The Devolved Nature of Energy in the UK
In the first instance, it is important to note that due to historical and geographical reasons, the Northern Irish electricity grid is effectively separate from that in Scotland, England and Wales (ie, Great Britain or GB). As a result of devolution, electricity market regulation has to an extent been devolved from the United Kingdom (UK) to Scotland, England, Wales and Northern Ireland, whereby the regulatory regimes of the other countries are very similar to one another. Northern Ireland, however, has its own national regulatory authority, the Northern Ireland Authority for Utility Regulation (NIAUR), which works in close co-operation with Ofgem.
The Northern Irish electricity market is coupled to that of the Republic of Ireland as part of the Integrated Single Electricity Market (I-SEM), which is regulated jointly by NIAUR and the Irish Commission for Regulation of Utilities (CRU).
Due to the devolved nature of electricity policy with respect to Northern Ireland and to the single GB national electricity transmission system (NETS), this chapter shall focus primarily on the GB regulatory regime.
GEMA and Ofgem
Great Britain (GB) had one of the first liberalised electricity markets. The Electricity Act 1989 privatised the various state authorities and created individual types of market participants – specifically generators, transmission network operators, suppliers and later distribution network operators.
The 1989 Act paved the way for the establishment of the GB energy regulatory authority, the Gas and Electricity Markets Authority (GEMA) by the Utilities Act 2000, which is supported by the Office of Gas and Electricity Markets (Ofgem). GEMA acts independently from the UK government, but is accountable to the UK Parliament.
EU Energy Packages
The first, second and third energy packages of the EU – enacted in 1996, 2001 and 2009, respectively – set out to liberalise the electricity markets of EU member states, which effectively reinforced the principles of the 1989 Act. The UK electricity market is based on the principle of free competition and transparency, with Ofgem primarily acting to protect consumer interests. With the notable exception of the Low Carbon Contracts Company (see 1.8 Unique Aspects of the Power Industry), the state itself does not directly participate in the UK electricity market (see 1.3 Foreign Investment Review Process regarding "golden shares"), although it may hold minority shareholdings in certain market participants.
As of the time of writing, there are 378 generation licence holders, which are all based in GB and operate a variety of generation types. The main GB-based generators include Centrica, Drax Power, EDF Energy, Engie, RWE, Scottish Power and SSE. Due to market liberalisation, these entities are variously under UK and foreign ownership.
As of the time of writing, there are 25 transmission licence holders. Under the UK electricity market trading regime, introduced through the British Electricity Trading Transmission Arrangements (BETTA), National Grid Electricity Transmission plc (NGET) was nominated as the sole operator of NETS – ie, the onshore transmission network of GB. As of 1 April 2019, NGET was split into two separate legal entities, with National Grid Electricity System Operator (NGESO) taking over the operation of NETS and therefore becoming certified GB Transmission System Operator (TSO), whereas NGET remains owner of the onshore transmission network in England and Wales.
In Scotland, the network ownership is divided between SP Transmission Ltd (SPT) regarding southern Scotland, and Scottish Hydro Electric Transmission plc (SHE-T) regarding northern Scotland and the Scottish islands.
The remainder of transmission licence holders are primarily offshore transmission owners (OFTOs), which own and operate the transmission lines between offshore generators and NETS.
As of the time of writing, there are 17 interconnection licence holders. A number of interconnectors are currently in development, however six are currently in operation:
Since the initiation of the cap and floor regime, a further 10.9 GW of capacity is either operational, under construction or in development. On 18 June 2021, Ofgem published two working paper consultations in respect of its review of its regulatory policy and approach to new electricity interconnectors. The Interconnector Policy Review: Working Paper 1 seeks to review Ofgem’s regulatory policy of its cap and floor regime, the regulated route for electricity interconnector developers in GB, and its approach to new electricity interconnectors. The aim was to identify whether there is demand for more GB interconnection capacity beyond the projects that at present have regulatory approval, and to consider Ofgem’s approach to the regulation of future GB interconnection, as well as identifying whether further interconnection and the framework for delivery are still in the consumers’ best interests.
The review is also carried out in consideration of the government’s net-zero target for carbon emissions by 2050 in which the Energy White Paper – published by the Department of Business, Energy and Industrial Strategy (BEIS) in December 2020 – committed BEIS to working with Ofgem, developers and European partners to bring about a minimum of 18 GW of interconnector capacity by 2030.
The Interconnector Policy Review: Working Paper 2 summarises Ofgem’s findings and recommendations from Workstream 2: socio-economic modelling. The primary objective of Workstream 2 is to better recognise whether further GB interconnection beyond the present baseline is both in the interests of GB and its consumers from a socio-economic perspective. Based on the conclusions from Workstream 2, it has been identified that there is a need for further GB interconnection and the continuing relevance of the regulatory regime to bolster additional investment that is beneficial for consumers.
