Electricity Capacity Regulations 2014
Baroness Verma
That the Grand Committee consider the Electricity Capacity Regulations 2014.
Relevant documents: 4th Report from the Joint Committee on Statutory Instruments, 6th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma) (Con)
My Lords, today we are considering the six instruments which form the implementing secondary legislation for the electricity market reform programme—namely, the draft Contracts for Difference (Definition of Eligible Generator) Regulations 2014, the draft Contracts for Difference (Allocation) Regulations, the draft Contracts for Difference (Standard Terms) Regulations 2014, the draft Contracts for Difference (Electricity Supplier Obligations) Regulations 2014, the Electricity Market Reform (General) Regulations 2014 and the draft Electricity Capacity Regulations 2014. I apologise from the outset: given that we are taking a large number of regulations together, I have some detailed speaking notes.
The electricity market reform programme is designed to encourage investment in secure, low-carbon electricity generation. The reforms that we will debate today will transform the electricity sector, supporting jobs, strengthening supply chains and boosting economic growth. The reforms have been strongly welcomed by the industry, and that is best demonstrated by the fact that it is already generating private sector investment in low-carbon electricity. Based on the information provided by projects, the eight renewables projects which have signed investment contracts—an early form of CFDs—will bring forward up to £12 billion of private investment. We hope that by delivering EMR this year, we can secure much more of this vital investment.
This investment, of course, is needed to ensure that we have a generation mix which responds to the challenge of climate change and meets our legally binding carbon and renewables targets. The investment is also necessary if we are to ensure that the lights do not go out. The UK faces very rapid closure of existing capacity as older, more polluting plant goes offline, and this needs to be replaced with a cleaner, more sustainable generation mix. To achieve this, we estimate that £100 billion of investment is required up to 2020.
The enabling powers to make this implementing secondary legislation are found in the Energy Act 2013, which completed its passage through Parliament last December. Since then, my department has finalised the policy detail for the two mechanisms for reform—contracts for difference and the capacity market. These two mechanisms are implemented through the draft regulations before your Lordships today. They have now been approved by the other place and, if approved by noble Lords this afternoon, are planned to come into force on 1 August.
Noble Lords may be aware that yesterday the EMR programme reached a significant milestone as we received state aid approval for the CFD for renewables, the capacity market and the five offshore wind projects which have secured investment contracts under the final investment decision-enabling for renewables process. This is a large step forward for the programme and, subject to today’s debate, will keep the Government on track to launch the first CFD allocation round and the first capacity market auction before the end of this year.
Passing these regulations will be another important milestone which will provide developers and financiers the certainty they need to continue making the investment our energy infrastructure requires. Timely delivery of the reforms will help to ensure that we are on track to meet our carbon and renewables targets and that we have cost-effective measures to keep the lights on.
One of the key objectives of EMR is to minimise costs to consumers, and delivery this year will also help ensure that the benefits to consumers are realised as soon as possible. A delay to implementation is likely to mean that more developers will seek support under existing mechanisms such as the renewables obligation, the closure of which the Committee will debate later. While these mechanisms have served us well, they do not deliver the same value for money to consumers and industry that CFDs provide.
Timely delivery of the reforms will also reinforce the UK’s reputation as one of the most attractive places to invest in energy globally. Industry and investors have demonstrated that they have confidence in the new arrangements and have already expended substantial resources in preparing for the introduction of EMR. It is vital that we maintain this confidence and along with it the vast economic benefits—not only in terms of our energy infrastructure but in terms of job creation in energy industries and supply chains. The EMR will deliver that.
I know that securing approval for the implementing secondary legislation will be strongly welcomed by stakeholders, who are keen to engage and invest in the new arrangements, and I hope I will effectively explain why the timely delivery of these reforms is so important.
Before we commence the debate I will briefly describe the six statutory instruments under consideration. The first five instruments implement the contracts for difference regime. The Contracts for Difference (Definition of Eligible Generator) Regulations and the Contracts for Difference (Allocation) Regulations provide the starting point by setting out, respectively, which persons are eligible generators for the purposes of applying for a CFD and the eligibility criteria which must be met. The Contracts for Difference (Definition of Eligible Generator) Regulations define an eligible generator by reference to a person’s relationship to the generating station; and define those generating stations which are eligible generating stations by reference to the technology used by the generating station. The regulations include a list of 15 low-carbon technologies which are eligible for a CFD.
The allocation regulations stipulate qualification requirements that an eligible generator must satisfy in order that the application for a CFD by that generator may take part in the CFD allocation process, and provide for a three-tier appeals process in relation to the eligibility assessment. The qualification requirements include, for example, that an applicant’s project has secured relevant planning consents and that a grid connection agreement is in place. Applicants wishing to construct or alter offshore wind generating stations will be required to provide evidence of a Crown Estate agreement for a lease; and all projects generating 300 megawatts or more will be required to show that an approved supply chain plan is in place.
