Draft Contracts for Difference (Electricity Supplier Obligations) (Amendment) (Coronavirus) Regulations 2020
(4 years, 4 months ago)
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The Minister for Business, Energy and Clean Growth (Kwasi Kwarteng)
I beg to move,
That the Committee has considered the draft Contracts for Difference (Electricity Supplier Obligations) (Amendment) (Coronavirus) Regulations 2020.
It is a delight to open the debate under your chairmanship, Ms Nokes. I will try to explain clearly the rationale behind this draft instrument. The regulations aim to limit the negative short-term impact on electricity suppliers of an unexpected increase in the costs of the contracts for difference scheme, which members of the Committee will know is integral to offshore wind and electricity power generation.
The Low Carbon Contracts Company is a Government-owned, arm’s length company that manages CfDs. In simple terms, it gets money in from energy suppliers that is used to pay to manage contracts for difference auctions. It is, in effect, a levy on suppliers. The regulations aim to alleviate the burden on energy suppliers, who would be forced by the rules to pay the LCCC when there are fears about working capital. Because there has been a huge drop in energy demand, the LCCC would have needed to raise the levy to get enough funds from energy suppliers to pay the generators.
I took the view with officials that this is not the time to impose additional burdens on the working capital of energy suppliers. As a consequence, the Government have agreed to provide a loan of up to £100 million to the LCCC to allow it to continue to pay CfD generators this quarter without increasing the financial burdens on energy suppliers, who, as we know, are in a vulnerable state. The loan is governed by a separate agreement between the Department for Business, Energy and Industrial Strategy and the LCCC and is not covered by the regulations.
The regulations make four technical changes to the existing Contracts for Difference (Electricity Supplier Obligations) Regulations 2014 to, in effect, defer payment. There is no question but that these costs will have to be paid; we are simply deferring the obligation for this quarter.
In brief, the regulations first reduce each electricity supplier’s obligation, in a quarterly obligation period, by the amount of financial assistance provided by the Government to the LCCC—the £100 million loan I referred to. Secondly, they increase each supplier’s obligation four quarters later. The obligation is therefore reduced in this coming quarter, but it will go up correspondingly in four quarters’ time. Thirdly, the regulations enable the LCCC to take into account anticipated receipt or repayment of financial assistance provided by the Government when setting the obligation for one quarter.
Adam Afriyie (Windsor) (Con)
I very much welcome this measure, which is a reasonable step given the current circumstances. I want to ask the Minister this question now, to give him time to reflect. If, during this period in which electricity suppliers have extended terms, one of them was to go out of business, what clawback mechanisms might there?
Kwasi Kwarteng
That is slightly outside the scope, but I understand where my hon. Friend is coming from. There are a number of measures that we would go into: there is the SLR—the supplier of last resort—and there are measures for mutualisation of cost. I also remind him that this happens every summer, regardless of covid. It is a highly competitive space, and a number of energy suppliers come in and out of the market at will, so this is very much in the run of ordinary business. This measure is related to the specific challenge of covid and to deferring payments in the way that he described.
Finally, the regulations enable the LCCC to repay any financial assistance provided by the Government, using moneys collected from electricity suppliers after the reconciliation process following the relevant quarterly obligation period. In effect, all we are doing is delaying the payable period so that it does not force energy suppliers to go out of business in the way my hon. Friend suggested.
I must stress that this deferral will give suppliers more time to prepare for the increase in payments and provide greater confidence about the level of additional costs they will face in the second quarter of 2021. I must also stress that the Government are committed to upholding the self-financing nature of levies in the energy system. There was no question of our providing some sort of grant or subsidy to the LCCC. We fully expect that whatever moneys are deferred will be paid eventually to the LCCC and that it will be able to sustain its function regardless of Government intervention.
These legislative changes are technical in nature. They needed to be made ahead of the LCCC’s quarterly reconciliation process, which determines suppliers’ obligations for the current quarter. That is expected on 9 July, at the end of next week. Subject to the will of Parliament, this instrument will enter into force the day after it is made. I commend the regulations to the House.