There are 14 distribution licence holders based on the distinct geographic areas of the original 12 area electricity boards formed prior to the electricity market liberalisation under the Electricity Act 1947. These are Eastern Power Networks plc, Electricity North West Limited, London Power Networks plc, Northern Powergrid (Northeast) Limited, Northern Powergrid (Yorkshire) plc, Scottish Hydro Electric Power Distribution plc, South Eastern Power Networks plc, Southern Electric Power Distribution plc, SP Distribution plc, SP Manweb plc, Western Power Distribution (East Midlands) plc, Western Power Distribution (South Wales) plc, Western Power Distribution (South West) plc and Western Power Distribution (West Midlands) plc.
In addition, there are 13 independent distribution licence holders that operate smaller on-site networks, primarily used for residential and commercial developments connected to the 14 distribution networks.
In 1999, full competition was introduced into the UK electricity retail market. At the time of writing, there are 166 domestic and non-domestic licensed suppliers in the UK. However, the market is dominated by the so-called big six, some of which are additionally generation asset owners. These are British Gas, SSE, E.ON, EDF Energy, Scottish Power and npower.
In general, the UK government holds "golden shares" in a limited number of UK companies. These are special shares conferring particular rights under a company's articles of association. Typical golden share powers include the relevant Secretary of State (as shareholder) having the right to restrict shareholdings in the company to 15%. A number of golden shares also include powers over the disposal of material assets.
Following the entry into force of the Electricity Act 1989, golden shares were issued in energy companies to protect these from foreign takeover.
The National Security and Investment Act 2021 (NSIA) received Royal Assent on 29 April 2021 and instigates the UK’s first separate national security and foreign direct investment regime. The national security regime (NSI) within the Act is not yet effective but is anticipated to be in force by the end of 2021. NSIA establishes a statutory regime for government scrutiny and intervention in investments to protect national security, and extends to England and Wales, Scotland and Northern Ireland.
A key attribute of the NSI regime is mandatory notifications in certain sectors, including the energy sector. Under the mandatory notification system, prior to the completion of acquisitions, proposed acquirers of shares or voting rights in companies undertaking specified activities in the UK must obtain authorisation and approval from the Secretary of State for Business, Energy and Industrial Strategy (BEIS). Any transaction that is completed without approval is void and results in financial penalties, potential imprisonment and director disqualification.
The mandatory notification sectors are still in the process of being defined in response to consultation feedback, whereby the current definition of "energy" covers certain events that involve entities involved in the ownership or operation of:
It should be noted that retail electricity suppliers are not captured within the scope of the notification obligations.
There are, however, certain limitations. Section 59 et seq of the Enterprise Act 2002 entitles the Secretary of State for Business, Energy and Industrial Strategy to intervene in the private sector on exceptional public interest purposes, such as national security, media quality and financial stability. Section 13 of the Industry Act 1975 entitles the Secretary of State to block an acquisition by a non UK-based entity of an "important manufacturing undertaking" when it appears that a change of control would be contrary to the interests of the UK or a substantial part of it; however, there is no public record of this provision ever being used to prohibit a transaction.
Golden shares are still held in only a few strategically privatised companies, such as Rolls-Royce (aerospace) and BAE Systems (aircraft and defence), while certain service activities (such as radio and land-based television broadcasting) are subject to licensing. Furthermore, the UK requires that at least one director of any company registered in the UK must be ordinarily resident in the UK.
The Enterprise Act 2002, and indirectly the Competition Act 1998, govern the process of M&A in the UK and the Competition and Markets Authority (CMA) is responsible for their administration. The CMA may investigate a merger or acquisition upon the occurrence of a "relevant merger situation". Under Section 23 of the Enterprise Act 2002, this is met when (in relation to the supply of goods):
However, the EU Merger Regulation (Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings) allows the European Commission to assume exclusive jurisdiction over mergers that have a "community dimension" (ie, exceeding certain thresholds). The primary thresholds are that the combined aggregate worldwide turnover in the preceding financial year of all undertakings exceeds EUR5 billion and the combined aggregate EU-wide turnover of at least two of the undertakings exceeds EUR250 million.
Prior to Brexit, the EU Merger Regulation applied directly to the UK. However, since the UK’s departure from the EU, the TCA clarifies that the EU Merger Regulation regime and the UK merger control regime will apply in parallel, ending the one-stop shop regime. Mergers involving UK transactions that were previously handled by the European Commission under the EU Merger Regulation (EUMR) are now subject to the UK merger control regime. The CMA can now scrutinise transactions that were previously the jurisdiction of the EUMR. Although the UK merger control regime is voluntary, the CMA has a statutory duty to oversee merger activity and has the power to call-in transactions up to four months following any transaction which has not been notified to the CMA.
As noted above, the new NSIA in any event will require notification and approval for certain transactions involving the energy sector under the mandatory notification system.
Beyond the controls discussed in 1.3 Foreign Investment Review Process, there are no specific restrictions on the sale of power industry assets or businesses, or other transactions.
The ministry responsible for energy policy is the Department for Business, Energy and Industrial Strategy (BEIS). Acting under the Secretary of State, BEIS is responsible for the development of energy policy and preparing bills for consideration by Parliament. With respect to the electricity market, BEIS set out the following priorities from 2020 to 2021, which continue to apply:
In light of the fact that the UK formally left the EU on 31 January 2020, BEIS is focused on working together with its counterparts from neighbouring countries to ensure continuity of interconnector operation (for example, the UK government has concluded the TCA with the EU, discussed in further detail below), and ensuring national energy legislation properly functions post-Brexit, a significant amount of which derives from EU law.
