Energy Prices Bill

(Limited Text - Ministerial Extracts only)

2nd reading
Wednesday 19th October 2022 Lords Chamber

Moved by

[Lord Callanan]

That the Bill be read a second time.

14th Report from the Delegated Powers Committee, 4th Report from the Constitution Committee

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)]

My Lords, Russia’s illegal invasion of Ukraine and its impact on global energy markets have affected families and businesses up and down this country. As we approach winter, this Government have made bold decisions so that homes are kept warm and businesses are kept open. On 8 September, the Prime Minister set out a comprehensive package to tackle rising energy prices. As part of this, she announced that we would bring forward emergency legislation, which is before noble Lords today.

I thank the Opposition and the whole House for their constructive engagement to expedite the Bill. Providing support to those who need it is a shared value across all parties, as seen in Monday’s proceedings in the other place. I also thank the DPRRC for its report on the Bill, published this morning. I welcome its constructive comments on ensuring that the powers in the Bill are appropriately drafted and justified. We will of course be responding to the committee shortly; however, it is important that we remember the context of the Bill and ensure that consumers are able to benefit from the Bill as intended and as I will set out.

The Energy Prices Bill means that consumers will pay a fairer price for their electricity and that no one is left behind. First, the Bill provides the legislative footing for the energy price guarantee, which will protect UK households from soaring energy prices. By reducing the unit cost of electricity and gas, the typical household will have the equivalent of an annual bill of £2,500. Effective from 1 October this year to the end of March next year, the energy price guarantee will provide domestic consumers in Great Britain and Northern Ireland with crucial support in the winter months.

To ensure that support is available up and down the country, an alternative fuel payment will provide a one-off £100 payment to UK households that use alternative fuels for heating. Heat network consumers will also receive a one-off £100 payment. We are exploring delivery routes for the alternative fuel payments in Northern Ireland as well.

The energy bills support scheme was announced earlier this year to provide £400 to support households. I confirm that, through this Bill, households in Northern Ireland will be able to receive equivalent support to those in Great Britain.

The Bill also provides support for non-domestic consumers, such as businesses, charities, schools and hospitals. The energy bill relief scheme will enable the Government to provide financial assistance to all eligible non-domestic organisations in Great Britain and Northern Ireland over the coming winter period. Bills will be reduced by a new government-supported price, which is less than half the wholesale prices anticipated this winter. Discounts apply from 1 October 2022, with an initial period of six months.

In three months, the Government will publish a review to consider how to continue support for non-domestic users, particularly those most vulnerable to energy price rises. The Bill provides that the scheme may be extended to those deemed eligible for up to four consecutive six-month periods. For non-domestic consumers who use heating oil or alternative fuels instead of gas, the Bill will also introduce a non-domestic alternative fuels payment. This support will likely take the form of a flat-rate payment delivered via electricity bills.

This legislation strengthens previous action by requiring, rather than expecting, landlords and other intermediaries to pass on the energy price support they receive to end-users, such as tenants, as appropriate. This applies to the energy price guarantee, to the energy bills support scheme and to the energy bill relief scheme. The Bill will also ensure that heat networks benefiting from the energy bill relief scheme pass through cost savings to their consumers. The Bill will provide for the appointment of an alternative dispute resolution body to handle complaints raised by consumers against their heat network if it has not complied with those pass-through requirements.

Finally, we must protect consumers from paying excessive amounts for this low-cost electricity, while ensuring that no firms are unduly profiting from Russia’s illegal invasion of Ukraine. Wholesale electricity prices are currently set by gas-fired generation, which is the most expensive form of generation. This means that consumers are having to pay over the odds for cheap low-carbon generation. The powers in the Bill will allow us to introduce a temporary cost-plus revenue limit for low-carbon generators that are not currently covered by a contract for difference. This will allow generators to cover their costs and receive an appropriate revenue that reflects their investment commitment and risk profile. The precise mechanisms will be subject to a consultation to be launched shortly, ahead of it coming into force from the start of 2023.

