Contracts for Difference (Electricity Supplier Obligations) (Amendment) (Coronavirus) Regulations 2020
(4 years, 4 months ago)
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Lord Callanan
That the draft Regulations laid before the House on 4 June be approved.
Relevant document: 18th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
My Lords, the aim of this draft instrument is to limit the negative short-term impact on electricity suppliers of an unexpected increase in the costs of the contracts for difference—CfD—scheme as a result of measures introduced to reduce the spread of the novel coronavirus. Before outlining the provisions, I will briefly provide some context for the benefit of your Lordships.
The CfD scheme is the Government’s main mechanism for supporting new renewable electricity generation projects in Great Britain. The CfD is a 15-year contract between a renewable generator and the Low Carbon Contracts Company—LCCC—a government-owned company that manages CfDs and is at arm’s length from the Government.
Contracts are awarded in a series of competitive auctions that determine the strike price in pounds per megawatt hour that the generator will be paid for the electricity produced. Generators receive revenue from selling their electricity into the market as usual. However, when the market reference price of electricity is below the strike price, generators receive a top-up payment for the additional amount. Similarly, at times when the reference price is above the strike price, the generator pays the LCCC.
The LCCC is the designated CfD counterparty under Section 7 of the Energy Act 2013, and as such it has a power to collect payments from licensed electricity suppliers through the CfD supplier obligation to enable it to make CfD top-up payments to generators. This obligation comprises a daily interim rate levy paid on each megawatt hour of electricity supplied, plus a total reserve amount paid in the form of a lump sum at the start of each quarter to cover uncertainty.
Both rates are set by the LCCC three months ahead of each quarter, based on the LCCC’s forecasts of CfD payments and electricity demand. At the end of each quarter, the LCCC carries out a reconciliation of the amount owed by suppliers, based on the actual payments made to generators and amounts received from suppliers. The LCCC advised BEIS that, because of measures introduced to reduce the spread of coronavirus, it was anticipating a shortfall in funds required to pay CfD generators in the second quarter of this year, from April to June.
The LCCC had observed a sharp fall in electricity demand across the quarter, of around 13%, as a result of the lockdown. This would have meant a significant reduction in the amount collected from suppliers under the interim rate levy. There was also a significant fall in the wholesale price of electricity, which would lead to increased payments to CfD generators of £18.6 million higher than forecast. The combined effect of these unanticipated changes is a forecast shortfall of £121 million between the amount owed to CfD generators and the amount collected from suppliers under the interim rate levy.
To address the shortfall, the LCCC was considering an increase of between 22% and 35% in the interim levy rate part-way through the second quarter of this year. This would have been the first time such action was needed. Electricity suppliers would have faced an unexpected increase in their obligations at short notice and at a time when they were facing significant other pressures. Therefore, in line with efforts to support the economy in the light of the Covid-19 national emergency, the Government agreed to provide a loan of up to £100 million to the LCCC so that it could continue to pay CfD generators during the current quarter without increasing the financial burden on suppliers. The loan is governed by a separate agreement between BEIS and the LCCC and is not covered in this instrument.
Following consultation, the Government also announced that they intended to make changes to regulations to enable the LCCC to defer collection of the additional obligations covered by the loan to the second quarter of 2021. If regulations were not changed, suppliers would face a higher lump-sum payment to the LCCC this month, following the quarterly reconciliation exercise. This draft instrument makes four technical changes to the existing Contracts for Difference (Electricity Supplier Obligations) Regulations 2014 to implement the deferral.
First, it reduces each electricity supplier’s obligation in a quarterly obligation period by the amount of the financial assistance provided by the Government to the LCCC for that purpose, multiplied by each supplier’s market share in that quarter. Secondly, it increases each electricity supplier’s obligation four quarters later by the amount of financial assistance previously provided to the LCCC, multiplied by the supplier’s market share in that later quarter. Thirdly, it enables the LCCC to take into account anticipated receipt or repayment of financial assistance provided by the Government when setting the obligation for a quarter. Finally, it enables 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. This deferral will give suppliers more time to prepare for the increase in payments. It provides greater confidence over the level of additional costs that they will face in the second quarter of 2021, enabling suppliers to price future tariffs with minimum cost risk.