Ofgem is the GB national regulatory authority, whose responsibilities can be grouped into four categories:
Ofgem oversees the retail market to ensure that customers rights are protected and that the electricity market is run in an efficient and effective manner that is designed to promote innovation.
With respect to the development of transmission facilities, Ofgem and NGESO work together to ensure that NETS is fit for function' through the use of price controls, Ofgem ensures that NETS is used in such a way as to improve efficiency, encourage companies to innovate technically and to act in accordance with the interests of consumers as well as other stakeholders.
The Office for Nuclear Regulation (ONR) is responsible for the regulation of nuclear and safety in the UK, and the Nuclear Decommissioning Authority (NDA) is responsible for the decommissioning of nuclear generation stations.
The GB legislative framework is currently aligned with the EU third energy package, which took effect as of 2011. However, GB goes further, in many regards, including creating the electricity capacity markets, as well as the cap-and-floor regime for qualifying interconnectors. The last major legislative change concerning electricity was the enactment of the Energy Act 2013, which received Royal Assent on 18 December 2013.
This was a significant development in the electricity market, setting out the Electricity Market Reform – creating the contracts for difference (CfD) scheme to encourage low carbon electricity generation and the capacity market – and creating the Office for Nuclear Regulation.
On May 2018, Ofgem published a statutory consultation on modifications to the standard conditions of all electricity transmission licences. These licence modifications are intended to update and maintain the consistency of the electricity transmission licence following the legal separation of NGESO and NGET. As of the time of writing, the results of the consultation are still being considered by NGESO.
Following the withdrawal of the UK from the EU, GB ceases to be bound by EU energy law and is no longer part of the EU’s internal energy market. While EU law continues to apply directly in Northern Ireland, GB EU energy legislation enacted prior to the withdrawal date continues to apply as "onshored" EU law, subject to any amendments.
The UK has led the way in the EU in terms of energy market liberalisation, and therefore it is very unlikely that it will, for instance, reverse the separation of transmission from generation interests. However, further amendments to the EU legislation retained by virtue of the Withdrawal Act 2018 will clearly be required in some areas in order to ensure that the EU regimes and arrangements can continue to function outside the EU.
There are currently no forthcoming significant policy changes regarding the electricity market, but the UK's withdrawal from the EU has and will continue to have a significant impact on the UK electricity sector. The UK has enacted the European Union (Withdrawal) Act 2018, which ensured that all EU law was transposed into UK law on the date of the UK's withdrawal (31 January 2020).
From the perspective of the energy sector, it is understood that the UK will remain to a great extent aligned with the EU. However, subject to any international agreement between the UK and the EU 27, there is no certainty as to how long such an alignment will last. Where the UK seeks to remain aligned with EU energy policy, it is possible that the UK will voluntarily implement the eight acts of the Clean Energy for All Europeans Package into UK law.
The UK government has published a large number of Brexit statutory instruments in the past two years, including the Feed-in Tariffs and Contracts for Difference (Amendment) (EU Exit) Regulations 2018 or the Electricity and Gas, etc (Amendment, etc) (EU Exit) Regulations 2019. These regulations make minor amendments to the original regulations to reflect the fact that the UK is no longer an EU member state. However, in most cases, they do not affect the operation of the mechanism being regulated (eg, in the case of the feed-in tariffs, FiTs or CfD schemes are not altered).
The TCA with the EU provides a framework for electricity trading across interconnectors between the UK and the EU. The TCA facilitates the continued flow of electricity between GB and the EU by ensuring that GB-EU interconnectors continue to work effectively by stipulating rules for the efficient use of interconnectors and providing for the development of a new electricity trading model, which is to be implemented by April 2022.
Even in the areas that have been addressed by the TCA, a lot of open questions remain. While the TCA allows for a certain degree of continuity in respect of energy co-operation and trading between the EU and UK, the TCA energy chapter will expire on 30 June 2026, (subject to mutually agreed extensions in one-year intervals). This may be understood as implying the political will to negotiate a separate dedicated energy co-operation agreement in the near future.
On 18 November 2020, the Prime Minister set out a Ten Point Plan for a Green Industrial Revolution. The Plan sets out policies together with significant public investment alongside rallying private investment to hasten the realisation of the achievement of net zero. The measures within the Plan seek to drive the eradication of the UK’s contribution to climate change by 2050 in the lead-up to the 26th UN Climate Change Conference of the Parties (COP26) in November 2021. The Plan strives to reduce UK emissions by 180 million tonnes of carbon dioxide equivalent (180 Mt CO₂e) between 2023 and 2032.
The Ten Point Plan for a Green Industrial Revolution sets out the following measures.
In December 2020, following the Ten Point Plan, the government published the Energy White Paper. The Energy White Paper advances the intention to incorporate these energy-related measures into a long-term strategic vision for net-zero emissions by 2050. The Energy White Paper seeks to drive a shift from fossil fuels to clean energy in power, buildings and industry, alongside the creation of jobs, growing the economy and ensuring energy bills are affordable.
