Draft Electricity Supplier Payments (Amendment) Regulations 2022
(2 years, 1 month ago)
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The Minister for Energy, Clean Growth and Climate Change (Greg Hands)
I beg to move,
That the Committee has considered the draft Electricity Supplier Payments (Amendment) Regulations 2022.
The draft statutory instrument, which was laid before the House on 7 February 2022, amends regulations concerning the levies used to fund the operational costs budgets of the Low Carbon Contracts Company, the LCCC, and the Electricity Settlements Company, the ESC— two separate companies, all within this one SI.
The LCCC administers the contracts for difference scheme on behalf of the Government, under the Energy Act 2013. Under the same Act, it is anticipated that the LCCC will also administer the dispatchable power agreement and support the development of a new scheme for bioenergy with carbon capture and storage within the next three years. The ESC, the other company covered by the draft SI, administers the capacity market scheme. The schemes will incentivise the significant investment required in our electricity infrastructure, keep costs affordable for consumers and help to deliver our net zero strategy, 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 current CfD auction, the fourth to date, opened in December, and we are seeking to secure more than in all previous auctions. It will allow a broad range of renewable technologies to come forward, while delivering the best for bill payers. I remind the Committee that, for the first time, we also introduced a £20 million dedicated pot for tidal.
Only projects located in Great Britain have been awarded CfDs to date. However, the Department for Business, Energy and Industrial Strategy and the Northern Ireland Department for the Economy are considering whether to extend the current GB-only CfD scheme to Northern Ireland. Funds have therefore been included in the budgets to enable LCCC to undertake some preparatory work in case a final decision is made to enable Northern Ireland to join the scheme.
Turning to the ESC, the capacity market is tried and tested. It is the most cost-effective way of ensuring that we have the electricity capacity that we need now and in the future. The capacity market provides incentives in the form of guaranteed payments to eligible capacity providers to be on the system and to deliver capacity when needed by increasing generation or by turning down their electricity demand in return for the guaranteed payments. The capacity auctions held to date have secured the capacity that we need to meet the forecast peak demand out to 2025-26. The next auction, scheduled for early 2023, will secure most of the capacity we need out to 2026-27.
In both the CfD and the capacity market schemes, participants bid for support via a competitive auction, which ensures that costs to consumers are minimised. The LCCC and ESC’s effective administration of the CfD and capacity market schemes to date has demonstrated their ability to deliver such schemes at least cost to consumers. In part for that reason, LCCC has been working with BEIS to develop new schemes to incentivise deployment of more low-carbon technologies.
For example, LCCC has supported BEIS in the development of dispatchable power agreements, or DPAs, under the Energy Act 2013. Those agreements, which are based on CfDs, have been designed to instil confidence among investors for power carbon capture and storage projects and to incentivise the availability of low-carbon, non-weather-dependent dispatchable generation capacity. The DPA will drive the private sector investment required to bring forward at least one power CCUS—carbon capture, utilisation and storage—project by the mid-2020s. LCCC is expected to be the counterparty for DPAs, and funds have been included within the budgets to support that role.
It is anticipated that LCCC will also work with BEIS to develop incentives for bioenergy with carbon capture and storage. Although that has not been confirmed, contracts for such projects could potentially be entered into following a process established under the Energy Act 2013. Were BEIS to move forward with that option, LCCC would need to undertake activity to prepare for acting as the counterparty in the next three years. Consequently, funds have also been included in the budget for that purpose.
It is important that LCCC and ESC are sufficiently funded to perform their roles effectively given their critical role in administering the schemes I have outlined. However, the Government are clear that both companies must deliver value for money. With that in mind, we have scrutinised the operational costs budgets closely to ensure that they reflect the operational requirements and objectives for the companies. LCCC and ESC are 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. It is because of such actions that CfD operational costs per contract are falling despite the growing size of the CfD portfolio.
There is a similar narrative for ESC. The company currently manages 200.8 GW of capacity agreements, with 1,335 capacity providers under the capacity market. For the delivery year 2022-23, that equates to 52.9 GW of capacity and 350 capacity providers, an increase of 78 capacity providers compared with the 2021-22 delivery year. Despite this increase, operational costs are expected to be lower in 2022-23 compared with the year before.