I stress that the Government are committed to upholding the self-financing nature of levies in the energy system. The loan to the LCCC and the arrangements for deferring repayment are therefore envisaged to be a one-off response to the current exceptional circumstances arising from Covid-19. However, the mechanism in this instrument is not time-limited and could be used again in the future, if required. This would enable the Government to intervene quickly to ensure that CfD generators can continue to be paid, and burdens on suppliers could be deferred, if a similar exceptional event arose in the future. These legislative changes need to be made ahead of the LCCC’s quarterly reconciliation process that determines suppliers’ obligations for quarter 2 of this year. This is expected to take place on 9 July. Therefore, subject to the will of Parliament, this instrument will enter into force the day after it is made, and I commend these regulations to the House.
Lord Foulkes of Cumnock (Lab Co-op) [V]
My Lords, I thank the Minister most sincerely for his very helpful and comprehensive introduction, which enables me to be briefer than I had intended. I thank him also for his courtesy in asking us all in advance whether we had any questions.
I should say first, as a Scottish Peer, that I am very proud of the progress that we in Scotland have made with renewable energy electricity generation. Indeed, it is now reported that an equivalent of 90% of Scotland’s electricity consumption comes from renewable sources, representing an increase of 14% year on year. Despite some policy uncertainty over recent years, which has limited deployment, our 100% target for renewable power generation in 2020 looks as if it remains on track. I am sure that the Minister will agree that success with renewables, including solar, onshore and offshore wind, and tidal and thermal energy, will all be critical in demonstrating that we in the United Kingdom have shown leadership when we come to COP 26, which we look forward to hosting in Glasgow next year.
I have a couple of questions for the Minister. The explanatory statement to the instrument notes that there is opportunity for these regulations to be used in “similar exceptional circumstances” without the need for further secondary legislation or debate. Can the Minister inform the House what “similar exceptional circumstances” would look like in the future? In this event, would the Government commit to providing further loans to support the Low Carbon Contract Company?
Finally, since these regulations are temporary, my main question is how the Government will reassess these payments in a year’s time. With the current uncertainty in the market, the composition of the players involved may have altered in a year’s time, so I would find it really helpful if the Minister would tell us and help us to understand how they will secure future payments and whether this will mean redistributing them among new market formations. I look forward to hearing the Minister’s answer to these two questions in his reply to this debate.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, the government loan and delayed payback mechanism in this statutory instrument gives the electricity suppliers time to work unexpected higher charges through to customers. By delaying four quarters rather than three, the extra cost can be fed into the retail price cap to ensure that higher prices do not hit in the winter months. It is all very logical but, in the retail price cap, will any account be taken of the fact that it is not domestic energy consumption that dropped due to lockdown? Working from home, having children at home, extra cooking, baking, computer use and other household activity has led to increased consumption, and putting these levy-related costs on to domestic supply later on is retail picking up the tab for disruption in industrial consumption.
For those on low income, where fuel poverty is a serious matter, any rises are dreaded. What planning is being done for how the levy cost blip will be reflected in the price cap? Will the retail share of the levy blip be limited to cover, say, 30%, or whatever the 2019 domestic percentage of household electricity consumption is, and not the higher percentage that will probably happen in 2020 due to lockdown? Will it be reversed out of the baseline in later cap updates?
My back-of-envelope calculation for the spring quarter, based on the £100 million cap, has a possible maximum levy of around £125 million, over 28 million households and using 30% of total electricity. That share would come out at only about £1.50 per household for the quarter. Will that be the kind of maximum increase allowed? To some, even that is significant. Further loans are presently ruled out, but is it not the case that an elevated levy is likely in later quarters, as overall consumption and market prices remain depressed?
The Government said in their consultation that suppliers should absorb some of the costs, that being the reason for not giving 100% cover, and the payback will then be mutualised among suppliers extant in a year’s time—not least in case some go bust. Once the price rise comes in, all levy costs will surely be clawed back, but what will be the effect on consumers if some suppliers go under, including where there are advanced payments? Are those lost as unsecured creditors? Finally, have the consultation responses been published? I looked for them on the BEIS website but did not find them, and it is not really a public consultation without seeing the responses.
