Large Energy Users – Spring 2023 update on energy market reforms

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Those who develop, own, operate, manage or occupy sites with large or complex energy needs are being required to engage with the energy sector like never before. This Law-Now continues our series focussing on the energy sector developments of particular relevance from the perspective of those responsible for sites with significant energy needs ("Large Energy Users”).  

Among a range of issues, we are seeing the interlinked challenges and opportunities created by net zero commitments; securing and maintaining power capacity; and energy cost are all demanding the attention of those responsible for large/complex sites.

In our previous Law-Now for Large Energy Users (published in August 2022), we looked at some of the key energy sector policy developments likely to be of relevance, many with medium-to-long-term delivery timescales.

Since then:

  • the Energy Bill has remained under scrutiny in the House of Lords;
  • the Government (with the new Department for Energy Security & Net Zero (“DESNZ”) having recently taken over from BEIS on energy matters) has recently published a summary of the responses it has received to its very wide ranging review of electricity market arrangements (known as REMA), confirming that respondents broadly agreed with the need for change and most of the options originally proposed remain on the table. The Government plans to publish a second consultation later this year, with the decisions on shorter-term reforms to be taken more quickly where viable to do so; and
  • there has been little by way of update on the workstreams highlighted in the Electricity Networks Strategic Framework published by the Government and Ofgem.

In the meantime, this Law-Now considers some recent measures that are likely to be of interest to Large Energy Users in the shorter term, including:

NATIONAL GRID ESO – GRID CONNECTIONS REFORM

As the volume and variety of applications for electricity network connections continues to increase, so too does the upward pressure on lead times and costs for new (and varied) grid connections.

In the context of connections directly to the high-voltage national electricity transmission system operated by National Grid ESO, National Grid ESO has acknowledged a “common consensus across the industry” that the current connections process is “no longer fit for purpose”. Consequently, National Grid ESO has recently announced a five-point plan to speed up connections to the transmission network and enable proactive management of the connections “queue”. These short-term initiatives aim to bring forward connection dates by optimising reinforcement works and prioritising developers that are progressing.

Some of the projects bundled under the Connections Reform banner are not new. For example, the “queue management” provisions introduced into connection terms across both transmission (subject to the implementation of CUSC Modification Proposal 376) and distribution have been in the works with industry for several years (these provisions impose more stringent milestones on customers taking forward the underlying developments in respect of which a connection offer is held – see the Energy Networks Association’s Queue Management User Guide for further information). However, the aspiration is that, as a package, these initiatives will have a material impact on connection timescales and costs before the various longer-term measures come into play.

The Connections Reform projects, many of which are already underway, include the following:

Background Modelling Assumptions and Transmission Reinforcement Works review

When National Grid ESO makes a connection offer for direct connection to the national electricity transmission system, it must assess the capability of the system to accommodate the new connection in light of the queue of other connections that National Grid ESO has already contracted to provide. The costs and timescales of any further reinforcement works that are needed to accommodate the new connection are then factored into the connection offer. To date, when going through this process, the assumption that National Grid ESO has applied is that most projects in the queue are capable of delivery. However, National Grid ESO has now recognised that, in reality, this is true for as few as 30% of projects with respect to which developers apply for grid connections. National Grid ESO is therefore updating its construction planning assumptions to reduce the proportion of the contract-holders it will assume will connect for the purpose of its modelling.

As a consequence, National Grid ESO is undertaking a review of the “Transmission Reinforcement Works” (“TRW”) assumed in connection arrangements with connection dates from 2026 onwards with a view to bringing down such connection lead times and costs.

Two-step offer

A new two-step offer process has been introduced for new (and varied) transmission system connections, applying to applications NGESO deems to have been received in full from 1 March 2023. The initiative is intended as a temporary measure for twelve months. The aim is to give National Grid ESO time to carry out the Transmission Reinforcement Works review referred to above and thereby reduce uncertainty for developers in the long term.

The two-step process will entail the following:

  • Step one: initial offer – The initial offer will specify a connection location, capacity and indicative completion date, which may change in step two. However, the offer will not include details about the works, programme or indicative costs and charges that typically populate the appendices of connection offer documentation. The appended forms of Construction Agreement and Bilateral Connection Agreement (“BCA”) will be amended to reflect the indicative nature of the offer, and the user security requirements will not kick in until the step two offer.  
  • Step two: follow-up offer – Once the step one offer is accepted, National Grid ESO’s current proposal is that the step two offer will be issued a maximum of nine months later. National Grid ESO will meet with the customer to provide an update on the results of the TRW review and the likely impacts on the step two offer. The step two offer will then include the complete populated suite of appendices for the Construction Agreement and BCA, including securities and programme of work, based on the identified TRW. National Grid ESO intends to progress these offers in regional batches, to enable them to be processed as efficiently as possible. 

 

SUPPORT WITH BUSINESS ENERGY PRICES

Energy Bill Relief Scheme and Energy Bills Discount Scheme

The Energy Prices Act 2022, together with secondary legislation enacted under it, established energy price support schemes for both domestic consumers (the “Energy Price Guarantee”) and non-domestic consumers (the Energy Bill Relief Scheme, “EBRS”). EBRS provides temporary financial assistance to all eligible non-domestic customers on their energy bills. The scheme came into effect on 1 October 2022 and is due to expire on 31 March 2023. The scheme requires energy suppliers to discount business energy prices by effectively capping the wholesale cost component of such prices at a level set by the Government. This level is £211 per MWh for electricity and £75 per MWh for gas.

