Out-Law / Your Daily Need-To-Know

De-centralised energy: exemption from electricity licence requirement

Out-Law Guide | 21 Jan 2020 | 3:46 pm | 5 min. read

Residential and commercial energy consumers are increasingly turning to de-centralised energy structures such as on-site energy production, 'behind the meter' storage and demand side response solutions to provide them with cheaper, lower carbon energy.

However, the electricity and gas industries in Great Britain are highly regulated, so the success of these structures will require sufficient knowledge of the wider regulatory framework to ensure compliance.

The 1989 Electricity Act (as amended) (EA) prohibits the distribution and supply of electricity in Great Britain unless licensed or exempt. A person, including a corporate body, that breaches this prohibition is committing a criminal offence and could be liable for an unlimited fine. Further, where the offence is committed with the consent of or due to the neglect of a company officer, that officer is also guilty of a criminal offence in certain circumstances.

It is therefore critical when developing a de-centralised energy solution which may involve the distribution or supply of electricity by a non-licensed entity to ensure that that activity can be carried out on an exempt basis, and that the exemption can continue to be relied on for the duration of the solution.

The success of [decentralised energy solutions] will require sufficient knowledge of the wider regulatory framework to ensure compliance.

For the purposes of the prohibition, the EA defines 'distribute' and 'supply' as follows:

  • to 'distribute' means: "distribute by means of a distribution system, that is to say, a system which consists (wholly or mainly) of low voltage lines and electrical plant and is used for conveying electricity to any premises or to any other distribution system";
  • to 'supply' means: "its supply to premises in cases where (a) it is conveyed to the premises wholly or partly by means of a distribution system, or (b) (without being so conveyed) it is supplied to the premises from a substation to which it has been conveyed by means of a transmission system, but does not include its supply to premises occupied by a licence holder for the purposes of carrying on activities which he is authorised by his licence to carry on".

These activities are both defined broadly, and it is important to note that they do not include any minimum value, meaning that a person will be distributing and supplying electricity even where the amounts of electricity involved or the length of the network through which the electricity is conveyed is negligible.

The exemptions regime

Under the EA, the government may grant an individual or class exemption from the requirement to have an electricity distribution or supply licence.

The government published additional guidance on the application process (12-page / 342KB PDF) in June 2017.

The guidance states that, in most cases, it will not be appropriate to grant an individual exemption. The rest of this article therefore focuses on class exemptions.

The 2001 Electricity (Class Exemptions from the Requirement for a Licence) Order (as amended) (the Exemptions Order) sets out the available class exemptions from the requirement to have a licence in order to distribute and supply electricity. It also sets out the generation and transmission exemptions.

The class exemptions regime is widely regarded as being unhelpfully complex and opaque. One particular pitfall to be aware of is to consider whether an exemption requires the distributor or supplier to satisfy the particular exemption for the project in question only, or across its business as a whole.

There have been many suggestions from the industry for the government or Ofgem to provide further guidance on the interpretation of the Exemptions Order. Unfortunately, this has not been forthcoming to date.

Distribution class exemptions

There are four class exemptions from the requirement for a distribution licence. These are set out in schedule 3 of the Exemptions Order and available to persons that are not a licenced distributor or supplier.

Class A: Small distributors

This exemption applies to distributors who do not at any time distribute more than 2.5 megawatts (MW) of electricity for the purposes of giving a supply to domestic consumers or enabling a supply to be so given. The exemption includes rules which require electricity distributed by related persons to be included in the calculation, and therefore the distribution activities of the distributor's wider group must be considered when relying on this exemption.

Class B: On-site distribution

This exemption applies to distributors who do not at any time distribute more than 1MW of electricity for the purposes of giving a supply to domestic consumers or enabling a supply to be so given. To take advantage of this exemption, the electricity must come from a generating station embedded in the same distribution as each domestic consumer, excluding stand by electricity.

Class C: Distribution to non-domestic consumers

This exemption applies to distributors who do not at any time distribute electricity for the purposes of giving a supply to domestic consumers or enabling a supply to be so given with that electricity. It is commonly relied on in relation to distribution in de-centralised energy solutions that do not involve domestic consumers.

It should be noted that the exemption is broad enough to restrict distribution "for the purposes of" enabling a domestic supply to be so given, which means that it must be considered who the consumer of the electricity is even where the distributor is not distributing directly to a domestic consumer.

Class D: Offshore distributors

This exemption is relevant to distributors who only distribute electricity generated by an offshore generating station.

Supply class exemptions

There are four class exemptions from the requirement for a supply licence. These are set out in schedule 4 of the Exemptions Order.

Class A: Small suppliers

This exemption applies to suppliers who do not supply any electricity except electricity which they generate themselves and who do not supply more electricity than 5MW, of which no more than 2.5MW is supplied to domestic consumers. Electricity supplied by associated entities must be included in this calculation.

It is critical when developing a de-centralised energy solution which may involve the distribution or supply of electricity by a non-licensed entity to ensure that that activity can be carried out on an exempt basis.

Class B: Resale

This exemption relates to suppliers who do not supply any electricity except electricity:

  • provided to their premises by a licensed supplier or by a supplier falling within the on-site supply exemption at Class C below. This part of the exemption is therefore for suppliers who re-sell electricity provided to them, rather than suppliers that sell electricity which they generate themselves; or
  • which they generate themselves or which is supplied to them by an exempt supplier in circumstances where their normal licensed electricity supply is temporarily interrupted due to circumstances outside their control or because their generation equipment used for their normal supply is being tested.

For this exemption to be available, the supplier must also comply with the restrictions in Class B in relation to the re-sale of any electricity provided by a supplier falling within Class C. These restrictions effectively prevent a supplier from re-selling more than 10% of the electricity which it receives from a supplier falling within Class C, among other restrictions.

Class C: On-site supply

This exemption relates to suppliers who do not supply any electricity except electricity which they generate themselves or which they generate themselves together with electricity which is supplied to them by a licenced supplier.

For this exemption to apply, the supplier must provide the output of each generating station at which it generates electricity to a person or group of persons falling within one of the descriptions set out in Class C. Typically, whether a person or class of persons is covered would need to be considered based on the specific circumstances in question.

In particular, careful consideration may need to be given to whether the premises receiving the output are considered to be on the "same site" as the generating station or to be receiving the output via a "private wire". Careful consideration may also need to be given to whether the person(s) receiving the output are considered to be occupying the receiving premises and are themselves consuming the output provided by the supplier - as opposed, for example, to re-selling it.

Class D: Offshore supply

This relates to the supply of electricity by suppliers who only supply electricity generated at an offshore installation.

Research by Matthew Calmonson, energy law expert at Pinsent Masons, the law firm behind Out-Law.