The Energy White Paper sees electricity as a fundamental enabler for the transition from fossil fuels and the ability to decarbonise the economy by 2040. It stipulates that clean electricity will become the main form of energy with a doubling of electricity demand in 2050 and a fourfold increase in low-carbon electricity generation.
GB has one of the oldest liberalised electricity markets in the world, primarily originating with the Electric Lighting Act 1882, which provided for the creation of electricity supply systems. As noted, the UK has generally been a thought leader within the EU with respect to electricity policy, the most recent of which being the 2013 Electricity Market Reform (EMR), and EU legislation has, by and large, complemented, deepened and harmonised the existing GB regulatory regime.
An innovative approach of the UK can be demonstrated in the development of the "cap-and-floor" regime with respect to the CfD-type support mechanism for interconnectors. In order to encourage investment and protect against electricity price fluctuations, in 2014, Ofgem decided to introduce a cap-and-floor regulatory regime to qualifying interconnector projects. This sets out a cap price and floor price for a specific interconnector, so that should the market price drop below the floor, the operator is guaranteed a certain income to increase bankability; conversely, should the market price exceed the floor, the operator can only receive the capped amount, the difference of which is used to fund the scheme.
The Capacity Market
In 2013, the EMR introduced the capacity market, detailed in the Capacity Market Regulations 2014 and the Capacity Market Rules 2014. As noted in 1.6 Recent Material Changes in Law or Regulation, the capacity market (CM) was temporarily suspended until the Commission repeated its investigation into its state-aid compliance, but it was reinstated in late 2019. The CM allows NGESO as the capacity market delivery body to auction out capacity over four years (T-4) and over one year (T-1) in advance of the respective delivery year. Successful bidding generators enter into a capacity agreement with NGESO, and may be called upon by NGESO to deliver agreed capacity at any time during the delivery year, failing which they are faced with a financial penalty.
Subject to certain conditions, T-4 and T-1 capacity may be bought and sold on the secondary market prior to the delivery year. The CM therefore provides a valuable tool to NGESO to aid in balancing and ensuring a stable supply on the electricity market. On 8 July 2021, BEIS published a letter to National Grid ESO, setting out the CM auction parameters for the T-1 auction for the 2022 and 2023 delivery year and the T-4 auction for the 2025 to 2026 delivery year.
In response to the open consultation (Capacity Market 2021) run by BEIS, which ran between 5 March and 16 April 2021, the government has set out several proposals which will be implemented, including extending the long-stop date, the extended deadlines for Metering and Demand Side Response (DSR) Tests for DSR Capacity Market Unit (CMUs) and Independent Technical Expert certificates in relation to progress reports.
BEIS also intends to maintain the minimum capacity threshold at 1 MW to align the CM with other markets and to ensure the costs of administration are balanced with broad market access. The Electricity Capacity (Amendment) Regulations 2021 and Capacity Market (Amendment) Regulations 2021, which are not in force as of yet, will affect the changes brought about as a result of the consultation which at present is being debated in the Houses of Parliament.
The GB electricity wholesale market is based on half-hourly delivery intervals. The start of each interval is known as "gate closure", before which market participants must submit final nominations of contracted electricity quantities to NGESO. One hour after gate closure is the settlement period, and there are 48 half-hour settlement periods per day. The wholesale market can therefore be generally divided into pre-gate and post-gate closure.
Pre-gate closure, wholesale market participants can trade electricity with power purchase agreements, forwards-negotiated OTC and futures (ie, standardised agreements traded over an exchange for delivery at a future date), all of which may be agreed from several years in advance up to approximately 48 hours pre-gate closure. Within the 48 hours prior to gate closure, electricity can be sold on the spot markets (including intraday).
Post-gate closure, as the GB system operator, NGESO is responsible for providing "ancillary services" until the end of the settlement period in response to imbalances of supply and demand or times of system stress.
Imports and exports of electricity to and from other jurisdictions are permitted. Following the entry into force of the Electricity Directive, Regulation (EC) No 714/2009 on conditions for access to the network for cross-border exchanges in electricity (Electricity Access Regulation) and the subsidiary network codes (see 5.1.1 Principal Laws Governing the Construction and Operation of Transmission Facilities), and Regulation (EU) No 838/2010 on laying down guidelines relating to the inter-transmission system operator compensation mechanism and a common regulatory approach to transmission charging, imports and exports of electricity with the EU27 and European Economic Area (EEA) member countries is permitted through the use of interconnectors.
Furthermore, the above legislation creates the EU Internal Energy Market, a market across all EU member states and EEA member countries where electricity can be traded without any technical or regulatory barriers. Following the withdrawal of the UK from the EU on 1 January 2021, with respect to core EU energy regulation, all UK legislation implementing the 2009 version of the Electricity Directive remains in place, and the Withdrawal Act 2018 saves the 2019 Electricity Regulation and all EU network codes for electricity. Much of the UK legislation implementing the Electricity Directive is likely to remain in the longer term.