On 1 April 2023, the Energy Bill Discount Scheme (“EBDS”) is set to replace EBRS (as the non-domestic support scheme implemented via secondary legislation under the Energy Prices Act 2022). EBDS will work a little differently from EBRS: where wholesale prices are over a certain threshold, EBDS will provide a set discount on business energy bills. The applicable thresholds and discounts will depend on whether the relevant business is considered to fall within an Energy and Trade Intensive Industry (“ETII”) (largely comprising certain types of manufacturing), and are summarised in the following table:

Utility

Majority of business consumers (£/MWh)

ETII consumers (£/MWh)

Threshold

Maximum discount

Threshold

Maximum discount

Electricity

302

19.61

185

89

Gas

107

6.97

99

40

 

While, for most business consumers, the EBDS thresholds will represent significant increases on the wholesale price caps built into the current EBRS, the EBDS electricity threshold anticipated for ETII consumers (£185/MWh) is actually lower than the EBRS electricity wholesale price cap (£211/MWh).

HM Treasury has confirmed in its Spring 2023 Budget that the planned increase to the energy price cap under the domestic Energy Price Guarantee scheme (with the effect of raising typical annual household energy prices from £2,500 to £3,000), originally due to come into effect in April 2023, will be postponed by three months. However, in the non-domestic context, it appears that the Government’s intention remains for the Energy Bill Relief Scheme to be replaced by the less generous Energy Bills Discount scheme from 1 April 2023.

One notable feature of the Energy Prices Act 2022 regime (which provides the executive powers under which secondary legislation can be enacted to implement both the EBRS and EBDS) is that “intermediaries” (such as landlords) receiving support under schemes such as the EBRS / EBDS are required to pass through the benefit of such support to end users (such as tenants). Landlords are under an obligation to inform tenants if they have received support and if so, in what quantity and period. They are required to notify tenants in writing of any benefit they are intending to pass on within 30 days of receipt of a billing update from their energy provider. Exceptions apply (at least under the current EBRS regulations) in cases where the landlord has absorbed the energy costs (e.g. where annual rent includes energy bills) and the landlord can demonstrate to the tenant that it is “just and reasonable” for the landlord to retain the benefit.

Landlords that both receive EBRS / EBDS support and operate heat networks (including landlords who appoint a separate billing provider or include heating bills within service charge) have additional obligations, including requirements to:

  • register with the Energy Ombudsman redress scheme; and
  • submit a notification to the Office for Product Safety and Standards on or before 6 January 2023 for existing heat networks and within 30 days of operation for future heat networks.

British Industry Supercharger

Following the Energy Security Strategy published last year, the Government has announced a proposal for a new “British Industry Supercharger” scheme. The scheme aims to reduce the charges that certain industrial businesses that are Large Power Users pay for their electricity supply. The long-term goal is to help to make these businesses more competitive internationally by bringing their energy costs in line with those incurred by similar businesses in other major economies around the world. Unlike the EBDS/EBRS, the focus of the British Industry Supercharger scheme is certain non-commodity costs added to electricity prices, such as final consumption levies (with respect to Government generator revenue support regimes including Contracts for Difference, the Renewables Obligation, Feed-in Tariffs and the Capacity Market) and network charges. It is envisaged that the scheme will exempt the relevant businesses from non-commodity costs of these kinds.

The Government’s proposal appears (but as at the time of writing this is not entirely clear) to be to apply the scheme to the same Energy Intensive Industries as currently benefit from the Energy Intensive Industries Compensation Scheme (which provides compensation to such businesses with respect to some of the UK Emissions Trading Scheme risks that are priced into wholesale energy costs). This is expected to include over 300 businesses (noting that the list of types of business eligible for this support will be shorter than the list of types of business considered to constitute ETIIs for the purposes of the EBDS, as referred to above).

The scheme is set to be introduced in Spring 2024.  

CONCLUSIONS

Although National Grid ESO’s Connections Reform programme is a key step in transforming the current connections process:

  • the proposals are largely focused on the interest of generators rather than demand users (for example, the “Transmission Entry Capacity amnesty” initiative appears to apply to only export users);
  • notwithstanding the introduction of the new queue management provisions, there is a risk that the Connections Reform initiatives as a whole will encourage applications to be submitted speculatively and therefore increase the demand issues; and
  • with respect to the two-step offer process: while the aspiration is to improve costs and timescales overall, developers may find the additional nine-month period between the step one and step two offers challenging in terms of delayed certainty on these key connection parameters.

Energy prices remain a hugely significant issue for Large Power Users. The EBRS / EBDS and British Industry Supercharger regimes may go some way to alleviating the strain on the largest power consumers.

The shorter-term measures considered in this Law-Now do not remove the need for more fundamental energy industry reforms. Continued improvements will need to be delivered at pace in order to meet net-zero targets.