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Freshfields Transactions

| 3 minutes read

The Energy Security Bill – new powers for Ofgem promise to turn up the heat

On 6 July 2022, the UK Government introduced to Parliament the Energy Security Bill (the Bill) which aims to build a “clean, affordable, and home-grown energy system” through the most ambitious package of energy reforms  in recent history. The Bill has had its first and second readings in the House of Lords, and will move through the Committee and report stages and a third House of Lords reading in the autumn, before progressing through the House of Commons later in 2022.

The Bill is based on three “key pillars”, namely: (i) leveraging investment in clean technologies; (ii) reforming the UK’s energy system and protecting consumers; and (iii) maintaining the safety, security and resilience of the energy systems across the UK. These policy pillars encompass a wide array of reforms, ranging from extending the current energy price cap beyond 2023 to the introduction of new energy codes to confirming that nuclear fusion will not be subject to further regulation at this stage, and almost everything in between. The Bill is far too broad for a single article, so this blog will focus on the expansion of Ofgem’s regulatory remit to cover new technologies and heat networks.

For our take on the Bill’s proposed changes to competition and merger reviews in the energy sector, please see our separate blog here.

Carbon capture and hydrogen

The Bill’s focus on clean technologies is particularly striking in relation to carbon capture, hydrogen and heat networks. First, the Bill provides for the establishment of a new economic licensing regime for carbon capture, usage and storage (CCUS). Companies would require a licence to operate infrastructure for the capture, transport and storage of CO2 from a range of sources, including power plants, industrial facilities, low carbon hydrogen production and potentially direct air capture. The proposed regime would aim to attract private investment by allowing reasonable returns, while maintaining affordable prices for industrial users of CCUS infrastructure, and allowing Ofgem to monitor and enforce licence conditions and address market failures.

Similarly, the Bill aims to boost the prospects of hydrogen as a viable source of clean energy, particularly for heating. The Government intends to pilot the use of hydrogen through a neighbourhood-scale trial by 2023 and a village-scale trial by 2025, and has proposed a subsidy-based business model to attract investment in hydrogen production. The Bill would also establish a new independent Future System Operator to oversee Great Britain’s energy system as a whole, integrating existing networks with emerging technologies such as hydrogen.

The heat is on: Ofgem’s latest regulatory frontier

The Bill also takes the significant step of extending Ofgem’s regulatory oversight to cover heat networks. This is not a wholly unexpected development: the CMA’s 2018 market study into heat networks – i.e. distribution systems that transfer heat from a central source and deliver it to several different domestic or non-domestic dwellings – recommended the introduction of a regulatory framework, and the Government’s 2020 Energy White Paper foreshadowed the Government’s intention to do so. The Bill appoints Ofgem as the heat networks regulator with a view to regulating heat networks in much the same way as other utilities, with a policy goal of ensuring transparent information for consumers, fair prices, minimum technical standards and a high quality of service, whilst furthering Government decarbonisation objectives.

To achieve these goals, the Secretary of State would designate a “Heat Network Zones Authority” to work alongside local government and stakeholders to designate heat network zones (i.e. areas within which heat networks are the lowest cost solution for decarbonising heat), and “Zone Coordinators” who will apply the regulations within these zones. Certain buildings would be required to connect to district heat networks, over which Zone Coordinators would exercise operational oversight, including the allocation of contracts for the construction, design and operation of the networks, monitoring of minimum service standards, and compliance with maximum emissions limits.

While the Bill sets out an ambitious vision for the regulation of heat networks, a great deal of the detail remains to be fleshed out in secondary legislation ahead of the new regulatory framework launching in early 2024. Most significantly, the Secretary of State would have discretion to expand the definition of what amounts to a “relevant heat network” in the future, which creates considerable uncertainty in the scope of the new regime.

Final thoughts

The scale of the Bill’s ambition is remarkable, and many of its measures will – if passed – hopefully achieve significant benefits for consumers as the UK pushes towards Net Zero. That said, there remains considerable uncertainty about the impact of some of the proposed reforms, which risks dissuading potential investors due to the prospect of greater regulation in novel areas.

Please get in touch with us or your usual contact in our Antitrust, Competition and Trade team if you have additional questions or would like to discuss what your business can do to prepare for the Bill entering into force. To read more about antitrust developments globally, including in relation to transforming industries and net zero, please refer to our Global antitrust in 2022: 10 key themes report.