Lord Naseby (Con) [V]
My Lords, I welcome this SI and say well done to the Government for anticipating this need. If they had not done that, there could have been problems with the continuity and reliability of supply, and it is absolutely crucial at this difficult time that we do not go through any of the old problems we had in the past. As an aside, I recently had no telephone, no wi-fi and indeed no water supply, but thankfully they are all back on again now.
I have a few questions. First, what consultation was there with the key renewable companies over this arrangement and were any problems raised by them? Secondly, following the speech by the noble Baroness, Lady Bowles, does Ofgem fit into this anywhere? She is right in the sense that we know that, domestically, demand has gone up because everyone has been locked down and stuck at home, and we have all been using our computers far more than we would normally do. Thirdly, some might say that this action is undermining efficiency and making it a little too easy for companies that ought to be able to handle the toing and froing of challenges. However, maybe looking at the detail of the SI, the Minister will tell me that paragraph 7.5 of the Explanatory Memorandum answers that question.
What exactly is the estimated cost to the Government through this transitional loan? Presumably it is a cost of lost interest, and is that somehow rolled up at the end of the process? Finally, as someone who was a very junior Minister in Northern Ireland, I am not sure why Northern Ireland is not involved. Is it because Stormont was not sitting and this came under Stormont, or is the infrastructure in Northern Ireland different from the rest of the United Kingdom?
Baroness Sheehan (LD) [V]
My Lords, the only good thing to come out of the coronavirus lockdowns worldwide has been the biggest fall in energy demand in 70 years. That has had the fortunate effect that global energy-related carbon dioxide emissions in 2020 are set to fall nearly 8% to their lowest level in a decade. However, that reduced demand for energy means that the LCCC has a cash-flow problem. However, here is a remarkable statistic: renewables generated 47% of the UK’s energy in the first three months of this year.
While I do not oppose the Government’s plan to step in temporarily to ease the situation for energy suppliers, I wonder what discussions are taking place about other ways to smooth out the demand-and-supply mismatch that can sometimes occur with renewable sources of energy, given that we cannot control when the wind will blow. For example, the climate change committee’s progress report, published last week, stated that battery storage facilities need greater investment and development. If we had the ability to store power when it was produced in excess, the LCCC would be much less likely to be in a situation where the price of electricity went negative. Is investing in battery technology—a technology that is moving apace—under consideration?
Another way to smooth out supply and demand is to move energy around more efficiently—for example, through interconnectors. Can the Minister update the House as to when the Denmark-Britain cable will become operational?
Given the Prime Minister’s intention to lift restrictions on people’s movements to get the economy moving again, which will have the effect of gradually increasing demand for energy, was a more phased approach to clawing back the deferred payment considered?
Lastly, this is a Treasury intervention that will support energy suppliers, with the effect that consumers should be protected from energy price rises. Can the Minister confirm that that is indeed the case and that no supplier benefiting from deferred payments will increase energy prices for consumers?
Baroness Jones of Moulsecoomb (GP) [V]
My Lords, these regulations seem to suggest a fundamental flaw in the way the Government are thinking about funding new energy generation. It looks as though the Government intend to tie us into tens of billions of pounds of these contracts over the coming years, for everything from new nuclear power stations to solar and wind energy. Contained in these contracts is a guarantee that energy payers will pay high energy prices whether or not the wholesale price is much, much lower, and whether or not we use much less energy. Surely the Government can see that that is a bad business practice. Why would a Conservative Government do something like this?
We have used less energy while in lockdown, and that has essentially bankrupted the Government’s whole energy-generation scheme; I understand that. As we embark on the rapid reduction in energy consumption that is necessary if we are to meet a net-zero carbon future, we will see the same thing happen again and again. However, for me this is a stealth tax. It will be deeply regressive, pushing the burden of costs on to the fuel-poor and disadvantaged while the wealthy will barely notice the difference.
For these very reasons, the Government should abandon this bankrupt contract system and instead bring their energy-generation and energy-efficiency schemes into normal government capital investment, to be funded by progressive taxation. Will the Minister comment on those ideas?
