UK government signals major changes to pricing in the energy market

On Thursday 13 October 2022, the UK government published the text of its new Energy Prices Bill with the aim of ensuring that consumers "pay a fairer price for their electricity". The bill covers a number of aspects addressed in various announcements over the last six weeks in response to the energy crisis limiting the prices paid to domestic and non-domestic energy users as well as limits on the revenues of renewable and nuclear generators.  

The bill as drafted provides the Secretary of State with wide-ranging powers to introduce schemes to implement the announcements but provides little, if any, detail on how these schemes will operate or the revenue limit that will be imposed. More detail is expected to follow shortly following further consultation, but we can draw some conclusions on how the government intends the scheme to operate from the text of the bill.

'Cost-Plus Revenue' scheme

One of the schemes which the Secretary of State is empowered under the bill to establish is a periodic payment scheme for electricity generators. Though not specifically referred to in the bill, associated government announcements have indicated the intention is this will be a Cost-Plus Revenue limit scheme primarily aimed at renewable and nuclear generators. A new payment administration body is to be set up to collect payments from relevant generators, which will then either be passed onto suppliers to enable them to reduce consumer bills or will be paid to HM Treasury. 

The mechanics are far from clear and crucially the basic level of the limit has not yet been announced. It is understood that values from £50-60/MWh to a level of €180/MWh (the level announced by the EU) have been discussed by the government with generators, but no figure has been made public. 

Even when the figure itself has been set, the current bill provides no illumination on what will count as "cost" for the revenue plus cost calculation, whether generators will have to show actual costs to justify the revenue portion they can retain, whether costs will be deemed by generic limits depending on technology type and size, or how unwind costs where prices had been fixed in advance will be treated.

The government has denied that the limit is a tax on the basis that it does not target profits, but rather is a way to correct the way the market functions. 

Existing subsidy support such as the Renewables Obligation will continue under the Cost-Plus Revenue scheme, and the limit will not apply to generators who are part of the Feed-in Tariffs or Contracts for Difference (CfD) schemes. 

The draft bill envisages a process for a new form of CfD for nuclear and renewable generators, which would reflect the discussions held with the industry for the last few weeks for a move to voluntary CfDs, but again detail is scant. However, it seems renewable or nuclear generators which signed up to these new CfDs would be outside of the Cost-Plus Revenue scheme. 

Broad definition of 'electricity generator'

As well as the imposition of the Cost-Plus Revenue scheme, the bill gives the Secretary of State wide-ranging powers to amend energy licences in response to the energy crisis or in connection with the bill and regulations made under it. 

It also gives the Secretary of State extensive powers to require provision of information by electricity generators in support of the establishment of the scheme. The definition of "electricity generator" in the draft legislation, being "a person who owns or has any interest in a relevant generating station", is wider than might be expected. This could potentially include a shareholder in a generator (whether direct or indirect) and could perhaps extend to holders of bonds or other instruments where the holder has income deriving from the generation plant,  

There is no mention in the draft bill of the treatment of gas-fuelled electricity generators and whether they too will be subject to some form of price limit in addition to the 25% oil and gas windfall tax. However, with the current changing of roles in the Treasury it is unclear how (or if) the tax regime may evolve.

Timescale and application

The provisions requiring generators to make payments are stated to be temporary, but the bill provides for the measures to last up to five years, with further extensions by the Secretary of State being possible. This seems at odds with what is described as being an exceptional emergency intervention as a result of the Ukraine conflict.
 
The government has announced that the Cost-Plus Revenue scheme (and indeed other elements) are expected to be introduced at the beginning of 2023 following a consultation. However, the bill envisages some of the elements having retrospective effect and some of the secondary legislation is to be introduced through the affirmative procedure which means it will have legal effect when it is made – prior to being laid before Parliament. If not approved by both Houses of Parliament within 28 days then such secondary legislation would fall away.

In terms of territorial application, the bill will apply to England, Wales and Northern Ireland, but will not apply in Scotland unless the Scottish government passes its own legislation. It is not yet clear whether the determining factor for the measures to apply will be if the asset is located in Scotland, or whether the entity owning the asset is Scottish. 

Osborne Clarke comment

Though the detail of the government's Cost Plus-Revenue limits for renewable and nuclear generators is not available (nor is the detail of the other interventions envisaged under the bill), the bill contains some important indicators as to the government's thinking on how it will operate this policy. 

The wide scope of a number of the measures, and the potentially lengthy period in which the provisions will apply, are likely to give rise to concerns to investors and those active within the renewable and nuclear energy industry. 

There may also be potential for the bill to be challenged on the basis of a failure to honour legitimate business expectation, to the extent that the cost-plus-revenue limit does not fairly account for hedging and forward sales positions struck in good faith in the usual course of trading before the announcement of the government's plans. However, a public policy defence based on the energy crisis and Ukrainian war emergency may make it difficult for any such challenge to be won.

The bill is currently undergoing its third reading in the House of Commons as it is being fast-tracked through the Parliamentary process as emergency legislation. It is currently expected to complete all Parliamentary stages before the end of October 2022. As the impact of the government's energy pricing proposals is significant, further details on the government's plans will be closely monitored if the bill continues on its journey through Parliament in the coming days and weeks.

This article was written with the assistance of Saskia Zant-Boer, Trainee Solicitor.