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    Electricity Regulation in UK

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    Electricity regulation in the United Kingdom: overview, Practical Law Country Q&A... Electricity regulation in the United Kingdom: overview by Kirsti Mass and James England, Mayer Brown LLP Country Q&A | Law stated as at 01-Jan-2021 |England, United Kingdom, Wales A Q&A guide to electricity regulation in the UK. The Q&A gives a high level overview of the domestic electricity market, including domestic electricity companies, electricity generation and renewable energy, transmission, distribution, supply and tax issues. It covers the regulatory structure; foreign ownership; import of electricity; authorisation and operating requirements; trading between generators and suppliers; rates and conditions of sale and proposals for reform, Overview Electricity market Regulatory framework Electricity companies Main companies Foreign ownership Insolvency Import of electricity Electricity generation and renewable energy Sources of electricity generation Imports Authorisation and operating requirements Electricity transmission ‘Authorisation and operating requirements Transmission charges System balancing Electricity distribution Authorisation and operating requirements Distribution charges Electricity supply ‘Authorisation and operating requirements Trading between generators and suppliers Electricity price and conditions of sale Statutory powers 022 Thomson Reuters. All rights reserved. 1 Electricity regulation in the United Kingdom: overview, Practical Law Country Q&A. Tax issues Insurance Reform Contributor profiles Kirsti Massie James England Overview Electricity market 1. What is the role of the electricity market in your jurisdiction? Overview ‘The UK clectricity market is a fully privatised and competitive electricity market organised around the following licensed activites: + Generation + Transmission + Distibuton + Supply including smart metering), + Interconnection. ‘The Electricity Act 1989 provided forthe re-organisation of the UK's electricity industry and paved the way forthe privatisation ofthe sector. The old Area Electricity Boards were superseded by the Regional Electricity Companies. The Central Electricity Generating Board, which owned the UK's generating assets, was split into four new companies, which were subsequently privatised. The UK's transmission assets were transferred to National Grid pl. Since its privatisation, the electricity sector has grown to include a multiplicity of participants. Companies in the generation sector range ftom multinational corporates to smaller independent generators operating a single generation plant, The UK transmission network is owned and maintained by the following regional transmission companies: 2022 Thomson Rev rs, All rights reserved. 2 Electricity regulation in the United Kingdom: overview, Practical Law Country Q&A. + National Grid Electricity Transmission ple (NGET). + Scottish Power Transmission Ltd, + Scottish Hydro Electric Transmission, + Norther Ireland Electricity Ltd, Offshore transmission networks are subject to a separate competitive tender regime. There are 14 licensed distribution network operators (DNOs) in Britain, Bach is responsible for a particular regional area, There are also @ number of small networks contained within the areas covered by the DNOs. These smaller networks are owned and operated by independent network operators, Licensed suppliers are responsible for the supply and sale of electricity to end customers, Full competition was introduced into Britain’s electricity retail market in 1999 with both domestic and industrial customers able to select and readily change their electricity supplier. While this Q&A addresses the electricity sector in the UK, the focus is primarily on the arrangements in England and Wales, with limited references to specific arrangements in Scotland and Northern Ireland, Government policy objectives The Department for Business, Energy and Industrial Strategy (BEIS) is the governmental department responsible for policy setting in the electricity sector. BEIS has three main policy goals + Ensuring the UK's energy system is reliable and secure. + Delivering affordable energy to households and businesses. + Supporting clean growth and promoting global action to tackle climate change. Recent trends Recent issues in the UK electricity sector inelude the following: + Climate change target. On 27 June 2019, the UK set a legally binding target to reduce emissions to net-zero by 2050 (as required under the Climate Change Act 2008, as amended by the Climate Change Act 2008 (2050 Target, Amendment) Order 2019 (S1 2019/1056), + Energy White Paper. BEIS's much awaited UK Energy White Paper, which socks to address the transformation of the UK electricity sector in line with the UK government’ climate goals for 2050, is set for publication in autumn 2020, having originally been scheduled for release in June 2019. There are currently no further details as to the likely publication date. + UK Capacity Market. The UK Capacity Market is designed to ensure reliable capacity given projected increases in demand, the imminent closure of a number of coal and nuclear power plants and the increased penetration of intermittent renewable generation, Electricity regulation in the United Kingdom: overview, Practical Law Country Q&A. In 2018, questions arose as to the whether