Baroness McIntosh of Pickering (Con) [V]
My Lords, I congratulate my noble friend the Minister on bringing forward these regulations for our consideration this afternoon. My first question is not dissimilar to that asked by the noble Baroness, Lady Bowles, and I am grateful to her for the research she has clearly put into that. Paragraph 7.1 of the Explanatory Memorandum states this fairly complicated payments procedure and says at the end:
“We expect that suppliers pass on the costs of these payments to their customers.”
As we know, while retail shops and business customers generally closed down, as they were told to do because of the Covid-19 virus—and it was absolutely right that they did so—that meant that everybody was working from home and the consumption of electricity and water went up incrementally. I am therefore concerned that this will be passed on to the domestic customer in what is a very grey area as regards transparency of payments.
Successive Governments have introduced renewable energy, and we as domestic customers pay handsomely for the privilege. However, the transparency of how we pay is indeed very opaque. Can my noble friend put my mind at rest as to how this increase will appear, and what role Ofcom will have in agreeing to this? Presumably Ofcom was consulted, and as the regulator it will have a view when it comes to sorting this out at the end of the next quarter or at the end of the financial year.
Finally, I do not quite understand the thinking behind why the agreement that the Government have entered into—between BEIS and the LCCC—is not part of our proceedings this afternoon. That would have been very helpful. I hope that my noble friend will agree to publish all the responses on the website, in the normal way.
Lord Holmes of Richmond (Non-Afl) [V]
My Lords, I congratulate my noble friend the Minister for the clarity and thoroughness of his introduction to these regulations. I also sincerely thank all those key workers in energy and power production, not least everyone at National Grid, who have kept the lights and the heat on through this Covid crisis, often putting themselves in harm’s way to ensure that everybody across the country has power.
I welcome the regs in the sense that they are necessary, given the current construction of the sector, but as other noble Lords have commented, there is an extraordinarily high level of complexity and opacity in the whole energy sector. Does my noble friend the Minister agree that it would be helpful to produce a clear chart showing the real price per kilowatt hour of energy, including everything, from whatever source that energy came?
I appreciate that this is somewhat off-piste, but perhaps my noble friend will indulge me: in this new future that we are embarking upon, does Hinkley C in any sense seem like something we should be doing? A technology unproven and unbuilt, a deal done at a strike price three times the strike price at the time—it was a bad deal then and it looks disastrous now. If he were offered that today, would he say “deal” or “no deal”?
Finally, what are the Government doing to address one of the most pernicious energy issues? Those on meters or pre-paid cards—those in our society who have the least—often find themselves paying the most. Does he agree with me that we still need to do so much to address this inequity?
Lord German (LD) [V]
My Lords, it is worth reminding ourselves that the purpose of the CfD is to incentivise investment in low-carbon electricity generation in the UK. I support the measures taken in this set of regulations, in so far as they avoid a large increase in suppliers’ payment obligations at this stage, thereby temporarily avoiding the inevitable passing on of those extra costs to the consumer or a reduction in the effectiveness and economic sustainability of those suppliers. However, we must see these regulations through the perspective of whether they will incentivise investment in low-carbon electricity generation.
As many noble Lords have said, these regulations imply a loan, which will have to be repaid. At present, that is envisaged for next year, although I note, as the Minister said, that it is not time limited. I suspect that he is not in a position to tell whether, if it is to be repeated, there will be an equivalent investment by the UK Government, putting money into the pot to make sure the books balance.
I want to consider the impacts on the generators’ side of the CfD, which are current as well. Can the Minister explain the impact of the changes that have arisen from the targeted charging review? The changes proposed will have an impact on the revenue stream of most low-carbon energy generators. Larger generators will miss out on transmission generation residual payments, which are currently equivalent to about £2.30 per megawatt hour. Once these TGR payments are reduced to zero, a wind farm bidding for a CfD will have to increase its bid by £2 per megawatt hour to ensure the same internal rate of return. This, in turn, will have an impact on new generation projects coming forward. Ofgem acknowledges the impact of the TGR on generators, stating:
“There is a risk that these changes could lead to the cancellation of some projects, including renewable generators which have been awarded CfD contracts”.
