The Energy Transition | Ofgem extends the Market Stabilisation Charge and government consults on hydrogen

This week we look at Ofgem's decision to extend the Market Stabilisation Charge, the government's proposed business models for hydrogen transport and storage, Good Law Project's plans to sue Ofgem over the increase to the energy price cap, and more.

Ofgem to extend the Market Stabilisation Charge and ban on acquisition-only tariffs

Ofgem has published its decision to extend the Market Stabilisation Charge (MSC) to 31 March 2023. On 16 February 2022, Ofgem announced it was implementing the MSC as a temporary measure to support domestic suppliers during the recent period of market volatility caused by the unexpected rises in gas and electricity prices. Although the MSC was intended as a temporary measure (to expire on 30 September 2022), the Standard Licence Conditions give Ofgem the option to extend the measure up to 31 March 2023.

Ofgem launched a consultation on its proposal to extend the MSC in June 2022 and, taking into account the views of stakeholders and the current market position, it has decided to extend it to 31 March 2023 due to the benefits it provides to consumers. Ofgem predicts that the MSC could have already benefitted customers by at least £1 billion by providing suppliers with some protection against downside risk. This gives suppliers the confidence to hedge appropriately for customers in accordance with the price cap. 

To augment the MSC, Ofgem also introduced the ban on acquisition-only tariffs on 16 February 2022, which deters suppliers from offering aggressive acquisition prices during market instability as they are required to make the same offers available to existing customers. This is intended to help mitigate supplier financial losses and market exits and the resulting costs and disruption to consumers. Ofgem has therefore also decided to extend the ban until 31 March 2023. 
Currently, Ofgem has no power to extend the MSC past 31 March 2023 unless it makes a licence modification. Ofgem is therefore inviting stakeholder views on what steps it should take to support market stabilisation beyond the cut-off for the MSC. The deadline for responses is the 19 September 2022. Ofgem will also continue to evaluate the impact of the ban on acquisition-only tariffs  and will consider whether this should be implemented on an enduring basis. Ofgem has stated that it will consult on such a proposal before implementation.   

Government proposes hydrogen transport and storage business models 

The government has published a consultation that seeks views on business model design options, regulatory arrangements and strategic planning for hydrogen transport and storage. This is the government's first step in meeting its commitment, as set out in the British Energy Security Strategy, to design new business models for hydrogen transport and storage infrastructure by 2025. The strategy doubled the UK's previous hydrogen production ambition so that delivery of 10GW of low-carbon hydrogen production capacity is now targeted for 2030. Hydrogen transport and storage infrastructure will be critical for enabling the growth required in the hydrogen economy to meet this target. 

Transport proposals in the consultation focus primarily on onshore pipelines to transport hydrogen as a gas; however, the government has stated that it is open to views on other methods of transport. The government has also set out a number of potential hydrogen transport infrastructure business models. These include operating hydrogen transport on a "regulated returns" basis, which would require an economic regulator, or a "contractual payments" basis, which would require a counterparty to collect levies, make payments and manage compliance issues. In particular, the government has suggested that a contracts for difference-type model could be used to make transporting hydrogen competitive.

The consultation also invites views on how hydrogen storage can be utilised to provide flexibility across the whole energy system. The government notes that developers and investors are likely to have differing appetites for risk and, as storage infrastructure can be made available in a wide range of sizes and types, one storage type is unlikely to be suited to all circumstances. The consultation sets out a number of business model options for hydrogen storage infrastructure, though the government has stated that it is open to alternative ideas or exploring possible hybrid options. The government has also put forward the idea that hydrogen storage could be operated on a merchant basis whereby storage providers make storage capacity available to market at risk, with no implementation of a new business model. 

Additionally, the government is keen to understand the potential for hydrogen blending to help bridge the gap between production volumes and the development of large-scale hydrogen transport and storage infrastructure. The consultation also explores the potential strategic role of blending to act as a reserve offtaker to support hydrogen economy growth.

The consultation closes on 22 November 2022 and the government aims to publish its response in the second quarter of 2023. 