the EU Commission's decision that the UK Capacity Market complied with BU state aid rules had been correctly made. The challenge fed to a temporary suspension of the UK Capacity Market, ‘The matter has been reconsidered and final confirmation received that the Capacity Market is compliant with EU state aid rules, The scheme is now back in operation. ‘The legislation that implements the Capacity Market contains a requirement for the UK government to undertake a five-yearly review of the scheme. BEIS's review, published in July 2019, concluded that the scheme has been working ‘well and no major changes were proposed. However, incremental changes to the Capacity Market going forward are anticipated. + Brexit. Up until now, the EU has played a large role in UK energy policy. However, Britain’s imminent departure from the EU nn 1 January 2021 looks set to change that. In preparation for 1 January 2021, interconnectors, code administrators and market participants in Great Britain have been carrying out contingency planning for the end of the transition period. Depending on the outcome of free trade agreement negotiations: + the administrators of the industry codes (the rules of the electricity system) will need to ensure that the codes are updated; + imterconnectors will need to put in place altemative trading arrangements, as well as understand the processes for potential reassessment of their Transmission System Operators certifications; + market participants in Great Britain will need to register with an EU regulatory authority under Regul: 1227/2011 on wholesale energy market integrity and transparency (REMIT), mn (EU) ‘Much of the BU legislation applicable to the electricity sector has already been implemented into UK legislation and, as ‘a result, significant disruption on 1 January 2021 as a result of the UK leaving the EU is not anticipated. + Government response to the 2019 novel coronavirus disease (COVID-19) pandemie.In response to commercial delays brought on by the COVID-19 pandemic, on 28 July 2020 the UK government made the Electricity (Individual Exemptions from the Requirement for a Transmission Licence) (Coronavirus) Order 2020. The Electricity Order came into force on 3 October 2020 and provides limited time exemptions from the obligation to hold a transmission licence in tender round five and tender round six of the offshore transmission owner regime for certain named offshore wind farms, Regulatory structure 2. What is the regulatory framework for the electricity sector? Regulatory framework The main legislation regulating the electricity sector in the UK includes the: Electricity regulation in the United Kingdom: overview, Practical Law Country Q&A. + Electricity Act 1989. + Competition Act 1998, + Utilities Act 2000. + Enterprise Act 2002. + Energy Acts of 2004, 2008, 2010, 2013 and 2016. + Climate Change Act 2008, + Directive 2010/75/EU on industrial emissions (Industrial Emission Directive). + Electricity and Gas (Market Integrity and Transparency) (Enforcement ete.) Regulations 2013 (S/ 2013/1389) + Domestic Gas and Electricity (Tariff Cap) Act 2018, The Energy Act 2013 is the most significant recent legislation, implementing the UK government's electricity market reform (EMR) plans. At its core, the Energy Act 2013 aims to ensure that, as older power plants are taken offline, the UK will remain able to generate enough energy to meet increased demand, while also attracting the investment needed to decarbonise the sector, which is essential ifthe UK government is to meet its net-zero carbon targets by 2050, Two of the key mechanisms included in the Energy Act 2013 are the: tracts for Difference (Cf) scheme, which introduced long-term contracts to provide stable and predictable pricing to incentivise companies to invest in low-carbon generation (see Question 8%. + Capacity Market, designed to ensure adequate capacity for the purposes of security supply, including provisions to allow electricity demand reduction to be delivered (see Question 1) Regulatory authorities The main authorities in the electricity sector are the: + Department for Business, Energy and Industrial Strategy (BEIS). BEIS is the governmental department responsible for setting energy policy, including electricity. It is supported by 41 agencies and public bodies. + ‘The Gas and Electricity Markets Auth: the: (GEMA). GEMA's powers and duties are set out in statute, including in + Blectricity Act 1989; + Uilites Act 2000; + Competition Act 1998; + Enterprise Act 2002; and + Bhergy Acts of 2004, 2008, 2010 and 2011 Electricity regulation in the United Kingdom: overview, Practical Law Country Q&A. GEMA also derives powers from EU legislation that has direct effect in respect of energy regulation, much of which will be retained in UK law under the UK Withdrawal Act 2020 at the end of the transition period, GEMA's stated purpose is to protect consumers now and in the future by working to deliver a greener, fairer energy system. GEMA is comprised of non-executive and executive members, and a non-executive chair appointed by the Secretary of State, who all meet at least ten times a year. GEMA delegates its day-to-day functions to Ofgem, + The Office of Gas and Electricity Markets (Ofgem). Ofgem is the regulator for clectrcity (and gas) markets in Great Britain. Ofgem's primary responsibility is to implement government policy and to ensure that the electricity retail ‘market works in the interests of consumers