I stress that this is not a windfall tax; this is a targeted intervention to deal with a specific problem that has occurred in the wholesale electricity market. It will help to break the link between abnormally high gas prices and the cost to consumers of low-carbon electricity. We are also legislating for powers that will allow us to offer a contract for difference to existing generators not currently covered by the Government’s existing contracts for difference scheme.

[Lord Liddle (Lab)]

I raised this point about a windfall tax last week, so I thought I would be justified in intervening today. There is an argument that a windfall tax, which is predictable because the suppliers of electricity know what bills they are going to have to pay, is better in terms of promoting long-term investment in renewables, which we desperately need, than this cost-plus arrangement, which is also variable, as I understand it, by ministerial order. That provides no certainty for potential investment.

[Lord Callanan (Con)]

I am not sure the noble Lord is correct. The reason we have selected this mechanism is that it is a complicated picture; of course, many suppliers would no doubt argue that they have sold ahead their production to energy retailers, et cetera, and therefore the precise circumstances of every individual supplier will determine the arrangements that will be appropriate for them. It is not a windfall tax because a windfall tax would be levied on profits and would go to the Exchequer. This money clearly does not go near the Exchequer; it will go directly to consumers in the form of lower bills.

I mentioned that we will also introduce a contract for difference to existing generators that are not currently covered by the Government’s existing contracts for difference scheme. We hope that many of these suppliers will move voluntarily to contracts for difference payments, which will provide them with secure long-term revenue, and therefore there will be no need to impose this cost-plus mechanism.

The voluntary contract would grant existing generators longer-term revenue certainty and safeguard consumers from future price rises. This Bill is part of the swift, decisive action we are taking to deliver affordable and secure energy in the UK. There are no cost-free actions, but I think the whole House agrees that it would be wrong to do nothing. This Government will always act decisively to support households and help businesses grow. The consequences of not acting now would mean worse economic outcomes going forward; this Bill will provide certainty, reduce inflation and support economic growth. I would welcome the support of noble Lords in ensuring the Bill becomes law and therefore commend it to the House.

--- Later in debate ---

[Lord Callanan (Con)]

I thank all noble Lords for their contributions to this important debate today. I will respond to as many as possible of the issues that were raised in the time that is available to me.

I start by briefly reminding noble Lords of the importance of the Bill. Russia’s illegal war in Ukraine has led to a global energy crisis, and the Government are taking urgent action now to support households and businesses across the UK which would otherwise face significant financial difficulties this winter. I know that many speakers in the debate recognised that. This legislation will ensure that households, businesses and other bodies such as charities and public organisations—and indeed churches—receive the financial support that they need by providing the framework to deliver the Government’s energy support package. In so doing, the Bill will help drive down inflation and support economic growth.

I turn to points raised by noble Lords in their contributions. First, I thank the noble Lord, Lord Lennie, and the noble Baroness, Lady Blake, for their letter that I received this morning on the Energy Security Bill. I will respond to them in writing shortly, but I assure the House that the government remain committed to the important measures in that Bill to deliver change in the energy system over the longer term. We have to deal with the short-term crisis but we are not forgetting the longer-term context, and many of the measures in that Bill are to ensure that changes are made in the regulations that will benefit us all in the long term.

In the meantime, we are facing a global energy crisis, and we must ensure that we prioritise delivering the measures in this Bill to provide that much-needed support to consumers. I will say a few words about why it is so important to get this legislation passed soon. I thank the noble Baroness, Lady Worthington, and the right reverend Prelate the Bishop of Manchester for raising the important issue of the speed of this legislation; I readily accept that we are going through it extremely rapidly.

Households and businesses face rising energy prices, and it is essential that this legislation and subsequent secondary legislation that will be laid under it is in place by the end of this month. This is to allow for urgent financial assistance for householders, businesses and other organisations across the UK ahead of the winter, and particularly from the start of November.