Dr Alan Whitehead (Southampton, Test) (Lab)
The SI before us is, in one way, quite uncontroversial; it is eminently justified and reasonably undertaken, given the present pandemic and the problems it is creating for energy companies in relation to the payments into and out of the LCCC. The Opposition do not object to it; on the contrary, we support it and think it will help considerably with the difficulties energy companies have in both ways as they react to the LCCC’s concerns regarding this pandemic.
To add to the Minister’s admirable explanation of the regulations, my understanding is that they reduce the obligations on energy suppliers to pay a levy to the LCCC in one quarter and increase those obligations by the amount that they were decreased in that particular quarter four quarters later, so that there is no long-term difference to the overall arrangements as far as obligations are concerned, but the effect is delayed by a year.
The recent effects are twofold. First, energy prices are very low, which means that organisations and companies that take money from the LCCC for their generation receive a greater amount. The difference between the strike price—for example, for an offshore wind farm—and the reference price is greater when energy prices are low, so generators will be paid more out of the funds that the LCCC holds at that time. There is an effect on the money going out of the LCCC to generators as a result of low energy prices.
Secondly, there is very low demand. As prices are determined on a megawatt-hour basis, the amount of revenue coming into the LCCC to pay for the money going out is also decreased. It is a perfect storm of lack of resource for the body that is supposed to keep the money coming in and going out and to settle what is happening in between. It is likely that the LCCC will not have sufficient resources in its reserves or its immediate revenue to easily deal with that without putting a large new imposition on energy companies to balance the books in the meantime. That is my understanding of the situation behind the regulations.
I do not mean this in an unkind way, but the regulations kick the can down the road for a year to deal with the immediate problem and crisis that we are in. The answer to the intervention rightly made by the hon. Member for Windsor is that when the levy is reassessed in a year’s time, it will be based on the then market share of those companies, not their market share today. So if there are changes in market share, or indeed, if certain companies have no market share by that point, that would be reabsorbed among other companies that will thereby have a greater amount of market share, so it will come to the same amount of levy as would have been the case today.
The issues surrounding the levy and the measure being proposed give rise to a couple of questions, although not to opposition to the measure, and I would be grateful if the Minister could address these questions. They are not intended to be hostile or to trip the process up, but to reflect on some of the consequences of what is being proposed and how that reflects across other areas.
First, the statutory instrument sets out measures whereby it is possible for this measure to be used again without recourse to a further piece of secondary legislation if there are “similar exceptional circumstances”, as the explanatory memorandum states. It is important for the Minister to set out today what he thinks those similar exceptional circumstances might be in future.
It would clearly be inappropriate for the measure to be used if there was just a temporary dip in energy prices, or there was lower seasonal demand than anticipated, and for no other reason than that was slightly in excess of predictions. This is a wholly exceptional circumstance, inasmuch as there is a combination of low prices, low demand and the likelihood of that continuing for quite a while under the circumstances of the present pandemic. I hope the Minister can say that it would not be the intention of the Government to use the changes that have taken place with this SI for anything other than similar exceptional circumstances such as the present pandemic.
My second point is that a hike in the requirement for the LCCC in the next quarter—as the Minister says, that would have to be settled by 9 July—would undoubtedly have had implications for customer prices had it gone ahead, because levy payments are routinely passed on to customers by energy companies when those payments are made. The same thing will therefore happen four quarters from now, when we may or may not have a price cap on energy prices. As the Minister will know, Ofgem is required to report each year—as the price cap develops—on market conditions either being present or not being present, in order to advise the Government on whether the price cap should be continued or discontinued for the next year.
Kicking the can down the road for a year means that the market arrangements for the price cap will need to be determined next year rather than this year, in the light of those changes. I am not sure that Ofgem has the remit, in terms of its requirement to report on the price cap and market conditions, to take the circumstances that will cause this change in the requirement for the levy—and, hence, potential price rises—into its consideration of the price cap. I would be grateful if the Minister can give me his thoughts on that and explain whether that has been taken into account with this SI.