Can the Minister tell us whether these changes have been postponed? They would certainly affect the quarterly reconciliation process under the CfD, which determines obligations. In turn, that would mean a shortage of low-carbon generation to meet the Government’s targets. The regulations we are considering today acknowledge the urgency of ensuring that additional costs arising from the response to Covid-19 will not fall upon suppliers. But if the whole purpose of the CfD is to incentivise low-carbon electricity generation, these regulations must provide a temporary fix not just to one side of the equation; they must pay attention to the generation incentive as well.
Lord Kirkhope of Harrogate (Con) [V]
My Lords, the title of this statutory instrument is long and complex, but the issues are, I think, relatively simple. In order to encourage alternative or green suppliers of electricity, the levy on energy suppliers provides resources to support Contracts for Difference—or CfD—generators. So far so good. However, a combination of seasonal or weather-related issues plus Covid-19 issues has resulted in overall demand for electricity dipping substantially, creating a serious financial position for suppliers. Effectively, therefore, what is proposed is a loan of up to £100 million for the Low Carbon Contracts Company—the LCCC—so that the CfD generators can continue to receive the sums due under their respective contracts.
I therefore have several questions for my noble friend. First, I understand these government moneys are just loans that will be clawed back within a year. How are these loans to be secured and enforced, especially if the suppliers continue to have financial pressures? Secondly, to what extent should general energy prices have any effect in the next year? Are the contracts from the so-called difference auctions flexible in this regard? Does my noble friend understand that low energy prices give rise to the concern that the prices paid for the alternative suppliers are fixed at a much higher rate, especially if these low prices in the market continue, with a depressed economy, the Covid aftermath and resultant low demand?
Thirdly, the reference to “similar exceptional circumstances”, allowing these measures to continue without any further parliamentary scrutiny by even secondary legislation, concerns me. Definitions such as this are imprecise; we need to be sure that they are not used in respect of only slight changes in energy prices, usage or climate variations. Can my noble friend describe what “exceptional circumstances” means? As this measure postpones the levy payments only for a year, and as the costs are ultimately borne by the consumer, can he advise us of the likelihood of a fresh price cap following a new Ofgem determination?
As noble Lords know, as the dispenser of the levy, the LCCC is established as an independent body. I hope, therefore, that this intervention by the Treasury with these loan moneys—for no doubt very merit-worthy reasons—will not affect that longer-term independence which I believe is so vital in these overall energy relationships.
Lord Oates (LD)
My Lords, I thank the Minister for introducing the regulations so clearly. As my noble friends have indicated, on these Benches we recognise the need to bring forward these regulations in order to tackle the exceptional circumstances that coronavirus has given rise to. It is a reminder of how the pandemic has affected almost every aspect of life. I join the noble Lord, Lord Holmes of Richmond, in paying tribute to the front-line workers in the electricity industry who have worked so hard on our behalf to keep the lights on.
As my noble friend Lady Bowles highlighted, the issue here is not so much the need for these regulations, but how their consequences will work through the system —and indeed out of the system. I note that the impact statement at the end of the Explanatory Memorandum states that there
“is no, or no significant, impact on charities or voluntary bodies”
and that:
“The impact on business is expected to be positive and welcomed.”
The impact assessment also states:
“There is no or no significant impact on the public sector.”
It does not, however, address the potential impact on domestic consumers. Indeed, the only reference to consumers is in the section relating to the positive impact on business, in which the Explanatory Memorandum states:
“It will give electricity suppliers a high level of confidence over the additional costs they will incur for each unit of electricity”
and:
“This will enable suppliers to price the additional costs into consumer energy bills in advance with minimal cost risk.”
I am sure that will be encouraging and reassuring to suppliers, but what about consumers? Will the Minister tell the House what assessment the Government have made of the impact of these regulations on consumer prices in the second quarter of 2021? My noble friend Lady Bowles had a go at suggesting a figure, but it will be useful to know from the Minister whether the Government accord with that. Have they assessed what, if any, impact this will have on fuel poverty, bearing in mind that the impact of even a small rise may be significant on the fuel-poor?