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 ensure that they represent value for money. The response received to the consultation noted the significant increase of budget for LCCC, but was generally supportive of the Government’s rationale for the increase. BEIS is satisfied that the operational costs budgets for LCCC and ESC should remain as consulted on; the budgets remain unchanged as a result of the consultation.
The proposed operational costs budget for LCCC is £24,210,000 in 2022-23, £26,978,000 in 2023-24, and £29,051,000 in 2024-25. For ESC, the proposed operational costs budget is £6,954,000 in 2022-23, £7,382,000 in 2023-24, and £7,734,000 in 2024-25. The regulations revise the levies currently in place to enable the companies to collect enough revenue to fund those budgets. Any levy collected that is not spent will be returned to suppliers at the end of the relevant financial year, in accordance with the regulations. Subject to the will of Parliament, the settlement costs levy for ESC is due to come into force on the day after the regulations are made, and the operational costs levy for LCCC by 1 April in each of the relevant financial years.
I assure hon. Members that the Government are also mindful of the uncertainties involved in setting a budget for the next three years, such as world events impacting energy demand and supply decisions on new schemes that have not yet been taken. Consequently, BEIS will keep the companies’ budgets under careful review throughout the budget period to ensure that costs to consumers are minimised. I commend the draft regulations to the Committee.
Dr Alan Whitehead (Southampton, Test) (Lab)
The SI is clearly not controversial, except for a number of points on which I would like to ask the Minister for clarification. The Opposition do not oppose the SI, and there will be no need for the Committee to divide today. I will restrict my remarks to questions for the Minister about the LCCC, the settlements body, the budgets, what that means for value for money, and a review of the functions of the LCCC and the settlements body. One would hope that the review of the workings of the capacity market and CfDs, which is supposed to be coming up, will include a review of a number of the issues that I will raise.
First, we have two separate bodies essentially doing the same thing. They were set up by different pieces of secondary legislation. Each body has a budget for its work, but they do the same work and even, I think, have the same address. They are essentially counterparty bodies—one for the capacity market and one for CfDs. It is beyond me why there is not one organisation with one set of costs and arrangements. I am sure the costs would be rather less than we have now. That may be something that the Government might like to include in a review of the workings of the capacity market and CfDs.
The report of that review was supposed to be with us in 2019, five years after the Energy Act 2013 was passed. It is still not here. I note that the explanatory memorandum states that
“the findings for the review are expected to be laid in Parliament shortly.”
They have not been. What is the progress of that review? When is it likely to be laid before Parliament, if it is indeed ready? There has been a two-year hiatus in getting the report organised. Why has it been so difficult to it bring forward? If there is any time for reconsideration of any aspects of the report, perhaps some of the things that I raise—particularly the companies’ status—could be included in it.
My second question relates to the capacity market settlement body and how the funds for capacity auctions are being administered. I will shed a small spotlight on the recent T-1 capacity auction. The Secretary of State—I think it was the Secretary of State, rather than the Minister who is present this afternoon—decided that the amount to be procured in that auction would be identical to the amount of pre-qualified capacity in the auction. One can see fairly clearly that that move meant that there would not be an auction in the way that auctions are normally decided, in so far as all the capacity that decided to enter the auction would get a place because there was no room for anything pre-qualified to be outside the auction.
Indeed, that is what happened, and the auction closed at a very high price of £75—a record high for a capacity auction. I suggest that that was particularly due to the Secretary of State’s declaration that the amount to be procured would be identical to that which had been pre-qualified. Indeed, the amount that was procured was actually less than the amount that was pre-qualified, and that added to the inflation of the price in the capacity auction. I would be grateful for the Minister’s explanation, because there is a much higher price for capacity being procured and therefore administered by the settlements body than would otherwise have been the case, and there is possibly also a greater administrative cost.
