The Energy Act 2023: a brave new world?

The Act introduces a new licensing framework for CO2 transport and storage. The 2022 Power up Britain Energy Security Plan confirmed the government's plan to initiate Carbon Capture, Utilisation and Storage ("CCUS") systems in 2 industrial clusters by the mid-2020s, and a further 2 clusters by 2030 ("Phase 1" and "Phase 2", respectively). The government envisages CCUS systems becoming a key technology for the net zero transition, which involves capturing and storing carbon emissions from industrial clusters (regional collections of industrial sources of CO2).  

Following the selection of HyNet and East Coast Cluster as the two Phase 1 CCUS clusters in November 2021, the Government confirmed the eight shortlisted Phase 2 projects in March 2023. In addition to providing environmental benefits, the Government believes that its commitment to Phase 1 and 2 could help create 50,000 jobs in the UK by 2030.

Under the Act, CCUS operators will be required to hold a licence to either dispose of carbon dioxide by way of geological storage or provide a service of transporting carbon dioxide by pipes ("T&S Licence"). The T&S Licence:

·        will be granted by Ofgem (though the Secretary of State will grant the T&S Licence during the first regulatory period), and

·        will be awarded on a competitive basis, in a similar manner to the competitive tendering process described below in respect of the building, ownership and operation of onshore network assets.

The Act also contains provisions that confer power on the Secretary of State to make regulations about Revenue Support Agreements ("RSA"), which are contractual mechanisms that facilitate the provision of revenue support to T&S Licence holders during the phase in of the new technology (when the market will not be sufficiently mature for the T&S Licence holder to mitigate this risk). The Government has already held a consultation on RSAs, which ended on 25 October 2023, the outcome of which will delineate Ofgem's powers and confirm the obligations required of the T&S Licence holders under the RSA.

Great Britain's transmission and distribution networks transport high and lower voltage electricity across the country from where it is generated to where it is consumed. The electricity networks are owned and operated by regional monopolies, each serving different geographical areas. There is no direct competition between them.

The energy regulator Ofgem has historically used 'price control' mechanisms to manage supplier charges (who in turn supply energy and pass on charges to consumers). However, the Government has increasingly questioned the effectiveness of such mechanisms at creating innovative, efficient, and cost-effective onshore energy networks. One of the ways in which the Government intend to tackle this issue in the energy sector is by increasing competition in Britain's onshore electricity networks.

The Act builds on the Energy White Paper, published in December 2020 (the "White Paper"), which revealed the government's plans to introduce competitive tendering in the building, ownership and operation of the onshore electricity networks. The White Paper reports that increasing competition in network assets is an effective tool in reducing network costs, citing the estimated £800 million of savings generated for consumers from the introduction of a competitive tender process in the offshore wind network.

The Act extends the competitive regime for offshore electricity transmission networks to the onshore energy sector, where currently only incumbent network operators can build, own and operate network assets. While the Act has already introduced some key amendments to the Electricity Act 1989 (as discussed below), the exact mechanics of the tendering process, including the criteria for identifying projects that are suitable for competition and the identity of the "Delivery Body" (i.e., the body procuring the tender) will be determined by secondary legislation. The government response to consultation, published in August 2022, indicates that:  

·        the National Grid Electricity System Operator will be appointed to the role of the Delivery Body for projects at the transmission level,

·        while it remains unclear which body will be appointed to the role of Delivery Body for projects at the distribution level, it will likely be brought under the remit of Ofgem (though possibly Distribution System Operators),

·        at the transmission level, only projects above a value of £100m will be competitively tendered, and

·        at the distribution level, this de minimis threshold is yet to be determined but will likely be much lower. 

Amendments to the Electricity Act 1989

Under the Act, the Delivery Body will have the power to hold a competitive tender for various electricity projects, including projects related to:

1. the total onshore and offshore transmission and distribution system of Great Britain,
   
   
2.  electricity interconnectors, or
   
   
3. multi-purpose interconnectors (a new type of subsea electricity cable which connects a cluster of offshore power generators to the mainland).

In addition to the above, the Delivery Body will also be able to hold competitive tenders to identify new licensees for:

1. generation licences,
   
   
2. distribution licences,
   
   
3. interconnector licences, or
   
   
4.  multi-purpose interconnector licences ("MPIs") (MPI operators are now required to hold a licence – see 3.5 below).

According to the Government, this new competitive tendering model is expected to save consumers up to £1 billion off their energy bills by 2050.

A new merger regime

The Act also introduces a new merger regime, which will enable the Competition and Markets Authority (the "CMA") to investigate energy enterprise mergers in Great Britain. Where an energy network enterprise with a GB turnover of over £70 million merges with another energy network enterprise that holds the same type of licence, then the CMA must refer the merger to a CMA inquiry group for investigation (subject to certain conditions arising).

·        The main condition is that the merger has substantially prejudiced or may substantially prejudice Ofgem's "ability to make comparisons between such enterprises", when determining the 'price control' mechanism discussed above.

