The Energy Transition | Government removes hydrogen levy on consumer energy bills

This week we look at amendments to the Energy Bill to remove the hydrogen levy on consumer energy bills, changes to the energy price cap and the Balancing Reserve service and more.

Government removes proposed hydrogen levy on households

Amendments to the Energy Bill have been published that remove the proposed hydrogen levy on consumer energy bills. This change in government policy has been widely trailed (as we have previously reported), and follows criticism of the additional costs that would have been added onto household bills under the proposed consumer levy while energy prices remain high. The levy had been intended to support low carbon hydrogen production and accelerate the government's ambition to reach up to 10GW of low carbon hydrogen production capacity by 2030.

Instead, the government now proposes to introduce a new levy on the gas shipping industry. A consultation will be published to seek views on the proposed new levy which the government hopes will require those who benefit from hydrogen to support the UK's growing hydrogen economy. Though the proposed levy will not directly apply to consumer energy bills, there are concerns that it could indirectly effect consumers connected to the gas network as those subject to the levy look to recover increased costs from end users.

A spokesperson for the Department of Energy Security and Net Zero said, "changes to the Energy Bill put fairness at the heart of our plans to drive forward low-carbon hydrogen, which will boost energy security and help lower bills in the long term."

The Energy Bill will shortly be submitted for final reading in the House of Commons, before moving to the final stages where the proposed amendments will be considered.

Ofgem announced changes to the energy price cap

Ofgem has announced the new energy price cap to be implemented this winter. From 1 October 2023 to 31 December 2023, a typical household will pay £1,923 per year, a decrease of £151 from the current cap.

The energy price cap sets a limit on the amount that energy suppliers can charge each household per unit of energy. The regulator is responsible for setting price caps across England, Scotland and Wales, which is updated every three months.

Concerns have been raised that the new energy price cap remains too high for vulnerable households, as energy bills will not receive a discount through the Energy Bills Support Scheme this winter. The support scheme provided many customers with support through last winter but ended in June 2023.

The deputy Chief Executive at Energy UK welcomed the fall in the level of the price cap but warned that, “energy bills are still much higher than they were 18 months ago. The government’s energy bill support was a lifeline during an extended period of high prices but with that no longer in place, many customers will be paying a similar amount to last winter."

Ofgem has also launched a consultation on changes to the prepayment meter system which include lowering energy bills for customers by £42 per year and providing customers who are on additional credit support with assistance through an initial 12-month allowance to cover increased debt costs.

Under the current system, prepayment meter customers standing costs are higher than customers who pay via direct debt. The Energy Price Guarantee will continue to fund the difference in standing costs between the two methods of payment until March 2024. The new consultation includes proposals designed to reduce the differences in prices across different payment methods. The final proposals following the consultation process are expected to be implemented by April 2024.

Smaller units to have full auction access to new Balancing Reserve service

National Grid ESO (NGESO) has recently announced plans to ensure that its new Balancing Reserve service will be accessible to providers other than the large gas plants. Under these plans, the market will be open to a wider, more diverse range of smaller units. The Balancing Reserve Service, also known as a regulating reserve service, will be used to manage imbalances between supply and demand and create a scheduled reserve of mostly synchronised generators in real time. This type of reserve is currently secured via the Balancing Mechanism but in the past few years costs of securing such reserve have risen significantly. NGESO has stated that "during periods of scarcity there can be insufficient margin to meet our positive or negative reserve requirements and procuring extra capacity may be extremely expensive."

Previous plans which would have required any potential provider to have the capability to provide Mandatory Frequency Response (MFR) have been dropped. Typically, only the largest gas plants would have been able to meet these criteria.

NGESO has confirmed that the Balancing Reserve service is due to be launched during the first quarter of 2024. Where economic conditions allow, NGESO intends to procure its reserve requirements through Balancing Reserve auctions and expects the new service to provide consumers a net benefit of £639 million over the first four years from launch date.

Carbon capture power plant targets to remain at current level

The government has this week confirmed that carbon capture, use and storage (CCUS) plants will not see new, enhanced targets set in the short term. There will also not be any new specific targets set for power CCUS, despite calls for such a target from some consultation respondents.

As previously reported, the government has published its response to a consultation carried out last year. The government have stated that the current targets allow for the continued development of a mix of technologies which will enable the UK to meet net zero goals.

As a result, the current 10GW target of power CCUS to support the 2035 decarbonised electricity system goal is to remain in place. The government response explains that this decision "allow[s] the exact mix of technologies providing low carbon flexibility to be determined by market developments, such as cost reductions, technology development, and the buildout of enabling infrastructure".

Since the publication of the consultation, the government has announced up to £20bn of funding to support the development and deployment of CCUS. Further developments are expected this year, with further long-term CCUS government announcements expected in the latter stages of 2023, alongside a broader review of all types of flexible CCUS technologies.

This article was written with the assistance of Amy Lewis and Jack Duffy trainee solicitors.