The inflation in the budgets for the two bodies is actually quite staggering. For example, the CfD counterparty’s operational budget will increase by 14% between ’21 and ’22, by 10.3% between ’22 and ’23, and by 7% between ’23 and ’24. That is a cumulative increase over three years of 34%. That is enormous, by anybody’s reckoning, for any Government Department or sub-department or agency. I am not convinced that the explanation put forward today—that the CfD counterparty body will have a larger number of CfDs to deal with—justifies a cumulative 34% increase in budget over that three-year period, particularly as a similar, but smaller, increase is contemplated for the capacity market settlements body at the same time.
It is a considerable increase in budget, which, by the way, lands back on customers’ bills. Hon. Members will see in the explanatory memorandum that the estimated effect on household bills will be about 50p added to each customer’s bill per year. That is set out in the explanatory memorandum as one of those “only” calculations—“it is only 50p on bills”—but that is, of course, a cumulative £1.50 on bills over the settlement period. Indeed, the Government have levied similar increases on customer bills—for example, with the green gas levy—in order to deal with arrangements for the management of the market.
We are therefore faced with a number increases that are very small individually but collectively add up to quite a bit of money on customer bills, at a time when those bills are going through the roof. We need to find every method we can to ensure that bills are cheaper. Let us be clear: these measures will add to the problem, not take away from it. Is the Minister absolutely satisfied that the increase in operational budgets is justifiable? Is there merit in reviewing it, now or in the near future, to ensure that we have got the figures right?
I would like to run a final point by the Minister. As he knows, the LCCC, as the body responsible for CfDs, has the function of collecting the money where the difference between the strike price and the reference price on the CfD is positive and giving the money back where the difference is negative. What I mean by that is where a project has a CfD at a certain price, that price would normally be above the prevailing price on the electricity market. Where the price on the electricity market goes above the strike price, which it has done more recently with a number of bodies that have CfDs, the body that has a CfD starts paying the money back to the LCCC. The estimates for this year are about £1.5 billion to be paid back over a period, which is substantially larger than the operational budgets of these bodies, as hon. Members will see.
That arrangement being in place, I would have thought that a useful way of underwriting the operational budgets of such bodies would be to take those repayments back into account as part of the operational budget arrangements for the companies, so that prior to redistributing those moneys on the way back, they could incorporate part of that payback into their operational budget, circumstances permitting. Alternatively, if they build up reserves as a result of the payback arrangements, they could use those reserves for their operational budget instead of levying a further cost on customer bills, as they are at the moment.
Those are fairly modest suggestions for the Minister. I will be grateful if he considers those points, if he thinks that they are reasonably valid. If he does not think they are, perhaps he will say so. They all have the objective of ensuring that what we have, as far as the counterparty bodies are concerned, is the most efficient way of running them; the most appropriate way of procuring the finances to make sure that they run in the best possible way; and the best possible way of organising them so that they are as lean as possible in the operation of their duties.
Greg Hands
I thank the hon. Member for Southampton, Test for living up to the name of his constituency—he set some testing questions for us. Let me deal with the five questions that he asked.
First, why are there two companies? It is worth stating that the two functions are very different: the capacity market and running the contracts for difference auctions. I am sure the hon. Gentleman is fully aware of that. The idea is also to separate out the liabilities of the two companies. During the consultation on electricity market reform, investors and other stakeholders believed that it would be better to have two legally separate companies to keep the liabilities separate. We rolled them together because, in essence, they are funded in a similar way, but they have two different functions. However, I appreciate the hon. Gentleman’s testing question about that.
The hon. Gentleman is right that the report due under the Energy Act 2013 has been delayed. That is, essentially, because of the pandemic and to ensure that it did not get in the way of the recent contracts for difference auction by taking people off that. The recent CfD auction that started in December is the largest ever—in fact, larger than the previous three auctions put together. We will publish the report in due course. I expect to see advice on it shortly.
The hon. Gentleman asked why the Secretary of State and/or I recommended increasing the amount that was bought at the recent capacity market auction. It was a prudent decision, in these times of high and volatile energy prices, to ensure that we were as covered as we could be going into next year. The Secretary of State and I very much took the same view—we always take the same view in the Government; there is never such a thing as different views—that it was a very prudent decision to be able to maximise that. The hon. Gentleman asked whether that resulted in a higher price. The answer is no. There was obviously a very high price going in to that auction, reflecting high energy prices at the moment.
