UK cuts energy price cap, targets more oil, gas

The new prime minister has fixed the retail price for domestic consumers, while National Grid has hatched a plan to pare back demand, write Georgia Gratton and Paul Martin

The UK government will fix the energy retail price cap for a "typical" home at £2,500/yr ($2,870/yr) for two years, and is seeking to accelerate domestic supply by launching a new North Sea oil and gas licensing round and lifting a moratorium on hydraulic fracturing (fracking), prime minister Liz Truss said on 8 September.

The energy price cap will apply from 1 October, superseding one of £3,549/yr set by energy regulator Ofgem on 26 August. Businesses, charities and public-sector bodies will receive equivalent support for six months. There will also be a temporary suspension of so-called green levies on bills, she said.

But Truss did not sway from her position on a windfall tax on producers, having consistently emphasised her opposition to them in recent weeks.

As part of the drive to increase supply, a moratorium on shale gas extraction — fracking — will end "where there is local support for it". No details were given on how this support will be assessed. Newly-appointed energy minister Jacob Rees-Mogg is firmly supportive of fracking. But the process would be too slow and output too low to offer much relief to tight supply and high prices, former energy and clean growth minister Greg Hands said in March.

Truss expects the new offshore licensing round to lead to more than 100 new licenses. But industry body Offshore Energies UK said that if all projects currently awaiting approval from the UK government go ahead, they would add about 10pc extra to current oil and gas supply, but production from these developments would not peak until 2027.

Truss also pledged to "speed up our deployment of all clean and renewable technologies" and promised a review of energy regulation.

Demand-side reform

UK system operator National Grid has launched a proposal to revamp the process by which it asks market participants to cut their gas consumption in the event of a supply emergency.

The planned modification to the UK's gas grid code would allow the operator to invite pre-qualifying firms to offer demand savings. This mechanism could help avoid National Grid being forced to cut gas demand, which is unlikely to occur, according to the system operator.

Firms would receive "options" payments if their initial offers are accepted by National Grid, while they would receive "exercise" payments if called on to cut demand. The combined value of demand-side response (DSR) options is to be set initially at £5mn per winter, but there is no limit on the amount of gas. The existing DSR mechanism only has an exercise price, limiting the operator's scope to identify demand that could be turned down ahead of time.

Options payments are to be priced per unit and multiplied by the volume of potential demand cut that National Grid chooses to accept. They will be funded from the balancing neutrality charges paid by all transmission system users. National Grid also wants to be able to use its DSR mechanism on a day-ahead basis, rather than just on a within-day basis as at present.

DSR applicants must use at least 2mn th/yr (58.6 GWh/d) of gas and would have to offer at least 100MWh per tranche, consistent with existing rules.

Regulator Ofgem has approved an expedited timetable, with a consultation on the proposed revamp of National Grid's DSR tool ending on 22 September. An industry panel will then submit its recommendation to Ofgem on 28 September.

National Grid aims to implement the changes by mid-October and wants the entire DSR process — including any acceptance of offers — to be completed by the middle of December.