Electricity Supplier Payments (Amendment) Regulations 2021
(Limited Text - Ministerial Extracts only)
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Lord Callanan
That the draft Regulations laid before the House on 21 January be approved.
Relevant document: 44th 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, this statutory instrument amends regulations concerning the levies that fund the operational costs budgets for the Low Carbon Contracts Company and the Electricity Settlements Company. LCCC administers the contracts for difference scheme on behalf of the Government, and ESC administers the capacity market scheme. Those schemes are designed to incentivise the significant investment required in our electricity infrastructure, keep costs affordable for consumers and help to meet our net-zero target, while keeping our energy supply secure.
Contracts for difference, or CfDs, provide long-term price stabilisation to low-carbon generators, allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers. The capacity market ensures security of electricity supply by providing to all forms of capacity the right incentives to be on the system and to deliver capacity when needed by increasing generation or by turning down their electricity demand in return for guaranteed payments. In both schemes, participants bid for support via a competitive auction, which ensures that costs to consumers are minimised.
The next CfD auction—the fourth to date—planned to open in late 2021, will be available to both established technologies, such as solar PV and onshore wind, as well as less-established technologies, such as floating offshore wind. As the Prime Minister announced in October, we seek to secure up to 12 gigawatts of renewable electricity capacity in this round—double what was secured in the last round in 2019. It will thus allow a broad range of renewable technologies to come forward, while delivering the best possible deal for bill payers.
The capacity market is tried and tested, and is the most cost-effective way of ensuring that we have the electricity capacity we need now and in the future. It facilitates investment in existing capacity to remain in the market and drives innovation in financing new capacity to be built. The capacity auctions held to date have secured the capacity we need to meet the forecast peak demand out to 2023-24. The next auctions, scheduled for March 2021, will secure most of the capacity we need out to 2024-25.
LCCC and ESC play a critical role in delivering the CfD and capacity market schemes. LCCC enters into and manages CfDs with low-carbon generators, collecting the supplier obligation levy from electricity suppliers, which it uses to make payments to generators under the CfD. ESC is responsible for all financial transactions relating to the capacity market, including collecting the supplier charge from electricity suppliers, which it uses to make capacity payments to capacity providers, but also managing supplier credit cover and capacity providers’ auction credit cover. This statutory instrument sets a revised operational cost levy for the LCCC and a revised settlement costs levy for the ESC, which the companies collect from suppliers to fund their day-to-day operations in administering the CfD and capacity market schemes.
It is important that LCCC and ESC are sufficiently funded to perform their roles effectively, given their critical role in administering these schemes. However, the Government are clear that both companies must deliver value for money and, with that in mind, we have closely scrutinised their operational costs budgets to ensure that they reflect the operational requirements and objectives for the companies. Savings have been identified in a number of areas. For example, £184,000 has been saved by reducing the number of desks that LCCC will have at its new office, reflecting changing work patterns.
LCCC and ESC are themselves very mindful of the need to deliver value for money, as their guiding principle is to maintain investor confidence in the CfD and capacity market schemes while minimising costs to consumers. They have taken a number of actions to date to reduce costs, such as bringing expertise in-house rather than relying on more expensive outside consultants. Because of actions such as those, CfD operational costs are falling both per contract and by overall generation capacity, despite the growing size of the CfD portfolio. It is a similar narrative for ESC. The company currently manages 54.4 gigawatts of capacity agreements with 513 capacity providers under the capacity market. This is expected to increase to 55.16 gigawatts of capacity and 546 capacity providers in 2021-22. Despite this increase, operational costs are expected to be marginally lower in 2021-22 compared to 2020-21.
The operational costs budgets for both companies were subject to consultation, which gave stakeholders the opportunity to scrutinise and test the key assumptions in the budgets and, importantly, to ensure that they represent value for money. Subsequently, the budgets remain unchanged save for one amendment, which I will briefly summarise. The consultation was published before the outcome of the 2020 spending review was known. The review announced a pause in public sector pay rises for the majority of the workforce. Taking into account this outcome of the review and the wider economic landscape, LCCC’s remuneration committee decided to agree a pay pause for its staff for 2021-22. Consequently, an allowance contained within LCCC’s operational costs budget for pay rises that was included in the consultation has now been removed.
In conclusion, taking into account the removal of that allowance, the proposed operational costs budget for LCCC in 2021-22 is £20.736 million and £7.472 million for ESC. The amendments revise the levies currently in place to enable the companies to collect enough revenue to fund these budgets. Any levy collected that is not spent will be returned to suppliers at the end of the financial year in accordance with the regulations. Subject to the will of Parliament, the settlement cost levy for ESC is due to come into force on the day after the day on which these regulations are made and the operational costs levy for LCCC by 1 April 2021. Finally, I assure noble Lords that the Government will continue to evaluate and monitor the costs of both companies, ensuring that costs to consumers are appropriately minimised. I therefore commend these draft regulations to the House.
Lord Callanan (Con)
First, I thank all noble Lords who contributed to the debate. I am delighted that the noble Lord, Lord Grantchester, is still following this brief from 2013. He showed that in the excellent contribution he made and in the knowledge he portrayed in his questions. I hope that my answers can do his memorable state justice.
As I set out in my opening speech, the companies and the Government have taken steps to ensure the proposed operational cost budgets allow the companies to perform their crucial roles effectively while representing value for money for consumers. I believe that these twin aims will be achieved if this draft regulation is approved. However, the noble Lord, Lord Grantchester, did make an important point, and I will not pretend the 19% increase in the LCCC’s budget is not significant; it clearly is. I do believe, though, that this is a justifiable increase, and I will set out, for the benefit of the House, why that is.
