is considered desirable to ensure flexibility where it would be inappropriate for the Crown to be bound.

Clause 88: Subordinate legislation under this Part

Powers conferred on:	Secretary of State
Powers exercised by:	Statutory Instrument
Parliamentary Procedure:	Affirmative Resolution for any regulations under section 55 which amend or repeal any provision of the Nuclear Installations Act 1965 or an Order under paragraph 26 of Schedule 5 (payments and borrowing). An instrument containing any other subordinate legislation under this Part, other than an Order under section 86(5) (Crown application), is subject to annulment in pursuance of a Resolution of either House of Parliament.

260. This clause makes clear that any power to make subordinate legislation under Part 2 of the draft Bill includes the power: to make different provision for different cases; to make provision for some cases only or subject to exceptions; and to make provision generally or only in particular respects. Subordinate legislation made under this Part may include consequential, incidental and supplementary provision, as well as transitional, transitory and savings provisions.

Clause 89: Transitional provision etc

Powers conferred on:	Secretary of State
Powers exercised by:	Order
Parliamentary procedure:	Negative Resolution

261. Clause 89 enables the Secretary of State to, by Order, make such transitional, transitory and savings provisions as appear appropriate in consequence of the provisions of Part 2 of the draft Bill. This power is considered necessary to enable a smooth transition of the regulatory powers from the Health and Safety Executive and the Secretary of State to the ONR. The level of detail likely to be required which will primarily be about the mechanics of the transfer of the regulation functions is not appropriate for primary legislation. In addition, this power contains a power to modify any provision of primary legislation passed before the end of the session in which the Bill is passed or an instrument made before the end of the session. It would not be practical to make such amendments on the face of the Bill.

262. An Order made under this provision will be subject to the Negative Resolution procedure. This is considered to be sufficient for Orders giving effect to the substantive change in identity of the regulator for the civil nuclear industry as set out in the draft Bill.

Clause 90: Transfer of staff etc and Schedule 8

Powers conferred on:	Secretary of State
Powers exercised by:	Statutory Instrument
Parliamentary procedure:	Negative Resolution

263. This makes provision for the transfer of staff and property to the ONR by introducing schedule 8—Transfers to the ONR. The Schedule states which staff or property a transfer scheme can apply to and the matters which may be included in such schemes. Any such scheme will be made by Order by the Secretary of State.

264. The work required to transfer the ONR from an agency model to a separate statutory corporation is such that the commencement of the relevant provisions of the draft Bill are likely to be phased. As a consequence, the powers in Schedule 8 are sufficient to enable the Secretary of State to make more than one transfer scheme and to make any amendments he or she considers appropriate to any existing Order made under those powers. The Secretary of State will be required to carry out consultation before making any Order under Schedule 8. The persons to be consulted are those who appear to the Secretary of State to be likely to be affected by the making of scheme or appearing to the Secretary of State to represent such persons.

265. An Order made under Schedule 8 will be subject to the Negative Resolution procedure. It is considered that the detailed provision dealing with the mechanics of the transfer of staff from the Health and Safety Executive to the ONR and the transfer of property from the HSE and the Secretary of State to the ONR would most appropriately be dealt with in secondary legislation. As the Secretary of State must consult those likely to be affected by the scheme or their representatives before making any Order under this provision, the Negative Resolution procedure is considered to be sufficient.

Clause 91: Minor and consequential amendments

Powers conferred on:	Secretary of State
Powers exercised by:	Regulations Order in Council
Parliamentary procedure:	Negative Resolution

266. This clause introduces the minor and consequential amendments to primary legislation which are set out in Schedule 9 (minor and consequential amendments related to Part 2). It also enables the Secretary of State to make further modifications, by Order, to existing legislation, either primary or secondary, that are required to give full effect to the provisions of Part 2 of the Bill. Primary legislation is defined for these purposes in clause 87.