To avoid projects benefiting from a double subsidy and to ensure value for money, generating stations already in receipt of funding from another government support scheme, such as the RO, are excluded from the subject of a CFD application under the regulations.
Noble Lords should note that my department also intends to introduce, through future amendment to the regulations, a non-delivery incentive to discourage speculative or strategic applications where there is little or no prospect that they will deliver on CFD commitments. We are also exploring measures that prevent an applicant who has engaged in such behaviour from applying for a CFD in respect of a generating station on the same site as that included in such a speculative application, for a period of time that will cover at least the allocation round subsequent to that in which the CFD was offered or entered into.
The allocation regulations set out the parameters for the allocation process. Included as part of this is how applications are to be assessed by the delivery body; how the budget for each round is notified to those wishing to apply for a CFD; and how an allocation framework applies to an allocation round. The allocation framework is a separate document that sets out the CFD auction process in detail, including the individual rules that apply to each auction, and may, where the allocation regulations permit it to do so, set out supplementary qualification requirements. Having a non-statutory document in the form of an allocation framework helps the Government effectively to balance the need for regulatory certainty for investors with the flexibility needed to adapt the auction rules to changing circumstances or to close loopholes that undermine the integrity of the auction process. It would not be practicable to subject any changes in the auction rules to any parliamentary procedure as doing so might constrain the Government’s ability to deal quickly with a problem that has been identified with the technical auction rules.
Baroness Worthington (Lab)
Can the Minister clarify something for me? There are seven instruments listed on the Order Paper, including the Renewables Obligation Closure Order.
Lord Jenkin of Roding (Con)
My Lords, my noble friend the Minister has made a very brave and thorough attempt to explain all these complicated regulations to the Committee and I do not envy her her task. This is an immensely complicated business, and I approach this as one who has spent many months over the last two or three years dealing with these matters—first on the Energy Bill, now the Energy Act 2013, and in the months since then. I see that I am surrounded by a very select band of aficionados who have been doing the same, and I think that between us we have the capacity to put some questions to my noble friend.
I entirely endorse the description of the scrutiny committee, which reported a few days ago. In paragraph 9 of its report, it said:
“The number of statutory instruments laid, and the highly detailed nature of their provisions, are not conducive to a rapid understanding of their effect”—
to which I can only say, “Hear, hear!”. Of course, the committee expresses some anxieties about how far consumers can be helped to understand these measures. In response to that, the then Minister for Energy undertook to provide what he described as an,
“additional, succinct explanation of the legislation”.
I invite noble Lords to look at Appendix 1 to the Select Committee report. I m not sure that the six pages of detailed description can match what Mr Fallon said on that occasion. This is a serious problem. The scrutiny committee was clear that much more needed to be done to explain this complicated system to consumers.
Viscount Hanworth (Lab)
My Lords, I wish to reassert and reinforce some of the anxieties that we have been listening to. More than 20 years ago, a Conservative Government sought to privatise the electricity industry in favour of free enterprise and competition. The outcome has been an industry dominated by an oligopoly of six large suppliers owned primarily by foreign capital. There has been an absence of the necessary oversight of the industry that would provide an assurance that it will meet the future needs of the nation, and there has been a severe deficit in investment.
The present Conservative Government have sought to amend this situation through a programme of electricity market reform. The result was the Energy Bill, which we struggled with last summer. The Bill promised to engender a raft of secondary legislation that would come to haunt us later. Now, that legislation is represented by a massive pile of documents concerning the regulation of electricity market reform, the regulation of the so-called contracts for difference and the regulation of the capacity market. We are aware that not all the regulations are yet before us, and this shortfall promises to cause problems.
On encountering the mass of regulations, I am assailed by feelings of inadequacy. I have neither the time nor the energy for the task of scrutinising the regulations in detail. I fear that my own inadequacy may be a symptom of a more general problem with which government is faced in our era. One of the features of the problem is clear. It is that, by pursuing a philosophy of free enterprise and marketisation, the Government have created an almost impossible amount of centralised regulation.
The foreign ownership of our electricity industry is one of the reasons for the severe underinvestment. The owners of the big electricity companies are large multinational enterprises that are able to look worldwide for the best investment opportunities. They have no overriding incentive to invest in the UK. Therefore, the Government are constrained to look to small independent generators within the UK to provide much of the necessary investment. These companies require careful fostering if they are to fulfil this role and if they are not to be squeezed out by the big six oligopolists.
The Government have signally failed to protect independent generators. Their oversight in this respect is baffling and distressing. Last summer, it seemed that, eventually, the Government had been convinced that the independent generators required an assured route to market for their product. The means of providing the necessary assurance has been termed the offtaker of last resort. In the absence of a purchasing power agreement, the offtaker would be prepared to purchase the power at a heavy discount. This stringency threatens the viability of any investment projects that the independents might wish to pursue, and it has made it unlikely that they will be able to raise the necessary finance.