by monitoring the market and, where necessary, taking action to strengthen ‘competition or to enforce the rules with which licensed participants must comply. + ‘The Competition and Markets Authority (CMA). The CMA is responsible for promoting competition for the benefit of consumers within and outside the UK, The CMA has concurrent powers with Ofgem to prohibit anti-competitive arrangements and the abuse of a dominant position in the electricity sector. Electricity companies Main companies 3. What are the main companies involved in electricity generation, transmission, distribution and supply? Generation The largest wholesale electricity generation companies in the UK are + EDF Energy. + Centrica + RWE, + EON. + SSE. + Scottish Power. + Drax. + Engie + Uniper. Electricity regulation in the United Kingdom: overview, Practical Law Country Q&A. Other large electricity generators include: + Intorgen + EPH + Vito + Orsted + ReR, ‘There are also a large number of smaller generators who own and operate single-site generating plants Transmission ‘There are four companies that own the onshore transmission system in the UK: + National Grid, through its subsidiary NGET for England and Wales. + Scottish Power Transmission Ltd for southern Scotland. + Scottish Hydro-Electric Transmission ple for Northern Scotland. + Norther Ireland Electricity Ltd for Northern Ireland, ‘The transmission system in England, Wales and Scotland as a whole is operated by National Grid Electricity System Operator (NGESO), which is responsible for ensuring the stable and secure operation of the national electricity transmission system, Distribution Ofgem grants licences to DNOs to distribute electricity for the purpose of supply to any premises in the UK. These companies ‘own and operate the system of cables and towers that connect the high-voltage transmission network to end users. There are 14 licensed DNOs in Great Britain, owned and maintained by six different operators: + Electricity North West Limited. + Northem Powergrid: + Powergrid (Yorkshire) ple; + Norther Powergrid (North East) Limited. + Scottish and Souther nergy: + Scottish Hydro Electric Power Distribution ple; + Southern Electric Power Distribution ple; + ScottishPower Energy Networks: 2022 Thomson Reuters, All rights reserved. Electricity regulation in the United Kingdom: overview, Practical Law Country Q&A. + SP Distribution Lid; + SP Manweb ple + UK Power Networks: + London Power Networks ple; + South Eastern Power Networks ple; + Basten Power Networks pl. + Western Power Distribution: + Wester Power Distribution (East Midlands) ple; + Western Power Distribution (West Midlands) ple; + Westem Power Distribution (South West) ple; + Westem Power Distribution (South Wales) pl. Supply ‘The UK's largest private energy suppliers are known collectively as the "Big Six” and comprise: + British Gas, + EON. + EDF Energy. + Npower: + Scottish Power. + SSE. ‘Between them they supply gas and electricity to over 50 million homes and businesses across the UK. ‘There are currently around 60 energy suppliers in total that provide gas and electricity in the UK. The number has reduced slightly reduced since its peak in 2018, when there were more than 70 energy companies supplying domestic power, according to Ofgem March to June 2018 staisties. Unbundling requirements In 2009, the EU Third Energy Package introduced provisions aimed at unbundling the electricity sector. The main objective of ‘the unbundling provisions is to ensure independence of electricity (and gas) transmission services from generation and supply, thereby preventing the establishment of large vertically integrated entities, with the overall aim of increasing competition, 2022 Thomson Reuters, All rights reserved. 3 Electricity regulation in the United Kingdom: overview, Practical Law Country Q&A. ‘The unbundling requirements we 2011, which in turn amended section 6 of the Electricity Act 1989. transposed into UK law through the Electricity and Gas (Internal Markets) Regulations Foreign ownership 4, Are there any restrictions concerning the foreign ownership of electricity companies or assets? In general, the UK government does not impose any foreign ownership restrictions on UK electricity companies or assets (the cone exception potentially being the ownership of nuclear assets). However, Ofgem has an overriding responsibility to maintain security of supply and so has the ability to review and scrutinise inbound foreign investment. Ofgem also has concurrent powers with the CMA to assess competition in the energy market. Insolvency 5.Are there any special insolvency regimes that apply to companies operating in this sector? A special administration regime exists for "protected energy companies” (PECs) under section 154(5) of the Energy Act 2004. In the UK electricity market, PECs are holders of a licence granted under section 6(1)(b) or (c) of the Electricity Act 1989 (in other words, holders of electricity transmission or distribution licences), Jims to ensure thal essential services to consumers remain secure and uninterrupted in the 's must provide Ofgem with financial health information on an ongoing basis to enable Ofgem to identify potential financial difficultics at an carly stage. Interconnector licensees are not PECs and are consequently not subject to the special administration regime. The special administration regim« event a PEC becomes insolvent. PE A special insolveney regime known as "energy supply