267. It is anticipated that most of the amendments required to be made to primary legislation in consequence of the creation of the ONR will be made on the face of the Bill. However in the event that any further amendments to primary legislation are subsequently identified, the Secretary of State has the power to make consequential amendments to primary legislation The creation of the statutory ONR will also require a substantial number of changes to be made to secondary legislation and consequently it is more appropriate for them to be dealt with through secondary legislation, rather than on the face of the draft Bill.

268. As the changes made by an Order under clause 91 will be to give effect to the Bill and will for the most part contain detailed amendments to secondary legislation it is considered that the Negative Resolution procedure is sufficient.

Clause 92: Application of Part 2

Powers conferred on:	Her Majesty
Powers exercised by:	Order in Council
Parliamentary procedure:	Negative Resolution

269. This clause provide that Her Majesty may, by Order in Council, extend the application of Part 2 of the draft Bill outside the United Kingdom.

270. Orders in Council are commonly used to extend United Kingdom legislation to Crown territories outside the United Kingdom (such as the Channel Islands and the Isles of Man). For example, section 28 of the Nuclear Installations Act 1965. In addition, section 84 of HSWA contains a power to extend the application of certain provisions of that Act to persons premises and other matters outside Great Britain as they apply within Great Britain or a specified part of Great Britain.

271. The power gives flexibility to extend the application of Part 2 to ensure that the provisions of this Part apply to persons, premises, activities, articles, substance or other matters outside the UK just as they would if they were within the UK. It is the Government’s view that the appropriate procedure for this power is the Negative Resolution procedure. Section 84 of HSWA provides for Orders in Council made under that provision to be subject to that procedure. As the power in clause 92 is equivalent to that in section 84 of HSWA it is considered appropriate to follow the same procedure.

PART 3—Government Pipe-line and Storage System

272. The draft Energy Bill proposes provisions to allow the sale of a Ministry of Defence (MOD) held asset that supplies aviation fuel to military airbases in the UK, as well as a number of civilian airports. The MOD has previously reviewed the pipeline and concluded that it does not need to be owned by the Government. Legislation is required to create a set of transferable rights necessary to operate the GPSS and remove restrictions on developing the system for greater commercial usage unless there is an underlying defence requirement. The power to make an Order conferred by Clause 103 is exercisable by statutory instrument.

Clause 103: Power to dissolve the Oil and Pipelines Agency by Order

Power conferred on:	The Secretary of State
Power exercisable by:	Order by Statutory Instrument
Parliamentary procedure:	Negative Resolution

273. Clause 99 provides that the Secretary of State may transfer the Government pipe-line and storage system. The system consists of around 2,500 kilometres of cross-country pipelines of differing diameters, together with storage depots, associated pumping stations, receipt and delivery facilities and other ancillary equipment. The system receives, stores, transports and delivers light oil petroleum products for military and civil users. The Oil and Pipelines Agency is a statutory corporation set up for the purposes of exercising and performing functions assigned to it by the Oil and Pipelines Act 1985 (c.62). One of the main functions of the Agency is the management of the system.

274. Given that Clause 99 provides that the Secretary of State may transfer the system, subsection (1) of Clause 103 provides that the Secretary of State may provide by Order for the repeal of the Oil and Pipelines Act 1985 and the dissolution of the Agency. Subsection (2) provides that if the Agency is dissolved under subsection (1), the Secretary of State may by Order make a “transfer scheme” for the transfer to the Secretary of State of property, rights and liabilities. Subsection (3) provides that Schedule 10 makes further provision about any transfer scheme contained in an Order under subsection (2). Paragraph 1 of the Schedule provides that the things that may be transferred under a transfer scheme include certain property. Paragraph 2 provides that a transfer scheme may make consequential, supplementary, incidental or transitional provision and may, in particular, may certain kinds of provision. Paragraph 3 provides that a transfer scheme may provide for its modification. Subsection (4) provides that an Order under subsection (2) may make different provision for different cases or circumstances or for different purposes.