Building on the DPRRC’s report, the noble Lords, Lord Lennie, Lord Teverson, Lord Foster and Lord Grantchester, and the noble Baronesses, Lady Worthington and Lady Young, raised concerns about the delegated powers in the Bill. Again, I pay tribute to the work of the DPRRC and thank the committee for its report, which I will also respond to shortly. The Bill takes a relatively limited number of powers but I readily accept that they are broad ones. They are essential for ensuring that these crucial support schemes can be stood up at pace. The House will appreciate the speed at which this measure has been drafted. I pay tribute to the exemplary work of the officials involved in delivering it; it has involved lots of late nights and weekend working for them, for which I thank them. It is essential that these measures are delivered as intended. To be frank with noble Lords, these powers will allow us to do this with the appropriate scrutiny.

As I said in my introduction, the vast majority of the powers in the Bill are effectively time-limited through either direct sunsetting—normally, noble Lords are calling on me to sunset powers—their link to other powers in the Bill, or indeed the duration of this energy crisis. The ability to extend time limits ensures that we have sufficient scope if we need to change them over time. I assure the House that noble Lords will of course have an opportunity for further scrutiny on the details of those schemes via the secondary legislation route, much of which is subject to the affirmative procedure.

A number of noble Lords raised concerns about the powers in Clauses 21 and 22, specifically powers to modify licences and give direction; those concerns were also reflected in the DPRRC’s report. In my view, these powers are necessary to facilitate the delivery of a number of support schemes, including the Northern Ireland energy bills support scheme and the alternative fuel payment for domestic and, potentially, non-domestic customers as well. Let me make it clear to the House that, under the terms of the Bill, Clauses 21 and 22 must be used in response to the current energy crisis. Using the powers in either clause in relation to action under any of the other powers in the Bill is in effect time- limited, as these powers are themselves time-limited.

As expected, and as always happens in these debates, many noble Lords raised the important issue of energy efficiency. A crisis gives even greater urgency for action to make homes more energy efficient in order to reduce energy bills and, crucially, to tackle fuel poverty. That is why the Government are investing £12 billion in our Help to Heat scheme, including £1.5 billion to upgrade around 130,000 social housing and low-income properties in England. I was able to launch an additional £800 million of that scheme in discussions with housing associations and local authorities only last week.

The Government have also announced further support on energy efficiency through the ECO Plus measures. This scheme was announced in the mini-Budget—it is one of the few measures from the mini-Budget to have survived so far. It will help hundreds of thousands of households to reduce their energy bills by targeting that support to the most vulnerable. Of course, as it is an obligation, we will consult on the detailed policy design of ECO Plus shortly; I am sure that noble Lords who take an interest in these matters will want to contribute. We hope to have the scheme up and running by April next year.

In addition, our energy security strategy sets out further commitments to support property owners, including facilitating low-cost finance from retail lenders to help consumers upgrade their properties at low cost. This includes zero-rating VAT on the installation of insulation and low-carbon heating for the next five years. That will potentially save up to £2,000 on the cost of an air source heat pump—should the noble Baroness, Lady Young of Old Scone, want to move in that direction.

The noble Lord, Lord Lennie, and the noble Baroness, Lady Young, raised the cost-plus revenue limit. The Government recognise the importance of dispatchable and baseload generation for security of supply. The low-carbon technologies that can deliver these types of power, such as biomass and nuclear, tend to have higher input costs. This is being considered as part of the detailed policy design for the cost-plus revenue limit. We intend the limit to last only for as long as it is strictly necessary. A number of noble Lords referred to the five-year sunset provision. That would allow the Government to respond to the immediate effects of high wholesale prices on consumers while ensuring their ongoing protection if gas prices remain abnormally high for a prolonged period beyond current expectations.

[Lord Teverson (LD)]

Can the Minister clarify that renewables on the cost-plus, whether hydro, solar, wind, AD or whatever, will be assessed separately within those different sectors, rather than it being an across-the-board average?

[Lord Callanan (Con)]

That goes back to the point I made in my introduction. There are many different circumstances facing different providers. Some of them have pointed out quite loudly that they have sold their power in long-term contracts, et cetera, so it varies from provider to provider. However, the noble Lord gives me the opportunity to say that the precise mechanics of the temporary cost-plus revenue limit will of course be subject to a full consultation, which we will launch shortly.