The CMA will ultimately be empowered to prevent qualifying mergers from taking place, where it considers it to be reasonable and practical do so, and provided there is not a public interest case to the contrary. The Government expects the merger regime will save households £430 million over the next decade.

Multi-purpose Interconnectors ("MPIs")

The Act also creates a new licensable activity for MPIs, meaning that operating an MPI without a licence will be prohibited. MPIs present a lower-cost, lower-environmental impact alternative to existing point-to-point connector systems which "could reduce consumer costs by £3-6 billion… and could reduce the number of on-shore 'landing points' by up to 50%". By regulating and licensing developments in this area, Ofgem aims to provide "certainty" to investors to encourage future developments to reduce consumer costs.

While heat networks are already a well-recognised source of low-cost and low-carbon heat, they have seen limited use in the UK to date, and their use has been restricted to mainly domestic end users. The CMA found in a 2018 study that there were pricing and quality issues present in many heat networks and recommended that the government regulate the sector. Building on this recommendation and the White Paper, the Act creates a new regulatory framework for heat networks, bringing the sector under the remit of Ofgem.

A key part of this new regulatory framework is the establishment of a standardised methodology to identify potential heat network zones. The government held a consultation on heat network zoning in 2022, and published its consultation response in June 2022. While the exact methodologies regarding heat network zoning will be determined through the implementation of secondary legislation, the consultation response indicates that:

·        The government will introduce a standardised methodology to identify potential heat network zones.

·        Local government will be given the power to act as or establish a local zoning coordinator to undertake zoning functions including designating areas as heat network zones.

·        Once a zone has been established, specific buildings or building clusters will be required to connect to a heat network within a prescribed timeframe. Building owners will be able to request an exemption under limited circumstances.

·        Price protections will be offered to all consumers who are required to connect within zones.

The Act also includes mechanisms to put heat networks on an equal footing with traditional energy sources for the first time at a construction level, including introducing permitting systems for street works and improved access to land previously only available to traditional energy sources.

New heat networks are touted as a key factor in 'Levelling Up' objectives, with the Government advertising a £500 million pipeline in the North-East alone. Facilitating the expansion of brand-new heat networks may prove to be a significant opportunity for the infrastructure sector.

In its 2022 British Energy Security Strategy paper, the government committed to doubling its UK ambition for hydrogen production to up to 10GW by 2030, with at least half of this from electrolytic hydrogen.

In 2021, the government ran a consultation on a proposed hydrogen business model, which aims to "overcome one of the key barriers to deploying low carbon hydrogen: the higher cost of low carbon hydrogen compared to high carbon counterfactual fuels." The government's response to consultation, published in 2022, confirmed that the government aim to incentivise the production of and use of low carbon hydrogen by providing revenue support, through RSAs (which will work in a similar way to those introduced for CCUS).

In April 2023, the Government published its Powering Up Britain report, in which it revealed its ambition to ramp up nuclear capacity in the UK to up to 24GW by 2050. In order to facilitate the delivery of its nuclear programme, the Government set up Great British Nuclear ("GBN"), which is currently operating via an existing governmental company, British Nuclear Fuels Limited. The Act gives the Secretary of State the power to designate a publicly owned company as Great British Nuclear, the object of which under the Act is to "facilitate the design, construction, commissioning and operation of nuclear energy generation projects for the purpose of furthering any policies published by His Majesty's government."

GBN will be established as a company rather than a statutory corporation, meaning that its general powers will be derived from the Companies Act 2006 (as long as it does so in line with objectives set by the Government). This will give GBN greater flexibility in selecting nuclear projects, providing funding mechanisms, and interacting with the private sector.  

The first job for GBN is to lead the competitive process to select the best small modular reactor technologies for investment. This competitive process commenced in April 2023, with market engagement in the first phase. The second phase was launched in the summer of 2023 and the leading technologies were selected in October 2023. The shortlisted companies will be invited to bid for Government contracts later this year with successful companies announced in spring next year and contracts awarded in the summer of 2024.

Until such time as the relevant secondary legislation is implemented, it is yet to be seen how the Act will shape the long-term future of the UK's energy framework. Notwithstanding this uncertainty, the infrastructure sector undoubtedly stands to benefit from a number of significant opportunities arising from the Act.

In setting out the future of the regulatory landscape for energy the Government has said that it aims to provide legal certainty to investors in order to incentivise both domestic and foreign direct investment. For example, it is suggested that the Act will help unlock £100 billion in private investment in energy infrastructure, which, if true, could help support the construction of new energy infrastructure projects. In addition to private investment, the provision of public investment through contractual mechanisms such as RSAs could provide infrastructure projects with the capital required to ease the initial phase-in of these nascent technologies.

It is clear that Government envisages that the infrastructure sector will play a key role in the UK achieving a net zero transition, particularly in the construction of new sustainable energy projects. The sector's continued activity will be a key determining factor in balancing the UK's long-term goals of fostering sustainable energy security and mobilising public and private investment in energy projects.