Energy White Paper - the short term impact for energy sector participants

Key themes of the Energy Policy White Paper published by the Government last week are the move towards a low carbon economy, security and diversity of supply, competition in energy markets and affordable energy for all. Its proposals range from specific, short-term initiatives to long term aspiration goals such as the widely published targets for renewables. The White Paper also engages in some crystal ball gazing, looking at the potential impact of new technology such as nuclear fusion and hydrogen fuel for vehicles.

The White Paper is wide ranging. Measures proposed in the White Paper are intended to affect all businesses by creating an environment in which economic growth is decoupled from increased carbon emissions while ensuring ongoing security and diversity of supplies. This note deals with a small selection of issues - the points of particular interest to licence holders and investors in the UK energy sector in the shorter term. For a separate summary of the climate change related policy measures in the paper, please click here.

On the future security of energy supplies, the overall approach is not to intervene in the market unless absolutely necessary and to work on creating the right conditions for investment. There are a few specific proposals about how those conditions will be created. Generation capacity payments are expressly rejected. The underlying message is that the existing regime is adequate to ensure ongoing security supply - in particular, and possibly worryingly for the licence holders concerned, much is made of the role of licences in ensuring security of supply.

The paper also signals the Government's intention to keep development of the Balancing and Settlement Code under review to ensure that there is a level playing field for smaller generators. It is not clear whether this is intended to refer just to administrative procedures or whether it extends to market rules. Changes have already been made to NETA to assist smaller generators.

Of particular interest to network licence holders (gas transportation, transmission and distribution) will be the proposal to undertake a consultation on the need for an administration regime for gas and electricity networks, similar to those that already exist in the water and rail sectors.

Also for network operators, both distribution and transmission, the White Paper emphasises the need to ensure that price controls provide signals that are aligned with the Government's wider policies for renewable generation. For distribution networks, the White Paper affirms Ofgem's commitment to the incentive framework for connecting and using distributed generation. As to the need for development of transmission networks to support wind, the White Paper acknowledges the importance of the price control in achieving necessary upgrades and indicates that discussions are already taking place between Ofgem and the transmission operators in these areas. The role of BETTA in encouraging new transmission capacity to help support renewables development is also acknowledged.

On regulation, a number of changes are envisaged. Proposals to give the Government a power to direct Ofgem are rejected in the White Paper, but the Government will revise its statutory guidance on social and environmental issues to make the guidance more specific. In addition, the code panels which advise on code revisions are to be strengthened by ensuring that they include people with expertise in renewables and the environment.

Also of interest is the proposal to work with Ofgem to strengthen the transparency and accountability of the code modification process, although the paper oversimplifies the process. It is not clear whether the Government is intending to modify the rules about Ofgem's position in the context of code changes that follow consultation and also discussion with the modification panels. It has indicated that it intends to consult on a "range of further measures". Among the topics of consultation will be whether it is appropriate to provide appeals against Ofgem decisions on certain code modifications. It appears, however, that the Government is intending to wait until the conclusion of the House of Lords enquiry into the accountability of regulators before deciding whether to consult on a more general right to appeal against Ofgem decisions. At least the White Paper confirms that the Government regards the independence of Ofgem as being a good thing.

Consultation on the legal framework for offshore development started last year. The White Paper indicates that the Government will bring forward legislation as soon as possible to enable the granting of licences for offshore windfarm developments beyond territorial waters. It is a little more vague about the timetable for a regulatory framework for offshore infrastructure for transmitting electricity.

Generators will already be aware of the potential impact on their businesses of the EU emissions trading proposals agreed last November. The White Paper confirms that emissions trading will be a "central plank" of emissions reduction policies.

The existing guidance on information required to accompany power station consent applications is to be reviewed so that applicants will need to provide significant evidence clearly demonstrating that they have considered all economically viable options of CHP and community heating.

On planning, major energy projects in England and Wales are to be subject to the streamlined public enquiry process for major infrastructure projects.

For suppliers, the White Paper proposes an extension to the energy efficient commitment (EEC) to run from 2005 to at least 2008 and to increase the current level of activity and the suggestion that EEC may be extended to businesses.

Also relevant for suppliers, the White Paper hints that the Government will consider reviewing the 28 day rule in supply licences in order to facilitate the development of the market for energy services. The 28 day rule enables customers to switch suppliers within 28 days and is seen as a major impediment to the development of energy services providing efficiency in energy use.

A summary of the White Paper is available at: http://www.dti.gov.uk/energy/whitepaper/wp_summ.pdf.

The full text is available at: http://www.dti.gov.uk/energy/whitepaper/ourenergyfuture.pdf.

For further information about the White Paper, please contact Amanda Seaton at [email protected] or on +44 (0)20 7367 3454.