The noble Baroness, Lady Worthington, raised important issues on who should bear the cost of the measures. The energy profits levy on oil and gas and the cost-plus revenue limit that have been announced for low-carbon generators will help to fund these schemes. The scale of the crisis means that the sums involved are beyond those two mechanisms so higher borrowing will be necessary to pay for this temporary support, and it is right that we use all the available tools to support businesses through this crisis and to spread the costs over time.

The right reverend Prelate the Bishop of Manchester, the noble Baroness, Lady Young—

[Baroness Worthington (CB)]

I am sorry to interrupt when the Minister is trying to finish, but on a point of clarification, with the profits levy, up to 85% of that tax can be defrayed by the Government investing in North Sea oil and gas, keeping us hooked on a volatile and unpredictable source of fossil fuels, whereas this cost-plus recovery has no provision for generators to invest in cleaner power. Why is there not equal treatment?

[Lord Callanan (Con)]

There are separate provisions allowing generators to invest in clean power. The aforementioned contracts for difference scheme is doing exactly that, providing the incentive for them to invest in clean power. We have increased the number of CfD rounds that we have launched. As the noble Lord, Lord Teverson, said, this has proved to be an immensely successful scheme. I pay tribute to the officials who designed it. It has been so successful that most of the rest of Europe is proposing to adopt a very similar scheme for their own wind generation. It is precisely because that mechanism exists and provides guaranteed revenue for their investments that those incentives that the noble Baroness refers to already exist.

The right reverend Prelate the Bishop of Manchester, the noble Baroness, Lady Young, and the noble Lord, Lord Grantchester, all raised important points regarding the default tariff cap. The energy price guarantee will now determine the prices that households pay for their energy. However, we are retaining the price cap to help deliver this energy price guarantee. Clause 20 will ensure that Ofgem continues to calculate the cap level to determine what it costs an efficient energy supplier to provide a household with gas and/or electricity. Of course, this will not determine the prices that householders pay, but it will enable the Government to identify what level of support is needed to deliver the prices in this energy price guarantee. The price cap is a mechanism that has been proven to prevent excessive charging and to reflect the real costs of supplying energy. Retaining it will ensure that suppliers price in line with the energy price guarantee and that public funds are used efficiently.

The noble Lord, Lord Foster, gave his view that the Bill treats renewables less favourably than oil and gas. No energy firms, however they produce, should be profiting unduly from Russia’s war in Ukraine, whether they generate low-carbon or fossil-fuel energy. Current price levels in electricity markets are far higher than any energy firm could possibly have envisaged or forecast, or would have predicted they would need, to continue investing in renewables.

Low-carbon electricity generation from renewables and nuclear will be key to securing more low-cost homegrown energy, which is why we continue to support investments in the sector. I remind noble Lords of the point I have made continuously: the schemes have been extremely successful. We have the highest proportion of offshore wind energy in Europe, by far. We have the second-highest proportion in the world, and we have extremely ambitious plans to continue investing and producing more of it, precisely because the scheme has proven so successful and is delivering much cheaper power. It is our flagship scheme and it has worked a treat, as I said—so successfully that other countries are now adopting it. In 2023, the scheme will move to annual auctions, helping to further accelerate the deployment of clean low-cost generation, which is something that I know all contributors will welcome.

The energy price guarantee and the energy bill relief scheme support millions of householders and businesses with rising energy costs. The Chancellor made clear that they will continue to do so from now until next April. Looking beyond that, I am sure noble Lords would be interested to know that the Prime Minister and Chancellor have agreed that it would be irresponsible for the Government to continue exposing the public finances to unlimited volatility of international gas prices. Therefore, it is the Government’s intention that, after this winter, support is better focused on the most vulnerable households and those least able to pay, with greater incentives to improve energy efficiency.

