Energy Prices Bill 2022: Success or Mess?20 October 2022

• he and “the Prime Minister…agreed…to reverse almost all the tax measures announced in the growth plan three weeks ago that have not been legislated for in Parliament”;
• he is set “to review the energy price guarantee”, which he described as “the biggest single expense in the growth plan and one of the most generous schemes in the world”;
• “the support we are providing between now and April next year will not change, but beyond next April, the Prime Minister and I have reluctantly agreed that it would not be responsible to continue to expose the public finances to unlimited volatility in international gas prices. I am announcing today a Treasury-led review into how we support energy bills beyond April of next year. The review’s objective is to design a new approach that will cost the taxpayer significantly less than planned while ensuring enough support for those in need. Any support for businesses will be targeted at those most affected and a new approach will better incentivise energy efficiency”; and
• “The issue with the revised scheme that we want to announce for the energy price guarantee is that, while I think most people agree with the logic of targeting support where it is needed the most, we need a scheme which works practically, and it is not particularly easy to design that kind of scheme. We are going to do as much work as we can, and we will announce what we are going to do as soon as we can…”

Despite these plans, the Bill received its third reading in the House of Commons’ evening session. As of publication, the Bill has moved into the House of Lords to complete the legislative process.

It is unclear whether the Bill will make it through the process, and in what form, particularly given the policy changes announced. With sunset provisions that limit powers for two years from 1 October 2022, is this Bill even worth pursuing? Particularly given the new Chancellor’s unwinding of the two-year energy price guarantee.

What is the Energy Prices Bill proposing?

Nevertheless, let’s take a look at what the Bill actually proposes to do (noting that this analysis is based on the Bill as first published). It gives the Secretary of State the following powers:

(1) DOMESTIC PRICE REDUCTION: To establish a domestic electricity and gas price reduction scheme for being a scheme that makes provision for and in connection with (a) reducing the amount that would otherwise be charged for domestic electricity and gas supply by licensed suppliers who are parties to the scheme, and (b) making payments to those suppliers in respect of those reductions in charges. Such regulations would be subject to the negative procedure (see below). (Sections 1 to 8);

(2) NON-DOMESTIC PRICE REDUCTION: To make, by regulations, provision for and in connection with (a) reducing the amounts that would otherwise be charged for GB and NI non-domestic electricity and gas supply by licensed suppliers, and (b) making payments to those suppliers in respect of those reductions. Such regulations would be subject to the affirmative procedure (see below). (Sections 9 to 12; Schedules 1 and 2);

(3) SUPPORT FOR MEETING ENERGY COSTS:

• To take such steps as the Secretary of State considers appropriate to (a) provide support for meeting costs related to the use of energy; (b) enable or encourage the efficient use of energy; (c) provide support for meeting costs related to the supply of energy; (d) enable or encourage the supply of energy; and to take such other steps as the Secretary of State considers appropriate in response to the energy crisis;
• To make, by regulations, provision about designated bodies taking action in support of relevant steps, and in particular, provision in connection with designated bodies: (a) receiving financial assistance, (b) distributing and otherwise managing financial assistance, (c) monitoring and accounting for financial assistance, (d) recovering and returning financial assistance; and (e) providing information; and
• Notably, such steps can have retrospective effect from 1 January 2022. (Sections 13 to 15).

(4) REDUCING THE PRICE OF ELECTRICITY:

• For a specified purpose, to make regulations for and in connection with, requiring periodic payments to be made to a payment administrator by (a) specified electricity generators, (b) electricity generators that are of a specified description, or (c) electricity generators that are designated by the Secretary of State in accordance with the regulations. Such regulations would be subject to the negative procedure (please see further below);
• The specified purpose is to enable a payment administrator to obtain funds for (a) paying to electricity suppliers in connection with reducing the cost to customers of electricity and (b) meeting expenditure incurred or to be incurred by the Secretary of State in reducing the cost to customers of electricity; and
• Crucially, while the regulations may make “provision about the method by which the amount of a periodic payment is to be calculated”, that provision must “require the amount of a periodic payment to be calculated by reference to the quantity of electricity generated during the period in question by the relevant generating station with which the electricity generator is concerned”. (Sections 16 and 17).

(5) PASS-THROUGH REQUIREMENT: To impose, by regulations, pass-through requirements on persons to whom energy price support is provided (“intermediaries”), such requirement being to secure that the benefit of energy price support provided to an intermediary is passed on to end users of the intermediary by a specified time. Such regulations would be subject to the affirmative procedure (please see further below). (Section 19).

