Electricity Supplier Payments (Amendment) Regulations 2022
(Limited Text - Ministerial Extracts only)
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Lord Callanan
That the Grand Committee do consider the Electricity Supplier Payments (Amendment) Regulations 2022.
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 used to fund the operational costs budgets for the Low Carbon Contracts Company and Electricity Settlements Company. 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 administers the capacity market scheme. Those 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.
The contracts for difference—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, which is the fourth to date, opened in December and we are seeking to secure more capacity than all the previous auctions combined. It will allow a broad range of renewable technologies to come forward, while delivering the best deal for bill payers. To date, only projects located in Great Britain have been awarded CfDs. However, BEIS and the 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 the LCCC to undertake some preparatory work in case a final decision is made to enable Northern Ireland to join the scheme.
I turn to the Electricity Settlements Company—ESC. The capacity market is tried and tested and 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 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 auctions, scheduled for early 2023, will secure most of the capacity we need out to 2026-27. In the CfD and capacity market schemes, participants bid for support via a competitive auction, which ensures the 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. It is in part for this reason that the LCCC has been working with BEIS to develop new schemes for incentivising the deployment of more low-carbon technologies. For example, the LCCC has supported BEIS in the development of dispatchable power agreements, or DPAs, under the Energy Act 2013. These agreements, which are based on CfDs, have been designed to instil confidence among investors for power carbon capture and storage projects and 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 carbon capture and storage project by the mid-2020s. The LCCC is expected to be the counterparty for DPAs, and funds have been included within the budgets to support this role. It is anticipated that the LCCC will also work with BEIS to develop incentives for bioenergy with carbon capture and storage. Although this has not yet 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 this option, the LCCC would need to undertake activity to prepare for acting as the counterparty during the next three years. Consequently, funds have been included within the budget for this purpose.
It is of course important that the LCCC and the ESC are sufficiently funded to perform their roles effectively, given their critical role in administering the schemes that I have just outlined. However, the Government are clear that both companies must deliver value for money and, with this in mind, we have closely scrutinised their operational cost budgets to ensure they reflect the operational requirements and objectives for the companies.
Both the LCCC and the 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. It is because of actions such as this that CfD operational costs per contract are falling, despite the growing size of the CfD portfolio. There is a similar narrative for the ESC. The company currently manages 200.8 gigawatts of capacity agreements with 1,335 capacity providers under the capacity market. For the delivery year 2022-23, this equates to 52.9 gigawatts of capacity and 350 capacity providers, an increase of 78 capacity providers compared to the 2021-22 delivery year. Despite this increase, operational costs are expected to be lower in 2022-23 than in 2021-22.
The operational cost budgets for both companies were subject to consultation, which gave stakeholders the opportunity to scrutinise and test the key assumptions in the budgets and, more importantly, to ensure that they represent value for money. The response received to the consultation noted the significant increase of budget for the LCCC but was generally supportive of the Government’s rationale for the increase. BEIS is satisfied that the operational costs budgets for the LCCC and the ESC should remain as consulted upon. Subsequently, the budgets remain unchanged as a result of the consultation. The proposed operational costs budget for the LCCC in 2022-23 is £24,210,000, in 2023-24 it is £26,978,000 and in 2024-25 it is £29,051,000. For the ESC, the proposed operational cost budget is £6,954,000 in 2022-23, £7,382,000 in 2023-24 and £7,734,000 in 2024-25.
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 relevant financial year in accordance with the regulations.
Subject to the will of Parliament, the settlement cost levy for the ESC is due to come into force the day after the day on which these regulations are made and the operational costs levy for the LCCC by 1 April in each of the relevant financial years.
Finally, I assure the Committee that the Government are also mindful of the uncertainties involved in setting a budget for the next three years, such as any world events that we are witnessing now which could of course impact energy demand, and in policy 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, as always, that the costs to consumers are minimised.
I commend these draft regulations to the Committee.
Lord Lennie (Lab)
My Lords, I thank the Minister for his explanation of the regulations before the House. They are essentially non-controversial and, on this lonely side of the House, we do not take issue with them. As we have heard, the regulations update the rates for the operational costs levy and settlement costs levy, which fund the operational costs of the LCCC and the Electricity Settlements Company, respectively. As these two private companies share staff and facilities, these levies are set together.