The noble Lord, Lord Foster, raised issues on the essential importance of encouraging solar energy use in households. I completely agree with the noble Lord. We are committed to solar power, which not only is good for the environment but at the moment represents the cheapest way to generate electricity in the UK, albeit intermittently. The British Energy Security Strategy sets out an expectation of 70 gigawatts installed solar capacity in the UK by 2035. To achieve that and meet this increased ambition, we will need a significant increase in both ground-mounted and rooftop solar in the 2020s and beyond. The noble Lord will be pleased to know that there is a healthy pipeline of ground-mounted projects, currently amounting to around 19 gigawatts across Great Britain, which either are in scoping or have already submitted planning applications.

The noble Baroness, Lady Worthington, asked me yesterday and again today about our negotiations with Norway.

[Lord Foster of Bath (LD)]

I apologise; I thought the Minister was going to continue points about solar. Before he finishes, could he respond to the question I asked on the Environment Secretary’s plans to stop further solar farms? Could he update us on that situation?

[Lord Callanan (Con)]

I have referred to the pipeline of solar for which planning permission has already been granted or that is in scope. I think the noble Lord can see that there is a considerable pipeline of solar plants that are already coming on stream and that our target remains in place.

[Baroness Young of Old Scone (Lab)]

Would the Minister give way on that point? I hope we can depend on him to make the point to the Secretary of State for the Environment that, if he had a proper land use strategy, he would not have a conflict between wind farms, solar farms and agricultural land. We would have a proper planned process to use our land wisely.

[Lord Callanan (Con)]

I thank the noble Baroness for that point. It is now on the record, and I will ensure that it is drawn to the attention of the Secretary of State for the Environment. In answer to the point made by the noble Baroness, Lady Worthington, about our negotiations with Norway, following the successful vaccine task force, we have created a new energy supply task force under the leadership of the excellent lady Maddie McTernan. She had such success with vaccines that we have now given her an even tougher challenge to solve. She and her team are already negotiating new long-term energy contracts with domestic and international gas suppliers to bring down the cost of the intervention immediately. The Government are opening negotiations with domestic and international gas suppliers on the prospects of longer term, lower cost gas contracts.

The right reverend Prelate the Bishop of Manchester was wrong to question whether the Bill should include suspension of green levies. In fact, we have not suspended the green levies in Great Britain; £150 of the savings will be delivered by temporarily suspending environmental and social costs being passed on to consumers. They were levied on bills, but they will now be directly funded by the Exchequer under the energy price guarantee. The Whip is telling me that I am running out of time, so apologies if I do not manage to get all the remaining points in. Those costs will be transferred to the Exchequer, so they are not borne by consumers, but they are present and still funded to help us benefit from low-carbon electricity generation.

The noble Baroness, Lady Bennett, asked about community-owned energy schemes, and we recognise the role community and locally owned renewable energy schemes can and do play in supporting the UK’s national net zero targets. These projects help encourage innovation and investment as well as community engagement with the energy challenge.

The noble Baroness, Lady Young, asked about the £100 alternative fuel payment, as did the noble Lord, Lord Rogan. This is designed by reference to past increases in the cost of heating oil in the year to October 2022. We will be monitoring the price of heating oil and other alternative fuels closely in the months ahead to see whether further payments are required at a future point in time. The noble Baroness also asked about the off-grid gas consultation. As I said to her in our conversation, we consulted last year on plans to phase out the use of fossil fuel heating on the gas grid. We have not made any decisions yet on how to move forward. The noble Baroness will be the first to know when those decisions are made and announced.

If the House will permit me just a little bit of time to say something on the important subject of Northern Ireland, I would like to touch on our equivalent support for Northern Ireland, in response to the noble Lord, Lord Rogan. In the absence of an Executive, the UK Government are taking steps to ensure that households and businesses across the whole of the UK are able to access support to manage their energy bills. In doing so we are ensuring that households and non-domestic consumers in Northern Ireland receive an equivalent level of support to those in Great Britain. I am sure that will reassure the noble Lord.

To conclude, I am encouraged by the support for the Bill, and I thank, in particular, noble Lords in the Opposition for that. I realise, of course, that on all the various subjects noble Lords have many other points that they wish to make and to put forward, but I think there is general support across the House for the Bill. As always, I look forward to continuing constructive engagement as the Bill progresses through your Lordships’ House.

Bill read a second time and committed to a Committee of the Whole House.