Now we are discovering that, notwithstanding the belated assurances of the Government, the problem persists. It seems that there will be an 18-month delay between the negotiation of the first contracts for difference and the realisation of the arrangements for the offtaker of last resort. My supposition is that this delay has been caused by the sheer volume of secondary legislation that is entailed in the electricity market reform and that this crucial element of the programme has been sidelined or at least severely delayed. The consequences for the independent generators and for their investment programmes will be dire.
Lord Deben (Con)
My Lords, I, too, support my noble friend in his concerns. It is a pity that the noble Viscount, Lord Hanworth, retreated to his usual attack on free enterprise and a glorification of the appalling electricity industry which was there before privatisation. Those of us who worked with it knew that the Central Electricity Generating Board was one of the most inefficient, self-opinionated and dreadful bodies that has ever been created. It was so bad that it hid from the world the cost of nuclear power, and when it was taken to pieces, the Cabinet had to accept that it could not do much of what it wanted to because the facts had been hidden by Lord Marshall—Walter Marshall—whose personal fiefdom it had become. It really is a pity if we have to discuss this via the déjà vu which was extremely biased in the way that the noble Viscount put it forward.
It seems much better if we discuss how it is at the moment, which is that privatisation has done a great deal of good but has a number of problems. One of its problems is that it has ended up with an oligopoly, but that oligopoly has been made more possible by decisions made by other parties as well. Looking back on it, I think that the previous Government would not have made the changes that they did and which have underlined that. Let us not make this into a party-political argument but try hard to see what to do now.
The two things which we have to do now are, first, to stop being argumentative about the fact that it is going to cost money to enable us to have a generating system that will withstand the very many pressures upon it. There is the pressure of climate change; we have to decarbonise our electricity system and do so according to a budget, which I am happy to say has again been accepted by the Government. That budget means that it has to be done relatively fast because we cannot reach the 2050 target, which is a statutory one, unless we do it according to the sort of speed which the budgets lay down. That means we will need a portfolio of generating capacity, because only in that way can we ensure that we do not pick winners and find ourselves in a situation of not having the opportunities as technology changes.
Regarding my noble friend’s slightly offhand remark about the cost of supporting wind generation, there is a very big cost in supporting something that he is very fond of, which is nuclear power. The strike price which we agree now and the commitment to that over a very long period may well turn out to be the most expensive piece of decision-making that we have made. I happen to think that it is necessary but do not let us suggest that it is not expensive—because, frankly, it is extremely likely that offshore wind will have come down in price to be competitive with nuclear and goes on going down, whereas I am afraid that nuclear is a system which has never actually got cheaper. It has always become more expensive and been less reliable in delivery terms than almost anything else.
Let us realise how difficult is the issue that we are dealing with. We need to have a real mix. However, my noble friend is right to say that one of the ways in which you can ensure that that mix works is to be absolutely clear about the need for competition. Only competition will stop us returning to the easy, comfortable position of the electricity business in the days of its nationalised state. New and small companies that are based here find this extremely difficult. My noble friend has been their advocate over a long period.
I have to ask the Government something terribly simple. If it is necessary to have an offtaker of last resort in the period following the first 18 months, why is it not necessary for the first 18 months? Indeed, I have to ask something much more fundamental than that. I am a businessman, and it seems to me that the process which has brought this to fruition has been one in which the Government have accepted that if you want independent generators, you need to have this protection. When do you need that protection most? You need it at the beginning of the process, when these people have just started, and when it is most difficult for them. If you need it at all, you need it when it begins. The idea that you need it not when it begins but 18 months later is almost incredible. I do not see how you can argue that case. The case must be that you either need it, in which case you need it at the beginning, or you do not need it, in which case you do not need it at all. It is not possible to argue a case which says that you need it, but only 18 months after you start. I find the economic and business arguments for that very difficult to take.
Lord Whitty (Lab)
My Lords, as the noble Lord said, we knew that this was a massive task for the Government and that very detailed regulations have to go through. I think we are all a bit upset that we are here on the last Thursday before the recess, and that we have to deal with all these regulations at the same time. I guess that very few of us, even though we are aficionados, as the noble Lord, Lord Jenkin, said—although that probably exaggerates the degree of sentimental attachment we have to the process—do not find it difficult to come to grips with these regulations today. I will underline a bit the process that the noble Lord, Lord Jenkin, and the Select Committee referred to—the difficulty of coming to terms with it in this way.
The appendix supplied by the Minister or her Secretary of State is very helpful, but it is an idiot’s guide. This particular idiot is happy that it is there, because it helps me through the regulations before us this afternoon, but what is needed is a comprehensive narrative: one which participants in the industry and consumers of its output understand. At the moment, none of it is understood out there, even among people who are engaged in the industry. It is certainly not understood by consumers and will not be when some aspects hit them—either literal consumers of energy or people faced with various developments in their part of the country.