As mentioned above, the TCA allows for a certain degree of continuity in respect of energy co-operation and trading between the EU and UK.
The supply mix of electricity for the GB market in the fourth quarter of 2019 was published and consists of the following (TWh/quarter):
Subject to 1.4 Principal Laws Governing the Sale of Power Industry Assets, there are no concentration limits in the UK.
Pursuant to the Competition Act 1998, the CMA is responsible for detecting anti-competitive behaviour and taking action to sanction such behaviour. Due to licence obligations with market participants, Ofgem has concurrent authority regarding specific anti-competitive behaviour, and the Enterprise and Regulatory Reform Act 2013 sets out certain co-operation measures between Ofgem and the CMA.
Under the Kyoto Protocol, the UK was required to reduce its greenhouse gas (GHG) emissions by 12.5% (below 1990 levels) in the period 2008–12, and signatories are required to cut GHG emissions by 18% by 2020 and by 20% in accordance with the EU climate and energy package.
The Climate Change Act of 2008 made the UK's voluntary national targets for the reduction of GHG emissions until 2050 legally binding. It provides a long-term framework for climate change policy in the UK, operating through a series of five-year carbon budget periods, which is designed to give businesses and individuals the certainty they need to invest in energy efficiency and low-carbon technologies. The Climate Change Act 2008 (Credit Limit) Order 2016 sets out the net amount of carbon units that may be credited to the net UK carbon account for the 2018–22 budgetary period.
Prior to the end of the implementation period, 31 December 2020, the UK was part of the EU Emissions Trading System (EU ETS). Subsequently, GB no longer participates in the EU ETS. The UK launched the UK ETS on 1 January 2021 to replace its participation, and continue to provide a carbon pricing mechanism as a tool for achieving GHG mitigation targets.
Approximately one-third of UK emissions and nearly 1,000 UK factories and plants were covered by the EU ETS and, as such, the UK is considering a link between the two schemes, allowing for the cross-recognition of emissions reduction certificates. According to draft plans from the government, a minimum auction price would apply during the first phase of the system to reduce discrepancies between the new UK market and the EU ETS. The design of the UK ETS closely follows the design of the EU ETS but there are some fundamental differences, such as a single allowance type, a different scope of operators, a different penalty mechanism and a single national registry. Until the EU implements a net-zero target and amends the EU ETS, the scheme is less aligned to the UK’s net-zero target and, as a result, there will be the need for greater supplementary policies in the UK.
The UK currently has three coal power stations in operation. In 2016, the UK government performed a consultation on the phase-out of coal stations. Implementing the end of unabated coal by 2025: Government response to unabated coal closure consultation was published in January 2018, formally setting out the government's position.
The UK, Canada and over 20 other countries founded the Powering Past Coal Alliance in 2017, the number of signatories to which had increased to 58 in early 2018. This sets out a commitment of governments, businesses and organisations to:
On 2 March 2021, ministers and prominent global figures came together for the first Global Summit of the Powering Past Coal Alliance. The summit called for ambitious global action to phase-out coal in the run up to the United Nations Framework for Climate Change Conference (COP 26) in November 2021.
Whilst no longer an EU member state, the UK has implemented Directive 2009/28/EC on the promotion of the use of energy from renewable sources into a wide body of UK law and these still remain in force following the UK’s withdrawal from the EU. Under this implementation, a number of schemes have been developed to promote the use of alternative energy sources.
Feed-in Tariff (FiT)
The Energy Act 2008 introduced the feed-in tariff (FiT), a fixed payment for electricity injected to the grid, to promote the development of small-scale electricity generators. The FiT is limited to specific renewable generators with a maximum capacity of 5 MW. Furthermore, the Energy Act 2008 introduced the Renewable Heat Incentive (RHI), a payment system operating similarly to the FiT. This sets out a fixed payment for generators of renewable heat for domestic and non-domestic properties.
The Renewables Obligation
The Renewables Obligation, implemented in England and Wales by the Renewables Obligation Order 2009 (as amended), imposes an obligation on electricity suppliers to procure a certain amount of renewable electricity as part of its fuel mixture each year, failing which they are subject to a financial penalty. As a means of support for renewable generators, accredited UK-based renewable source electricity generators are issued with a Renewable Obligation Certificate (ROC) per MWh of electricity, and suppliers may purchase these to demonstrate the fulfilment of their obligation.
Similar ROC systems exist in Scotland and Northern Ireland, but these are reliant on devolved powers.
The scheme closed to new generating capacity on 31 March 2017 by virtue of the Renewables Obligation Closure Order 2014, with the support generally being replaced by the CfD.
Contracts for Difference (CfD)
The EMR introduced the CfD programme as a support system for renewables, designed to replace in part the Renewables Obligation. The CfD is a private law contract between the low carbon electricity generator and the Low Carbon Contracts Company (LCCC), which is a government-owned company. The CfD provides price security and thereby bankability for a renewable generator by setting a specific "strike price" for electricity. Should the market reference price fall below the strike price, the LCCC pays the difference to the generator, and if the reference price exceeds the strike price, the generator pays back the difference to the LCCC.
