RESEARCH PAPER 04/36 The Energy Bill [HL] 6 MAY 2004 Bill 93 of 2003-2004 The Energy Bill is in Five Parts. Provisions in Part 2 of the Bill relating to the Civil Nuclear Industry and the Nuclear Decommissioning Agency (NDA) are dealt with in a separate paper (RP 04/37) Part 1 introduces a duty to ensure security and integrity of supply and to make annual reports to Parliament on new energy sources under the Sustainable Energy Act 2003, and on energy efficiency. Part 3 of the Energy Bill relates to the development of offshore renewable energy resources and the establishment of a mutually recognisable system of Renewable Obligation Certificates in Northern Ireland. It also includes a strategy for microgeneration and provision for a Renewable Transport Fuels Obligation. Part 4 of the Bill relates to energy regulation issues, principally the introduction of Great Britain wide electricity trading and transmission arrangements, known as BETTA. Part 5 relates to miscellaneous and supplemental provisions. Most of the Bill’s content relates to reserved matters, and with exceptions, applies to the whole of the United Kingdom. Brenda Brevitt SCIENCE AND ENVIRONMENT SECTION HOUSE OF COMMONS LIBRARY RESEARCH PAPER 04/36 Recent Library Research Papers include: 04/21 Promotion of Volunteering Bill [Bill 18 of 2003-04] 03.03.04 04/22 The Justice (Northern Ireland) Bill [HL] [Bill 55 of 2003-04] 04.03.04 04/23 Poverty: Measures and Targets 04.03.04 04/24 The Cardiac Risk in the Young (Screening) Bill [Bill 19 of 2003-04] 10.03.04 04/25 The Christmas Day Trading Bill [Bill 20 of 2003-04] 17.03.04 04/26 Unemployment by Constituency, February 2004 17.03.04 04/27 Direct taxes: rates and allowances 2004-05 18.03.04 04/28 Kashmir 30.03.04 04/29 Protective Headgear for Young Cyclists Bill [Bill 21 of 2003-04] 31.03.04 04/30 Economic Indicators [includes article: The Lyons Review] 01.04.04 04/31 Individual ministerial responsibilities – issues and examples 05.04.04 04/32 Unemployment by Constituency, March 2004 16.04.04 04/33 The Human Rights Clause in the EU's External Agreements 16.04.04 04/34 Age-Related Payments Bill [Bill 92 of 2003-04] 29.04.04 04/35 Economic Indicators 05.05.04 Research Papers are available as PDF files: • to members of the general public on the Parliamentary web site, URL: http://www.parliament.uk • within Parliament to users of the Parliamentary Intranet, URL: http://hcl1.hclibrary.parliament.uk Library Research Papers are compiled for the benefit of Members of Parliament and their personal staff. Authors are available to discuss the contents of these papers with Members and their staff but cannot advise members of the general public. Any comments on Research Papers should be sent to the Research Publications Officer, Room 407, 1 Derby Gate, London, SW1A 2DG or e-mailed to [email protected] ISSN 1368-8456 2 RESEARCH PAPER 04/36 Summary of main points The Energy Bill is in five parts with 23 Schedules. Part Two relating to the Civil Nuclear Industry and the Nuclear Decommissioning Agency is dealt with in a separate paper, RP 04/37. Part One introduces a statutory requirement to ensure security and integrity of energy supplies, and to make annual reports to Parliament on new energy sources under the Sustainable Energy Act 2003, and on steps to secure carbon savings from domestic energy efficiency. Part Three - Renewable Energy Sources: There is currently no legal framework to support renewable energy developments beyond UK territorial waters. Part 3 of the Bill will bring in powers to license Renewable Energy Zones (REZs) beyond the current 12 mile limit, based on rights under the United Nations Convention on the Law of the Sea (UNCLOS), which will apply to wind, wave and tidal energy projects. New powers to declare Safety Zones around such installations and prohibit access to unauthorised vessels will be introduced; costed decommissioning plans will also be required. Electricity must be brought ashore in the most environmentally sensitive way. The Bill also paves the way to a UK-wide system of tradeable Renewable Obligation Certificates once Northern Ireland has introduced a mutually recognised system. The Bill also allows surplus funds arising from the auctioning of output contracted under the Scottish Renewables Obligation and Fossil Fuel Levy to be recycled into the Scottish Consolidated Fund for the purposes of promoting renewables in Scotland. A new strategy for microgeneration is proposed alongside provision for a Renewable Transport Fuel Obligation. Part Four - Energy Regulation: New Electricity Trading Arrangements (known as NETA) were introduced in England and Wales in March 2001. In Scotland, wholesale electricity prices are subject to an administered price cap. The Government proposes to extend to Scotland trading arrangements based on the NETA model, thus creating the British Electricity