I do not want to get deeply into the ideological debate that has been going on here. From the beginning, we recognised that this is not exactly free competition, but not exactly reverting to the CEGB either—I think that at one point, the noble Lord, Lord Lawson, called it Gosplan, which I think was going a bit too far. Nevertheless, this is not quite a free and open market. There is not, strictly speaking, technological neutrality here; we have different systems for the capacity market against the CFD non-fossil fuel market, and we have differences within the renewables sector in terms of government intervention. Let us not pretend that we are starting from a level playing field, but we need to ensure that the outcome is that there are more participants in the system than there are now. One energy Minister, who has now moved on, said that we want to have not the big six but the big 60,000. I rather fear that the CFD side of this in particular is unlikely to deliver 600, let alone 60,000, new participants.
I hope that the noble Lord, Lord Jenkin, is right. We are a little behind on the capacity mechanism; this is the first time that we have seen an outline of it, which is very helpful. I hope that he is right that it will allow more participants to get in. Given the further detail that we have on the CFD side, I am not sure that it will allow more participants than we were hoping for when we started this exercise.
I want to make some points about small businesses, by which I mean independent generators. They may be quite large in relative terms, but they are not the big six. I have some particular points that relate to the renewable technology that is probably cheapest, the one that comes down fastest in price, the most easily installed and the one that has least planning and public opposition: the solar industry. That seems to be seriously disadvantaged by the detail of these rules. Some of my points apply to independent generators in general, but I will focus on the solar sector.
The solar sector has been extraordinarily successful here and internationally in many ways, but it has become the victim of its own success. Successive Governments have changed the terms regularly through the RO process, so individual firms—they are mainly small firms in that sector—and potential investors are confused about what will be the level of subsidy through the whole RO process. That is now compounded by what is happening on the CFD side of the provision.
The budget makes that slightly worse, I think, because the level of subsidy allocated to what are regarded as established technologies—which includes solar: what are established and what are not is a bit of definitional fuzz—is £50 million. According to the industry’s calculation, that would probably deliver 1 gigawatt. The Government are probably too constrained by what they put in their indicative plans, because until quite recently, the price was coming down and the number of installations was going up, so they decided that they would not only introduce the degression under the RO but that they would also, under the new system, not allocate it a significant amount of the budget because they thought that we were already approaching the level in their forward plans.
That seems to me pretty daft. If you have a successful industry and a successful regime with a level of understanding, and that industry largely consists of small companies, it needs the highest degree of stability possible. Uncertainty is always complained about by the big six but the people whom uncertainty really hits are those who invest their own money and who need to attract new investors into their area. That applies to the solar area and other sectors as well.
The other disadvantage—maybe the Minister will put me right on this—is that FITs will apply to small-scale solar. Between 5 megawatts and 10 megawatts the RO will have been withdrawn right at the beginning of the RO process—this may apply to the next regulation we are discussing. Whereas it will be phased out in general by 2017, it will be withdrawn from that sector immediately and there will be no CFD equivalent. That is the very sector which the Government in UK Solar PV Strategy Part 1: Roadmap to a Brighter Future were emphasising only a few months ago as being a major part of our conversion to low-carbon technology. The sector that was on the roofs of factories, flats, schools and universities—and to some extent in the countryside, although that runs into planning problems occasionally —is the very sector that seems suddenly to have no support, or no clear support. I would be grateful if the Minister could tell me whether that is a wrong analysis, and that there will be some support for middle-range solar regimes within that period because it is an area of possible significant expansion. In other countries, such as Germany, there has been substantial investment in this sector and to some extent it is included in building regulations in Germany and other parts of the continent.
The solar sector made a number of other points that may apply more widely as well. There is the regularity of auctions at once per year and the attached qualification that if you have failed in the bid, you cannot qualify for the next period. That would obviously have a significant impact the longer the timescale is between auctions. The sector is arguing for quarterly rather than yearly auctions. It could be that at the beginning of this process there could be a move towards more frequent than annual auctions. Of itself, that would benefit SMEs. Since we are differentiating by technology, but we want all technologies to be in there, government policy should set a technology minimum for all those technologies to which the CFD process applies.
There are very substantial costs—this is a general smaller-business issue—in the prequalification period. The Government need to find a way, if they are genuinely to open the market, to ensure that those costs are minimised. It seems to me that these regulations will probably increase the costs beyond what the industry was originally thinking. The likely outcome of this process is even more costs upfront for companies that may or may not win an auction. The Minister will know that some of these sectors argued against auctions, and this is the knock-on of that argument. Nevertheless, now that we are having auctions, it must be recognised that auctions do, to some extent, disadvantage smaller operators and independent generators.
