Energy and Utilities

The Energy Transition | UK government publishes the Energy Prices Bill

Published on 18th Oct 2022

This week we look at the newly published Energy Prices Bill, the approval by Ofgem of a cap on BSUoS charges and NG ESO's outlook for the coming winter.

UK government publishes Energy Prices Bill 

On Thursday 13 October, the UK government published the text of its new Energy Prices Bill with the aim of ensuring that consumers "pay a fairer price for their electricity". The bill aims to deliver the various announcements made by the government over the last six weeks in response to the energy crisis which include limiting the prices paid by domestic and non-domestic energy users.

One of the schemes is the creation of a cost-plus-revenue scheme for renewable and nuclear generators. Read more about what the bill might mean for the revenues of these generators in this Insight.

The bill also introduces measures which enable the domestic and non-domestic customer energy price reduction schemes, promised by the government in recent weeks, to take effect. More details for the non-domestic energy customer subsidy scheme were announced on Tuesday. Similarly to the price guarantee for domestic customers, the scheme will only last for six months,  but it will be backdated to apply to any contracts that were signed since 1 December 2021. Wholesale energy prices will be discounted to £211 per MWh for electricity and £75 per MWh for gas. When the scheme ends in March, the government said that it will implement further support for "vulnerable" businesses, including those in the hospitality sector.

Ofgem announces temporary cap on BSUoS charges

Ofgem has approved a cap on Balancing Services Use of System (BSUoS) charges to combat the fluctuating and increasing charges that generators and suppliers are facing as a result of the energy crisis. The cap came into effect on 6 October 2022 and will remain in place until 1 April 2023. The cap has been set at £40/MWh, with the maximum deferred cost being £250 million.

Ofgem has defended its approval of a £40/MWh cap, which is significantly higher than the £15/MWh or £25/MWh limits which were originally suggested. It said that the cap is designed to kick in where the BSUoS charge is so high that it could not reasonably have been foreseen by those paying it. Although a £15/MWh or £25/MWh charge is considered high, it is not so high as to be reasonably unforeseeable, and capping it at a lower level could lead to the £250 million maximum deferred cost being met much faster than if the £40/MWh cap is imposed.

The cap was originally proposed in August 2022 and Ofgem recently decided to treat this as an urgent request as a result of the spiralling BSUoS charges. Against the backdrop of the energy crisis, generators and suppliers had been finding that the high BSUoS charges were adding increasing risk and cost to their commercial activities.

The cap will cease to apply after 1 April 2023, at which point BSUoS charges will no longer be recovered from suppliers and generators and will instead be levied solely from final demand (being electricity that is consumed other than for the purposes of generation or export on to the electricity network).

NG ESO's winter outlook 

National Grid ESO (NG ESO) has published its winter outlook which gives an early view of anticipated electricity supply margins covering the period from 31 October 2022 to 31 March 2023. The outlook indicates that NG ESO's current expectation is that the winter supply margins should broadly align with that of recent winters, although there are likely to be days where operational tools (such as use of system notices) may need to be implemented to mitigate supply shortages.

The expectation is that there will be enough capacity to meet energy demand. NG ESO cites a de-rated supply margin of 4.0GW which equates to 6.7%. This conclusion is based on the assumption that, even on days where the supply margin is at its tightest, the energy price in Great Britain will exceed that of Europe, meaning there will be interconnector flows into Great Britain, as has been the case in previous winters.

NG ESO also expects that operationally the first half of December may be a tight supply period with daily operational margins possibly dipping below 0 GW. Measures such as issuing electricity margin notices may be needed to manage these periods. Overall, however, NG ESO expects there to be sufficient available capacity to meet consumer demand.

The outlook also suggests ways in which Great Britain can prepare for winter, including delaying coal plant closures, having a greater demand side response, minimising the impact of network outages and engaging with industry stakeholders to mitigate risks as they materialise. NG ESO has been in discussions with the government regarding a delay to the closure of five coal fired power stations which could provide up to 2GW of de-rated capacity over the winter. NG ESO is also instigating discussions with generators, neighbouring European Transmission System Operators and Electricity Market Reform Delivery Partners in the hope that it will be able to address any risks or issues being faced as soon as possible. 

This article was written with the assistance of Saskia Zant-Boer and Hannah Wooderson, Trainee Solicitors.

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