The government has laid a draft Contracts for Difference (Miscellaneous Amendments) Regulations 2021 before Parliament, which seeks to implement changes to the CfD support scheme. The draft regulations include amendments to:
The Renewable Energy Guarantee of Origin
The Renewable Energy Guarantee of Origin (REGO) is a "guarantee of origin" (GoO) in the meaning of Directive 2009/28/EC and its successor act, Directive (EU) 2018/2001. Whilst the UK was an EU member state this was implemented into the Electricity (Guarantees of Origin of Electricity Produced from Renewable Energy Sources) Regulations 2003 (as amended) and forms a key element of the fuel mix disclosure obligation under the Standard Conditions of the Electricity Supply Licence – ie, the labelling of renewable electricity supplied to end-consumers. REGOs may be issued to accredited renewable source energy generators (even in parallel to ROCs), which may sell REGOs in parallel to the underlying electricity to suppliers for additional income.
The CfD scheme, introduced by the Energy Act 2013, is discussed in detail in 1.8 Unique Aspects of the Power Industry. It is not available to renewable generators that already receive support under the Renewables Obligation.
Alternative Fuels Infrastructure Directive
While an EU member state, the UK implemented the EU Directive 2014/94 on the deployment of alternative fuels infrastructure (Alternative Fuels Infrastructure Directive) into the Alternative Fuels Infrastructure Regulations 2017 and the Automated and Electric Vehicles Act 2018. This sets out specific standards for electric and hydrogen vehicle recharging/refuelling points and the framework to increase the number of recharging and refuelling points across the UK.
The position of the UK with respect to the Alternative Fuel Infrastructure Directive and the UK’s alignment with related EU policy post-Brexit is likely to continue, given the various commitments made by the UK. In 2015, the UK government reaffirmed its commitment for almost all cars and vans on UK roads to be zero emission by 2050.
This commitment has been reaffirmed in 2020, as outlined in the Ten Point Plan where the sale of new petrol and diesel cars and vans will be banned in the UK by 2030. Between 2030 and 2035, new cars and vans can only be sold if they have the ability to drive a significant distance with zero emissions.
The Electricity Act 1989 is the principal act concerning generation assets, whereby Section 6(1)(a) places a licence obligation on any person that intends to generate electricity. The Utilities Act 2000 sets out that the Secretary of State may impose standard conditions of electricity generation licences, to which all UK generators must accede, subject to de minimis exemptions.
Section 14 of the Planning Act 2008 sets out that a "generating station" is a "nationally significant infrastructure project" (NSIP) and therefore "development consent" is required under Section 31 et seq, issued as a Development Consent Order (DCO).
EU Directive 2011/92/EU on the assessment of the effects of certain public and private projects on the environment (EIA Directive) is implemented as the Electricity Works (Environmental Impact Assessment) (England and Wales) Regulations 2017 (EIA Regulations). This requires that in making the application for a Section 36 consent, an environmental impact assessment (EIA) is required for the construction or extension of a thermal generating station with a heat output of 300 MW or more (a Schedule 1 project). An EIA may be required by the local planning authority for the construction or extension of a generating station with a lower heat output (a Schedule 2 project).
The construction and operation of nuclear generating stations are primarily regulated by the Nuclear Installations Act 1965 and subsidiary regulations.
Under the Electricity (Applications for Licences, Modifications of an Area and Extensions and Restrictions of Licences) Regulations 2010, Ofgem has set out the application procedure for a generation licence.
For an electricity generation licence under the Electricity Act 1989, the applicant must submit a written application and fee to Ofgem. Following this, a notice of application must be submitted. A licence will then be granted or refused, or a request for further information may be made by Ofgem.
In parallel, an application must be made to the relevant organisations in respect of the industry codes that must be complied with or become a party to the licence.
These industry codes include: Elexon for the Balancing and Settlement Code (BSC); NGESO for the Connection Use of System Code (CUSC); Electralink for the Distribution Use of System Agreement (DCUSA); Gemserve for the Master Registration Agreement; NGESO for the Grid Code; the Energy Networks Association for the Distribution Code; NGESO for the System Operator – Transmission Operator Code (STC); and SECAS for the Smart Energy Code (SEC), as appropriate.
Section 36 consent has five general steps:
This involves: the identification of the location; establishment of contact with the Secretary of State, planning authorities and the local community; and submission of the application with an Environmental Statement (if required) to BEIS, and publishing it in the relevant media.
The planning authority may object, whereby the Secretary of State must call a public inquiry. The Secretary of State furthermore has discretionary power to call a public inquiry even if the planning authority does not object. Following the public inquiry, the Planning Inspector will present a report to the Ministers. If there is no public inquiry, the Minister will decide upon the application. In the post-decision stage, the applicant must comply with granted consent and planning conditions in order to proceed.
EIA and DOC Processes
The EIA is a five-step process.
The application for a DCO is conducted by the Planning Inspectorate in six steps.