company administration” also applies to energy supply companies defined in section 94(5) of the Energy Act 2011, which, for electricity, are companies that hold an electricity supply licence granted under section 6(1)(d) of the Electricity Act 1989. The framework for the special insolvency regime applicable to electricity supply companies is set out in Part 2 of Chapter 5 of the Energy Act 2011 with further detail provided in the Energy Supply Company Administration Rules 2013. An energy supply company administration is initiated through an application to court for an energy administration order. The application is made either by the Secretary of State or the Gas and Electricity Markets Authority (GEMA). An insolvency practitioner is then appointed as an energy administrator. Electricity regulation in the United Kingdom: overview, Practical Law Country Q&A. A “supplier of last resort” regime is also available to Ofgem and can be used as an alternative to appointing an energy supply company administrator. A special insolvency regime also applies to Smart Meter Licensees under the Smart Meters Act 2018 and the Smart Meter Communication Licensee Administration (England and Wales) Rules 2020. This regime is based on the Energy Supply Company Administration regime. Import of electricity 6, To what extent is electricity imported andior exported? Great Britain currently benefits from $ gigawatts (GW) of interconnector capacity: + 2GWto France (IFA), + 1GWto Netherlands (BritNed), + 1GW to Belgium (Nemo). + 500 megawatts (MW) to Northern Ireland (Moyle). + SQOMW to Republic of land (East West) A number of other interconnectors are planned o in the process of being developed with about 10GW of new interconnection capacity proposed by 2025. The GB regulatory regime applicable to interconnectors is largely designed to accommodate EU legislation and requirements. There are two main regimes that apply to interconnectors: + ‘The "cap & floor" regime, which provides a regulated tariff route for developers. + ‘The “exemption basis" regime whereby developers seek exemptions from applicable provisions of the EU Third Energy Package and relevant domestic legislation. (Ownership and operation of an interconnector isa licensed activity, Brexit clearly has important implications for interconnectors going forward and much will depend on the outcome of ongoing trade negotiations, Import of electricity The UK has been a net importer of electricity since QI 2010. Electricity regulation in the United Kingdom: overview, Practical Law Country Q&A. In 2019, 24,556 gigawatt hours (GWh) of electricity were recorded by the UK government as having been imported into the UK. Export of electricity In 2019, total exports of electricity from the UK are recorded by the UK government as amounting to 3,385GWh. Elects 'y generation and renewable energy Sources of electricity generation 7. What are the main sourees of electricity generation? Fossil fuels In previous years, around 50% ofall electricity supplied in the UK was generated by fossil fuels, predominantly by natural gas. However, in the second quarter of 2020, 35.1% of UK electricity was generated by fossil fuels (34.4% from natural gas, 0.5% from coal and 2.9% from oil). This was only the second time that UK electricity generation by fossil fuel sources had dropped below 40%, with the UK achieving its first coal-free month of electricity generation between April and June 2020. Nuclear fission The UK currently has 15 nuclear reactors producing around 21% of the UK's electricity, but the UK's existing nuclear plants will close gradually over time, with 35% of existing nuclear generation capacity to close by 2030. Although plans for construction of a generation of new reactors ate underway, political tensions around the use of nuclear generation and its cost have slowed progress. I is anticipated that the UK's Energy White Paper scheduled to be published in 2020 will clarify the future of nuclear energy generation in the UK, cnergy represented 17.6% of the UK's electricity generation in the second quarter of 2020 according to UK government Renewable energy Between April and June 2020, renewable energy sources accounted for 44.6% of electricity generation in the UK, up from 35.6% for the same period in 2019. Wind accounted for the vast majority of renewable electricity generation, which saw a 53% rise compared to the same period in 2019. February 2020 was the first month on record when more electricity was produced by ‘wind farms than by gas-fired power stations, Between April and June 2020, the UK also set a new record for the longest period the UK grid has operated without coal. The increased prevalence of renewable generation in the UK energy mix has resulted in the National Grid Electricity System Operator (NGESO) having to spend increased resources on balancing the network Imports Electricity regulation in the United Kingdom: overview, Practical Law Country Q&A. The UK has also been a net importer of electricity since 2010 and imports electricity from Ireland, France, Belgium and the Netherlands when economical to do so (see Question 6) 8, Are there any government policies, targets or incentives in place to encourage the use of renewable or low carbon energy? ‘The UK's greenhouse gas emissions have fallen steadily over the last 30 years, In 2019, the UK's emissions were 435.2 metric tonnes of carbon dioxide equivalent (45% below 1990 levels and 32% below 2008 