On 6 July 2022, the new Energy Security Bill (the “Bill”) was introduced in the House of Lords. It seeks to deliver a cleaner, more affordable and more secure energy system, as set out in the Queen’s Speech, by encouraging investment in clean technologies, protecting consumers from unfair prices, and increasing the system’s resilience. This article discusses the areas focussed on consumers –suppliers and retail smart appliances, as set out in Parts 6 and 8 of the Bill.
New measures contained in Part 6 of the Bill are focused on better regulating suppliers by addressing the default tariff price cap and energy bill reduction targets. In doing so, the measures also aim to protect consumers from unfair prices.
Extending the Default Tariff Price Cap
The Default Tariff Price Cap (the “Price Cap”) was introduced in 2019 in response to findings that customers on default tariffs were being overcharged by way of a ‘loyalty penalty’. It currently impacts around 22 million households by limiting the amount energy suppliers can charge for each unit of gas and electricity, as well as the maximum standing charge consumers pay.
Section 161 of the Bill provides that the Price Cap can be extended beyond 2023. The conditions for extending the Price Cap will be set out in a new section 8A of The Domestic Gas and Electricity (Tariff Cap) Act 2018. It states that, where the Secretary of State concludes that the conditions for effective competition have not been met for domestic supply contracts, the Secretary of State must extend the Price Cap for two years at a time. Where the Secretary of State considers that there is a significant prospect of the conditions for effective competition being in place before the end of that year, then they must extend for one year.
Energy Company Obligations and Buy-Out Mechanism
The Energy Company Obligation (“ECO”) scheme has been in place since 2013 and is an energy efficiency scheme that is aimed at reducing carbon emissions and tackling fuel poverty. The newest iteration of the scheme, ECO4, requires suppliers to install energy efficiency and heating measures such as insulation or upgraded heating systems in the least energy efficient and vulnerable households.
Currently, small suppliers with under 150,000 customer accounts are exempt from ECO because their size means the costs of meeting their obligations would be disproportionate compared to larger suppliers. Government have stated that they aim to include these suppliers in the ECO scheme to rectify market distortions caused by smaller suppliers undercutting those suppliers who must pay ECO costs. Therefore, the Bill provides for a ‘Buy-Out’ mechanism as an alternative to meeting ECO obligations to ensure that smaller suppliers will not face disproportionate costs once they are included in ECO. The aim of this measure is to achieve a more equal and fair energy market for suppliers and spread the cost of ECO amongst a greater number of domestic consumers.
Section 163 of the Bill provides powers to the Secretary of State to:
enable suppliers to make a buy-out payment;
set the buy-out price;
make the criteria for approved third parties and purposes to which a buy-out payments made; and
set the procedure to be followed by suppliers to make buy-out payments.
The details of the mechanism have not yet been established and secondary legislation to that effect will be preceded by a separate consultation.
Measures concerning smart appliances are contained in both Part 6 and Part 8 of the Bill and are focused on regulating smart devices associated with Demand Side Response (“DSR”), such as smart meters and EV charge points. The Government seeks to drive adoption of smart devices whilst also protecting consumers from certain risks.
The Government set minimum installation targets for energy suppliers in 2022 to drive the rollout of smart metering in households and small businesses. It sees great benefits in smart meters, which allow prepayment customers to top-up remotely, enable solar PVs, heat pumps and EVs to be efficiently integrated into homes, and help customers manage their energy use by providing near-real time information.
The installation targets are part of a four-year Targets Framework which will be in place until the end of 2025, with installation targets for the final two years of the policy to be set during 2023. Under the Energy Act 2008 and associated sections of the Electricity and Gas Acts, the Secretary of State has powers to modify energy licence conditions and industry codes for the purpose of the rollout. The Bill seeks to extend these powers – which are due to expire on 1 November 2023 – for a further five years until 2028. The aim of this extension is to allow Government to deliver the current Targets Framework and ensure it has powers to react to a post-implementation review of the rollout after 2025.
Regulating Smart Appliances and Load Controllers
The Government claims that a smart energy system could reduce energy costs by up to £10 billion a year by 2050. At the centre of the Government’s reform are energy smart appliances, which will help decarbonise whilst also allowing consumers to benefit from efficient management of electricity.
To minimise the cyber security risks associated with the mass adoption of these devices, the Government wants to ensure appropriate protections are in place for consumers and the grid to give all participants confidence in DSR. This means regulating not only smart appliances, but also load controllers.
The Bill provides Government with powers to introduce regulations for energy smart appliances so that these meet minimum technical requirements for cyber security, interoperability, data privacy and grid stability. The Government is specifically targeting:
The new powers would allow the Government to impose requirements on any person making, selling, importing, or distributing energy smart appliances or carrying out load control. Designated enforcement authorities will ensure compliance through powers requiring persons to produce information, make appliances compliant, or limit the sale of appliances. Non-compliance or the giving of false or misleading information will be sanctioned by the imposition of civil penalties.
The Bill also provides Government with powers to make activities related to load control licensable by amending the licensing conditions under section 6(1) of the Electricity Act 1989 and section 7A(1) or 7AB of the Gas Act 1986. Modifications to the conditions of a licence may prohibit the provision of load control to non-compliant appliances or require the holder of a licence to supply information about tariffs. Regulation will likely seek to ensure that load controllers meet requirements for consumer protection, cyber security, and data privacy.
It is clear from parts 6 and 8 of the Bill that there is a sense of urgency for a smarter energy system. Whilst there are currently few load controllers, their numbers are expected to grow significantly over the next decade as more consumers shift to smart technologies. The challenge will come in ensuring that a cohesive approach to regulation and business practices across smart devices is introduced and that this does not slow the roll out of smart home devices. The Bill’s attention to consumer protection and load controllers is welcome as confidence in smart home appliances is key to adoption and to allow consumers to participate in a more active way in the energy system.
However, there are strong concerns that the Bill is not doing enough to drive energy efficiency or address the immediate cost of living crisis. Whilst extending the price cap will give time to tackle the underlying factors that led to a loyalty penalty in the GB supply market, there is a question that remains as to whether the price cap is being used to tackle the cost of living crisis (which was not intent of the mechanism). Whilst extending ECO4 to more suppliers should increase the installation of energy efficiency measures, the Bill presents a missed opportunity to introduce new measures such as mandatory Minimum Energy Efficiency Standards, zero interest loans, and other incentives for households to improve their energy efficiency. Without more, it seems unlikely that the Government will meet its EPC C by 2035 target.
The Bill is currently undergoing its second reading in the House of Lords, before it will face the Committee and Report stage. If it is passed in its current form, it will be necessary to expand on the powers contained within. A consultation on those powers related to the interoperability and cyber security of smart appliances and load controllers has been published and closes on 28 September 2022. Its outcome will hopefully provide more guidance to industry about what to expect. Ofgem also held a consultation on the ECO4 scheme, which closed on 18 July 2022 and is awaiting decision.
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