The Government have stated that they regard the loan to the Low Carbon Contracts Company as a one-off response to the current crisis. None the less, they have taken powers in these regulations that are not time-limited. I admit that I would normally be extremely suspicious of Ministers seeking unending powers to tackle what they claim is an exceptional situation. However, given that the reduction in demand has been principally driven by industry, it is unclear how long energy prices in the wholesale market are likely to remain below the strike price, and, as a consequence, whether the Government will need to intervene again. What assessment have the Government made of the trajectory of prices in the wholesale market and how that will impact on the system?
As the Government seek to put the country on the right track to meet our 2050 net-zero target, it is important to bear in mind the points made by my noble friend Lord German. The purpose of the CfD system is to expand investment in renewable and non-carbon sources of energy. It is very important that we bear that in mind as we go forward. Have the Government considered how we may need to adjust market mechanisms in the longer term to support the move away from a carbon economy towards a net-zero figure? What impact does the Minister think the crisis may have on investments in renewables, which have expanded so rapidly and encouragingly in recent years, not least because of the visionary decisions taken by the then Climate Secretary, Ed Davey, during the coalition Government? What steps will the Government take to ensure that the positive picture that has arisen is built on over the coming years?
My noble friend Lady Sheehan raised the important issue of the need for the Government to invest in energy infrastructure through battery storage and other means to help smooth the use of renewables in the supply system. That will be a critical part of building an energy system fit for the future and, in particular, fit to meet the Government’s commitment to net zero by 2050.
I hope that the Minister will be able to answer the questions that my noble friends and I have asked and other noble Lords have raised, but, with that said, we recognise the need for these regulations. We thank the Minister for the clarity with which he introduced them, and we support them.
Lord Grantchester (Lab)
I thank the Minister for his introduction to the regulations, but I admit to being slightly thrown by how I understood them to work through to consumers. Let us hope that there are easy explanations.
As the Minister said, the aim is to limit the negative short-term impact on electricity suppliers of an unexpected increase in costs of the contracts for difference scheme due to the pandemic. The CfD scheme is the main mechanism for supporting new renewable electricity generation projects in the UK and, in outline, the government-owned Low Carbon Contracts Company, or LCCC, manages those generating contracts, collecting payments for generation from electricity suppliers, which pass on those costs to customers in their bills. As the Minister explained, there has been a shortfall in funds required to pay the generators in the second quarter of 2020 following a sharp fall in the demand for electricity ensuring a low wholesale price of electricity, leading to higher payments to generators as they have to be paid the difference between the wholesale price and the strike price agreed necessary to bring forward renewable generation. The Government have brought forward these regulations to assist with the consequences —for example, by extending a one-off loan to the LCCC to enable payments to generators without increasing the financial burden on suppliers and therefore consumers. I understand the time-sensitive nature of the regulations being approved so that they can come into force before the quarter reconciliation date of 9 July. I also understand that they will not impose burdens any more onerous than before or require different behaviours without sufficient time for reorganisations.
Regarding the consultations on the regulations, due to the urgency, I understand that a longer period than the one-month consultation undertaken was not practicable, yet the engagement seems to have been widespread and productive, resulting in the payback period being put back a full 12 months to avoid spikes in consumer prices during winter, and the sensible determination of the split between suppliers in accordance with their share of the market at that time, rather than at the time of the loan, which is to be made to the total cost of the LCCC irrespective of present market shares.
All that is clear and sensible. However, I have one or two anxieties on which it would be useful to have clarity from the Minister. The regulations are made for quarter two, from April to June. These measures may well need to be used again without recourse to more regulations if there are “similar exceptional circumstances”. Will the Minister confirm that the regulations will not be used for circumstances other than those due to the coronavirus pandemic? What similar exceptional circumstances might he envisage in the future? Temporary volatility of prices or seasonal demand fluctuations should be excluded, I would have thought, but would he care to determine any specific margin?
Furthermore, this pandemic may well continue and we are now into July. Will the Minister explain to the House how the effects of the pandemic are continuing to affect the market? What is the size of the loan that the Government are giving to the LCCC and therefore the size of the overhang in the market that will need to be reconciled in 12 months’ time? I believe the Minister mentioned the sum of £121 million in his introduction. We also need to consider the implications of the price cap legislation passed last year under the stewardship of Claire Perry, who appreciated the effects of energy prices on consumers. Has the Minister’s department had discussions with Ofgem regarding how these increased costs will be reflected in its future determination of whether the prices cap will continue into next year or not? It is important to get a general understanding of the expected effects and outcomes at this stage.