levels). Recent falls in UK emissions ean largely be attributed to progress in the power sector, with power cmissions falling 67% from 2008 to 2019. The Contracts for Difference (CADs) scheme under the Energy Act 2013 is the UK government's m: support low-carbon electricity generation, CfDs are long-term contracts that effectively provide a pricing hedge for renewable generation. In 2019, the CfD auction in the UK contracted a total of 5.SGW, of which 5.2GW was attributable to offshore ‘wind, The sites contracted are expected to generate 29 terawatt hour of electricity per annum, which equates to roughly 9% of the UK's electricity, in mechanism to Renewable energy targets ‘The Climate Change Act 2008 (2050 Target Amendment) Order 2019 amended the Climate Change Act 2008 by introducing a target of at least a 100% reduction of greenhouse gas emissions (compared to 1990 levels) in the UK by 2050. In effect, net- zero means that a level of emissions can continue, providing they are offset by appropriate mechanisms, including trading. The Order came into force on 27 June 2019. Government policies/incentives The UK's March 2020 Budget included several green initiatives, including a pledge to invest a minimum of GBP800 million in carbon capture and storage (CCS) infrastructure to establish CCS clusters in two UK sites by 2030 (the first by the mid-2020s). (Changes tothe tax scheme for gas and clectricity were also proposed, which will in effect raise gas prices for certain commercial and industrial consumers, and a new "green gas levy" on household gas consumption will be phased in over time. In June 2020, the Climate Change Committee noted that Department for Business, Energy and Industrial Strategy (BEIS)'s Energy White Paper (scheduled to be published in the Autumn 2020) should include clear steps to promote a resilient and flexible energy system. 9, What are the main obstacles to the development of renewable energy? Despite the fact that generating electricity from solar and wind is becoming increasingly cheaper, a number of obstacles remain +0 developing renewable energy in the UK. The key challenges of moving toward a low carbon economy are: Electricity regulation in the United Kingdom: overview, Practical Law Country Q&A. + Intermittency. From a technical standpoint, the intermittent nature of wind and solar power make it more diffieu! balance supply and demand, The increased penetration of renewable generation into the UK energy mix requires the ‘market structure to evolve. This has led to grid modernisation, including a transition towards smart grids, together with increased research and investment into energy storage systems. + Storage. Although advanced storage systems have the potential to create significant environmental and economic benefits, outdated regulatory policy and a lack of standardisation in the market create challenges. Regulatory policy is, lagging behind the energy storage technology that exists today, Wholesale market rules and retail rules will also need to ‘be updated to better accommodate storage and the full range of value-add benefits it provides. + Implementation of net-zero and changing societal behaviour. Implementation of the UK's commitment to net-zer0 will require significant and complicated changes. To achieve that target, electricity production and use would need to increase substantially to meet heating and transport demands, as fossil fuels still account for about 80% of energy used for heating and transport in the UK. National Grid has previously stated that it could be ready to implement a zero ‘emissions system as early as 2025, but that this would require significant investment. 10, Are there any plans to build new nuclear power stations? In 2006, former British prime minister Tony Blair endorsed a new generation of nuclear power stations, whereby new reactors ‘would be built on existing nuclear sites, replacing those to be decommissioned over time, In 2011, the National Policy Statements for Energy Infrastructure were approved. These contain the policies by which applications for major energy projects are judged, which include new generation nuclear power facilities. New nuclear power stations were subsequently proposed at: + Oldbury in South Gloucestershire. + Wylti on the island of Anglesey in Wales. + Moorside in Cumbria, + Bradwell B in Essex + Sizewell Cin Suffolk + Hinkley Point C in Somers. Of the six sites originally identified as being potentially suitable for new nuclear facilites, only Hinkley Point C is under construction. The Sizewell C and Bradwell B plants are awaiting approval. Oldbury, Wylfa and Moorside have either had plans suspended or abandoned, Hinkley Point C is a project to construct a 3.2GW nuclear power plant with two EPR reactors (a third-generation pressurised water reactor). EDF Energy owns a 66% majority stake in the project with Chinese state-owned China General Nuclear Power Electricity regulation in the United Kingdom: overview, Practical Law Country Q&A. Corporation (CGN) the minority 33% stakeholder. After lengthy delays, construction on the site began on 11 December 2018. ‘The plant isnot expected to start generating power before 2025. Sizewell C is also a project to build a 3.2GW power station with two EPR reactors. It is majority owned by EDF Energy, with CGN holding a 20% stake in the development phase. Progress on the proposed site was severely stalled by planning

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