End of an era

The Energy Bill terminates the rule of the market over energy policy and puts the government firmly back in control, writes Roger Barnard

Another year, another Energy Bill… This is the eighth major energy statute to see the light of day within the past decade. It was certainly not the jewel in the crown of the Queen’s Speech to Parliament on 9 May, when its announcement was generally ignored. But interest perked up when the government issued a draft version of the Bill last week for a period of pre-legislative scrutiny by the Energy Select Committee before Parliament rises for the summer recess. That was a sensible move because, when the real Bill returns for its first reading in the autumn, there will not be a more urgent piece of legislation for Parliament to enact.

The publication of the Bill marks a step-change in the development of energy policy. This is high-level legislation, operating on two strategic fronts. The first is the creation of an over-arching new legal framework to support the government’s Electricity Market Reform (EMR) programme. This was outlined in detail in a white paper last July, followed by a technical update in December. EMR’s objective is a restructured electricity market that will be able to meet the long-term challenge of supplying decarbonised power on a secure and sustainable basis, and at a price that is affordable relative to current price levels.

Actually, “market reform” is something of a misnomer for the project. Its real aim is not to reform the electricity market, famously described as “bust” some years ago, but to replace the normal investment functions of a commodity market with central planning and regulated price contracts designed to de-risk the investment of some £110 billion that is reckoned to be required in generation and transmission alone by the end of this decade. The Bill therefore heralds the introduction, within about a year’s time on the current parliamentary timetable, of the largest and most significant intervention in the market-based approach to the evolution of energy policy since the privatisation of the industry in 1990.

About half of the Bill’s 109 sections and ten lengthy schedules lay the legal foundations for the project. The key elements here are powers enabling the government to introduce new long-term supply contracts to provide stable financial incentives to invest in low-carbon generation, while also creating a market-wide capacity mechanism to ensure future security of supply. These building blocks will be supported by a statutory emissions performance standard, to underpin the requirement that no new coal-fired power stations can be built without carbon capture and storage, and the fixing of a carbon floor price (already established in principle in last year’s Finance Bill) to reduce investor uncertainty. The rest of the Bill mostly contains provisions to put the Office for Nuclear Regulation (currently a non-statutory agency inside the Health and Safety Executive) onto an independent statutory footing, with a stronger legal remit to protect people and society from the hazards of nuclear power.

The second strategic front on which the Bill is focused is the enshrinement in law of the idea that government must in future be able to clarify and demand compliance with its own key policy positions more, rather than less, if regulation is to be an effective enabler of infrastructure and other utility investment for the 21st century. This is to be achieved by the introduction of a national statement of strategic objectives for the energy sector, in a form approved by Parliament, coupled with a new legal duty on Ofgem to take, and justify, its regulatory decisions within that context. This is an important development because it is likely to have the effect, over time, of displacing Ofgem from the centre-stage position it has come to occupy in the energy industry. But such an outcome would be consistent with the evolving political view of how independent regulation on the traditional model should fit into the policy-making process in a democratic state. It may also have significant implications for the governance and practice of regulation in other utility sectors.

A large number of technical papers, impact assessments and explanatory notes, all of which help to improve the public transparency of the draft Bill, have been issued with it. Even so, much of the policy detail still remains to be spelt out later in a torrent of regulations, statutory orders and licence modifications. There is a real concern that any implied Treasury liability for losses resulting from future changes to long-term supply contracts could fall foul of the European Union’s state aid rules. And the government’s cost-benefit studies, which purport to show that household electricity bills after implementing EMR will be 4 per cent lower than they would have been without EMR in place over the period up to 2030, are sure to crumble under the onward march of global economic events, particularly if there is no abatement of the pressures (whether from Brussels or our own Climate Change Committee) for faster progress towards a low-carbon economy.

In the end, however, the only issue that matters, far more than meeting unrealistic renewables targets, is security of supply. The government deserves credit for facing up to this stark political reality. Nobody under the age of 50 can have much idea of what life was like when Britain last suffered rolling power blackouts during Ted Heath’s struggle with the coal miners in 1972. Since then, the significance of electricity’s role as a primary public good in our national life has multiplied beyond measure. The existence of the industry is necessary for society to function at all: continuity of service is essential for every aspect of modern personal and economic life, and the collateral impact of any serious or widespread breakdown of supply could be catastrophic for social cohesion and civil order.

Against that background, this Bill marks the end of an era in which the best brains of an entire generation of regulators and policy wonks devoted their energies to asserting that the light touch of the market’s invisible hand would more effectively deliver the investment required for energy security than the clumsy interfering hand of government. But it has arrived desperately late in the day, after a lost decade of legislative tinkering, and represents our last chance to get energy policy right while adapting sensibly to climate change at a price that will not impoverish both individual citizens and society as a whole. The consequences of getting it wrong are too awful to contemplate.

Roger Barnard is a legal consultant and was head of regulatory law at EDF Energy until his retirement two years ago

This article first appeared in Utility Week’s print edition of 1 June 2012.

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