The Electricity Generation Licence: Standard Conditions set out the terms and conditions in the operation of generation facilities. This is divided into four sections:
Section B sets out the following conditions concerning the operation of generation facilities:
There are no general eminent domain rights or similar for electricity generation facilities. However, Schedule 3 to the Electricity Act 1989 provides that the Secretary of State may authorise a licence holder to purchase compulsorily any land required for any purpose connected with the generation activities by means of a Compulsory Purchase Order. The generation licence holder may not dispose of the land or any part of it without the permission of Ofgem.
Whereas there are stringent requirements for the decommissioning of nuclear generating stations, there is no specific law concerning requirements for conventional thermal stations. Instead, this is set out more generally.
With respect to nuclear generating stations, there is a general requirement to return the site to an unrestricted and de-licensed condition, or to a state whereby the land may be used for suitable alternative uses. An EIA specifically for the decommissioning is required under the Nuclear Reactors (Environmental Impact Assessment for Decommissioning) Regulations 1999.
Nuclear decommissioning is co-ordinated by the Office for Nuclear Regulation (ONR) and the Nuclear Decommissioning Authority (NDA), and is generally done in three stages.
Nuclear decommissioning is performed by NDA, acting through Site Licence Companies (SLCs), which hold the nuclear site licence, as granted by the ONR to operate the relevant nuclear sites. The SLCs are thereby tasked by NDA to decommission the sites, which do so under the continual oversight of NDA.
Requirements for thermal generating stations are broader than those for nuclear, whereby all waste and materials must be disposed without causing environmental damage, in accordance with general environmental protection legislation.
The Electricity Act 1989 is the key law that created the liberalised electricity market. This is supported with a body of primary legislation:
The above generally allows for the implementation of energy policy over time, creating powers for the Secretary of State or another authority to enact secondary legislation, which are often comprehensive in their scope and detail.
The most significant directive with respect to transmission system operation is Directive 2009/72/EC which has now been implemented into UK law, concerning common rules for the internal market in electricity, which has been implemented into the above national legislation.
Section 37 of the Electricity Act 1989 sets out that consent is required for the installation and operation of overhead lines of longer than 2 km with a nominal voltage of 132 kV or higher. Section 14 of the Planning Act 2008 goes beyond this, setting out that "electric lines above ground" with a nominal voltage of 132 kV are an NGIP, and therefore a DCO is required for their construction. The Town and Country Planning Act 1990 is applicable for associated works to the construction of transmission lines.
The EIA Regulations sets out that for a Section 37 consent, an EIA is required for the construction or extension of an electric line installed above ground with a voltage of 220 kV or more and a length of over 15 km (a Schedule 1 project). An EIA may, however, be required by the local planning authority for the construction or extension of an above-ground overhead line with a voltage of over 132 kV in a sensitive area (a Schedule 2 project).
Under the Electricity (Applications for Licences, Modifications of an Area and Extensions and Restrictions of Licences) Regulations 2010, Ofgem has set out the application procedure for a transmission licence.
For an electricity transmission licence under the Electricity Act 1989, the applicant must submit a written application and fee to Ofgem. Following this, a notice of application must be submitted. A licence will then be granted or refused, or a request for further information may be made by Ofgem. In parallel, an application must be made to the relevant organisations in respect of the industry codes that must be complied with or become a party to under the licence; see 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities.
The Section 37 consent is submitted to the Secretary of State, whereby the local planning authority is responsible for consulting with the local community and other stakeholders. The Secretary of State will decide whether to grant or refuse the application on the basis of the application itself, as well as the evidence from the consultation.
The EIA and DCO are applied for in the same manner as in 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities.
The Electricity Transmission Standard Licence Conditions is divided into five sections:
The general conditions include provisions on:
System Operation Conditions
The system operation standard conditions include provisions on:
Transmission Owner Conditions
The transmission owner standard conditions include provisions on:
Offshore Transmission Owner Conditions
The offshore transmission owner standard conditions include provisions on:
NETS Operator Conditions
As NETS operator, NGESO is additionally subject to special conditions, which go beyond the standard conditions. These are grouped into nine chapters:
The licence conditions can be found at: www.ofgem.gov.uk.
There is no general eminent domain rights or similar for electricity transmission facilities. However, Schedule 3 to the Electricity Act 1989 provides that the Secretary of State may authorise a licence holder to purchase compulsorily any land required for any purpose connected with the transmission activities by means of a Compulsory Purchase Order. The transmission licence holder may not dispose of the land or any part of it without the permission of Ofgem.
Under the Planning Act 2008, the construction of transmission lines requires a DCO from the Planning Inspectorate, which provides for associated land rights. The consent process requires the developer to undertake several steps to identify and consult with any stakeholders with an interest in land potentially affected by the route. Once the routing has been established, the developer enters into an agreement to grant an easement with any landowners, tenants or mortgagees, whereby the developer may make entry onto the land following the grant of a DCO.
Such easement is permanent so that, once executed, landowners, tenants or mortgagees cannot negatively affect the transmission infrastructure. Affected stakeholders would be paid compensation, including with respect to the easement, injurious affection, survey and investigation works, land acquisition and agents fees.
The Electricity Act 1989 authorised Ofgem to select a single UK NETS system operator, the role of which was recently transferred to NGESO. As noted, in the UK there are three transmission system owners – NGET, SHE-T and SPT – as well as various OFTOs.
