This note provides highlights of the UK’s recently released and remarkably sweeping Energy Security Bill.  If enacted, the Bill will have profound impacts on energy investments and the pace and scope of the energy transition in the UK.  Before detailing the Bill, some political context may be useful.

The Uxbridge Surprise

Boris Johnson’s resignation as the Conservative MP for Uxbridge triggered a by-election, which Labour had been expected to win.  In the event, however, the Conservatives unexpectedly prevailed by effectively turning the campaign for the Uxbridge seat into a referendum on the popularity of extending London’s Ultra-Low Emissions Zone (ULEZ) – ironically initially proposed by Johnson in 2015 when he was still Mayor of London.

This victory may have led some in the Conservative Party to perceive a chink in Labour’s apparently impregnable opinion poll lead.  Focusing on the energy transition as a factor in the cost-of-living crisis creates a clear political divide between the two parties.  That conclusion which may lie behind recent announcements of policy reviews of car controls in inner cities; and pressure from Conservative members and MPs to drop commitments to ban the sale of hydrocarbon-powered cars by 2030, to phase-out gas boilers by 2035 and to impose energy efficiency targets on landlords.

However, given that, at the same time, we have seen the PM commit to substantial long-term investment in the UK’s first at-scale CCUS project in Aberdeen and the long-awaited and ambitious Energy Security Bill being laid before Parliament, it is fair to say that the UK’s energy policy signals are mixed.

North Sea Oil and Gas Exploration to Continue

On 31 June, PM Sunak announced that his government would award over new 100 oil and gas licences for North Sea oil and gas exploitation under the current 33rd licensing round, (with a commitment to undertake future licensing rounds).  The Energy Minister, Grant Shapps, stated he wanted to “max out” the UK’s remaining reserves of North Sea oil and gas.

The IEA and the UN have argued that no new exploration and development of oil and gas fields should occur if the world is to limit global temperature rises to 1.5C above pre-industrial levels.  Since Labour has aligned its policy on new oil and gas with this position (pledging to ban drilling for new oil and gas projects in the North Sea, whilst allowing existing wells to remain operational), Sunak’s announcement and Shapps’ determination have created a clear policy divide between the two parties.

Armistice in the ‘War on Cars’?

Building on the ULEZ victory, the PM declared himself to be ‘on the side of the car-driver’ and announced a review of low-traffic neighbourhood (LTN) initiatives, including – according to some reports – restrictions on councils’ ability to impose 20mph speed limits, or install bus gates.

Although the PM did renew his commitment to the 2030 deadline for ending the sale of new petrol and diesel cars, that position is already under pressure, with 70% of Conservative Party members and a growing number of Tory MPs and peers reportedly opposing the ban. On 1 August, the Business Secretary told Cabinet colleagues that the Government’s EV targets risked damaging investment in Britain and 30 Conservative MPs signed up to the five pledges of the influential newspaper The Sun on Net Zero – one of which is the postponement of the 2030 ban.

Although Labour’s candidate in Uxbridge distanced himself from the UKEZ policy (and appeared to receive support in doing so from the Labour Leader), it is the poster-child of the Labour Mayor of London. 

Carbon Markets in Turmoil

In June the UK government offered more UK ETS allowances than expected as part of an overall reduction in the Scheme’s emissions cap – in the process making it cheaper for industry to emit greenhouse gases. The Government also announced that it would make 53.5m tonnes of extra allowances — about half a year’s worth of UK emissions covered by the scheme — available between 2024 and 2027 and would exclude domestic shipping from the Scheme until 2026 (two years later than the EU). These developments pushed carbon prices to trade at a steep discount compared with those in Europe – (nearly 40 % below the EU at £47 a tonne in the UK compared with £75.86 in the EU).

Although the change has pushed UK power prices below those on the continental mainland, given the centrality of the UK’s Carbon Market to its Net-Zero plans, the lower price could encourage power generators to burn more gas, whilst having a negative impact on efforts to attract the green investments needed to reduce carbon emissions by expanding renewable energy.