There is a particular point where the issue of qualification seems to arise. The Contracts for Difference (Allocation) Regulations refer to qualifications in relation to agreements to connect. The solar sector and the onshore wind sector argue that the agreement to connect is at the end of the process. If you have to wait for qualification until you have a full-scale agreement with the grid to connect, the rest of the process cannot work. They seemed to feel that they had had some understanding from the department that it should be the offer effectively from the grid rather than the agreement at the end of the day that should stipulate that they were eligible—otherwise they are going to engage in yet more expenditure until the point where the agreement is signed, sealed and delivered.
Lord Oxburgh (CB)
My Lords, many of the points that I would have made have already been made by other speakers more eloquently than I could have. I simply make three separate small points.
First, the importance of the OLR to small businesses has been emphasised on every side. I hope the Minister will take this back to her department and seek urgent action on it. It is very important. The Government’s stated objective to bring in small companies and open up the market simply will not happen unless this is fixed.
My second point is more a comment. Does the Minister realise that the very process of consultation that the department has embraced, with the best intentions in the world, discriminates against small businesses? I read that there have been 30 separate consultations over the past 12 months. The big companies can take their responses in their stride—they have people who do nothing but write responses on their behalf—but for small companies it is a major burden. The department runs a serious danger of seeing responses from the big companies overemphasised in what is intended to be, with the best will in the world, an open consultation. The Government have to take that into account when responding to this process and acting on it.
I will not pursue the second point in detail, but it relates to the capacity mechanism, which we have not been discussing in detail today. The information we have received so far is not encouraging. Clearly, competition is important—many of us around the table here support that—but there is competition and competition. An awful lot depends on the precise and detailed rules associated with that competition.
To go back in history, we had the ROC system—we still do—which was introduced as a technology-blind mechanism. It did not matter what technology was used. The fact is that, given the structure of the ROC mechanism, only one technology could compete: wind. There was not really any competition between technologies. We are in serious danger of getting into the same apparent open competition, with the capacity mechanism as we see it now, without it being truly open.
Without going into detail today, I need to be persuaded that the capacity mechanism as we see it at the moment, given what has been published so far, is not heavily weighted in favour of the continuation of heavy use of coal. That is not consistent with the Government’s objectives, legally committed to, to climate change and carbon reduction. I would be very grateful if the Minister could describe how she sees the capacity mechanism playing out in the balance between coal and gas.
My final point—I declare an interest as honorary president of the Carbon Capture and Storage Association—is to ask the Minister why carbon capture and storage has not been included in the list of CFD-eligible technologies. I see no reason for that. We have had a competition on carbon capture and storage, and two companies were selected. I do not criticise the basis of that selection, but, if I remember rightly, five or six companies had done a lot of work on that competition. We would like those companies to continue to engage with carbon capture technology, because it is one of the legs of the Government’s low carbon strategy. I am a little surprised not to see it mentioned here, because it would at least give those companies that were unsuccessful in the main national competition something to think about and some encouragement to go forward.
Baroness Worthington
My Lords, I am grateful to the noble Baroness for her comments by way of introduction and for taking us through the instruments that we face today, and for the contributions of noble Lords from all sides to this debate.
Here we are again. I seem to remember that for most of last summer we were working through very similar topics and subjects. Now we see some of the detail flowing from that primary legislation before us.
I want to start by making a couple of general points before considering the instruments in more detail, when I will have a number of questions for clarification. First, this is our first opportunity to discuss the energy market reform package since the finalisation of the Energy Act. Between then and now, something quite significant happened in the Budget, when it was announced that the carbon price floor, which was a fundamental part of the EMR package, was to be frozen. Noble Lords will remember that during the passage of the Bill, that topic was debated at length, and we received many reassurances from department officials and from the noble Baroness, both in the House and in meetings, that the carbon floor price was integral, because that was to ensure that we move towards a low-carbon economy. However, the ink had scarcely dried on the Act before we saw a fundamental change announced in the Budget—there was no mention of it in the Pre-Budget Report, which I thought was quite odd—simply bringing it in.
That serves to highlight something that we have all commented on, which is that that instrument is not a firm policy. It is not bankable or something that investors can take into account as a material policy, because it is subject to change at the whim of a Chancellor. I think that we are less than two years into its operation and it has already been fundamentally changed.
My first question is: what impact did that decision in the Budget have on DECC’s dynamic dispatch model? By that I mean: how has it changed the forecasts that DECC now uses for capacity and what does it do to the fuel mix? If that is perhaps too complex an issue to go into here, I would welcome a note on this, because it is fundamental in thinking through how the EMR hangs together.