My final point is that the LCCC was, as I am sure the Minister will recall, introduced in the Energy Act 2013 only because the Government wanted to introduce a levy payment to the disbursement system that did not impact on the Treasury and that effectively guaranteed payments by Government backing. It was a method of keeping the whole thing outside the Treasury and, hence, independent of the whole process. Indeed, there was discussion at the time about whether that would work efficiently. It did work efficiently, so there has been no further issue with that. Through this process, however, the Government are effectively bringing the Treasury back into the dealings of the LCCC.
Although I appreciate that this is a temporary measure, or a measure for exceptional circumstances, which require exceptional actions to be taken, does the Minister consider that this breaches, in some long-term way, the understanding that was undertaken at the time of the passing of the 2013 Act? Does he perhaps also consider that it might be prudent in the light of this piece of secondary legislation to consider whether, for future purposes, the LCCC ought to be effectively brought within Treasury guidelines, so that, rather than having a body that is theoretically independent but actually has occasional support, we have a body that is clearly backed, supported and resourced, if necessary, by the Government, so that these sorts of issues do not materialise in the future?
Kwasi Kwarteng
I will deal with the three points made by the hon. Gentleman in reverse order. He will have noticed that the Treasury has made all sorts of interventions across the whole economy. That does not mean that the Treasury should sustain its intervention in every business that has been furloughed. Similarly, with the LCCC, I made the decision that these were exceptional circumstances that warranted an exceptional response. It is in that sense that the Treasury has intervened; there is no notion that this will be ongoing. I want to put his mind to rest about that. Secondly, that is a loan—essentially, a working capital facility of £100 million that we expect to be repaid
On the hon. Gentleman’s second point about Ofgem and the price cap, that is something to which I am not privy. Ofgem will have a discussion about the price cap; it knows the circumstances of the energy suppliers and about the legislation. I have had weekly rounds with the sectors and the energy suppliers, and twice-weekly conversations with Ofgem, in which we have talked about a lot of those issues. They fully understand the context in which the draft instrument has been laid, so I do not think that there will be any kind of read-across in what Ofgem will do, and I strongly suspect that the price cap will be in force for a number of years to come.
Dr Whitehead
Does the Minister recognise that the draft instrument could mean inflated customer levies in a year’s time when that effect comes through?
Kwasi Kwarteng
I do not think that the hon. Gentleman or I have any idea what the circumstances will be next year. Lots of things operating in the market may or may not reduce wholesale gas and electricity prices. It would be very foolish for him or me to speculate about the state of the wholesale market in 12 months’ time. Ofgem will take into account a whole range of factors; some may relate to deferred payments, which we had to bring in to alleviate the pressure on the suppliers, and the hon. Gentleman recognised that as a good thing. There is no way that he or I can say exactly what the effect will or will not be on the price cap or on bills in 12 months’ time.
The first issue that the hon. Gentleman really goes to the heart of the matter. This is an exceptional time. A friend of mine—a banker—said to me, “If there ever was a case of force majeure, the covid crisis is it.” The Government have made exceptional interventions, of which this is one. There is no sense in which we would use the powers in the draft instrument to intervene on a regular basis in the market for the LCCC. I fully assure the hon. Gentleman that we will only do so in exceptional circumstances. He will understand that the very nature of exceptional circumstances means that we cannot predict here or now the specifics of what they might be, just as a year ago, we could not say that covid-19 was going to come upon us in February and March of this year—nobody foresaw that, or certainly not the timing. The very nature of exceptional circumstances should give him some assurance that we will only use the legislation in exceptional circumstances. I cannot here and now give him chapter and verse about what those exceptional circumstances would look like.
The Government are committed to the regulations, and I commend them to the Committee.
Question put and agreed to.
Draft Direct Payments Ceilings Regulations 2020
Direct Payments to Farmers (Amendment) Regulations 2020
(4 years, 4 months ago)
General CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Chair
Before we begin, I remind Members about social distancing rules. The spaces available for Members are marked; please do not sit in between those spaces. If Government Members wish to sit on the Opposition side of the Committee Room, that is perfectly okay. Hansard would be grateful if you could send any speaking notes to hansardnotes@parliament.uk.
