A new roadmap for the UK energy industry

The UK government recently unveiled its plans to reduce the impact of the recent surge in gas prices on household and business energy bills. While much of the attention focused on the price cap, there were also important announcements that may affect the long-term structure, regulation and functioning of the country’s energy market. 

While many of the details of these changes are still to be worked out, it is clear that some of the changes may have far-reaching consequences for the energy industry. They will also have an impact on the country’s energy transition, as well as on the UK’s desire to promote greater energy security.

The announcements included:

• An energy price guarantee to limit the rise in household energy bills for the next two years
• An ‘equivalent’ level of support for businesses – but only for six months
• Suspending green levies to help meet some of the cost
• Setting up a new Energy Supply Taskforce to negotiate long-term energy contracts with domestic and international gas supplier
• Undertaking ‘fundamental reforms’ to the structure and regulation of the energy market through recommendations from a review into the UK’s energy regulation
• A drive to increase domestic oil and gas production by accelerating the licensing of projects in the North Sea
• Speeding up the deployment of clean and renewable technologies, including hydrogen, solar, and carbon capture and storage, as well as wind
• Introducing Contracts for Difference (CfDs) for older renewable and nuclear infrastructure developments  
• Overturning the moratorium on the fracking of shale gas
• Introducing a £40bn liquidity facility to help energy producers manage market volatility
• Launching a review aimed at ensuring the UK reaches net zero in a 'pro-business and pro-growth' way

While the immediate impact of the government support on household bills is relatively clear, there are a number of questions about the rest of the package that will need to be addressed in the coming months. For example, what will happen to businesses after the six-month period? The scheme will fix wholesale gas and electricity prices for firms for six months from 1 October. It is understood the scheme will be reviewed after three months with a potential to extend support for vulnerable businesses - but it is not yet known what sectors will receive help.

When it comes to the energy market, the government is planning to move existing renewable and nuclear generators onto fixed-price contracts, using CfDs to help delink the cost of electricity from the marginal price of gas. The details of how this will happen, the pace at which the contracts will be changed, the extent to which they will be voluntary or compulsory, and how prices will be set have however yet to be decided. 

Turning to the plan to boost renewables and other clean technology, there has again so far been little indication of how the government plans to support the drive. The UK is already a global leader in clean energy production, and the industry will be keen to hear how the pace of change can be accelerated. It is unclear for example whether this may require a change to the way new projects are financed, an overhaul of planning rules, or a change to regulation. 

There are other issues that remain outstanding. How viable is fracking on a large scale, and will it be able to overcome the objections of local opposition groups? How will the next round of offshore oil and gas licence auctions be run? And how quickly can the new projects be brought up to sufficient scale to meet the need for greater energy security? 

One of the biggest issues still outstanding is the scope of the proposed review of UK Energy Regulation, which is said to be aiming to make fundamental reforms to the structure and regulation of the energy market. It is not yet clear how broad and deep the changes might be, what sectors will be impacted, and how any changes will affect the future supply of both green and fossil fuel energy.

More broadly, there will be questions about how the moves taken as a whole will support the energy transition. While the government remains committed to its net-zero goals, the support for renewables on one hand, and for fracking and North Sea production on the other, will require careful balancing if the country’s aims are to be met. 

In summary, while there have been a series of significant announcements, there are still a substantial number of details to be finalised about the package. The end outcome is likely to be uncertain for some time, while the government works through the details. Whatever happens however, it may well mean a potential shift in the UK’s energy landscape, which will have implications for developers, regulators, investors and the wider energy industry. 

At Ashurst, our energy experts will continue to monitor the plans as they evolve over the coming months. Meanwhile if you have any questions about how they will impact you, please contact your local Ashurst team.