The provision of transmission service is primarily governed by the Electricity Transmission Standard Licence Conditions, and regulation of transmission charges is governed by CUSC, in particular Part II of Section 2 regarding connection charges, and Part II of Section 3 regarding use of system charges. In the latter, Part IIB sets out transmission network use of system (TNUoS) charges and Part IIC sets out balancing services use of system charges (BSUoS).
The TNUoS charges are designed to recover maintenance and developmental costs of common infrastructure parts of the transmission system owners (NGET, SHE-T, SPT and OFTOs), whereas single-user asset costs are recovered directly. TNUoS tariffs are calculated in accordance with the methodology in Part IIB of Section 3 of the CUSC and are published on an annual basis every January 1st, taking effect on April 1st of the same year.
The BSUoS charges are designed to recover costs of balancing the NETS, and BNUoS tariffs are calculated in accordance with Part IIC of Section 3 of the CUSC.
Connection charges are designed to recover the costs of installing and maintaining connection assets used to connect to the NETS. Connection tariffs are calculated in accordance with Section 2 of the CUSC.
Taking effect as of 1 April 2013, the RIIO-T1 (Revenue = Incentives + Innovation + Outputs) transmission price control regime remained in force until 31 March 2021. RIIO-T1 was designed to ensure effective and efficient electricity delivery for consumers, and placed emphases on innovation to promote the development of a smarter electricity network.
On 30 July 2018, Ofgem issued its decision on the RIIO-2 framework which came into force this year. The second set of price controls, RIIO-T2, were effected in April 2021 and will run until 2026. Ofgem is currently developing methodologies to be used for sector-specific price controls.
The Electricity Access Regulation and EU network codes CACM and FCA set out that transmission systems must be operated on an open access and non-discriminatory basis. These principles are echoed in UK national law, in particular in Condition C7 of the Electricity Transmission Standard Licence Conditions (Prohibition on discriminating between users).
The Electricity Act 1989 is the key law that created the liberalised electricity market in GB. This is supported with a body of primary legislation:
The Planning Act 2008, Section 37 of the Electricity Act 1989, the Overhead Lines (Exemption) (England and Wales) Regulations 2009 and the EIA Regulations apply to the construction and operation of electricity distribution facilities.
Under the Electricity (Applications for Licences, Modifications of an Area and Extensions and Restrictions of Licences) Regulations 2010, Ofgem has set out the application procedure for a distribution licence.
For an electricity distribution licence under the Electricity Act 1989, the applicant must submit a written application and fee to Ofgem. Following this, a notice of application must be submitted. A licence will then be granted or refused, or a request for further information may be made by Ofgem. In parallel, an application must be made to the relevant organisations in respect of the industry codes that must be complied with or become a party to under the licence; see 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities and 5.1.2 Regulatory Process for Obtaining Approvals to Construct and Operate Transmission Facilities.
The standard conditions of the Electricity Distribution Licence contains 12 chapters:
There are no general eminent domain rights or similar for electricity distribution facilities. However, Schedule 3 to the Electricity Act 1989 provides that the Secretary of State may authorise a licence holder to purchase compulsorily any land required for any purpose connected with the distribution activities by means of a Compulsory Purchase Order. The distribution licence holder may not dispose of the land or any part of it without the permission of Ofgem.
Similar to the transmission system, rights to install and maintain distribution infrastructure on privately owned land include a wayleave agreement or an easement, and a transfer or lease for substation equipment.
There are no monopoly rights under law. However, due to the natural monopoly offered by the infrastructure, the entry into the market of distribution network operators (DNOs) is uncommon. Nevertheless, there are a number of infrastructure projects that are classified as either independent distribution network operators (IDNOs), which relate to small-scale networks for residential or commercial projects of which 13 are currently licensed in GB, or licence-exempt private networks.
The Electricity Act 1989 and the standard conditions of the Electricity Distribution Licence, specifically Chapter 4 (Arrangements for the provision of services), comprise the regulatory regime for the provision of electricity distribution, regulation of charges and the terms of service.
The Distributed Use of System (DUoS) charges are designed to recover installation and maintenance costs of the local distribution networks operators. The 14 DNOs set the DUoS individually for their own networks and these are time-banded for different times of the day, subject to demand, whereby the prices are lower at times of lower demand and higher at times of higher demand.
Similarly to transmission, a price control regime is in place for DSOs, which is currently RIIO-ED1. RIIO-ED1 is in force until 31 March 2023 and is based on the RIIO-T1 model. The next series of price controls for the electricity DNOs (RIIO-ED2) will commence in April 2023 and will continue until March 2028. On 18 June 2021, Ofgem published a consultation to review and identify which market segments display effective competition in the electricity connections market for RIIO-ED2. The outcome of the review will help Ofgem identify its application of financially incentivised outputs to connection services in RIIO-ED2 with the possibility of changing provisions that enable the DNOs to charge connection customers a margin in addition to their costs for connection services.
Distribution terms of service are set out in the standard conditions of the Electricity Distribution Licence.