Guidance

Energy Security Bill factsheet: Network charging compensation scheme for energy intensive industries (added 9 May 2023)

Updated 1 September 2023

In the UK, EII sectors that are eligible for Department for Business and Trade relief schemes employ around 400,000 workers and have gross value added of £30 billion in 2019 (1.5% of the UK economy). Their turnover is around £155 billion and, in 2019, their exports totalled around £104 billion (28% of total UK exports). EII sectors include a number of key foundations industries (such as glass and cement) as well as industries that are essential to critical national infrastructure (such as steel and chemicals) and/or form part of the supply chain for other important sectors (such as auto and aero).

Summary

Energy Intensive Industries (EIIs) in the UK have faced the steepest industrial electricity prices in Europe. Despite government support schemes being applied, typical electricity costs for very energy-intensive industry users in the UK were £56/MWh, compared to £38/MWh in the Netherlands, £34/MWh in France, and £35/MWh in Germany.

On 23 February 2023, the government announced the British Industry Supercharger: providing further targeted measures to ensure the energy costs for key UK industries are in line with other major economies around the world – levelling the playing field for British companies across Europe.

These measures include:

• increasing the level of exemption on Feed in Tariffs, Renewables Obligations and Contracts for Difference provided through the EII Exemption Scheme to 100% – these are policy mechanisms designed to accelerate investment in renewable energy
• implementing a 100% exemption on Capacity Market Charges, which are the costs paid to support security of electricity supply and safeguard against the possibility of future blackouts
• providing compensation on network charging costs, which are the costs users pay for use of the electricity grid

The Bill will provide government with the enabling powers to implement a scheme which will compensate EIIs for a portion of their network charging costs through the Network Charging Compensation (NCC) Scheme. The Bill will also provide the powers to implement the means of funding this compensation scheme, a charge on all licenced electricity suppliers in the form of the EII Support Levy.

A public consultation on the NCC Scheme and EII Support Levy will be launched in Summer 2023 which will help inform the details of the policy.

The details of the NCC Scheme and EII Support Levy will be delivered through secondary legislation, following the consultation and government response.

Why are we legislating?

EIIs struggle to remain profitable due to the high cost of electricity, driven by historical policy costs applied by the UK - such as the capacity market and network charges and costs arising from policies aimed at encouraging electricity generation from renewable and low carbon sources.

This risks significant job losses and disinvestment in strategically important foundational industries such as the manufacture of steel and chemicals.

UK EIIs are also at a disadvantage to their counterparts in many neighbouring countries who face exemptions to high electricity costs. In the absence of domestic production, the UK will need to place much greater reliance on import markets, sourcing goods from territories with less stringent climate policies (sometimes called ‘carbon leakage’).

In response, the government announced the British Industry Supercharger in February 2023 as a package of measures designed to bring the electricity costs of the UK’s EIIs in line with those charged across the world’s major economies.

Whilst the proposed measures on the EII Exemption Scheme and exemption on Capacity Market Charges do not require primary legislation, the government is required to seek primary powers in order to deliver the ESL and NCC Schemes. Technical details of these schemes will be set out in secondary legislation.

The government will launch a public consultation on the ESL and NCC Scheme in Spring 2023 with an implementation date of April 2025. This consultation will invite views from stakeholders and help shape the detail of the policy proposal.

How will the Bill achieve this?

Network Charging Compensation Scheme

The government will provide eligible EIIs with compensation on their network charging costs. The Bill will provide the Secretary of State with the enabling powers to, through secondary legislation, implement and modify a compensation scheme. It will also provide the Secretary of State with the powers to designate administrators for the scheme (who would be responsible for the day to day running of the schemes).

EII Support Levy

The NCC Scheme is to be funded through a charge on licenced electricity suppliers and, by extension, their customers. The Bill provides the Secretary of State with the enabling powers to, through secondary legislation, implement and modify a charge and to appoint an administrator.

FAQ

Will the proposed measures in the Bill apply to Northern Ireland?

No, the measure will only apply to Great Britain. Energy policy is devolved to the Northern Irish government, and Northern Ireland operates within the Single Energy Market.

Haven’t we already provided support to EIIs through the Energy Bills Relief Scheme (EBRS)/Energy Bills Discount Scheme (EBDS)?

The EBRS / EBDS are a temporary solution to protect UK industry from the significant spike in wholesale gas and electricity prices caused by Putin’s illegal war.

The British Industry Supercharger is designed to reduce the long-term electricity price gap that exists between UK EIIs and competitor countries, thereby preserving jobs and investment whilst reducing the risk of reliance on imports from territories with less stringent climate policies. The measures within the package will come into effect after the EBDS has come to an end in March 2024.

What will be the impact on consumer bills?

Once all measures in the British Industry Supercharger package have been implemented (by 2025 to 2026), this package will add between £3 and £5 to the average household bill. This includes the proposed EII Support levy.

Once implemented, the package will increase electricity costs for non-eligible businesses by £1/MWh. How much this adds to an annual electricity bill will depend on the overall size of the business and the amount of electricity they use.

Background

In April 2022, the government launched the British Energy Security Strategy, which committed to explore measures to assist energy EIIs with their electricity bills. This was supplemented in February 2023 when the government announce the British Industry Supercharger package of measures.

The measure to provide relief on network charging costs aims to offer comparable support to that offered by certain EU states. Germany, France and Netherlands all offer up to 90% exemptions to EIIs on their network charging costs.

British network charges are paid by users of the electricity network, such as electricity suppliers, to the electricity system operator. These include charges intended to cover the costs of building, maintaining and balancing the system.

Network charges are approved by Ofgem, the independent regulator for the gas and electricity systems in Great Britain. The charging methodologies are approved by Ofgem to be cost-reflective of the burden that users place on the network. Electricity suppliers generally pass on network charging costs to the consumers they supply, including EIIs. Network charges include transmission network costs being the type of charge for use of the high-voltage transmission system; distribution network costs for use of the lower-voltage distribution system; and balancing costs, which covers the costs of balancing electricity supply and demand.

EIIs pay a portion of network charges which reflect the level of demand they place on the network. EIIs pay higher network charges in Great Britain compared to their counterparts in some other European countries, largely due to discounts provided to EIIs in those other countries.

EIIs struggle to remain profitable due to the high cost of electricity, which risks significant job losses and disinvestment in strategically important foundational industries. In the absence of domestic production, the UK will need to place much greater reliance on import markets, sourcing goods from territories with less stringent climate policies (sometimes called ‘carbon leakage’).