The Energy Security Bill was introduced to parliament on 6 July 2022 and promises to be the most extensive reform of the energy market in the past decade.
The Bill follows a series of government strategies, including the Ten Point Plan, the Net Zero Strategy, the Heat and Buildings Strategy and, most recently, the Energy Security Strategy. Increasingly, volatile energy markets and the war in Ukraine have shifted the government’s focus from “building back greener” towards ensuring the security of our energy systems across the UK.
The Bill introduces 26 energy-related measures, structured around three pillars:
- Leveraging private investment in clean technologies – the first part of the Bill focuses on promoting the growth of low-carbon technologies such as hydrogen, and carbon capture, utilisation and storage, as well as reviewing the regulatory framework for fusion energy.
- Reforming the UK’s energy system to protect consumers – the second Part includes a wide range of measures, from extending the energy price cap, to introducing heat network regulation, aimed at protecting consumers from volatile and unfair energy prices.
- Ensuring the safety, security and resilience of the UK’s energy system – the final part of the Bill covers measures related to the oil and gas industries to ensure core fuel supply resilience and to attract private investment in nuclear energy.
Heat network regulation
Part 7 of the Bill establishes a UK regulatory framework for heat networks which covers single-building “communal” heating systems and multi-building “district” heating networks. This part of the Bill is the culmination of years of hints at regulation of the heat sector, following the Competition and Markets Authority market study in 2018 and the government’s consultation in 2020.
The Bill provides that the heat network industry will be regulated, to come into force in 2024. The Bill appoints Ofgem (NIAUR in Northern Ireland) as heat networks regulator and confers powers to introduce regulations to govern the development and maintenance of heat networks (through secondary legislation to follow). This is similar to how electricity and gas sectors are regulated – and so fits well with Ofgem’s current remit and will be familiar to energy companies that operate across already regulated sectors.
In addition:
- There will be “regulated activity” and it will only be lawful for those that hold a heat network authorisation to carry out such regulated activity. Authorisations may include conditions regulating pricing (potentially including a price cap), technical standards, continuity of supply and limitations on greenhouse gas emissions.
- The new regime is likely to mean that only entities authorised by Ofgem are permitted to generate and supply heat to consumers. A new licensing regime will grant “installation and maintenance licences” to heat network developers, which will confer rights and powers similar to those held by other utilities (eg access to particular permits for street works, and to install or keep apparatus in roads).
- Pricing will be subject to greater scrutiny, and it is intended that Ofgem has the power to investigate and intervene where consumer prices appear to be disproportionate or if prices are significantly higher than those consumers would expect to pay if they were served by an alternative comparable heating system.
- The regulator has a “supplier of last resort” role in ensuring continuity of supply and powers to replace a heat network operator (with associated powers to transfer property, rights and liabilities as may be required).
This market framework is unlikely to be a surprise – it generally seeks to address the concerns over pricing transparency and inconsistency in service standards that the CMA raised in its 2018 report and reflects the government’s previous consultation proposals – but its implementation is still a groundbreaking leap for the heat sector.
It remains to be seen what the detail of secondary legislation provides – but we can expect that any entity that is currently (or intending to commence) installing, maintaining or operating a heat network and/or supplying heat will be required to obtain the relevant authorisation or licence to continue to do so. Energy service company operators that are part of larger regulated energy businesses are likely to be well placed to navigate the necessary accreditations. Others (including smaller landlord-operated networks) are likely to find themselves subject to regulations that are unfamiliar and that need careful consideration.
It is likely to be at least 18 months before any implementation, so landlords, developers, and heat network operators have time to consider the potential implications of the regime.
Heat network zoning
Following on from the government’s earlier consultation, the Bill introduces powers to enable heat network zoning in England.
There is to be a Heat Network Zones Authority at national level, and “zone coordinators” appointed by one or more local authority for a wider area. The Heat Network Zones Authority and the zone coordinators will identify areas for the construction and operation of heat networks. Once a heat network zone has been designated, regulations may require buildings of specified types in the zone to be connected within a specified timetable. Zone coordinators may be given powers to grant exclusive rights to design, construct, operate or maintain district heat networks within a given zone or part of a zone.
For developers, connections to district heating systems are not new, but this legislation is likely to drive larger, local authority-wide low-carbon heat networks with requirements on surrounding new developments and buildings to connect.
Emerging markets and new technologies
The Bill introduces a low-carbon heat scheme intended to accelerate the government’s ambition to achieve 600,000 heat pump installations per year by 2028. The Bill allows for secondary legislation to be introduced that obliges manufacturers of fossil fuel-based boilers or heating appliances to meet a minimum threshold of low-carbon heat pump sales, either as a proportion of their own sales or by purchasing credits from external heat pump manufacturers.
With heating responsible for almost half of the fossil fuel gas consumed in the UK each year, building a robust heat pump supply chain is crucial to establishing the transition towards electric-powered heating.
Electricity load management
With the increasing electrification of our transport and heating, energy systems need the ability to manage demand and supply. The Bill envisages the introduction of regulations for energy smart appliances, such as electric vehicle charge points and heat pumps. Smart devices will be required to meet minimum technical requirements for cyber security, interoperability and data protection, to ensure load management systems are safe and secure for both consumers and the grid.
The government will also be able to mandate devices have smart functionality to ensure a cohesive approach to “demand side response” activities, where organisations can control the shifting electricity usage to align with lower demand on the wider electricity system. The Bill also provides that load control can be made into licensable activities, to ensure that consumer protection and cyber security requirements are met.
As pressures on available grid capacity and costs of upgrades increase, smart functionality is essential to ensure that existing capacity is maximised.
Consumer protection
The Bill includes a number of key consumer protection measures intended to protect against price volatility and unfair pricing in the energy market. These include:
- Enabling the energy price cap to be extended beyond 2023 to protect consumer prices until competition in the market improves.
- An energy company obligation buy-out mechanism to ensure the cost of ECO measures (ie the installation of energy efficiency and heating measures) is spread across the industry and with a greater number of domestic consumers.
- The extension of the government’s smart meter rollout for a further five years until November 2028 to continue the drive to install smart metering for domestic consumers. This requires energy suppliers to meet minimum annual installation targets to ensure as many households and small businesses as possible benefit from smart metering.
What comes next?
The Bill had its second reading in the House of Lords on 19 July 2022 and is currently in the committee stage for further review and debate. The Bill will still need to pass through the House of Commons before receiving royal assent and, considering the political landscape, it is difficult to predict how long this may take.
Following royal assent, expect a raft of secondary legislation addressing many of the key topics under the Bill, which will provide greater detail on the new regulations and timelines for implementation. In the meantime, developers should examine existing contracts and technical specifications so that they are prepared for the impact of these anticipated changes.
Megan Coulton is a senior associate and Hannah Giebus is a solicitor at Trowers & Hamlins LLP
