Energy analysis: The Energy Prices Act (the Act), introduced as a Bill to Parliament on 12 October 2022, was passed into law on 25 October 2022. Originally introduced as part of the former Prime Minister, Liz Truss’s, mini-budget, this emergency legislation includes a series of measures addressing the current energy crisis.
This analysis was first published on Lexis®PSL on 02/11/2022 and can be found here (subscription required)
The Act provides the legislative footing for several support schemes which have been previously announced by the government and aims to assist UK customers and businesses with their energy bills. It also grants wide powers to the Secretary of State to intervene in the UK energy market.
Key provisions of the Act
Energy Price Guarantee and Energy Bill Relief Scheme
The Act enshrines into law the Energy Price Guarantee and the Energy Bill Relief Scheme, both of which had already been announced (see: LNB News 12/10/2022 52 and LNB News 17/10/2022 58), by giving the Secretary of State power to cap energy bills for household and non-household energy consumers.
Under the ‘Energy Price Guarantee’, which has been in place since 1 October 2022, the price households pay per unit of gas and electricity is capped. Whilst this was originally proposed to last for 2 years, it is now limited to 31 March 2023 (see: LNB News 24/10/2022 18). A review will consider more targeted measures beyond this period.
Similarly, the Energy Bill Relief Scheme provides for financial assistance on energy bills for all eligible non-domestic customers between 1 October 2022 and 31 March 2023 (see: LNB News 03/10/2022 20). Eligible customers include businesses, charities and public sector organisations who are:
- on existing fixed price contracts that were agreed on or after 1 December 2021
- signing new fixed price contracts
- on deemed/out of contract or variable tariffs, or
- on flexible purchase or similar contracts—support will be provided through a discount on the gas and electricity unit prices, with such discount to be calculated based on a baseline ‘Government supported price’ of £211 per MWh for electricity, and £75 per MWh
The ‘Cost-Plus Revenue Limit’
Perhaps the most controversial measure of the Act is the temporary ‘Cost-Plus Revenue Limit’ (CPRL). The Act provides the Secretary of State with powers to set a cap on the revenue received by specified generators who are not already subject to a Contract for Difference (CfD) (or who are subject to a CfD but under which no payments have begun to fall due). The precise parameters of the CPRL (eg the scope, the cap level, the proportion of revenues above the limit that generators could keep, the duration of the scheme etc) remain subject to consultation, which the government has indicated will be launched shortly, and will be implemented through secondary legislation.
Further detail is provided in the government’s accompanying policy paper. The government has indicated that the CPRL will apply to low carbon generating assets. Under the Act, the CPRL can be effective for a maximum of five years. The government has however underlined the temporary nature of this measure which will endure until such time as the ‘markets return to normal’. It has also clarified that the CPRL will still allow generators to cover their costs and continue to receive their existing revenue support or subsidy payments (eg Renewable Obligation Certificates). In order to set the cap level, the government is considering ‘pre-crisis expectations for wholesale prices, and what a reasonable upper estimate for what those might be’. This could be anywhere between around £50/MWh (the average power price in the decade and a half before the crisis) and £160/MWh (the power price shortly before the invasion of Ukraine by Russia).
Industry players may be reassured by the indication that an arrangement that allows generators to keep a proportion of their revenue above the limit is being considered, as well as differentiation for low-carbon technologies that can deliver dispatchable and baseload generation (such as biomass and nuclear) which tend to have higher input costs.
Voluntary Contracts for Differences
The Act provides the Secretary of State with powers to create a voluntary CfD process for existing low carbon generators from 2023. Generators may be incentivised to participate as it will provide longer-term revenue certainty and excuse them from the CPRL. The strike price, which has not been established and remains subject to consultation, will be a key factor for those generators deciding whether to participate. This voluntary process will run in parallel to the CfD fifth allocation round for new generators already planned for 2023, presumably with a different contractual strike price.
Criticism and impact on investment decisions
Through the CPRL, the government seeks to decouple the cost of low-carbon electricity from that of gas prices, which the Review of Electricity Market Arrangements (REMA), launched in July 2022, is aiming to do in the longer term (see: LNB News 19/07/2022 28). The Act reflects the government’s intention to provide differentiating regimes for:
- generators who are reliant on gas as a fuel and are subject to the increased price of gas, and
- generators who are not reliant on gas, and which may have been receiving payments significantly in excess of their generation costs
However, the CPRL has been heavily criticised. It was labelled by many as a de facto windfall tax, which the government refutes, noting that ‘it will be applied to excess revenues generators are receiving, as opposed to applying to all profits’. Critics have also noted that it will build a tax regime favourable to oil and gas, as the levy on oil and gas (which raised the tax rate applicable to fossil fuel producers) is charged only on profits, was accompanied by an investment allowance to be used by companies to reduce their tax liability in certain circumstances and is currently scheduled to expire in 2025.
In a letter to the former Secretary of State for the Department for Business, Energy & Industrial Strategy, Jacob Rees-Mogg, several days before the bill was passed into law, some of the UK’s major energy suppliers asked the government to reconsider and amend the legislation so that it solely focused on providing support to households and business this winter. Critics cite concern about the impact of the CPRL on existing projects and their financing arrangements, potentially triggering private contractual rights (eg ‘change in law’ and ‘material adverse change’ provisions) and claims under international investment agreements. More generally, the CPRL has been criticised as undermining investor confidence in the UK market and could have negative consequences on future investment in the UK renewable sector inconsistent with the UK’s climate targets.
Ultimately, much will depend on the level of, and the methodology for calculating, the cap of the CPRL, which cannot be known until the not-yet-launched consultation concludes.
The fact that the EU has introduced legislation for a similar cap opens the door for the UK to do so, provided such cap is not overly punitive in comparison. In October 2022, the EU adopted a regulation which caps net revenues for electricity generators using ‘inframarginal technologies’ (eg renewables, nuclear and lignite) at €180/MWh (see News Analysis: Comment—EU energy crisis ‘flexibilities’ open door to divergence in national responses). For more information, see: LNB News 30/09/2022 38 and LNB News 06/10/2022 32. There is a degree of flexibility for Member States in transposing this measure into national law. These measures, including the cap, are temporary and will apply from 1 December to 31 December 2023.
Opting for a limit close to the EU’s €180/MWh cap is likely to lower the risk of the UK appearing unattractive as a location for renewables investment, when compared to the EU. However, this would reduce the government’s revenue from a cap substantially, compared to setting the cap on the lower end of the £50/MWh—£160/MWh range, and the need to meet the cost of the government’s intervention cannot be avoided entirely.
The UK electricity generators will likely be watching closely as the consultation on the secondary legislation is launched. In the meantime, as we have very few details of the precise mechanics of the CPRL, there is little to do for renewable generators to prepare for the Act, aside from reviewing change of law provisions in their contracts.
Interviewed by Diego Salinas