That leads me to my second general point. This is an incredibly complex set of regulations and, at some point, you have to try to take a step back and see how they all affect each other. It is a yarn of wool; you pull one end and the other gets affected. We are making a massive intervention in the market and this afternoon we have had something of a philosophical discussion, in which noble Lords have expressed differences of opinion over whether we should be more state-governed or more market-governed. What we have at the moment is, potentially, the worst of both worlds. We have a hugely state-driven system but with no power for the state to deliver. The state is entirely dependent on private entities coming forward to invest in this market. They will do so only if they feel they have clarity and confidence, and can understand the rules that they are being asked to apply. So we have a lot of micromanagement from government but no ability for government to make anything happen without the private sector. This morning Peter Atherton, a renowned commentator, stated after listening in on the budget announcements about the CFD:
“We are now in a world of staggering complexity, micro management and second guessing by the state”.
I am afraid that that is quite an accurate portrayal of where we are today.
We have also seen, just this week, that we have had state aid clearance. That was welcome although, as I understood it, there was a queue of state aid clearances with Hinkley as number one, then the rest of the CFD and then the capacity mechanism. We have not had a decision on Hinkley yet but we have on the capacity mechanism and have had the renewables part of the CFD cleared. Should we infer from that that there is something of a delay on the Hinkley decision? Can the Minister explain why we have received these judgments slightly out of the order in which we thought they were being considered and when we are likely to see pronouncement on Hinkley?
I mentioned that this is complex and that we need to take a step back to look at how all these parts interrelate. I now want to say something in relation to how these two major planks of the EMR package that we are considering today interrelate. Obviously, we have CFDs, which are there to bring on low-carbon capacity and to give guaranteed payments over a period of years to ensure that we can get capital-intensive projects away. We then have a capacity mechanism which, to give a shorthand definition, is designed to try to keep the lights on. However, there is something of a conceptual gap between these two mechanisms. I would really like to hear more from the Minister on that.
The reason that there is a gap is that CFDs reward low-carbon capacity. We are told that they will do this at some point through competition, where price will determine it. At the moment, it is not quite clear what the determinant is between somebody getting or not getting a CFD, so it is administratively decided. Nevertheless, that is the system. Then there is the capacity mechanism, which is designed to reward those people who are able to provide firm power and maintain system availability. In order for the capacity mechanism not to double reward, the decision has been taken that anybody receiving a CFD will not be eligible for the capacity mechanism. That essentially means that there is a class of CFD-eligible technologies which are firm—they provide you with available, predictable and, more importantly, dispatchable power—but are not being given any reward for that element.
To clarify: if we consider biomass or CCS, they are very different to wind or solar in that they can be fired up at will and used to meet spikes in demand. They therefore have an inherent value that is not rewarded through the capacity mechanism or the CFDs. How does the department value that element of capacity—the firm, low-carbon power that is coming on? I would appreciate an answer to that question.
Baroness Verma
My Lords, I thank all noble Lords for their helpful remarks and questions. It has been a well informed discussion. These are complex measures and, quite rightly, my noble friends and other noble Lords have asked for clarification. If I do not respond to any questions raised during the debate, perhaps it might be helpful if I undertake to write to noble Lords and place copies in the Library. There were a large number of questions and it may well be that we have overlooked some of them.
I start with the questions posed by my noble friend Lord Jenkin. I would like to put on record my apology to my noble friend for responding to his letter rather late. There were gremlins a-playing and I can only blame them. I hope my noble friend will agree that usually I try my level best to give prompt—and maybe lengthy—responses to questions that he and other noble Lords put to me in the department.
We want to ensure that independent generators are very much part of what we are trying to deliver; making sure that the lights stay on, and driving down costs to the consumer through competition. A number of questions were put to me around that matter. My noble friend raised the issue but other noble Lords have added their concerns about why it cannot be April rather than the October date that has been laid out. I will try my utmost to bring the date as far forward as I can and I will be happy to meet independent generators to give those assurances. However, noble Lords who know me will know that I would rather play on the side of caution. Rather than over-promise and then fail to deliver, I would prefer to put in place a date I feel I can deliver. That does not stop me—I hope my noble friend and other noble Lords will take away this assurance—from pushing to get an earlier date, but I felt I could deliver on the October date.
As always, my summer holiday will be spent pushing dates with officials, but perhaps my noble friend can take back to the independent generators that the date is not set in stone; that it is there because I would rather not over-promise. I am willing to work closely with the independent generators and I would be happy to meet them and reassure them. Perhaps my noble friend will take up that offer.
My noble friend asked how much capacity will be procured. The Secretary of State confirmed on 30 June that the first delivery year will procure 53.3 gigawatts for 2018-19. These will be procured at two auctions: one later this year will procure 50.8 gigawatts, and the second phase in 2017 will procure 2.5 gigawatts. He also asked if the indicative CFD budget included the contract for the capacity measure. The answer is no. The interactive budget numbers published this morning relate only to the CFD mechanism.