CCUS Ascending

However, in contradistinction to these apparently weaker-emission policy positions, the PM also used his trip to Aberdeen to confirm that the Acorn carbon capture and storage project in north-east Scotland, and Viking in the Humber had been chosen as the third and fourth CCUS clusters in the UK, to be supported by Government funding as a crucial part of the UK’s net zero strategy.  Critics note that although CCUS can be used to support net-zero ambitions, it also favors continued fossil fuel-powered electricity generation.

Energy Security Bill

Meanwhile, in the background, the Government presented its long-awaited UK’s Energy Security Bill (ESB) to Parliament on 6 July. This is an ambitious and complex piece of legislation – more than 300 pages long with 243 clauses and 19 Schedules.  If it passes serenely through Parliament, it could be in force by September.

It is a critical piece of legislation for the UK’s energy transition, including provisions to support energy efficiency, low carbon hydrogen, CCUS and nuclear fusion, as well as laying the foundations for structural regulatory reforms to electricity and heat networks. It also contains provisions affecting upstream oil and gas, electricity networks, fuel sector resilience and energy system governance. And it contains significant new regulator and Government powers which will re-shape the energy sector in the UK.

In response to concerns that the current remit of the UK electricity market Regulator (Ofgem) holds back the development of new wind turbines, cables and other measure, the Bill significantly expands the Regulator’s powers and responsibilities and places it under a legal obligation to assist the UK’s progress towards net-zero. This change will help empower Ofgem to oversee the enormous transformation of the UK’s energy sector required to reach net-zero including by developing flexible retail markets to manage the increasing greater proportion of the UK’s electricity generation which will come from intermittent renewable sources.

Key elements of the Bill include:

• Increased power to Ofgem

The Bill moves responsibility for energy code governance to newly-created code managers, which will be directly accountable to Ofgem. And gives the Competition & Markets Authority (CMA) power to assess whether a merger between energy network companies would substantially prejudice Ofgem’s price control-setting functions.

• Heat networks

The Bill also gives Ofgem the power to monitor and intervene in the heat network market. It gives the government powers to introduce heat network zoning as well as price regulations. And it introduces measures allowing developers to access powers equivalent to other utilities such as electricity and gas to scale up heat network infrastructure.

• Competition in onshore electricity networks

The Bill introduces new enabling powers for Ofgem to tender network projects identified under a new Centralised Strategic Network Plan for delivery by third parties, beyond the existing network owners.

• Greenhouse gas removal in the UK

The Bill allows for new greenhouse gas removal (GGR) methods to count towards UK carbon budgets and launches a consultation on business models for GGRs.

• Funding regime for CCUS networks

The Bill creates a basis for a CCUS regulatory regime in the UK. It appoints Ofgem as the regulator and creates a methodology for the provision of financial assistance to network operators and early projects. And creates the basis for decommissioning and insolvency regimes.

• Financial support for hydrogen and industrial carbon capture (ICC)

The Bill creates the powers which underpin low carbon hydrogen and ICC business models (including to offer hydrogen and carbon capture contracts to projects; organise allocation rounds and establish a hydrogen levy to fund financial support for hydrogen production from 2025).

• Trials of hydrogen heating

The Bill provides the powers required for full gas grid conversion to 100% hydrogen, including powers for a trial hydrogen village by 2025.

• Low-Carbon Heat Scheme

The Bill introduces a scheme which will set targets for “scheme participants” in terms of the energy efficiency or carbon intensity of the equipment they supply.

• New energy market arrangements

The Bill extends the UK energy price cap beyond 2023 and enables the inclusion of smaller suppliers in the energy company obligation (ECO) scheme.

• Independent System Operator and Planner

The Bill creates a new public body to consolidate operation and planning functions across a range of existing and future power systems into a single institution with operational independence from government to promote efficiency and reduced costs for energy consumers.

