Electricity Capacity (Amendment) Regulations 2021
(Limited Text - Ministerial Extracts only)
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Lord Callanan
That the Grand Committee do consider the Electricity Capacity (Amendment) Regulations 2021.
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 provide the Committee with a brief reminder of what the capacity market is and does. The 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 electricity consumers.
Since its introduction in 2014, the capacity market has succeeded in ensuring secure electricity supplies at a low cost to consumers. Furthermore, it has a proven track record of facilitating investment in new-build capacity. To date, the capacity market has supported investment in over 13 gigawatts of new capacity, including smart technologies such as battery storage and demand-side response.
The most recent auctions, which took place in March this year, were successful in securing all the capacity needed to meet peak demand through to 2024-25. This year, for the first time, as a result of the carbon emissions limit introduced to the capacity market in 2019, coal-fired plant did not participate in the four-year-ahead capacity market auction, nor will it be able to participate in any future four-year-ahead auctions. This is just one of the steps that we are taking to help to align the capacity market with our broader decarbonisation objectives on the road to net zero emissions by 2050.
In 2019 we published our five-year review of the capacity market. In it, we found that the capacity market was fundamentally meeting its objectives. However, we identified a number of areas that could be improved through incremental change, many of which have since been implemented through subsequent amendments. That has ensured that the capacity market remains the best way to ensure security of supply at the lowest cost to the consumer. Most years, we also make adjustments to the legislation based on our day-to-day experiences of operating the capacity market in order to ensure that it continues to function effectively.
In that context, the draft instrument before us today makes three technical improvements that will address issues in the functioning of the capacity market that we have encountered over the past year. Specifically, a number of capacity providers had agreements terminated last year but were unable to transfer their obligations to other providers through the capacity market’s secondary trading market. To reduce risks to security of supply, the draft instrument aims to remove the barriers restricting the trade of obligations following termination. This will improve the flexibility of the secondary trading regime and make it easier to replace capacity that closes prematurely and at short notice.
The past year also saw a large number of appeals by prospective capacity providers whose applications to participate in the capacity market had been rejected, often for minor administrative errors. The draft instrument aims to make clearer that the capacity market delivery body—the organisation that delivers the capacity market—can accept information that corrects such errors when determining these appeals. That will help to reduce the risk of applicants being rejected due to minor or administrative errors that could otherwise have a detrimental impact on the level of competition in the auction.
Finally, the draft instrument aims to allow capacity providers who have had the duration of their agreements reduced as a sanction for non-compliance with certain requirements the option to appeal a decision to the Secretary of State. We acknowledge that a reduction in agreement length could have significant impacts on the viability of projects, and we therefore believe that it is right that capacity providers in such a situation should be given the right to appeal.
To complement this draft instrument, we have put forward an amendment to the capacity market rules, which was laid before the House on 5 July 2021. The amendment rules make a number of additional technical improvements. Notably, they update the carbon emissions limits to introduce new formulae that allow for a better reflection of the actual carbon emissions of certain generators, such as those equipped with post-combustion carbon-capture technology.
The rules amendments also extend some of the coronavirus easements which were introduced and debated in this House last year, in recognition that coronavirus has impacted the ability of capacity providers to meet some of their obligations under the capacity market. The extension of some of these arrangements will help providers in coping with the continuing impacts of the pandemic.
In conclusion, this draft instrument introduces a number of technical provisions which are intended to address issues that we have identified over the past year through our experience of managing the annual delivery cycle of the capacity market. Therefore, these technical provisions are necessary to enable the continued efficient operation of the capacity market in delivering on its objectives. I therefore commend this draft instrument to the House.
The Deputy Chairman of Committees (Baroness Finlay of Llandaff) (CB)
I call the noble Lord, Lord Bradshaw. Lord Bradshaw? We seem to have lost the noble Lord. We will therefore move to the next speaker and then return to the noble Lord, Lord Bradshaw. I call the noble Lord, Lord Bhatia.
Lord Callanan (Con)
Perhaps I could say to the noble Lord, Lord Bradshaw, who has obviously had a problem coming in, that, if he has any specific questions about these regulations and wants to write to me directly, I will be happy to provide him with answers to any concerns he might have. I thank other noble Lords for their valuable contributions to this debate.
The Government continue to believe that the capacity market is the right mechanism for delivering security of supply at the lowest cost to consumers, and we continue to take steps to ensure its ongoing efficient and effective operation. The capacity market is tried and tested. The fact that it has supported investment in over 13 gigawatts of new-build generation and interconnectors since its introduction demonstrates that it can bring forward the capacity needed to meet future peak demand and replace older capacity as it retires.
Furthermore, the introduction of carbon emissions limits and the fact that coal-fired generation was unable to participate in the recent four-year-ahead auction shows that we are taking steps to ensure that the market is in alignment with our decarbonisation objectives. We acknowledge that further work will be required to ensure that the capacity market is aligned with our net-zero target and we intend to issue a call for evidence that will engage the industry on potential actions for delivering this objective. The Government are committed to ensuring that the right policy tools are in place for delivering a secure and affordable electricity system as we transition to net zero. This includes regularly assessing the performance of the capacity market.
In line with our statutory obligations under the electricity capacity regulations 2014, we have recently begun work on the next five-year review of the capacity market, which will be published in 2024. This in-depth review will scrutinise the objectives and design of the capacity market. It will take account of how the energy landscape has changed since the market was first introduced, in particular our net-zero ambition and changes to wider energy policy. We will also identify and implement changes to the design of the market to ensure that it remains able to deliver security of supply.
Returning to the draft instrument before the Committee today, the changes respond to three technical issues that we have encountered over the past year and will increase flexibility for both market participants and the capacity market delivery body. Ultimately, it will help ensure that the capacity market continues to deliver on its objective of guaranteeing secure electricity supplies at the lowest possible cost to consumers.
In response to the noble Lord, Lord Bhatia, and his brief intervention asking whether the market would create more CO2 emissions, I can tell the noble Lord that the capacity market helps to maintain public support for net zero by ensuring secure electricity supplies as we decarbonise the power sector. Furthermore, as I said earlier, we have introduced emissions limits to the capacity market to help align it with broader decarbonisation objectives.
The noble Baroness, Lady Bowles, was concerned about the low number of responses to the consultation. We held a series of stakeholder workshops during the consultation to gather additional views, including an open invite session which had around 100 different attendees. The noble Baroness also asked what the rationale was for secondary trading. This has been an important part of the capacity market since it was implemented in 2014. It supports the security of electricity supplies by enabling the transfer of agreements which cannot be fulfilled. In addition, the noble Baroness wanted assurances that secondary-trading agreements do not give the transferee a free pass on obligations and safeguards. They do not; capacity providers are subject to the same obligations whether or not they secured their agreements through secondary trading.
The noble Lord, Lord Grantchester, asked whether the market was simply providing payments for capacity which is already there. Existing plants can be the most cost-effective and efficient way of delivering reliable capacity. Including existing capacity in the capacity market auction drives competition and thus reduces the total cost of the scheme for consumers. The noble Lord went on to ask whether alternatives to the capacity market would be considered in the 10-year review. The answer is yes; the review will consider the case for government intervention in terms of security of supply, which scheme is best for this and what the objectives of such a scheme should be.
I think that deals with all the questions I was asked during the debate. So, with that, I commend these draft regulations to the Committee.