My noble friend inquired about the Bill’s impact on the CFD. My department’s latest analysis suggests that household electricity bills will, on average, be about 6% lower per year over the period 2014-30 under EMR compared to meeting the Government’s objectives under the existing policy instruments. It is estimated that the annual electricity bills of businesses will be around 7% to 8% lower.
Lord Jenkin of Roding
I am grateful to my noble friend for that. She reiterated the statement made this morning by her Secretary of State regarding 6%. I hope that my noble friend Lord Deben will forgive me for asking this question again. The sums spoken of in the EU Commission’s consent for state aid are very large. Unfortunately, I sent the numbers to Hansard, so I do not have them in front of me. My question is: how much of that represents subsidies that will have to be paid by consumers? The Minister will know that I have another amendment, which we will be discussing in October, to the Infrastructure Bill, under which I am asking for us to know what it will cost consumers. This is the same question. It is not the overall cost; it is how much of the cost of contracts for difference will fall on consumers.
Baroness Verma
I am extremely grateful to my noble friend for that clarification. I hope that I will be able to respond to that. If not, if my noble friend will allow me, I will write to him.
I am always pleased by the great energy with which the noble Viscount, Lord Hanworth, contributes to our debates but, as my noble friend Lord Deben pointed out, we had a very dysfunctional system before, so we need to go forward by ensuring collectively that the systems we have put in place since privatisation allow for greater competition, for costs to be driven down and, especially, that we are meeting our carbon commitments as well as ensuring security of supply.
I do not agree with the noble Lord’s premise about how we are approaching this. These are complex instruments and, with complex instruments, we have to ensure that people reading them can understand them. I undertake to try to make the instrument easier to understand. The noble Viscount showed me a big pile of notes. Sadly, all of us have had to drive through those because of the complexity of the Energy Bill 2013 and what we are trying to deliver through it.
I thank my noble friend Lord Deben for his intervention. First, I put on record our appreciation for all the work that he does as chairman of the Climate Change Committee, his great understanding and the very useful support that we gain from the work done by him and his committee. I agree completely that we need a real mixed portfolio of technologies and that, although energy security is crucial, we must not lose sight of our commitment to reduce carbon emissions by 80% by 2050. Therefore, it is important that, when we are talking about the need for energy security, in everything we do we are mindful of that target as well.
My noble friend also asked whether we were doing enough to push for competition. Vigorous competition and transparency is the key to keeping prices as low as possible, and to raise consumer confidence in the market. It is in a much better place today than it was when we first came to power in 2010. That is because there are now many more players in the market—although, I entirely agree, not enough. We have to open up markets and make them certain for the smaller players so that we do not have them disappearing, as they did when we the big six took over by consuming them.
The noble Lord, Lord Whitty, asked whether consumers understood what EMR was. I know that many of us have stood at the Dispatch Box with that question in mind because it is incredibly complex. I can assure the Committee that I have looked at different ways of making sure that the message goes out to the consumer. Ultimately all of us are working to ensure that consumers are the beneficiaries and can understand the policies that we are trying to deliver. As with all complex pieces of legislation, it is about how we bundle it up without losing the underlying measures that we are trying to deliver. I will take the noble Lord’s views back to the department and instruct it again to try to talk in a language that has more outreach. But with complex legislation, there are limits to what we can do.
The noble Lord also asked what engagement we have had with consumer groups. He is aware that we have been closely involved with all stakeholders, including consumer groups. They have been part of every discussion and we have consulted them on everything that we are doing. It is important to say that as far as we are aware, we have not tried to exclude anyone, but have taken their views on board. The noble Lord also asked about allocation rounds and whether they should operate on a quarterly basis. An allocation round takes about three to six months, depending on whether there are any appeals. This means that the earliest another allocation round could be scheduled would be around May or June next year, when we know how many contracts have been signed and are able to reallocate any unspent budget.
The noble Lord also said that there was not enough support for solar. The noble Baroness, Lady Worthington, also mentioned that. We work closely with the solar trade associations and others to assess the RO grace periods and other issues that have been raised by them to ensure that full participation is possible in the CFD auctions. The amount of money allocated to Part 1 in this allocation round and in the indicative budget for October 2015 will enable around 1.6 to 1.8 gigawatts of solar PV deployment, and potentially more depending on the strike price at which individual projects will bid for.
The noble Lord, Lord Oxburgh, asked about consultations, particularly with smaller players in the market. I can assure him that more than 30 consultations have been published on EMR since last summer and overwhelmingly, a number of them were to ensure that we had given support to stakeholders, particularly the smaller players. We wanted to ensure that they could understand the reforms and effectively engage in the consultation process. If the smaller players feel that they have not been involved enough we must do more, but the department has worked incredibly hard to engage at all levels with smaller players. The noble Lord, Lord Oxburgh, and the noble Baroness, Lady Worthington, asked why CCS was not mentioned. It is an eligible technology and I draw the Committee’s attention to Part 10 of the allocation regulations which enables the Secretary of State to direct the CFD counterparty to offer, for example, two CCS generators.