The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Victoria Prentis)
I beg to move,
That the Committee has considered the draft Direct Payments Ceilings Regulations 2020.
The Chair
With this it will be convenient to consider the Direct Payments to Farmers (Amendment) Regulations 2020 (S.I. 2020, No. 576).
Victoria Prentis
It is a pleasure to serve under your chairmanship, Mr Robertson. The draft Direct Payments Ceilings Regulations 2020 were laid before this House on 9 June. The two instruments have been grouped together for debate because they both amend retained EU law. The statutory instruments largely maintain the status quo from the 2019 scheme, and thus provide continuity for farmers. They do not change the rules that farmers have to meet. Both instruments are UK-wide and have been made with the consent of the devolved Administrations.
Before I explain a little more about each SI, I would like to explain why the Direct Payments to Farmers (Amendment) Regulations 2020 are subject to the made affirmative procedure. The procedure is specified in the Direct Payments to Farmers (Legislative Continuity) Act 2020. That procedure was required because the EU law under that Act became domestic law on exit day, and amendments to make that law operable were also needed by exit day. That avoided a legislative gap in the direct payment schemes for this claim year. The instrument makes some further operability amendments using the same powers, and they, too, need to be made without delay. That will avoid any ambiguity that would result from the statute existing longer than is necessary.
The draft Direct Payments Ceilings Regulations 2020 amend the UK national ceiling and net ceiling for this claim year, 2020. Those financial ceilings are used to calculate payments to farmers under the direct payment schemes. The amendments to ceilings take into account previous policy decisions made by the Government and devolved Administrations, such as the transfer of funds from direct payments to rural development. Each part of the UK has decided to make the same level of transfer in previous years. The amendment to the national ceiling and the net ceiling also reflect the findings of the Bew review and the subsequent funding decisions made by the Scottish Government and the Welsh Government.
The Welsh Government have decided to use the additional funds allocated to them for 2020-21 for their 2020 direct payment schemes. They have been added to the national ceiling and the net ceiling to account for that. The Scottish Government have decided not to use any of the money allocated to them following the Bew review for their 2020 direct payment schemes. We understand that they are still considering how they wish to use the money allocated to them for 2020-21, but it will be ring-fenced to be spent on farms in Scotland.
The net ceiling has also been amended to take account of the decisions made by the Government and devolved Administrations on the level of reductions to be applied to large payments. They are existing reductions that are separate from the phasing out of direct payments in England, which will not begin until 2021 under the Agriculture Bill. Each part of the UK has decided to maintain the same approach to the existing reductions as in previous years.
A key purpose of the Direct Payments to Farmers (Amendment) Regulations 2020 is to confirm what the euro-to-sterling exchange rate for payments will be for the 2020 direct payment schemes. The Government and the devolved Administrations have decided that it should be the same as for 2019. We are confirming that exchange rate three months earlier than happened under the common agricultural policy. That is to provide extra certainty for our farmers.
This instrument also addresses other, minor operability issues arising from the UK’s exit from the EU that were not fully dealt with at the time. For example, it removes redundant cross-references to provisions that are not part of retained EU law. It clarifies that, in some instances, the EU legislation being referred to is the version that had effect immediately before exit day. It removes some remaining references to the European Commission and makes other minor drafting amendments.
These amendments will enable the law governing the 2020 direct payment schemes to operate effectively in the UK, with no ambiguity. I commend the two sets of regulations to the Committee.
Daniel Zeichner (Cambridge) (Lab)
It is a pleasure to serve under you in the Chair, Mr Robertson, and a pleasure to continue this fascinating, if occasional, dialogue with the Minister about how we ensure a regular and healthy supply of food to our fellow citizens by helping our farmers financially. I am sure that the Minister enjoyed as much as I did going back to EU regulation 1307/2013 over the weekend, which is where we started the conversation some months ago.
