Annual Energy Statement 2013

United Kingdom

With the recent pressure the coalition government has been receiving from the opposition, press and public opinion in relation to rising retail electricity prices, the Annual Energy Statement provided last week among other things, aims to set out the government’s achievements in relation to consumer prices and plans for the future. The "energy trilemma" underpins the report with the government focusing on working towards all three limbs of the trilemma, namely more security in energy supply, reducing greenhouse emissions and reducing prices for energy consumers.

Consumer protection and satisfaction

Reduction of consumer bills is a key principle that runs through the government's approach to energy policy; this is unsurprising given recent events. The statement sets out the government's current approach to protecting consumer's interests, whilst setting out a raft of new initiatives with the intent of reducing domestic and non-domestic energy bills.

Amongst a range of new schemes, a key initiative is a planned consultation on clearly defined criminal sanctions for manipulation of energy markets and allowing Ofgem to require energy companies to compensate consumers directly in the event that they get things wrong.  Current proposals for retail market reform are also intended to increase competition in the market by allowing consumers to change suppliers more easily. 

The statement finally indicates the intention of Ofgem to monitor closely competition in the market. Ofgem will work closely with the Office of Fair Trading to develop a system for analysis of competition in the market. This will be initiated by Ofgem delivering a report on the transparency of financial accounts of vertically integrated energy companies and suggestions for necessary alterations (if any) to current financial reporting of energy suppliers.

Energy investment and promoting economic growth

The government has investment goals at a number of levels within the energy market. This includes small-scale local level initiatives such as the development of a Community Energy Strategy and the Rural Community Energy Fund to identify and promote local energy schemes and macro-investment goals in relation to new nuclear development and renewables investment under the Electricity Market Reform (EMR).

The statement indicates that the UK remains the fourth most attractive country for renewable investment in the world. With the introduction of Contracts for Difference (CfD), the Capacity Market and other initiatives under EMR, it predicts that this position is likely to be consolidated and continue to grow. The introduction of 'investment contracts' (Early CfDs) by government allows it to attract investment under the proposed EMR framework prior to its finalisation, a scheme utilised to good effect in the recent Hinkley Point C announcement. 

The government sees renewable investment playing a major role in economic development in the medium term and in the interest of providing support aims to provide additional assistance in the shape of the UK Guarantee scheme and other schemes. 

The importance of oil and gas in the developing energy market

The annual statement does acknowledge the continuing importance of oil and gas in the energy market. The importance of gas fired power plants in conjunction with the development of technology advancements in CCS is highlighted as a key contributor in a secure and sustainable energy supply for the UK.

The results of the current review by Sir Ian Wood into maximising the future economic recovery of UKCS oil and gas are expected in early 2014 and aim to provide an impartial view on the best ways for government and industry to work together to maximise North Sea oil production. The provision of the brown field allowance of 2012 and the introduction of greater decommissioning tax relief are key indicators of the government's intention to support the North Sea.

There is specific mention of the importance of unconventional oil and gas to the energy mix for the UK in the medium and long terms. It prioritises mapping out the regulatory regime for the exploration phase of unconventional gas including public engagement on shale gas recovery. This is likely to include incentivising shale activities with tax relief in order to offset the high upfront costs associated with shale gas projects. Consultations on such plans are expected within the next 12 months.

The government recognises the crucial importance of oil and gas to the stability of the economy and aims to review the arrangements for energy supply and import from Europe and beyond. Its initial review in September 2013 concluded that further intervention in the gas market above that already in place is likely to be unnecessary and could add to energy costs for consumers. 

The climate change balancing act

The government stresses the importance of climate friendly investment and reducing carbon emissions throughout the statement. It attempts to balance this with its underlying and topical focus on reducing consumer bills. The assertion by the government is that long term investment in renewables will reduce consumer exposure to rising electricity prices and allow them to take advantage of price reduction initiatives. 

The figures provided within the statement seek to demonstrate an 11% reduction in overall bills as a result of climate change policies, by offsetting mandatory price increases due to renewable levies with potential savings available to those who are eligible for relief. Whether the comparison stacks up will be the subject of debate, and cost savings will need to be balanced against other policy objectives such as the long term security of power supply and the sustainability of the generation market within the UK.

The future for domestic energy investment and growth

The government has announced a range of initiatives of both small and large scale value and those aimed at long, medium and short term benefit. These policies together are intended to promote the government's underlying principle of providing a secure and cost-effective energy supply, whilst continuing to tackle climate change. It has been suggested that the future success of these initiatives relies heavily on the implementation of a clear and stable direction for UK energy policy, rather than one shifting with political mood or in response to it.

Co Author:
Mick McArdle, Trainee Solicitor
T: 44 (0) 20 7367 3956
E: michael.mcardle@cms-cmck.com