UK Prime Minister's New Energy Plan

On 8 September, Prime Minister Liz Truss announced a new energy plan aimed at addressing the increasing energy prices faced by both domestic and business consumers in the UK.

Energy Price Guarantee

A key measure that the Government is introducing is a new Energy Price Guarantee, designed to give consumers certainty on energy bills and replacing the Ofgem price cap. This will lead to typical households:

• saving at least £1,000 a year (based on current prices from October 2022); and
• paying an average of £2,500 a year on their energy bill for the next two years (compared with the £3,549 price cap announced previously). Together with the £400 energy bills discount for all households, this means the average cost will fall to £2,100 a year.

Businesses, charities and public sector organisations will also benefit from an equivalent guarantee. However, this will only be available for 6 months, following which further support will be provided to vulnerable sectors such as hospitality.

The Energy Price Guarantee works by limiting the price which suppliers can charge customers for units of gas, with the Government making up the difference. The cost of this package is uncertain, but is likely to be more than £100 billion over the next year alone. As a result, it is unlikely that this approach will be sustainable in the long term.

Long Term Measures 

Recognising that short term measures will ultimately be insufficient, the Prime Minister also pledged action to address long-term issues in the UK energy sector.

1. Creation of the Energy Markets Financing Scheme.

HM Treasury announced a joint scheme (working with the Bank of England) to enable stability in the energy and financial markets, with the aim of reducing cost for businesses and consumers. The scheme will be worth up to £40 billion. However, key points to note are:

• this only provides short term financial support, and is designed for use as a last resort; and 
• there will be a rigorous assessment process to determine eligibility, with firms having to prove that they are otherwise in sound financial health, have a UK presence, and play a significant role in UK electricity or gas markets.

2. Establishing an Energy Supply Taskforce led by Maddy McTernan. 

This taskforce has begun to negotiate long-term oil and gas contracts with international providers, aiming to reduce the price charged for energy and increasing the security of its supply.

3. Migrating from Renewable Obligation Certificates (ROCs) to Contracts for Differences (CfDs).

Currently, most of the UK’s renewable generation capacity (32 GW) is remunerated by a combination of ROCs and power prices set by gas-fired power stations. The effect is that the price of renewables is being inflated simply because the cost of gas has risen, even though the cost of generating renewables remains largely constant.

Rather than ‘decoupling’ gas and electricity prices, the Government has proposed shifting UK generators onto CfDs, where a fixed strike price is paid instead. This will be a voluntary scheme, and its success would depend on the ROC generators agreeing to the shift. Generators are incentivised by the promise of a long-term contract of 15 years guaranteeing profitable terms when the current emergency has passed, as well as the implicit threat of imposing windfall taxes. 

 Further details of the scheme remain to be finalised, with the Government still considering how to differentiate between the various types of renewable energy given that not all cost structures are the same.

4. Measures to accelerate domestic energy supply.

A more detailed plan will be set out by the BEIS Secretary in the coming months, but an initial outline of steps to be taken include:

• launching a new oil and gas licensing round as early as this week, leading to over 100 new licences.
• lifting the moratorium on UK shale gas production, which may lead to gas flowing in as soon as six months’ time. 
• renewing the emphasis on delivering electricity generation by nuclear projects, leading to up to 24GW of nuclear by 2050. 

The ultimate goal is to make the UK a net energy exporter by 2040.

5. Finally, the Government will launch reviews in respect of: 

• energy regulation and the structure of the energy market to address long term supply and affordability; and
• the Government’s commitment to achieve net zero by 2050 to ensure that this goal will be met in a manner that is pro-business and pro-growth. A report on this is due by the end of 2022.