The noble Baroness asked about the impact of a dynamic despatch model on capacity. It is quite complex so if the noble Baroness will allow it, I will write to her and to other Members of the Committee.
Baroness Worthington
On a point of clarification, I did not ask whether CCS was eligible; I stated that I knew that it was and asked whether the standard contract terms in the third regulation before us were suitable for CCS. That was my question.
Baroness Verma
In direct response to the noble Lord, Lord Oxburgh, who did ask that, I think that I have laid that out clearly. I will wait for some inspiration to come my way in answer to the noble Baroness. Concerning coal in the capacity market, I say to the noble Lord, Lord Oxburgh, that the purpose of the capacity market is to ensure security of electricity supply, providing all forms of capacity with the right incentives to be on the system and to deliver energy when it is needed. Ruling out existing coal would add unnecessary cost to consumer bills. In addition, it acts as an important bridge while new nuclear and renewables come online, leading to a natural need not to have more coal.
The noble Baroness, Lady Worthington, asked about Hinkley Point C. The Commission considers the UK’s Hinkley Point C state aid notification as part of the normal process. We are working closely with the Commission. As the noble Baroness will be aware, these things take time to go through the various stages, but it is not significant to us that it is taking this long, because it is a big project. Of course we need to ensure that we comply with all the things that the Commission expects of us on state aid issues.
The noble Baroness asked about existing coal stations bidding for capacity agreements of up to 15 years. As I said to the noble Lord, Lord Oxburgh, all types of generation can in theory bid for a capacity agreement of up to 15 years. However, we do not expect any existing coal capacity to do so. The thresholds have been set so that the capital expenditure would have to be of a level similar to building a new plant to qualify for a 15-year agreement, so even if an existing plant could justify making that level of capital investment, it would be unlikely to do so. Modelling demonstrates that the wider market conditions, such as the carbon price floor, will make coal uneconomic in the 2030s. As I said to the noble Lord, Lord Oxburgh, ultimately it is about value for money for the consumer and energy security—both objectives that I do not believe for a minute noble Lords opposite or other Members of the Committee would be against.
The noble Baroness also asked whether the Secretary of State could change the auction parameters, such as the amount of capacity to procure, without consultation. The regulations give the Secretary of State the power to determine auction parameters, including the amount of capacity to procure, before each auction. They are not subject to consultation; they are made when published. The Secretary of State has the flexibility to change them between the pre-qualification period and when the auction takes place so as to be able to take account of issues such as the amount of capacity that has been pre-qualified and the plant that has opted out but will remain operational.
The noble Baroness also asked why the Government did not use the capacity market to support other means of capacity, such as interconnection or demand-reduction programmes, rather than support dirty coal. The capacity market is open to a wide range of capacity, from gas to CHP, as well as technologies including demand-side response and storage. All are eligible to participate in the first, main capacity auction. As we announced last year, we were unable to find a way to include interconnector capacity to allow it to participate in the first auction. However, that is an issue only for 2014, and interconnection will be eligible to participate early in 2015. We will bring forward amending legislation in early 2015 to facilitate that.
The noble Baroness also asked about eligibility for fixed generators in receipt of low-carbon support. The capacity market is open to technologies as long as they are not in receipt of other low-carbon support, such as a carbon capture and storage grant or a long or short-term operating reserve contract.
Baroness Worthington
Some of my questions have perhaps been a bit lost in translation. One of my questions on coal was also specifically about the definitions of new plant. If you get a 15-year contract under the new plant definitions in the capacity mechanism, should it not therefore mean that you are equivalent to a new entrant or a new plant under the EPS regulations? When we were debating this back in the summer of last year, nobody was aware that coal could qualify for 15-year contracts. I would really welcome a comment on that.
In terms of the demand-side management, I know that the generators are eligible but my question was more about whether there will be any room for them, given that we have 56 gigawatts of thermal capacity chasing an auction of fewer than that. It is conceivable that existing generators will be able to outbid them in that T-1 auction. I seek reassurances on how the Secretary of State is going to ensure that there will be space for the demand side to bid in.
Baroness Verma
I am grateful to the noble Baroness but I do not think that it got lost in translation. I responded to her but perhaps my response was not full enough, so it may be helpful if I undertake to write to her and to the Committee on that issue, as well as on the issue that she has just raised.
As I have said from the beginning of this debate—and it is now two hours later—the delivery of these new arrangements will be a significant achievement. They will ensure that we keep the lights on and ensure a clean, sustainable and competitive mix of electricity generation. We also want to do that in a way that secures value for money. I have always made the point to noble Lords that it is really important, as well as reducing carbon emissions, to look at value for money because, ultimately, all our measures have an impact on consumers. I commend these instruments to the Committee.