Good Law Project to sue Ofgem over energy price cap increase

Good Law Project, a not-for-profit campaign organisation, has announced plans to sue Ofgem over its latest decision to increase the energy price cap. Good Law Project and two other proposed claimants – Fuel Poverty Action and the Highlands & Islands Housing Associations Affordable Warmth Group – are threatening the claim as a result of Ofgem's alleged failure to mitigate the impact of rising energy bills on consumers.
 
The group argues that, as part of the energy regulator's legal duties, Ofgem is required to provide evidence that it has carried out a proper impact assessment of its decision to increase the price cap and consider appropriate mitigation measures for the most vulnerable consumers, neither of which have occurred. The threatened legal action follows an unanswered letter sent to Ofgem in July 2022 which set out Good Law Project's concerns about Ofgem's decision making, and a further unanswered letter sent to Ofgem on 12 August 2022, which put the regulator on notice of formal legal action if it failed to uphold its duties. The deadline imposed for a response to the 12 August 2022 letter was 26 August 2022 – the same day that Ofgem announced the increase to the energy price cap.
 
Good Law Project has stated that the most recent change to the price cap, which will increase the average household bill by 80%, will "push millions of people into poverty this winter". The not-for-profit organisation also envisages that this is likely to be the first legal action of its kind over the energy bill crisis, and that others may either join the claim or bring their own action against the regulator.
 
Jo Maugham, director of Good Law Project, commented: "[Ofgem's] announcement […] will devastate families. Just who and what is Ofgem for? Do not be fooled. This is a choice. And the choice they’ve made is to let low-income consumers and small businesses bear the brunt of this crisis. We believe Ofgem can, and should, do more. We intend to put the question before the High Court, and will ask for a fast-tracked timeline to reflect the urgency of this crisis." 

Publication of initial response to consultation on developing the UK Emissions Trading Scheme

The UK, Scottish and Welsh governments and the Department of Agriculture, Environment and Rural Affairs for Northern Ireland, which together form the Emissions Trading Scheme (ETS) Authority, have published an initial response to a March 2022 consultation on developing the UK ETS. The scheme operates as a cap-and-trade system. An upper limit on the total level of greenhouse gases that can be emitted per participant is set and reduced over time, with participants buying and selling their emission allowances to others under the scheme. This system creates a carbon market, incentivises decarbonisation and acts as a contributor to meeting net-zero targets. 
 
The ETS Authority launched the consultation in March to set out various proposed changes to the scheme; of these proposals, several required implementation via legislation ahead of 2023. The ETS Authority has published an early response to the consultation, setting out final positions on these time-sensitive proposals before new legislation comes into effect. Responses to the remaining proposals will be provided at a later date. 
 
Of particular interest is the ETS Authority's response to free-allocation policy and the impact of the Covid-19 pandemic. Free allocation of emission allowances is the main policy instrument through which carbon leaking risk is addressed in the UK ETS. Entitlement to free allowances is calculated based on a number of factors, including risk of carbon leakage, efficiency against a benchmark and, most significantly, differences between a participant's current and historic activity levels. Where a participant's current activity level differs from historic activity levels by more than 15%, this triggers a recalculation of the participant's free emission allowance.

For participants whose emissions reduce proportionately to activity levels, this calculation mechanism works as intended so that their free allowance is reduced to cover their new (reduced) level of emissions. However, as a result of the Covid-19 pandemic, some participants have showed evidence of a reduction in activity levels without a correlating reduction in emissions. Reducing the level of free allowances in these instances could potentially cause significant harm to both industry and the environment: a reduction in a participant's number of allowances increases exposure to the carbon price, potentially increasing the risk of carbon leakage. It is also not aligned with the policy intent of free allocations, which aims to ensure that any changes in free allocations are reflective of activity.
 
Following consideration of the responses received, the ETS Authority proposes to omit the year 2020 in the calculation of historic activity levels for those operators who can demonstrate significant discrepancies between reduced activity and emissions levels caused by the Covid-19 pandemic. Activity levels from 2019 and 2021 will instead be used in comparison with 2022 levels to decide whether a participant's free allowance needs to be recalculated. The ETS Authority has noted that it remains committed to having a sector-agnostic, consistent and methodological way of approaching changes to free allocations and highlights that this change is due to the unprecedented and significant impact of the Covid-19 on activity levels.