Electricity Capacity (Amendment etc.) (Coronavirus) Regulations 2020
(Limited Text - Ministerial Extracts only)
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Lord Callanan
That the draft Regulations laid before the House on 4 June be approved.
Relevant document: 17th 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, before outlining the provisions made by this draft instrument, I will briefly provide some context for the benefit of noble Lords.
The capacity market is at the heart of the Government’s strategy for maintaining security of electricity supplies in Great Britain. It secures the capacity needed to meet future peak electricity demand under a range of scenarios through competitive, technology-neutral auctions normally held four years and one year ahead of the relevant delivery year. Those who win capacity agreements —known as capacity providers—commit to providing capacity during periods of system stress in exchange for receiving capacity payments. Capacity payments are funded by electricity suppliers, which recover this cost from consumers.
This draft instrument, together with capacity market rule changes, which have recently been laid, will ensure that the capacity market remains compliant with its state aid approval by giving effect to government commitments recorded in the state aid approval decision. It will also make temporary modifications to support capacity providers in the light of the effects of coronavirus.
I will now briefly outline the context of the capacity market’s state aid approval, before detailing the changes proposed in this SI. The Commission’s state aid approval of the capacity market in 2014 was annulled in November 2018 by a judgment of the General Court of the Court of Justice of the European Union. This introduced a standstill of normal operations of the capacity market until October 2019, when the European Commission completed its reinvestigation of the capacity market and granted state aid approval.
The Commission’s state aid approval in October 2019 recorded government commitments to make technical changes to the capacity market’s design to reflect recent market and regulatory developments, including reforms that my department had already identified through the statutory five-year review of the capacity market conducted in July 2019. Specifically, these draft regulations will reduce the minimum size of capacity which is permitted to compete in the capacity market from 2 megawatts to 1 megawatt. This aligns the capacity market with other domestic energy markets, making it easier for smaller providers, such as demand side response operators, to participate.
This draft instrument will also introduce the arrangements necessary to enable demand side response—DSR— operators, which provide capacity by reducing the import of electricity from the electricity grid, to compete for multiyear agreements if they can meet the relevant capital expenditure thresholds. This will bring arrangements for demand side response operators in line with generation and might encourage greater DSR participation in the capacity market.
The regulations seek to provide a legislative underpinning of the UK’s long-standing commitment to procure at least half of the capacity set aside for the one year ahead of delivery year auction. This is set aside when the target capacity for the auction four years ahead of delivery is set. This change will help provide some certainty around auction volumes and will assist market participants, particularly DSR operators.
Finally, the draft instrument seeks to revoke an exclusion in place since 2014 that prevents a small number of holders of long-term contracts for the provision of an electricity market balancing service—the short-term operating reserve, or STOR—competing in the capacity market. In 2014, STOR contracts were expected to pay out very high revenues, and, to prevent windfall profits, holders of these contracts were therefore excluded. However, since then the energy landscape has changed significantly and revenues from STOR contracts have been much lower than originally anticipated. Therefore, it is no longer appropriate to maintain this exclusion.
I turn to the temporary modifications that this draft instrument seeks to make in recognition of the fact that coronavirus has impacted the ability of capacity providers to meet some of their obligations under the capacity market. The approach that we are taking of making temporary easements is similar to that adopted to support capacity providers during the capacity market’s standstill period last year. This draft SI will support modifications to the capacity market rules to allow a capacity provider which is late in demonstrating that it is ready to deliver capacity in this current capacity market delivery year to access capacity payments that have been suspended if the requirements are met by a later, specified date.
As the disruptive effects of coronavirus might lead to more capacity providers facing termination of their agreements, the regulations will increase the time for capacity providers to issue appeal notices to terminate their agreements to the Secretary of State. It also seeks to provide the Secretary of State with greater discretion when considering appeals: either extending the time for capacity providers to comply with requirements to avoid termination or directing that agreements should be terminated, without a fee, on the grounds that non-compliance was due to exceptional circumstances arising from the effects of coronavirus. That will reduce the risk of terminating capacity agreements where this would have an overall detrimental impact on security of supply.
In conclusion, this draft instrument will ensure continued security of electricity supply by ensuring that the capacity market continues to comply with its state aid approval. It will also reduce the burdens on capacity providers during the coronavirus pandemic. Finally, these changes will maintain confidence in the market. I commend these draft regulations to the House.
Lord Callanan
I thank noble Lords once again for their valuable contributions to this debate. The capacity market has played, and continues to play, a key role in maintaining secure electricity supplies for consumers and businesses in Great Britain. The market is tried and tested, and it is working. It has secured the capacity we need to cope with unexpected peaks in demand until 2024 at prices far lower than expected.
As older, dirtier generating capacity has retired—we are now down to our last coal plant in the capacity market—over 10 gigawatts of new-build capacity has come forward to replace it, including renewables and smart technologies, in response to the noble Lord, Lord Oates, such as battery storage and demand-side response. I will take this opportunity to reply to the question from the noble Lord, Lord Mann, on coal. We remain committed to switching away from coal. It is our ambition to bring forward the date by which unabated coal must be phased out, which is currently 1 October 2024. The closure date for specific stations is a commercial matter, but we hope that they might even close ahead of 2024. We are committed to this switch. We have made changes to the capacity market rules to apply carbon emission limits to existing plant, which should prevent coal securing capacity agreements from 1 October 2024, in line with our ambition. As I said, we hope that they will close earlier.