Achieving stated aims?

In summary, the Bill proposes to charge specified electricity generators in order to subsidise electricity and gas purchases by licensed suppliers, and to force suppliers to pass those subsidies on to final consumers, be they domestic or non-domestic. Which electricity generators are likely to be specified in the regulations? According to the Explanatory Notes published alongside the Bill, it will be “low carbon energy firms” (para 15):

The Bill will also enable the Government to take sever the link between abnormally high gas prices and the price of electricity from low carbon generators through the imposition of a temporary Cost-Plus Revenue Limit, ensuring consumers pay a fair amount for their electricity, and allowing generators to cover their costs and receive an appropriate revenue that reflects their investment commitment and risk. At present the electricity price in the UK is set by the price charged by the most expensive, or marginal, source of energy for generation. In most cases this most expensive source of energy for generation is gas, and currently gas prices are significantly inflated in the UK in light of global energy prices. Low carbon generators operating in the market may have lower operating costs but still benefit from the high price in the wholesale market. By regulating for a temporary requirement for electricity generators to make payments and to enable existing electricity generators to be offered a Contract for Difference, the Bill will ensure that consumers pay a fairer price for their energy and that low carbon energy firms do not unduly gain from the energy crisis. (emphasis added)

We have to question whether this is really the right approach. Are renewable generators actually the ones profiting from the way that the wholesale market price is set? The answer is maybe. It is impossible to be certain unless we have visibility over all bilateral contracts made between power generators and electricity suppliers or other offtakers. The majority of renewable-generated electricity in GB is traded bilaterally and forecast positions are hedged by actions taken on the day ahead or intraday markets. Comparatively few renewable generators trade using a “fully merchant” model on markets.

Certainly, many early renewable projects that benefited from subsidies such as Renewable Obligations Certificates are likely to have long term power purchase agreements in place with fixed prices. The subsidies allowed many of these projects to obtain finance so that they could be delivered and revenue contracts are often tied to loan tenors to ensure lenders will recoup their investments.

Irresponsible reporting  has conflated high market prices and subsidies painting renewable generators as “highway robbers”:

Owners of low-carbon schemes such as onshore wind and solar farms have made particularly big profits from the spike in electricity prices since Russia launched its war in Ukraine because they receive state subsidies on top of wholesale rates under a legacy “renewables obligation certificates” scheme that dates back two decades. (emphasis added)

There is no way of knowing whether owners of such schemes do make “wholesale rates” without reviewing the power purchase agreements in place and all of the pricing mechanisms contained therein. Sweeping generalisations are dangerous, but they are also particularly unhelpful and misleading in the context of highly complex and bespoke, not to mention confidential and commercially sensitive, arrangements. Assuming this audit hasn’t taken place this must be viewed as an erroneous conclusion on the status of such “low carbon schemes”.

The Bill is predicated on views that are at best misguided and misconceived, and at worst, an attack on the renewables sector which has hitherto relied on a supportive political landscape in order to grow and prosper.

How can you best prepare for the Bill (if you are a renewable generator)?

As a renewable generator, there are steps that you can take to prepare for the passing of the Bill.  As already stated by many law firms, you would be well advised to start checking the change in law provisions in your documents, including power purchase agreements, finance documents, other project documents. It would also be wise to assess any hedging positions taken in relation to forecast output.

Other than that, there is little to be done at the moment save marshalling information. Projects that could be affected would include any with output from 1 January 2022, regardless of whether or not they are subject to long term PPAs.  Any regulations that are to be made under the Bill can be made relatively quickly, though we would hope for adequate public consultation on any proposed measures.

The Bill itself specifies that where regulations are said to be “subject to the negative procedure”, the statutory instrument containing them is subject to annulment via a resolution of either House of Parliament.

Where they are said to be “subject to the affirmative procedure”, and are made:

• during the initial period of six months from the day the Bill is passed as an Act, the statutory instrument must be laid before Parliament after being made and will cease to have effect at the end of the period of 28 days after being laid unless, during that 28 day period, it is approved by a resolution of each House of Parliament;
• after the initial period of six months from the day the Bill is passed as an Act, they may not be made unless a draft of the statutory instrument has been laid before, and approved by a resolution of, each House of Parliament.

Therefore, the periods for contacting MPs and lobbying for amendments or annulments will be very short if there is no previous consultation.

If you are concerned about any of the issues raised, please do contact the authors.