Under the Energy Act 2013, which governs this instrument, the Government sought to distance the Treasury from the implications of a support system for renewable generation. It is now back in the spotlight. What are the terms of the loan to the LCCC and how do this Government view this breach? The Minister may well reply that it is a temporary measure, but, as I have just said, it may not be a one-off for only one quarter. It would be helpful to understand the full circumstances of the instrument in that respect. Has the Treasury published any guidelines and made them publicly available?
No understanding of the impact has been undertaken, in the expectation that it will be positive and welcomed, at present. But it may not turn out that way in the long run, when the time comes for the sums to be passed back to consumers. On the assumption that it is only a one-off, one-quarter situation, can the Minister say what added rise in consumer bills due to this pandemic easement will come about in 2021? That the answer will be known now means that suppliers might begin to pass the cost on to consumers well in advance of these provisions, and thereby negate the main object of the loan to the LCCC. Perhaps the Minister can require Ofgem to report on this situation, so that the full fall in wholesale prices is not passed back to consumers, which is extremely worrying for many people.
Lord Callanan
I thank noble Lords for their valuable contributions to this debate. As so often, they have strayed far and wide on the general subject of renewable energy and government support, as well as addressing the individual points made in this particular instrument. Nevertheless, in an effort to be as helpful to the House as possible, I will address most, if not all, of the points that noble Lords have raised.
Coronavirus is the biggest challenge that the UK has faced in decades. During this turbulent time, the Prime Minister has said that we will take every step that we can to ensure businesses are protected and the economy remains strong. The Government have introduced an exceptional package of financial support for households and businesses to help them through these difficult times. This includes £330 billion-worth of loans and guarantees, tax deferrals, and a package of temporary welfare measures worth over £6.5 billion, including increases to universal credit, working tax credits and local housing allowances.
It was therefore important that the Government took action when the LCCC advised BEIS that, as a result of measures introduced to reduce the spread of coronavirus, suppliers would face a significant unexpected increase in their obligations for the second quarter of 2020. By providing the loan to the LCCC to cover the majority of these unanticipated and exceptional additional costs, and by deferring repayments by 12 months, the Government are ensuring that the impact on suppliers is minimised. It also provides them with greater confidence in the additional costs that they will face in quarter 2 of 2021, enabling them to price future tariffs with minimal cost risk. In addition to protecting suppliers at this time, it is essential that we maintain investor and generator confidence in the CfD scheme by ensuring that payments can be made to renewable generators. This will allow us to continue to deliver on our commitment to provide clean, affordable electricity for consumers.
I can tell the noble Baroness, Lady Jones, that the UK is a world leader in clean growth, with more than £94 billion having been invested in clean energy in the UK since 2010. In the first quarter of this year, the renewables share of total electricity generation was 47%, the highest quarterly value on record and exceeding the share of generation from gas. I am sure that she, as a Green, will welcome these figures. The success of the CfD scheme will be pivotal as we emerge from Covid-19 into a phase of renewed green recovery and economic growth on the path to net zero.
In response to the noble Lord, Lord Oates, I can say that, so far, the CfD scheme has awarded contracts for 16 gigawatts of new renewable energy capacity, including 13 gigawatts from offshore wind. It is also driving down the costs of renewable technologies: for example, offshore wind clearing prices have reduced by 65% since the first CfD allocation round, with projects now being delivered for as little as £39.65 per megawatt-hour of electricity generated. The Government have committed to providing up to £557 million for additional CfDs, giving the industry the certainty that it needs to invest in bringing forward new projects. On 2 March this year, the Government announced their intention to allow pot 1 technologies, including onshore wind and solar, to compete in the next CfD allocation round of 2021. This could provide even more jobs in the solar and onshore wind industries, in addition to the 12,100 already supported, and power millions more homes with clean energy by the end of the decade.
