From nuclear to heat pumps: What’s included in the UK’s new Energy Act?

Following on from the British Energy Security Strategy in April 2022, which significantly increased targets for deploying offshore wind, blue and green hydrogen and nuclear, then Energy Secretary Kwasi Kwarteng introduced a new Energy Security Bill designed to enact many of the changes necessary to deliver the Strategy.

Following the resignations of Boris Johnson and Liz Truss as Prime Minister, the Bill was hauled in for review and an updated version – simply called the Energy Bill or Energy Act – was set out in December 2022.

The following months have included much back-and-forth between Lords and MPs about whether parts of the Act could be strengthened. Debates have included whether the UK should have an outright ban on new coal mines and whether the North Sea oil and gas sector should be mandated to reduce gas flaring more rapidly.

The Government ultimately rejected both of those interventions.

Royal Assent was finally granted for the Act on Thursday (26 October) following this fraught process. Here, we round up some of the key things the Act will change.

A net-zero remit for Ofgem

Chris Skidmore MP’s Net-Zero Review, published in January, recommended that regulator Ofgem should be given a net-zero remit. Energy Efficiency Minister Lord Callanan initially argued that this would not be a necessary move given Ofgem’s existing contribution to Climate Change Act targets, but Skidmore has maintained that it is one of his Review’s most crucial recommendations.

The remit was ultimately added to the Act thanks to the intervention of four members of the House of Lords.

Ofgem has stated: “Our duty to protect the interests of current and future consumers and ensure sustainable development of the energy sector, is entirely consistent with the net zero mandate.”

Heat transition

Another change for Ofgem thanks to the Act is that it is now the UK’s official regulator of heat networks, which serve around half a million buildings across the nation and which are set to be expanded as individual fossil fuel boiler use reduces.

The fact that the sector now has a regulator should, in theory, enhance customer protections. The Government’s aim is to bring protections in line with those available to homes on the gas and/or electricity network. There is, however, no plan for an Ofgem price cap for heat network customers at this stage.

Additionally, the Bill sets the ball in motion for the development of more mature heat network zoning plans, outlining how organisations like councils and businesses and collectively co-ordinate the delivery of infrastructure in well-served areas.

The Act also details measures intended to support the Government’s target of 600,000 heat pump installations annually from 2028. There is a new mandate for the manufacturers of fossil fuel heating appliances to ensure that heat pumps account for an ever-increasing proportion of their total appliance sales. This is similar to the Zero-Emission Vehicle (ZEV) mandate for automakers. Time-bound targets are yet to be confirmed for heat pumps.

Carbon capture and storage

Ministers have stated that scaling carbon capture is not the “principal purpose” of the Act as it does not contribute directly to energy security. Nonetheless, there are some important changes here.

The Conservatives have set out a vision for the UK to capture and store 20-30 Mt of CO2e per year from 2030 using man-made carbon capture and storage (CCS) technologies. It has supported a string of large-scale CCS cluster projects at industrial hubs and is seeking to keep momentum in the sector going with a £20bn, 20-year commitment from Westminster coffers. Additionally it has overseen the first licencing round for the storage of captured carbon in the North Sea.

The Act builds on this by setting out the regulatory framework, licencing regime and likely revenue support contracts for the transport and storage of captured CO2.

It also gives the Government new powers to assist in the overseeing of the decommissioning of carbon storage installations.

Hydrogen

As with CCUS, the Act tables measures to fast-track the introduction of a business model for hydrogen transport and storage.

The Government is targeting 10GW of domestic hydrogen production capacity that is ‘low-carbon’ by 2030, of which at least 5GW should be renewable. While a business model has been set out for hydrogen generation, the industry has been pushing for more clarity on the regime to support transport and storage infrastructure.

In consultations, most respondents supported a regulated asset base (RAB) model to fund hydrogen storage and transport. This is the same model as is now used for new large nuclear plants. It provides private investors in a project with guaranteed payback terms from the Government.

The Act initially included powers for the Government to add a levy to domestic and business energy bills to fund the development of the UK’s hydrogen economy. This proved unpopular across all Parties given the cost-of-living crisis and given growing calls for the UK’s priority use-cases for hydrogen to be in sectors harder to abate than building heating.

As such, the levy proposal was officially axed in August.

Nuclear

By 2050, the UK is aiming to host up to 24GW of nuclear capacity, up from 6GW at present. The growth should be delivered using a mix of large projects, including one to come online this decade, and small modular reactors (SMRs).

The new Act gives Energy Security and Net-Zero Secretary Claire Coutinho the power to designate a new publicly owned company, Great British Nuclear, to oversee the Government’s involvement in delivering new nuclear projects. She will also have the power to allocate additional financial assistance to the company going forward due to the Act.

In return, Great British Nuclear is required to report annually to Coutinho and she must lay this report before Parliament.

Under the Act, Great British Nuclear’s objective is set out as “facilitating the design, construction, commissioning and operation of nuclear energy generation projects for the purpose of furthering any policies published by the Government”

It was announced in July that Great British Nuclear will, in the first instance, provide £150m of innovation funding on a competitive basis.

Aviation fuel

The Government’s Jet-Zero Strategy targets net-zero for all domestic flights by 2040 and net-zero for international flights by 2050. Its preferred technology pathway for decarbonisation is based on that of the industry, meaning it relies heavily on energy efficiency improvements and exponential increases in the use of alternative fuels.

September 2023 saw the Department for Transport adding a clause to the Energy Act that will compel it to host consultations on the design of a revenue certainty scheme for Sustainable Aviation Fuel (SAF) producers. This mechanism is set to be introduced by the end of 2026.

The scheme will run in tandem with a mandate requiring 10% of fuel supply to be SAF by 2030, increasing in increments through to 75% in 2050.

The UK defines SAF as any fuel with a total lifecycle emissions footprint at least 60% lower than traditional jet fuel.

Community energy

Four members of the House of Lords sought to add clauses to the Act that would have supported the accelerated development of community-owned renewable energy projects in the UK. One clause would have established a guaranteed income scheme for small generators and another would have enabled the operators of these arrays to more easily sell electricity locally.

There was cross-party support for the amendments with Tories calling them “straightforward, pro-competition and pro-consumer”.

Ultimately the Government decided that it would “not be appropriate to mandate suppliers to offer local tariffs”. The Act contains no new support for community energy.

Royal Assent for the Energy Act came on the same day that the Government responded to the Climate Change Committee’s most recent annual progress report to Parliament on the net-zero transition.