We are of course in a transitional phase, and it may be lengthy. It struck me, in preparing for this Committee, that we could be coming back year after year to discuss such statutory instruments—in 2021, ’22, ’23, ’24—who knows? But I am sure each iteration will prove yet more illuminating.
May I say how pleased I was to see that the environment land management scheme consultation is back open? That is relevant to today’s discussion, because of course it is the potential replacement system. However, I am slightly disappointed to see that the closing date remains the end of July, so the consultation period has effectively been halved. Could the Minister comment on that and explain the thinking? We are talking about a major change—as the Government says, the cornerstone of the system. I suspect that the reason for the closing date is probably that there is now some urgency because, as the Opposition warned earlier this year, things do not always go as smoothly as one hopes.
My next question for the Minister follows from that. I want to check that my understanding is correct, and that we will indeed repeat this exercise each year until basic payments are completely removed from the system. Today’s statutory instruments are for scheme year 2020. As I recall, clause 10 of the Agriculture Bill outlines what happens for future years, and as I understand it, measures under that clause will also be subject to affirmative resolution. While we continue to struggle with applying what is now considered an out-of-date system, the EU of course has moved on—to an ambitious goal of 25% organic by 2030. I fear that while it is doing that, we will be in the slow lane, toiling away at those “oven-ready” basic payments.
Be that as it may, today we have two fairly routine items to consider, which would formerly not have required decision and would have been handled in the normal structures of the European Union: a decision on the exchange rate to be used to calculate payments; and the distribution of those funds between the nations, and allocations between pillar one and pillar two, essentially to fund rural development programmes. As has been said, there is also an adjustment to take account of the recommendations of the Bew review.
All this ties back to EU regulation 1307/2013, which we enjoyed back in January, and the Direct Payments to Farmers (Legislative Continuity) Act 2020, which we also enjoyed discussing earlier this year. I am sure that hon. Members will be relieved to hear that these measures are not controversial and we will not oppose them. But I am duty bound to note, as I have done before, that for all the Government’s claimed green zeal, the opportunity to divert funds from pillar one to pillar two in England has once again been passed over. Control may be taken back, only for us to carry on as before. The area payment system that the Government are so keen to dismantle in the Agriculture Bill carries on unchanged for another year in England.
Meanwhile, the environmental and social schemes funded under pillar two, the stewardship-type schemes that the Government rightly wish to promote, get no additional funding. Labour Wales uses the maximum 15% allowed; Conservative England does not. Perhaps once again the Minister could explain why the Government continue not to take the opportunities on offer.
The ceiling has been adjusted to reflect the outcomes from the Bew review, as the explanatory memorandum helpfully explains at paragraph 7.6. The Welsh Government have opted to pass money on to their farmers, but, as the Minister has explained, it appears that the Scottish Government are taking a different path. I noted her comments, but would be interested to hear her views on how the additional €60.43 million is to be further allocated.
We also see from the helpful explanatory note, at paragraph 7.7, that although caps apply to basic payments in Scotland above €600,000, in Wales above €300,000 and in Northern Ireland above €150,000, there are no such caps in England, but merely the 5% over €150,000 required by the EU. Happy days continue for some. Perhaps the Minister can explain what thought was given to moving some funds from those very big payments into more environmentally and socially friendly schemes, and will she confirm that it could be done now? It is a political choice.
I appreciate that modulation has long been unpopular with influential farmers in England, but I would also gently reflect that we will see something remarkably similar introduced under ELMS; based just on the information for next year, we can see that some of the larger payments will indeed be reduced substantially. I am bound to ask: why is that right for ELMS, but not for direct payments? And also the converse: will there be similar scope to ensure that payments under ELMS can be capped, as effectively happens now in Wales, Scotland and Northern Ireland?