I will move on to some of the specific points raised in the debate. The noble Baroness, Lady Bowles, asked whether Ofgem would take the increased obligation into account when settling the price cap in August. Ofgem has the powers, timing and information necessary to ensure that the impacts of the changes to the supplier obligation provided for in this SI can be reflected in the price cap.
The noble Lords, Lord Grantchester and Lord Oates, and the noble Baronesses, Lady Bowles and Lady Jones, raised the impact on bills. The increase in suppliers’ obligations will be very small; we estimate that it will correspond to approximately 0.1% of a typical domestic annual bill. The precise amount will vary, depending on how much of the loan is used by the LCCC and on the evolution of bills over time.
The noble Baroness, Lady Jones, also renewed our long-standing debate about where we should fund the various schemes from: should it be from general taxation or from levies on bills? She knows my position on this, and I am sure we will continue to have that debate going forward.
The noble Baroness, Lady Bowles, and my noble friend Lord Naseby asked about the responses to the consultation. These have not been published, but the organisations that responded are listed in the Government’s response, and individual responses can be viewed on request. I can tell the House that the measures were broadly welcomed by both electricity suppliers and trade associations.
The noble Lords, Lord Foulkes, Lord German, Lord Kirkhope and Lord Grantchester, asked what similar exceptional circumstances would require these regulations to be used again. Obviously, by the very nature of exceptional circumstances, it is difficult for me to be precise—nobody could have predicted coronavirus —but this intervention can be used again in future if the effects of Covid-19 last longer than anticipated, or in the event of a similar national emergency, whatever that may be, and this will be decided by the Secretary of State on a case-by-case basis. I hesitate to say it, but perhaps it is a case of the noble Lords having to trust the Government on this one. But I can make the general point that we are committed to upholding the self-financing nature of levies in the energy system, and we will not intervene to alleviate normal fluctuations and variances in the LCCC’s forecasts.
My noble friend Lady McIntosh asked how the loan is being financed. It is being financed in a loan agreement between the LCCC and the Secretary of State, and it has been drawn in accordance with government accounting rules and is non-budget. However, as I said at the start, that is not actually the subject of this instrument.
The noble Lords, Lord Kirkhope and Lord Grantchester, asked whether we could be confident that it would be repaid in full by quarter 2 of 2021. We are confident that it will be repaid in full. If suppliers do not pay their obligations, the LCCC has enforcement powers to ensure that they pay. If suppliers go out of business and do not have the collateral available to pay the obligation, the LCCC can mutualise losses across remaining suppliers to repay the loan in full to my department.
I want to just correct slightly the figures quoted by the noble Lord, Lord Grantchester. I think we said that the shortfall in the LCCC was up to £121 million, but the loan provided by BEIS to alleviate that is up to £100 million; the LCCC will be financing the rest of the amount itself.
My noble friend Lord Naseby asked me about Northern Ireland, which is not currently covered by the CfD scheme. That was the choice it made; it is open for Northern Ireland to join the scheme in future if it wishes.
The noble Lord, Lord German, talked about Ofgem’s targeted charging review. Network charging is for Ofgem itself to determine as an independent regulator.
The noble Baroness, Lady Sheehan, asked about the Committee on Climate Change report. We will formally respond to that later this year, but the PM has set up a Cabinet committee focusing on climate change.
My noble friend Lord Holmes talked about Hinkley Point C, which is totally unrelated to this debate. Nevertheless, we remain committed to Hinkley Point C as the first new nuclear power station in a generation. We believe that we negotiated a competitive deal which ensures that we will pay for any construction overruns until the station starts generating.
I am running quickly out of time. The noble Lord, Lord Oates, talked about the potential impact on consumers. We said that it would probably be 0.1%, but of course it will depend on aggregate demand.
The noble Lord, Lord Grantchester, talked about the size of the loan; I have dealt with that. I have also dealt with the issue about exceptional circumstances.
In conclusion, the technical amendments to the supplier obligation mechanism in this SI, combined with the provision by government of a one-off loan, are intended to ease the burden on licensed electricity suppliers at a time of great financial stress due to Covid-19. I commend these draft regulations to the House and apologise if I have not dealt with any individual questions from noble Lords.