After a single year of unpredictably and reduced electricity demand during the pandemic, first, it is welcome that this process has been able to return to a three-year system, allowing stakeholders greater visibility of the estimated operational costs, as well as reducing the administrative burdens on the two companies and on us here. Given the situation, it was sensible to reduce the periodicity, and I am glad that we have returned to normal.
Both the LCCC’s contracts for difference and the Electricity Settlements Company’s capacity market are measures that encourage low-carbon electricity generation and ensure security of supply, which is a noble intention. As my colleagues in both Houses have argued whenever these issues have arisen, since these arrangements came into place in 2013, a levy system, which will be passed on to customers by the electricity firms, is possibly the most regressive way of making these arrangements. The figures involved are certainly not large, as the noble Lord, Lord Oates, said, especially when looking only at the impact on the yearly changes, as is the case with the explanatory notice, but with energy bills increasing substantially amid a wider cost-of-living crisis, it is certainly the case that every little bit helps. Has the Minister therefore given any consideration to other methods that could facilitate the costs of these arrangements not falling on the customer?
I would also like to ask some questions about the consultation that took place ahead of the laying of this regulation, both on questions coming from it and the consultation itself. The consultation ran for four weeks and received only one response, from Scottish Power. While the perspective of this large stakeholder was welcome, I am sure the Minister would agree that having a single response to any consultation is not ideal. It is no fault of Scottish Power, but there were gaps in the responses leaving questions mostly unanswered, and inherent biases from a single respondent were unavoidable. Perhaps when this is revisited in three years’ time, the Minister could consider a longer consultation for a broader spectrum of responses to be generated.
One aspect of Scottish Power’s response that I would like to pick up upon surrounds budget lines related to providing policy support to BEIS, which Scottish Power recommended be kept under review. In their response, the Government committed to returning funds allocated here to suppliers. As this is the case with any unused funds, will unallocated funds from this aspect be ring-fenced for return, and, more importantly —as the noble Lord, Lord Oates, has said—will steps be taken to ensure that this is passed on to customers, given that any adjustment to their bills will have already been enacted?
It was also pointed out that the year-on-year budget rises are not insignificant, reaching approximately 40% over the four years from this financial year to the last of the three years this regulation covers. The Government rightly say that this is not unprecedented, given that at least in the case of the Electricity Settlement Company, the Explanatory Memorandum suggests that the body has only become more efficient, but I would be grateful if the Minister could elaborate a little on where the cost increases come from.
I look forward to the Minister’s responses to these questions.
Lord Callanan (Con)
I thank the noble Lords, Lord Lennie and Lord Oates, for their contributions to this brief debate. The noble Lord, Lord Oates, is of course quite right to raise the issue of the publication of the five-year review, especially since I told him last year that it was going to be ready shortly—I am sure there could be a big debate on what “shortly” means in the context of government. If I may fill in a little more detail for the noble Lord, I understand that updated advice on the matter is currently with my colleague Greg Hands, the Minister for Energy, Clean Growth and Climate Change. I think he intends to publish the review in due course—I hope, shortly.
The noble Lord also, rightly, asked for an explanation of why the review is so delayed. I can certainly say that it has of course been a government priority to deliver on our commitment to open the largest ever CfD allocation round—I am sure that is something he would agree on—and it has been announced that the rounds will be running annually from March 2023. A lot of work has gone into the preparation behind that. Schemes such as CfD are vital in developing domestic sources of renewable energy to reduce our exposure to volatile global fossil fuel markets, which are of course peaking at the moment, and to protect consumers in the longer term. Delivering on those priorities has had an unfortunate knock-on impact on the publication of the review, but we will endeavour to get it out as quickly as possible.
The noble Lord also asked for an update on the hydrogen business model. Of course, it is not part of this statutory instrument, but I would be very happy to write to him separately. I can certainly confirm that we are not intending to fund hydrogen under this particular mechanism or under the Energy Act 2013, so it falls outside the scope of today’s debate.
On the noble Lord’s questions on inflation, we have used a somewhat optimistic assessment of 5% inflation for each year of the proposed budgets. That was after careful consideration of the forecasts produced by the Office for Budget Responsibility. They probably looked very sensible when it put its advice together, but it suggested that, on balance, an assumption of 5% was appropriate.