Trading and Transmission Arrangements, otherwise known as BETTA, ostensibly to harmonise the two regional markets and allow the Scottish companies to compete in the wider electricity market. It is hoped that the measures brought in under Part 4 of the Bill will protect the interests of consumers by bringing in more competitive prices for domestic and commercial customers. Shortcomings in the current trading arrangements in Scotland are seen as the prime justification for the introduction of BETTA. The new system would introduce one set of trading rules to allow electricity to be traded across Great Britain, with a single set of arrangements for access to and use of the GB transmission system under a single GB System Operator (National Grid Company), regulated by Ofgem. New codes to balance and settle the system will replace those currently applying to England and Wales, and 3 RESEARCH PAPER 04/36 there will be a new code to govern the relationship between the system operator and transmission system operators in Scotland (SO/TO Code). The widening of access to, and strengthening of, the transmission and distribution networks will also be required to facilitate the introduction of BETTA; this is seen as key to the growth of renewable energy resources, a central part of the Government’s energy policy, particularly those based in more remote areas such as the north of Scotland. However, concerns have been expressed that BETTA may fail to encourage the expansion of renewable energy unless better locational price signals are developed and barriers to small and ‘embedded’1 generators connecting to the Grid are removed. Implementation of BETTA originally planned for October 2004 now looks more likely by the backstop date of April 2005. Other regulatory provisions are introduced by the Bill. These include; measures to streamline the public inquiry process for power stations and overhead lines; extending the licensing scheme for electricity and gas interconnectors; introducing a special administration scheme for electricity and gas network operators threatened with insolvency to ensure security of supply; a mechanism to allow appeals to the Competition Commission against Gas and Electricity Markets Authority (GEMA) on modifications to the Electricity and Gas Network Codes; and a redefinition of the meaning of electricity supply to ensure that supply taken directly from the transmission network becomes eligible to pay the Renewables Obligation and the Climate Change Levy. Part Five - Miscellaneous and Supplementary Provisions: Part 5 of the Bill includes a cost recovery mechanism for funding specific regulatory functions in relation to the oil and gas and electricity industries. Most of the Bill’s content relates to reserved matters, and with exceptions, applies to the whole of the United Kingdom. The Bill has been amended substantially since it was introduced in the House of Lords on 27 November 2003. Details of the main Amendments is set out in three Library Notes SNSC-2919 Energy Bill [HL] Bill 2 2003-04 Grand Committee Stage2, SNSC-2985 Energy Bill [HL] Bill 34 2003-04 Report Stage3 and SNSC-3014 Energy Bill [HL] Bill 58 2003-04 Third Reading4. The reader is referred to these to pinpoint more detailed discussion on some of the issues that are beyond the scope of this paper. 1 Embedded generators supply energy for the network at a local (distribution) level 2 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-02919.pdf 3 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-02985.pdf 4 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-03014.pdf 4 RESEARCH PAPER 04/36 5 RESEARCH PAPER 04/36 6 RESEARCH PAPER 04/36 CONTENTS I Context of the Energy Bill 9 II Introduction of the Energy Bill 9 III Part One – Security and integrity of supply and annual reporting 11 IV Part Three – Renewable Energy Sources 13 A. Renewable Energy Generation 14 1. Wind power economics 16 B. Renewable Energy Zones 18 C. Safety Zones and Navigation rights 20 D. Decommissioning programmes 24 E. Generation and Transmission of electricity offshore 24 F. Discharge of Renewables Obligation by Payment 25 G. Northern Ireland - Renewables Obligation Certificates 26 H. CHP exemption from the Renewables Obligation 27 I. Microgeneration Strategy 28 J. Renewable Transport Fuel Obligation 28 V Part Four - Energy Regulation issues 29 A. Electricity generation and supply in England and Wales 32 1. Privatisation and the Pool 33 2. RETA and NETA 33 3. Issues arising under NETA 34 4. National Audit Office report on NETA 36 5. Public Accounts Committee Report on NETA 37 B. Electricity generation and supply in Scotland 39 7 RESEARCH PAPER 04/36 1. Current market arrangements in Scotland 40 2. Scottish administered pricing arrangements from 1 April 2002 41 3. The Hydro benefit 42 C. Electricity prices 43 1. Unit prices 43 2. Household bills 44 VI BETTA 45 A.