SI 2020 No. 576 mainly establishes the mechanism to be used for calculating the exchange rate to be used. It also tidies up some minor points that I suspect were left over from earlier changes. It is not controversial, although I am puzzled—I do not expect the Minister to have the answer today—as to why paragraph 6 of article 46 in regulation (EU) No. 1306/2013 needs to be taken out. Perhaps I am being over-suspicious, but the fact that it refers to intervention measures makes me wonder whether the Government are quietly removing one of the tools that may yet be needed if times get tougher ahead. Will the Minister clarify? I am also struck that this SI seems to be in some cases amending the amendments made in SI 2020 No. 90, which makes some of this quite hard to follow. That certainly seems to be the case for regulation 2, in which regulation (EU) No. 1306/2013 is being further revised.
Mr Robertson, you and the Minister will no doubt be glad to hear that I have no further substantive queries on the remaining amendments, although I cannot help wryly noting that one or two of the tidy-ups to regulation (EU) No. 639/2014 had to do with points that were raised when we discussed SI Nos. 91 and 90 earlier this year. It is good to know that our time here discussing these things is not wasted. We are content for the regulations before us to proceed, and we look forward to the next round.
Victoria Prentis
Of course our time here is not wasted, Mr Robertson. The instruments before us do omit some redundant provisions that we have previously discussed and cross-referenced. Part of the purpose of the transition period is that events move on. We hope for a full free trade agreement. In fact, we hope for a number of them. We now need to omit some of the regulation-making powers relating to EU financing rules, which are not necessary for domestically funded schemes, and some of the rules on the European Commission’s budgetary management, but I look forward to looking more closely with the hon. Gentleman at the specifics of the measures that he referred to.
We are providing farmers with a good deal of certainty; that is the aim, partly, of the changes we are making today. The Government announced on 30 December nearly £3 billion of funding direct payments for 2020, which matches the funding that was available last year. The instruments that we are debating are consistent with that announcement. More broadly on funding, the Government’s manifesto guaranteed the current annual budget in every year of this Parliament; that, too, is designed to give certainty and comfort to farmers. This will enable the Government to provide financial support to farmers in England for the purposes set out in the Agriculture Bill.
We have been clear, consistent and as transparent as possible about the maximum reductions in the direct payments in 2021. We first announced those in September 2018 so that farmers would have time to prepare. We will throughout this transition period continue to consult genuinely as we conduct our tests and trials of ELMS and as the policy continues, quite properly, to evolve. We will provide much more information about our plans for the agricultural transition both in July and September this year—something we announced fairly recently—so there will be considerable flesh on the bones of the hon. Gentleman’s favourite ELMS policy document. Our new schemes will be a more effective way of rewarding farmers for the work they do, and will help them to prepare for the future.
We remain committed to introducing new schemes that reward farmers for producing goods that are valued by the public. That is why the ELMS discussion is going ahead at pace—and, yes, we want to conclude the first part of it next month. I know that the hon. Member for Cambridge will be keen to engage with that discussion. We recognise that farmers and land managers need certainty, which is why we have committed to a seven-year transition. During that time, we will free up money so that we can continue to offer an improved country stewardship scheme.
We are already working closely with the devolved Administrations to find approaches to the framework to co-ordinate agricultural support after 2022. We will at this point be using the money in slightly different ways—but all to the benefit of farmers. Rural development projects, through which we will channel the money in England, can of course include funding for hedgerows, which are critical to the way in which we feel ELMS will probably develop in the next few years. It would be wrong to say that that money is being sent elsewhere. It will be used for the benefit of English farming.
Farmers need stability, certainty and a smooth transition, so we will not switch off direct payments overnight. During the transition period, we will offer financial assistance to enable growers to invest in their equipment, technology and infrastructure; to improve their productivity; to manage the environment sustainably; and to deliver other public goods.
The statutory instruments make the necessary amendments to enable the Government and devolved Administrations to pay 2020 direct payments to farmers in line with the approach taken in previous years.
Question put and agreed to.
Direct Payments to Farmers (Amendment) Regulations 2020
Resolved,
That the Committee has considered the Direct Payments to Farmers (Amendment) Regulations 2020 (S.I. 2020, No. 576).—(Victoria Prentis.)