It is essential that the design of the capacity market adapts to an ever-changing world if it is to continue delivering on its objectives of ensuring security of supply at least cost and supporting our decarbonisation plans. Recent changes include the introduction of carbon emission limits into the scheme, which will prevent the most carbon-intensive capacity competing in future auctions. The list of renewable technologies that can compete in the capacity market has also been expanded to include onshore and offshore wind and solar photovoltaic. These changes will directly support our wider efforts to decarbonise the energy sector.
The proposed changes contained in the instrument continue this trend of continual evolution and improvement of the capacity market. By ensuring that the capacity market continues to comply with its state aid approval, the instrument will ensure the continued operation of the scheme and engender confidence among market participants. Many of the changes contained in the instrument, such as the reduction in the minimum capacity threshold from two megawatts to one megawatt and enabling demand-side response to access multiyear capacity agreements, are in line with the reforms identified in my department’s five-year review of the capacity market, published in July 2019, and aimed at better facilitating the participation of demand-side responses in future auctions.
That brings me to the various questions asked by noble Lords, in particular the Liberal Democrats, who never fail to disappoint in these matters. Actually, though, they posed exactly the question I asked when these regulations were first put in front of me: why are we complying with these commitments if the UK is leaving the European Union? It is indeed a very good question. The noble Lords, Lord Purvis, Lord Oates and Lord Mann, and my noble friends Lady McIntosh and Lord Moynihan all raised similar points.
These commitments are consistent with the domestic policy for the capacity market set out in our five-year review, which my department published in July 2019—in other words, we would have moved to implement them anyway, regardless of our obligations as a member state. We are currently in the transition period as set out in the withdrawal agreement, with which we are all so familiar, so European law continues to apply to the UK until the end of the year. We will then be able to implement our own state aid regime. We are working at pace to develop this policy and will share more details on domestic subsidy control with key stakeholders in due course.
We believe strongly that we must retain our sovereign right when deciding how and when to spend taxpayers’ money to intervene in markets to support business, workers and consumers. The UK’s subsidy control regime will not involve any alignment with EU rules. I realise that is a challenge for the Liberal Democrats, but they will be able to continue to contribute to these debates. We will have our own debates in our own Parliament about what our domestic state aid regime should be, which I think is a good thing.
The noble Lord, Lord Campbell-Savours, and the noble Baroness, Lady Sheehan, talked about interconnectors. We continue to believe that interconnectors make a valuable contribution to the UK’s security of supply, while increasing competition and diversifying our electricity mix. Many of our interconnected markets have a high penetration of renewables and low-carbon electricity; much of the electricity imported into the UK through interconnectors from France is zero-carbon nuclear-generated electricity.
My noble friend Lord Moynihan asked why the state aid commitments are not in the regulations. We have laid out the capacity market rules, which complete the implementation of the majority of the commitments, including the introduction of carbon emissions limits. The final commitment on enabling foreign participation does not need to be introduced now. We will consider further arrangements and consult in due course.
The noble Lords, Lord Purvis and Lord Oates, continue their obsession with the European Union—I am joking, obviously—and ask about participation in the internal energy market. We will not be seeking alignment with EU law. The UK will make independent decisions on our energy policies, and will be leaving the internal energy markets. I am sure they are thrilled to hear that.
The noble Lord, Lord Campbell-Savours, asked why we are not doing more to support pumped hydro. In 2019 we published our five-year review of the capacity market, which noted that some new-build pumped hydropower storage projects have very long construction times that may make participation in the capacity market difficult. Therefore, we are exploring options for addressing this issue. I agree with my noble friend Lord Moynihan that natural gas should continue to play a part in the overall energy mix.
Many noble Lords raised important points about the energy policy in general; they will be aware that we are currently working on an energy White Paper, which will be the best forum for considering the range of challenges faced by the electricity sector as we move towards delivering net zero. This White Paper remains a priority for the Government and will be published soon.
My noble friend Lady McIntosh asked about long-term store contract holders who might not being able to compete. We believe that there is no longer a risk of windfall profits for providers holding both capacity markets agreements and long-term store contracts, and therefore no reason to continue excluding them from the market. Allowing them to be included could increase competition.
The noble Baroness, Lady Sheehan, and the noble Lord, Lord Oates, asked about energy efficiency and supporting continued energy efficiency in homes. We are publishing a home heat review later this year. We are committed to our clean growth strategy aspiration that as many homes be upgraded to energy performance certificate band C by 2035 as is practical, cost-effective and affordable. Furthermore, this draft instrument ensures that the capacity market adapts quickly to address the effects of coronavirus on existing capacity providers by proposing targeted and temporary measures where coronavirus has impacted the ability of capacity providers to meet some of their obligations under the capacity market.
In summary, this draft instrument is necessary to ensure the continued security of electricity supply, by ensuring that the capacity market continues to comply with state aid approval, and by supporting capacity providers during the coronavirus pandemic. I commend it to the House.