Table of contents

1. Background

The UK energy market is currently under pressure from the global rise in energy prices. This is due to factors including a surge in demand following the Covid-19 pandemic and supply issues arising from the Russian invasion of Ukraine. This increase in global energy prices has led to an increase in UK household energy bills. Further information on rising energy prices in the UK is provided in the House of Lords Library briefing ‘Rising Household Energy Costs and Consumer Protection’ (31 January 2022).

The Government recently set out its priorities concerning the UK’s energy supply in its energy security strategy, published in April 2022. The Government said the objectives of this strategy were to reduce the UK’s consumption of fossil fuels and increase domestic UK energy production. The strategy included a commitment to increase low-carbon hydrogen production. The Government said low-carbon hydrogen production would form at least half of the hydrogen gas produced in the UK by 2030. The Government also said it would seek to increase the use of nuclear energy to meet a quarter of the UK’s electricity demand by 2050.

1.1 Predicted energy demand

In December 2021, the Government estimated that renewable energy and waste would meet over 20 percent of the UK’s energy demand by 2032. This would include solar, wind and hydro-electricity as well as energy generated from waste, such as sewage and landfill gas. Oil and natural gas were expected to remain the largest components of energy demand by 2040. These estimates are based on the baseline projection of the UK Government’s net zero strategy, published in October 2021. 

Graph 1: Share of total energy demand, 2000–40

Source: Department for Business, Energy and Industrial Strategy, ‘Energy and emissions projections: Net Zero Strategy baseline (partial interim update December 2021)’, 7 March 2022, Annex E: ‘Primary energy demand’.

2. Energy market reforms

On 27 April 2022, the Financial Times reported the 2022 Queen’s Speech would include legislation concerning the energy market. The Financial Times said the new bill was intended to support the increased use of low carbon technology in the UK energy sector. The bill would:

  • Establish a new body called the future system operator. This body would be responsible for strategic planning for the UK’s electricity and gas infrastructure. The Financial Times reported the role of the future system operator would include ensuring the UK achieved its 2050 net zero target.
  • Reform the way in which hydrogen gas generation and carbon capture technology are financed. This would include subsidy contracts for hydrogen gas generation. The Financial Times also reported the bill would establish a new financing model for carbon capture technology.
  • Enable the household energy price cap to be extended beyond 2023.

2.1 Future system operator

The Government and the energy regulator, Ofgem, launched a consultation on the establishment of a future system operator in July 2021. The Government said the future system operator would have a duty to facilitate the Government’s net zero target and to maintain the security of the UK’s energy supply. The new body would take on the current role of the National Grid electricity system operator and the longer-term elements of the gas system operator. The consultation on these proposals ran until September 2021.

The Government and Ofgem published their response to this consultation in April 2022. The Government said that it would introduce legislation to establish the future system operator when parliamentary time allowed. The Government repeated this commitment in its energy security strategy, published in the same month.

2.2 Hydrogen gas and reducing carbon emissions

In August 2021, the Government published the UK Hydrogen Strategy. This strategy included a commitment to review the rules governing the hydrogen gas market established under the Gas Act 1986. The Government said it would consider as part of this review what amendments to primary legislation might be necessary in order to incentivise investment in the hydrogen gas market. The Government has yet to publish what changes to primary legislation it might make as a result of this review.

The Government also said it would consult on proposals to require all new natural gas boilers to be easily convertible to use hydrogen by 2026. The Government has not yet published this consultation. However, the Minister of State at the Department for Business, Energy and Industrial Strategy, Greg Hands, said in February 2022 the Government intended to publish this consultation soon.

The current system for awarding renewable energy subsidies is the Government’s contracts for difference (CfD) scheme. The Government’s most recent round of its CfD scheme was opened in December 2021. In April 2022, Mr Hands said in response to a parliamentary question the Government was exploring “further market intervention” to support low carbon capacity development.

Mr Hands said in his response to the same parliamentary question that the Government would launch a consultation on proposals intended to reduce the amount of carbon produced by power plants. He said this consultation would include proposals that operators building new combustion power plants or refurbishing existing plants should publish ‘decarbonisation plans’. These plans would set out how the plants were to be either converted into hydrogen generation plants or adapted to use carbon capture technology.

2.3 Household energy price cap

The current price cap mechanism was established by Ofgem in 2018 following the passing of the Domestic Gas and Electricity (Tariff Cap) Act 2018. This sets a limit on the amount suppliers can charge consumers for a unit of energy on the supplier’s default or standard variable tariff.

The 2018 Act enables the price cap mechanism to be extended on an annual basis up to the end of 2023. In December 2021, the Secretary of State for Business, Energy and Industrial Strategy, Kwasi Kwarteng, confirmed the Government intended to introduce legislation enabling the price cap to be extended beyond 2023 when parliamentary time allowed. However, he said the Government would only extend the cap if the conditions for effective competition were not in place.

3. Ofgem strategy and policy statement

The Secretary of State has the power under the Energy Act 2013 to designate a new strategy and policy statement for Ofgem. The Government’s 2020 energy white paper included a commitment to publish a new strategy and policy statement. The Government said this new statement would set out the strategic priorities for the energy regulator. It said these strategic priorities would be consistent with the Government’s ambitions for net zero and improving the security of the UK’s energy supply. In March 2022, Greg Hands said the Government intended to launch a public consultation on the strategy and policy statement for Ofgem later this year.

4. Downstream Oil Resilience Draft Bill

In June 2021, the Government published the Downstream Oil Resilience Draft Bill. The draft bill included proposals intended to improve the resilience of the UK’s supply of oil-based fuel. Specifically, the bill included provisions concerning the supply, storage and distribution of oil for the transport sector. It included new powers to enable the Government to direct companies to take measures to improve their own resilience. It would also enable the Government to provide financial support to these companies for the purpose of improving the resilience of the UK’s oil distribution network.

The House of Commons Business, Energy and Industrial Strategy Committee published a pre-legislative scrutiny report on the draft bill in November 2021. The committee supported the Government’s stated aims in introducing the draft bill. However, it argued the draft bill should be revised to include more information on how the broad powers in the bill would be used. The Government published its response to the committee’s report in March 2022. It said it would “take on board” the committee’s recommendations before introducing the bill. The Government has not yet indicated when it intends to publish the bill.

5. Taxes paid by energy companies

The Government’s policy on energy has been criticised by the Opposition. The Shadow Chancellor, Rachel Reeves, has called on the Government to introduce a windfall tax on oil and gas producers and provide greater support to households facing high energy bills. In February 2022, the Chancellor of the Exchequer, Rishi Sunak, said he was opposed to the introduction of a windfall tax, arguing this would deter investment in the UK energy market. However, in April 2022, Mr Sunak said the Government would consider a windfall tax if there was not sufficient investment in the UK energy sector by oil and gas producers. Further information on the Government’s broader fiscal policies and the 2022 Queen’s Speech is provided in the House of Lords Library briefing ‘Queen’s Speech 2022: Economic affairs and business’.

6. Read more

Cover image by Zybnek Burival from Unsplash.