The increase in the budget reflects a number of factors, in particular the company’s important role in helping to meet our legally binding net-zero target while minimising costs for consumers. The CfD scheme has proven that it can deliver large-scale, low-carbon generation while driving down costs. The cost of offshore wind, for example, as noble Lords have pointed out, fell by two-thirds between the first CfD auction, held in 2015, and the third auction, held in 2019. This proposed budget will allow the LCCC to play its part in delivering the next CfD auction, which will bring forward more low-carbon electricity while further pushing down technology costs and, in doing so, bring us closer to meeting our net-zero target.
I should also point out to the House that the LCCC is facing a number of costs beyond its control in 2021-22, such as the increased uncertainty in energy demand arising out of Covid-19. A number of noble Lords have referred to that. This has necessitated an increase in its existing contingency for lower-than-expected electricity demand—and other world events, such as Covid-19, have also pushed up insurance premiums for companies.
As the CfD portfolio expands, that increases the likelihood of a legal dispute arising between the LCCC and a generator. Consequently, the proposed budget increases the existing contingency for such disputes from £2.1 million to £3 million. The level of this increase has been informed by the costs of past and present legal disputes. It is important to consider that these two contingencies—one focused on electricity demand and the other on legal disputes—may not be needed. If that is the case, the funds raised from the levy to cover these costs will be returned to electricity suppliers. Excluding these contingencies, the overall increase in the budget equates to approximately 9%.
Noble Lords have also touched on what this budget increase means for electricity consumers. That is indeed important. I agree that we have to scrutinise every penny that goes on to consumer bills, but I also believe that in this case there has been sufficient scrutiny. Given the important role both companies play in our electricity system, a bill impact equating to less than 0.1% for the average consumer is proportionate and justifiable.
Virtually everybody who spoke—certainly the noble Baronesses, Lady Bowles and Lady Ritchie, my noble friend Lord Bourne, and the noble Lords, Lord Oates and Lord Grantchester—raised the important question of why we were setting the levy for the next financial year only, when we set the last set of levies, in 2018, for three financial years. We are amending the levy rates for 2021-22 only, instead of for the next three years, because of the impact of Covid-19 on electricity demand forecasting. Electricity demand has reduced significantly during the pandemic. Increased uncertainty with regard to a number of factors used to forecast electricity demand makes it extremely difficult to do so beyond the 2021-22 financial year. LCCC’s operational cost levy rate is calculated by dividing its annual budget by the total forecast electricity demand for the corresponding financial year. If demand is lower than forecast, LCCC will not be able to raise enough income from the levy to meet its budgeted costs. Therefore, a robust forecast of electricity demand is needed for each financial year to set the levy accurately.
My noble friend Lady McIntosh asked whether we needed an impact assessment. As she correctly said, an impact assessment has not been prepared for this instrument because of the relatively low levy impact on electricity consumers’ bills.
My noble friends Lord Bourne and Lady McIntosh, and the noble Baronesses, Lady Ritchie and Lady Bowles, asked about the impact of Covid on electricity demand and household bills. I will write to noble Lords on that, setting out what information we currently have on the deployment.
The noble Baroness, Lady Bowles, and my noble friend Lord Bourne asked about our ability to forecast electricity demand accurately and whether we would therefore set the levy for more than just one financial year. In the next round, we intend to return to the status of setting the levy for three financial years.
My noble friend Lady McIntosh asked about the consultation, on which I have responded. The noble Baroness, Lady Bowles, asked about the contingency for reduced electricity demand and why it has increased. The contingency in the proposed 2021-22 budget has increased by £0.75 million compared to the 2020-21 budget because of the impact of Covid-19. The pandemic has resulted in a reduction in electricity demand. LCCC’s forecasts predict that reduced demand will continue into 2021-22, but the landscape is extremely uncertain, as the Government may need to take further actions that impact on demand; for example, the emergence of new variants may require them to take extra measures in the short term to counter this threat, although we are confident that vaccines can be adapted to mitigate it in the medium term. To reflect this increased uncertainty and to mitigate the risk of LCCC having to rely on BEIS for cashflow, the electricity demand contingency has been increased by £0.75 million, bringing it to £1.5 million overall in 2021-22. As I said earlier, if the contingency is not used, it will be returned to the companies.
My noble friend Lady McIntosh and the noble Lords, Lord Oates and Lord Grantchester, asked when the five-year review of the energy market would be laid before Parliament. I am deeply conscious of the fact that this review is now overdue. We expect it to be laid in Parliament shortly.
The noble Lord, Lord Oates, asked about the operational budget being funded via a levy on electricity consumers rather than general taxation, a point raised many times in this House. The costs of decarbonisation should be shared fairly among consumers. Levying costs for supporting the deployment of clean electricity in this way enables electricity consumers to pay towards the costs associated with increasing the proportion of renewable electricity supply, from which they subsequently benefit. The contracts for difference scheme was designed to deliver value for money for consumers and it is doing so, with costs falling in every auction held to date. The CfD is entering a new phase in which renewable projects could even reduce consumer bills, as they are now much cheaper than alternative forms of generation. The LCCC must therefore be adequately funded if it is to perform its role in delivering the CfD effectively.
A number of other, more general questions were asked about energy policy and decarbonisation. If noble Lords will forgive me, I will not take up the time on these regulations by answering those, but I will write to them separately. I think that I have addressed all the points raised during the debate. I therefore take pleasure in commending the regulations to the House.