275. These matters are to be dealt with in delegated legislation so that if the system is transferred and the Agency is considered, by the Secretary of State, to have no remaining function the Agency can be dissolved and the Act that created it can be repealed. If the system is transferred, detailed provision will also be able to be made for the consequential transfer to the Secretary of State of property, rights and liabilities of the Agency. It has not yet been decided if or when the whole, or part, of the system will be transferred or what the effect on the Agency will be. Therefore, it would be inappropriate to provide for the repeal of the Oil and Pipelines Act 1985 and the dissolution of the Agency in the draft Bill itself. Dealing with these matters in delegated legislation will also allow appropriate provision relating to the transfer of property, rights and liabilities to be made at a level of detail that would be inappropriate for inclusion in the draft Bill.

276. The Government considers it appropriate that an Order under Clause 103 should, unlike the Order made under section 3(5) of the Oil and Pipelines Act 1985 for the dissolution of the Agency’s predecessor—the British National Oil Corporation—for which there was no procedure, be made by statutory instrument subject to the Negative Resolution procedure. This is because an Order under Clause 103 may contain a transfer scheme and Parliament should have the opportunity to scrutinise such a scheme.

PART 4—Miscellaneous and General

Offshore Transmission

277. Offshore Transmission contains no provision for delegated legislation.

Clause 108(1) and (4): Commencement

Power conferred on:	Secretary of State
Power exercised by:	Order
Parliamentary procedure:	None

278. This Clause contains a standard power to bring certain provisions of the Bill into force by commencement Order. By virtue of subsection (4), an Order can make different provision for different purposes and can make transitional provision and savings.

279. Consistent with the usual practice, commencement Orders under this Clause are not subject to any Parliamentary procedure. Parliament will have approved the principle of the provisions in the Bill by enacting them; commencement by Order enables the provisions to be brought into force at a convenient time.

