CEP response to UK Government Energy Prices Bill

The UK Government is proposing new legislation in the form of the ‘Energy Prices Bill’, both to deliver on commitments made by the Prime Minister to support households and businesses with the cost of energy, and to take temporary steps to break the link between the price of electricity and rising gas costs.

The Bill provides the legislative means to deliver schemes already announced, such as the ‘Energy Price Guarantee’ and the ‘Energy Bills Relief Scheme’, with extension to provide support in Northern Ireland. It also includes support packages for those not covered by those schemes, including those on alternative fuels such as heating oil, living in park homes, who pay landlords for energy, and those on heat networks.

The new Bill also includes a temporary measure called ‘Cost Plus Revenue Limit’, which will come into force at the start of 2023. The aim is to break the link between abnormally high gas prices and how much revenue low carbon electricity generators receive during the current disruption in international gas markets. The precise design of the mechanism will be subject to consultation in the next couple of months, to ensure that investment and other key incentives in securing our electricity supply are not distorted.

With household electricity bills effectively capped for two years, and those of businesses and other non-domestic users for six months, the main impact this winter will be on the public finance (and ultimately taxpayer) burden of paying the difference between the cap and market rates for electricity. Going forward, the Bill also introduces a measure known as ‘Voluntary Contracts for Difference’ which could offer low carbon generators longer term revenue certainty and safeguard consumers from further price increases.

Professor Karen Turner, Director of the Centre for Energy Policy at the University of Strathclyde said:

“The introduction of this Bill marks a significant moment in the energy market. While many of the schemes included have been widely publicised, the moves to limit the revenues made by low carbon generators constitutes a significant new intervention that focusses on rising energy prices – here the electricity price – rather than the impact thereof."

“It is important to note that this will not further reduce household energy bills for consumers as long as the electricity price remains above the October 22 cap. But it could have important impacts on the costs of doing business and inflation in the spring, when the non-domestic price cap is due to end."

“Crucially, the Cost Plus Revenue Limit will act to reduce the burden on our public finances in delivering the various support schemes in the Bill. This may also be an important first step in re-examining how wholesale energy markets operate, particularly where price increased are associated with abnormal revenue and profit generation on the supply side."

“However, we do welcome the fact the Government will be consulting on the Cost Plus Revenue Limit before finalising and deploying the mechanism. This is necessary to ensure that the scheme is delivered in a way that doesn’t hamper crucial future investment in low carbon generation and the price signals that are necessary to ensure a balance between the supply and demand for electricity at all times.”

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