Dr Whitehead
Is the Minister saying that the exact comparability of the pre-qualifying amount of capacity for the T-1 auction and the amount of capacity that the Ministers decided was the right thing, which was an increase in the recommendation, was a coincidence? Or is he saying that that was carefully designed to ensure that the capacity available and the capacity bid for was the same?
Greg Hands
I thank the hon. Gentleman for that further question. I would not say that it was a coincidence, but what we wanted to do was make sure that the British consumer had the maximum positive protection looking forward, particularly at a time of high and volatile gas and electricity prices combined with the previous parts of the auctions and the previous years rolled into that one period. For example, the previous T-4 auction meant that, overall, the ’22-23 capacity market year, which we are about to go into, is the second cheapest yet because of the cheaper prices in previous auction years. Although there was a high price paid in the T-1 auction this year, when we look at the whole period, we took advantage of lower prices to have the second cheapest delivery overall in terms of the capacity market for ’22-23.
The hon. Gentleman asked some fair questions about the budget increases. The budgets overall put less than 50p on the average electricity bill in the previous year, 2020-21. He is right that there is a significant increase; I have laid out why and shall do so again, but this is not a big part of consumers’ electricity bills.
The hon. Gentleman made the perfectly reasonable point that surely we should do everything we can to make bills cheaper, and that is exactly why the Chancellor announced on 3 February the package of measures to help households and bill payers through council tax payments and the different support funds for those who do not qualify for the council tax rebate but none the less have high energy prices.
The budget increase reflects the increase in the number of CfDs. Over this budget period, there has been a 400% increase as a result of the success of the Government’s renewables policy and of more renewable energy providers wanting to take part. That will mean a necessary increase in the number of people needed to go through all the bids in the CfD process. There are also more capacity market providers and the development of new technologies such as power CCUS. I also remind the hon. Gentleman that during the consultation, no one was against this proposal. I do not think that we received a response from him—
Dr Whitehead
I wonder whether the Minister would like to reflect on the numbers taking part in the consultation. Does he have an answer as to how many people responded to that? What conclusions does he think can be drawn from the total number of responses?
Greg Hands
I am happy to answer that. We had one response during the consultation, which was not from the hon. Gentleman but was from one of the power companies. The one response was not principally against the increase in the cost of the scheme. The increase in the cost, particularly in the LCCC, reflects a hugely increased workload with the 400% increase in the number of CfDs during the course of the budget period.
Finally, on the LCCC paying back the money, to put it more in the vernacular, when it comes to the strike price referencing the reference price, I do not think that it is practical to take that into the LCCC’s budget or in some way to pay for the LCCC that way. This is the right way to pay for the LCCC. The scheme is working in the way that it is designed to.
Dr Whitehead
If the Minister does not think that that is the case, does he think that some method of making sure that those repayments go back directly to customers rather than indirectly, as is the case at the moment, might be a better way of doing things?
Greg Hands
The hon. Gentleman raises a really interesting and important question. We have seen no evidence so far that repayments because of high energy prices are not being made to consumers. We will monitor that situation very closely and the scheme is designed to ensure that it happens. If he has evidence to suggest that that money is not reaching consumers in the way that it should, I am happy for him to write to me and lay out the evidence as he sees it. I have yet to see any evidence that that has happened.
I hope that my speech has given some answers to the hon. Gentleman’s five questions and that the responses I have provided give the Committee the necessary assurances to approve the statutory instrument before us. As I said at the start of the debate, the regulations that the Government are seeking to amend through the instrument will revise the operational costs levies of the LCCC and the ESC. Those companies play a crucial role in delivering the CfD scheme and the capacity market. The Government anticipate that the LCCC will play a similar role in administering new schemes in the future, including the DPA and potentially a scheme supporting bioenergy with carbon capture and storage. It must be sufficiently funded to perform these roles effectively, but the costs of doing that must be kept to a minimum.
It is my view that the operational budget for 2022-23 to 2024-25—so, for the next three years—strikes an appropriate balance between ensuring the companies are adequately funded and ensuring consumers’ bills are minimised. I therefore urge the Committee to back the regulations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Electricity Supplier Payments (Amendment) Regulations 2022.