Reshaping Britain’s energy regime in an uncertain political landscape | Bracewell LLP

Introduction

The UK Energy Security Bill, first promised in 2021 and presented to Parliament on July 6, 2022, contains a wide variety of measures which the UK government says will address the energy trilemma of environmental sustainability, safety and affordability.

The bill’s introduction was overshadowed by the UK government’s departure of 37 ministers and MPs on the same day, triggering the beginning of the end for Prime Minister Boris Johnson. The Bill, touted by some as the most important energy legislation for a decade, therefore begins its legislative journey through the UK Parliament against the backdrop of a volatile and uncertain political landscape. A number of potential prime minister candidates have been openly critical of Johnson’s climate change agenda, and as a result some elements of the bill could be politically controversial.

However, as currently drafted, the bill would have a significant impact on the UK energy regime. The 26 measures of the bill aim to achieve three main objectives:

  • leveraging private investment in clean technologies and building a local energy system;
  • ensuring the safety, security and resilience of the UK’s energy system; and
  • reform the UK’s energy system to protect consumers from unfair prices.

Clean technologies

The UK government has recently focused on climate change targets and policies designed to limit UK emissions, with the UK being the first major economy in the world to enshrine a commitment to achieve net zero emissions from greenhouse gases by 2050 into law in 2019. The UK government says the bill will help generate £100 billion of private sector investment by 2030 in industries to diversify the Britain’s energy supply and create around 480,000 jobs by the end of the decade. While most of this investment is expected to be in offshore wind, the government also wants to promote investment in emerging technologies such as green hydrogen production and carbon capture, use and storage, including following measures:

  • Licence – Establish a licensing framework and regulatory system for hydrogen and carbon dioxide transport and storage infrastructure.
  • Hydrogen tests – With specific regard to hydrogen, ensure that the government can complete its hydrogen village trial (connecting residential consumers in the relevant village to hydrogen instead of natural gas) by 2025, by extending the trials subsequent to large urban areas. The results of these trials will inform the government’s decision on the role of hydrogen in the UK’s thermal decarbonisation.
  • Battery and hydraulic storage – Review and seek to remove remaining barriers for developers of battery-based and pumped hydroelectric energy storage projects, including clarifying storage as a distinct subset of generators under the 1989 Act on electricity, following a similar decision by Ofgem in 2020. These sectors have seen strong progress in recent years, and storage will be crucial as intermittent renewable generation comes online.

Energy security

The Russian invasion of Ukraine has drawn attention to the energy security of all European governments. Although the UK is not itself particularly dependent on Russian gas (with only a very small percentage of its gas supply coming from Russia), it remains exposed to high prices in global energy markets and, therefore, security of energy supply for a robust domestic system means that the UK oil, gas and nuclear power sectors will continue to play a role in the UK’s energy supply at least in the medium term .

Accordingly, the bill sets out measures that address the following matters relating to the oil and gas industry:

  • Environmental standards – Existing legislation will be updated to ensure that the offshore oil and gas environmental regulatory regime maintains high standards for habitat protection and pollution control.
  • Change of control of players in the oil and gas industry – The bill aims to safeguard “responsible ownership” of the UK’s oil, gas and carbon storage infrastructure. The North Sea Transition Authority (“NSTA”) will be empowered to identify and prevent any potentially undesirable change in control of an oil licensee company before it occurs, rather than having to seek to remedy it after it has occurred (as is the case under the existing licensing structure). Undertaking a change of control without the consent of the NSTA could result in the revocation of the license. In practice, this is unlikely to result in a significant change, as companies currently require a prior “comfort letter” from the NSTA regarding a change of control in any case, but this amendment will formalize this procedure.
  • Fuel reserve – The Secretary of State will be empowered to maintain the continuity of basic fuel supplies and to ensure that industry maintains or improves its resilience to reduce the risk of emergencies affecting fuel supplies. These measures include directive power (for example, ordering an operator to prioritize the production of a particular fuel if it is considered that there is a threat to supply) and information power. (for example, imposing on large operators the obligation to report incidents which pose a significant threat to the continuity of the fuel supply).

With regard to nuclear energy, the UK government aims to attract investment with the following measures:

  • Public liability – The Bill will strengthen the nuclear third party liability regime by enabling the UK to join a second international treaty on nuclear third party liability, the Supplementary Compensation Convention (“CSC”). The CSC is an international convention designed to provide a clear path to compensation for damages in the event of a nuclear accident. It is an autonomous, independent and complementary instrument to the Paris and Vienna Conventions.
  • Licensing requirements – The Nuclear Installations Act 1965 will be amended to clarify that fusion power installations will not be subject to nuclear site licensing requirements and therefore will not be regulated by the same regulatory regime as nuclear fission, but will instead be regulated by the Health and Safety Executive and environmental regulators.

Consumer protection

Global energy prices have skyrocketed in 2022, especially after Russia invaded Ukraine. This had a significant impact on consumers, both industrial and domestic. Key measures in the bill designed to protect consumers include:

  • the possibility of extending the energy price cap beyond 2023 if the relevant extension conditions are met, to ensure that the protection of domestic supply consumers is not prematurely removed;
  • giving powers to the Competition and Markets Authority to review energy network mergers, which the government says could save consumers up to £420m over the next 10 years by protecting them from increased network prices as a result of mergers;
  • support the development of heating networks and enable the zoning of heating networks in England; and
  • the creation of a new independent body, the Future System Operator (known in the bill as the Independent System Operator or ISOP), which will be responsible for the strategic oversight of electricity and gas systems.

Comment

When introducing the bill, Business and Energy Secretary Kwasi Kwarteng said: “To ensure we are no longer held hostage by rogue states and volatile markets, we must accelerate plans to build a truly clean, affordable and developed energy system in Britain.

This is the biggest reform of our energy system in a decade. We will cut red tape, secure investment in the UK and capture as much global market share as possible in new technologies to make this plan a reality.

There is no doubt that the bill will have an impact on the UK’s energy regime. However, critics have pointed out that the measures detailed in the bill largely mimic the focus areas of the recent Energy security strategyand do not go far enough in relation to certain measures which will have an impact on climate change, in particular with regard to onshore wind, solar and energetic efficiency. In addition, the bill does not include any reform to the UK’s planning and permitting system which some industry players say prevents faster deployment of more power generation capacity. renewable energy in the UK, particularly with regard to offshore wind.

It is unclear whether the bill will go through the parliamentary process and be passed into law given the turbulent state of British politics, but second reading in the House of Lords is currently scheduled for July 19, 2022.

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