• Enabling multi-purpose interconnectors (MPIs)

The Bill redefines licensable activity under the Electricity Act 1989 as part of the wider Offshore Transmission Network Review, allowing for the operation of MPIs, defined as interconnectors that transmit electricity between the UK and a third country or territory; an offshore generation station and a substation; or between two or more substations. 

• Delivering a smarter electricity system

The Bill defines electricity storage as a distinct sub-set of generation. It extends powers under the Energy Act 2008 to modify energy licences and codes to enable smart meter roll-out, and provides powers to set requirements for energy smart appliances.

• Ensuring fuel resilience

The Bill gives the government additional oversight and powers to protect supplies from critical fuel infrastructure sites.

• Promoting responsible oil and gas investments

The Bill expands the powers of the North Sea Transitional Authority (NSTA) to identify and prevent undesirable changes of ownership and control.

• New Powers for Offshore Petroleum Regulator for Environment and Decommissioning (OPRED)

The Bill provides for secondary legislation to ensure that the offshore oil and gas environmental regime remains effective. It gives OPRED the power to make legislative changes to cover offshore hydrogen operations; and offshore gas unloading and storage and enables the Government to recover more of the costs associated with regulating offshore oil and gas decommissioning activities from the industry.

• Incentivising nuclear energy infrastructure

The Bill simplifies nuclear decommissioning and third-party liability regime to align with international standards. It sets out the regulatory regime governing a UK-based geological disposal facility and exempts fusion energy facilities from nuclear site licensing requirements.

• Improving the energy performance of buildings

The Bill provides the government with a power to amend the assessment, certification, and publication of the energy certificates regime.

Conclusion

With the Conservatives consistently trailing Labour by 20-plus points in polls, the unexpected victory in Uxbridge has given Tory election strategists pause for thought. There is a section of UK society that traditionally votes Conservative for whom rolling back (or slowing down) the implementation of green policies would be popular. And it is tempting to conclude from the Government position on ULEZ and its shift in stance on LTN that Conservative strategists have made the assessment that this is its path to electoral victory next year.

As noted above, the PM has (so far) continued to support the 2030 date for the ban on new petrol and diesel cars.  This position may be explained by concerns that uncertainty about the date could deter EV investment in the UK (cf Tata’s recent announcement of a battery gigafactory in Somerset).  However, in the face of growing opposition in the Conservative Party; concerns that the UK’s electricity infrastructure is not yet capable of supporting a wholesale switch to EV in the short to medium term; and a series of newspaper reports warning that Chinese-produced EVs could be switched off, paralysing UK roads, there are signs of a tentative softening in the official stance with Ministers beginning to emphasise 2035 (the date for the end of the sale of new hybrid vehicles), rather than 2030.

The ambition of the significant changes to the UK’s energy system foreseen in the Government’s own ESB, suggest that if the Government is seeking to water down its green commitments in response to pressure from inside the Conservative Party, it may choose to focus those changes in areas where there is political capital to be made.  Being ‘on the side of the motorist’ plays well with the electorate, especially during a cost-of-living crisis – PM Sunak hinted at this policy shift when he commented that ‘ordinary people’ must not bear the cost of compulsory green initiatives, and that the path to net zero must be “proportional and pragmatic”.

Whilst the shifting position on cars may be explained by short-term politics (the Uxbridge effect), it is also clearly part of an emerging longer term dynamic.  Current record global temperatures, ice-cap melt, wildfires and flooding have demonstrated that the energy transition is urgent and imperative.  But there is also a dawning realisation that the enormous economic cost and physical disruption to individuals and society of pushing ahead with that transition carries an increasingly significant political risk.  

Whereas the US and the EU benefit from broad-based taxpayer-funded subsidy regimes – the Inflation Reduction Act and the Green Industrial Plan respectively – the absence of an equivalent regime in the UK means that the cost burden of the energy transition in the UK is likely to fall more heavily and directly on the UK energy consumer.  This distinction seems destined to sharply test the UK’s political willingness to endure short-term financial (and electoral) pain for more nebulous, distant, difficult to grasp and yet necessary, environmental gain.