Annex A

DELEGATED POWERS IN THE BILL

CLAUSE	TITLE	POWER CONFERRED ON	POWER EXERCISEABLE BY	PARLIAMENTARY PROCEDURE
PART 1—Electricity Market Reform
Chapter 1—Contracts for Difference
1	Power to make regulations about contracts for difference	Secretary of State	Order	Negative Resolution
2	Issuing a CFD	Transmission system operator and Secretary of State	CFD Instrument	None
8	Order for maximum cost and targets relating to CFDs	Secretary of State	Order	Affirmative resolution
10(1)	Licence modifications for the purpose of CFDs	Secretary of State	Modification of electricity licence conditions	Negative Resolution
Chapter 2—Final Investment Decisions
15	Secretary of State duty to issue an investment instrument	Secretary of State	Investment Instrument	None
16	Secretary of State power to issue an investment instrument	Secretary of State	Investment Instrument	None
17	Licence modifications for the purpose of Investment Instruments	Secretary of State	Modification of electricity licence conditions	Negative Resolution
19	Regulations for the purpose of Investment Instruments	Secretary of State	Statutory Instrument	Negative
Chapter 3—Capacity Mechanism
20	Power to make regulations about capacity payments	Secretary of State	Regulations	Affirmative Resolution in the first instance, negative resolution for future changes
21	Capacity agreements	Secretary of State	Regulations	Affirmative Resolution in the first instance, negative resolution for future changes
22	Capacity auctions	Secretary of State	Regulations	Affirmative Resolution in the first instance, negative resolution for future changes
24	Other requirements	Secretary of State	Regulations	Affirmative Resolution in the first instance, negative resolution for future changes
25	Information	Secretary of State	Regulations	Affirmative Resolution in the first instance, negative resolution for future changes
26	Enforcement and dispute resolution	Secretary of State	Regulations	Affirmative Resolution in the first instance, negative resolution for future changes
27	Licence modifications for the purposes of the capacity market	Secretary of State	Licences	None
28	Amendment of enactments	Secretary of State	Regulations	Affirmative Resolution
Chapter 4—Conflicts of Interest
31	Transmission licences: new licence for system operation	Secretary of State	Order and licence/code modifications	Affirmative Resolution, Negative Resolution and None
32	Modifications of transmission licences: business separation	Secretary of State	Licence and code modifications	None
33	Section 29: supplementary	Secretary of State	Licence and code modifications	None
Chapter 5—Contingency Arrangements
34	Power to transfer EMR delivery functions	Secretary of State	Order	Negative
Chapter 6—The Renewables Obligation: Transitional Arranagements
35	Transition to certificate purchase scheme	Secretary of State	Order	Affirmative Resolution
Chapter 7—Emissions Performance Standard
36(5)(a)	Duty not to exceed annual carbon dioxide emissions limit	Secretary of State	Regulations	Affirmative Resolution
36(5)(b)	Duty not to exceed annual carbon dioxide emissions limit	Secretary of State	Regulations	Affirmative Resolution
36(5)(c)	Monitoring and enforcement	Secretary of State	Regulations	Negative Resolution
37	Exceptions for CCS demonstration projects	Secretary of State	Order	None
Chapter 8—Strategy and Policy Statement
40	Designation of statement	Secretary of State	Designation of statement	Affirmative Resolution
46	Reporting requirements	Secretary of State	Secretary of State Direction	None
PART 2—Nuclear Regulation
Chapter 1—The ONR’s Purposes
51	Nuclear security purposes	Secretary of State	Regulation	Negative Resolution
52	Notice by Secretary of State to ONR specifying sensitive nuclear information	Secretary of State	Notice	None
54	Transport purposes	Secretary of State	Regulation	Negative Resolution
Chapter 2—Nuclear Regulations
55	Nuclear regulations	Secretary of State	Regulations	Negative resolution except where amendments or repeals are made to the Nuclear Installations Act 1965 where the Affirmative Resolution procedure is required
Chapter 3—Office for Nuclear Regulation
58	The Office for Nuclear Regulation	Secretary of State	Order	Affirmative Resolution (in the House of Commons only)
Chapter 4—Functions of the ONR
60	Codes of Practice	Secretary of State consent required for the ONR to issue Codes of Practice	Code of Practice	None
63	Inspectors	Secretary of State	Regulations	Negative Resolution
65	Inquiries	Secretary of State	Regulations	Negative Resolution
70	Provision of information or advice to relevant authorities	Secretary of State	Regulations	Negative Procedure
73	Nuclear Security Directions	Secretary of State	Direction	None
74	Compliance with nuclear safeguards obligations	Secretary of State	Notice	None
81	Fees	Secretary of State	Regulations	Negative Resolution
Chapter 5—Supplementary
86	Crown application Part 2	Secretary of State	Order	None
88	Subordinate legislation under this Part	Secretary of State	Statutory Instrument	Affirmative Resolution for any regulations under section 55 which amend or repeal any provision of the Nuclear Installations Act 1965 or an Order under paragraph 26 of Schedule 5 (payments and borrowing). An instrument containing any other subordinate legislation under this Part, other than an Order under section 86(5) (Crown application), is subject to annulment in pursuance of a Resolution of either House of Parliament.
89	Transitional provisions etc	Secretary of State	Order	Negative Resolution
90	Transfer of staff etc and Schedule 8	Secretary of State	Statutory Instrument	Negative Resolution
91	Minor and consequential amendments	Secretary of State	Regulations Order in Council	Negative Resolution
92	Application of Part 2	Her Majesty	Regulations Order in Council	Negative Resolution
PART 3—Government Pipe-line and Storage System
103	Power to dissolve the Oil and Pipelines Agency by order	Secretary of State	Order (by Statutory Instrument)	Negative Resolution
PART 4—
108	Commencement	Secretary of State	Order	None
SCHEDULE
Schedule 1	Transfer schemes in connection with orders under Section 34	Secretary of State	Transfer Scheme	None
Schedule 2	The Renewables Obligation: certificate purchase scheme	Secretary of State	Order	Affirmative Resolution
Schedule 5	The Office for Nuclear Regulation (para. 26—Payments, grants and borrowing)	Secretary of State	Order	Affirmative Resolution (in the House of Commons only)
Schedule 6	Inspectors	Secretary of State	Regulations	Negative Resolution