A Touch of Class: Update on Electricity Licence Exemptions Consultation

It has been almost three years since the UK Government published its October 2020 short call for evidence (the “Consultation”) on reform of the electricity licence exemptions regime in Great Britain (see our previous Law-Now on this here). However, the Department for Energy Security and Net Zero (“DESNZ”) has now moved things along by publishing a summary of the responses received (the “Response Summary”) together with a brief indication of its proposed next steps. In this update, we briefly draw out some of the key points raised in the Response Summary.

A key driver for the Consultation had been the introduction of the Government’s statutory target to achieve net zero carbon emissions by 2050. In light of there having been less progress than expected to date towards the achievement of statutory emissions reduction targets, as apparent from e.g. the assessment published in June 2023 by the Committee on Climate Change, the Government will no doubt be keen to demonstrate redoubled efforts in this regard. There are a number of hints throughout the Response Summary that DESNZ may seeking to inject new life into the exemptions reform workstream by reinforcing its status as a lever for encouraging investment in net zero initiatives.

The focus of the Response Summary is largely on the on the electricity class exemptions regime under the Electricity (Class Exemptions from the Requirement for a Licence) Order 2001 (the “Class Exemptions Order”). As the name suggests, this is the existing legislative regime which provides for licence exemptions for particular scales or scenarios of electricity generation, electricity distribution and electricity supply. While individual exemptions (i.e. for specific persons/projects), were stated to be within the scope of the Consultation, these are mentioned only very briefly in the Response Summary.

Although exemptions also apply to the requirement to hold a gas licence under Gas Act 1986, this was not within the scope of the Consultation, and is perhaps evidence of the lesser focus that has been placed on net zero initiatives in the gas sector.

Uncertainty

We noted in our previous Law-Now that the electricity class exemptions regime can be challenging to interpret and apply, especially in the context of more complex sites where there are multiple parties involved in generation, distribution and/or supply of electricity. The Class Exemptions Order was enacted over twenty years ago, such that it has not kept up with modern technologies and practices, and the drafting is notably light-touch in some areas and convoluted in others.

This is a clear theme picked up in the Response Summary, in particular in the context of the supply licence exemptions, with the drafting of the current Class Exemptions Order viewed as a “‘roadblock’ for further investment”. DESNZ has pulled out certain aspects where stakeholders identified particular interpretive difficulties, including the drafting of the “Class C” supply exemption generally, the concepts of “on-site” and “private wire” and the extent to which third parties can be involved in the supply of electricity from generators connected to licence-exempt networks.

Stakeholders will be pleased to see that weaknesses in the existing electricity class exemptions regime have been formally recognised in this way, and will no doubt hope to see proposals for legislative clarifications in due course. However, mention of reform to the wider electricity licensing regime (such as the short-form definitions of “supply” and “distribution” in the Electricity Act, which are arguably a part of the problem) is conspicuous by its absence in the Response Summary.

Grandfathering

One of the key challenges in updating any legislative regime on which investors have relied is managing the impact of the reforms on existing projects. This is particularly true for the electricity class exemptions regime, pursuant to which no enduring certifications or assurances are granted to confirm that any particular person benefits from (and will continue to benefit from) any particular exemption. This means that operators seeking to benefit from an exemption must satisfy themselves on an ongoing basis that they continue to meet the conditions for that exemption, and are hence particularly vulnerable to “change in law risk”.

In the Response Summary, DESNZ has recognised that “a significant number of respondents believed that existing investments should be protected through grandfathering arrangements for current class exemptions”. Stakeholders benefiting from existing licence exemptions will no doubt hope to see assurances in any successor legislation to the Class Exemptions Order that such changes in law will not put them in a materially worse position and undermine the basis on which they invested. For example, respondents to the Consultation were in favour of maintaining the status quo on policy levies (see below) for investors who have relied on the avoidance of such levies in their business plans (assuming that the position on levies is to be reformed going forward).

Thresholds

Stakeholders are supportive of the proposal to increase some of the maximum thresholds set out in the Class Exemptions Order to encourage investment. These thresholds include maximum capacities for renewable generators to generate electricity on a licence-exempt basis, maximum domestic demand capacities that can be connected into licence-exempt distribution networks (e.g. to accommodate electric vehicle charging) and maximum capacities supplied to domestic customers on a licence-exempt basis. The highlighting of these areas is one example of the general observation made above that DESNZ may be trying to sweep the licence exemptions workstream up within its general policy drive towards decarbonisation and encouragement of net zero projects.

Levies

One of the key current benefits for stakeholders of licence-exempt electricity supply is that certain levies (funding energy policy initiatives including Contracts for Difference and the Capacity Market) are payable by only licensed suppliers, so the costs incurred by licence-exempt suppliers can be lower. Savings of this kind can be passed through to customers, which is often key, for example, to the competitiveness of private wire/on-site generation projects versus the alternative of supply from licensed suppliers via the grid. However, among the key stated aims of the Consultation was to understand what might be considered a “fair share” of levies to be borne by licence exemption holders.

DESNZ has acknowledged clear support among stakeholders for retaining at least some of the financial advantages that are currently available in the licence-exempt context. Respondents flagged that the introduction of levies in the licence-exempt context could deter investment in renewable generation and other critical developments, could reduce the benefits of behind-the-meter management of licence-exempt networks to the wider grid and may be disproportionate in the context of the relative size of operators in the licence-exempt space. It will be interesting to see how the question of “fair share” of policy levies is resolved in any licence exemption reforms.

It is worth noting, though, in this context that the Government has (in its response, published alongside the Powering up Britain policy package published in March 2023, to Chris Skidmore’s Net Zero Review), committed to “rebalance” the way policy costs are borne as between electricity and gas bills. If the result of this is effectively to reduce the policy levies borne by licensed electricity suppliers, the question of avoided levies for licence-exempt suppliers could be rendered less significant (or even moot if certain policy levies are moved in their entirety across to gas supply), given the key point is the relative cost of unlicensed supply versus the alternative of licensed supply.

Registration

As touched on above, there is currently no particular requirement to register or obtain certification with respect to operating under a licence exemption: operators must satisfy themselves that they meet the conditions for the relevant exemption. One reason for this is to reduce administrative burden for exemption holders, which are generally smaller entities with lesser reach than licensed operators. The Consultation queried how the Government could be given greater visibility of licence-exempt activities, in order to be better placed to regulate the licence-exempt sector, without placing unduly onerous obligations on exemption holders.

It appears from the Response Summary that stakeholders were largely in favour of the concept of a “light-touch registration/notification system” for licence exemption holders, at least on a voluntary basis, given some exemption information is already provided to organisations including Elexon and Ofgem in any event. A number of challenges in implementing such a system were identified in the Response Summary, including the risk that, to the extent that registrations are controlled or monitored by DESNZ or Ofgem, any such registration system might effectively act as an application process for licence exemptions, which could undermine the fundamentally lightly-regulated nature of licence-exempt activities. No doubt DESNZ/Ofgem would themselves also be mindful of implementing a position that avoids any implication that any such registration constitutes a confirmation that DESNZ/Ofgem has reviewed and confirmed exemption compliance.

Next steps

While the Response Summary notes that DESNZ will consider the responses to the Consultation “with a view to possible options for change to exemptions guidance, policy and/or legislation”, DESNZ has not committed any particular timeline for these actions. While the Energy Bill currently making its way through Parliament might have been considered an ideal opportunity for the introduction of reforms to the electricity licence exemptions regime, it seems likely that stakeholders will have to wait longer for these reforms to be developed and implemented.