Electricity Licence Class Exemptions – A new, simpler dawn?

Introduction

On 30 October 2020, the Department for Business, Energy and Industrial Strategy (“BEIS”) launched a call for evidence as part of its potential reform of the existing regime relating to granting of exemptions to hold electricity licences (the “exemptions regime”), which will follow sometime next year.

The purpose of the call for evidence is to assess whether the exemptions regime:

a) remains fit for purpose in the evolving energy landscape; and

b) ensures that all market participants “pay their fair share of policy and network costs”, in light of the government’s net-zero by 2050 commitment.

The call for evidence will collect information from existing exemption holders (class or individual) and other interested stakeholders in order to inform a future consultation on potential changes to the exemption regime.

Overview of the exemptions regime

The licensable activities under section 4 of the Electricity Act 1989 (the “Act”) are: electricity generation, transmission, distribution and supply, participating in the operation of an interconnector and providing a smart meter communication service. Conducting any of these activities without a licence and no applicable exemption is a criminal offence.

Section 5 of the Act grants the Secretary of State (acting through Ofgem) powers to grant exemptions to the requirement to hold a licence and prescribe conditions thereto.

Exemptions to the requirement to hold an electricity licence for a licensable activity falls into one of two categories – class or individual.

Class exemptions

The class exemptions are set out in the Electricity (Class Exemptions from the Requirement for a Licence) Order 2001 (the “Class Exemptions Order”) and apply automatically to entities that satisfy the relevant criteria and any attached conditions. As the name indicates, the Class Exemptions Order sets out certain classes of market participants that are exempt from the requirement to hold an electricity licence. These are as follows:

Electricity generation

• Class A—Small generators
• Class B—Offshore generators
• Class C—Generators not exceeding 100 megawatts
• Class D—Generators never subject to general despatch

Electricity distribution

• Class A—Small distributors
• Class B—On-site distribution
• Class C—Distribution to non-domestic consumers
• Class D—Offshore distributors

Electricity supply

• Class A—Small suppliers
• Class B—Resale
• Class C—On-site supply
• Class D—Offshore supply

Currently, no class exemptions are available to electricity transmission, interconnection or smart meter communication.

The criteria in each of these categories can be very complicated to apply to the circumstances of an individual project, particularly where there are a number of entities involved, which is an increasing trend with hybrid generation projects located on or near demand sites with several electricity consumers.

To an extent, this difficulty in application is however driven by the underlying definitions of electricity “supply” and “distribution” in the Act being far from user-friendly (a judge, in one particular High Court of Justice judgment, memorably articulated the Act’s definition of distribution as, “distribute means distribute means distribute”). However, whether BEIS would wish to go so far as to review these Act definitions, whose application in the GB electricity sector goes far wider than just the exemptions regime, remains to be seen.

Individual exemptions

Individual exemptions may be granted pursuant to section 5(1) of the Act. These exemptions typically apply to small generators (generating between 50 MW and 100MW) in order to ensure such operators are not burdened by licensing costs and regulatory obligations that are considered to be disproportionate to the scale of their impact on the electricity system.

Comment

This will be welcome news for many across the electricity sector, with the existing exemption regime often being cited as unnecessarily complicated and capable of tripping up the most diligent of market participants.

Commentators consider that the exponential growth in decentralised generation, electrification of transport and flexibility services warrant a re-thinking of how the energy system is licenced to facilitate this transition.

Nevertheless, developers with a pipeline of projects that plan to rely on any existing exemptions should watch these developments closely. For example, currently, on-site, class exempt supply of electricity does not attract green levies or network charges, resulting in potential cost savings for the electricity consumer and a business model for the developer. It is unclear whether this could be deemed by BEIS to fall foul of the “fair share” principle for future projects.

Who should respond?

The call for evidence is open to all interested parties in the exemption regime, including:

• Those who benefit from an exemption from the requirement to hold an electricity licence;
• Those who wish to benefit from an exemption but are currently unable to do so; and
• Any other stakeholders, such as licensed stakeholders, consumers and trade bodies.

The deadline to respond by is 1 March 2021.