Green Gas Support Scheme (Amendment) Regulations 2023

Monday 20th November 2023 Grand Committee

Considered in Grand Committee

16:12

Moved by

[Lord Callanan]

That the Grand Committee do consider the Green Gas Support Scheme (Amendment) Regulations 2023.

[The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)]

My Lords, the regulations were laid before the House on Monday 16 October 2023. They make a set of changes to improve the administration of the green gas levy, which is charged to licensed gas suppliers in Great Britain, and to ensure that it works in line with the original policy intent. The legislation will ensure that the levy operates as intended and seeks to minimise the burdens arising from it for the scheme’s administrator, Ofgem, and for the gas suppliers that have to pay it.

The green gas levy, as noble Lords are aware, funds the green gas support scheme, which is a Great Britain-wide tariff-based scheme supporting new biomethane plants injecting biomethane into the gas grid. It facilitates ongoing investment in the biomethane industry and enables the development of new production plants. The green gas support scheme is expected to contribute 3.7 million tonnes of CO₂ equivalent of carbon savings over carbon budgets 4 and 5, and 8.2 million tonnes of CO₂ equivalent of carbon savings over its lifetime. During the peak years of production, biomethane plants incentivised by the GGSS will produce enough green gas to heat around 200,000 homes.

All funds raised by the green gas levy are used to fund the green gas support scheme. The GGL funds both tariff payments to plants on the GGSS and the scheme’s administration by Ofgem. The levy is charged to suppliers based on the number of meters they supply. Currently, the cost is relatively low, at 45p per meter in 2023-24. It will increase in the coming years as deployment of the green gas support scheme increases, with costs expected to peak at around £7.50 per meter in the late 2030s.

16:15

The amendments made by these regulations are technical in nature. They improve administration and bring regulations in line with policy intent. They do not alter the aims of the GGSS or the GGL and will not add to the amount raised by the GGL or the rate at which it is charged.

We have consulted the Scottish and Welsh Governments on these regulations. The Scottish Government have consented to them, as required under the Energy Act, which provides the underlying primary powers for the regulations. The Welsh Government have also agreed to the changes.

The amount that the green gas levy collects is set according to a formula specified in regulations. Each year, the Secretary of State announces the rate for the next financial year by 31 December. This statutory instrument will change the formula so that it will operate as intended. Currently, the formula dictates that interest collected by Ofgem on late payments and penalties is added to the levy collection total, whereas, as a credit to the scheme, it should be subtracted from it.

This change is needed by 31 December, by which date the Secretary of State must announce the 2024-25 levy rate. This is the first year since the launch in 2021 in which interest amounts will be factored into setting the levy, because interest is applied with a lag, two years after it is accrued. The change will future-proof the levy by ensuring that in coming years it will not be increased if Ofgem accrues significant amounts of interest.

Regulations require the Secretary of State to publish a maximum amount that the green gas levy can collect, called the maximum levy amount. This is set at the total that the levy is expected to collect in its peak year and provides transparency for gas suppliers, to aid with their business planning. The SI will allow the maximum levy amount to be set by reference to whatever year is expected to be the peak year. Current regulations require it to be set at the 2028-29 amount, but we expect the GGSS’s funding needs to increase in subsequent years due to inflation, longer ramp-up of production by plants and the scheme’s extension by two years and four months, announced on 21 October 2023.

These regulations introduce powers for the Secretary of State to set a de minimis amount for the green gas levy. This amount will apply to selected payment obligations and credit cover requirements. Obligations to make payments or provide credit cover for amounts below the threshold will automatically be disapplied. The de minimis will apply when the cost of administering payments or credit cover is not proportionate to the value of the sums involved. It will be limited to a maximum level of £200, which will increase with CPI inflation from January 2024.

The instrument makes five further minor changes, four of which are small changes to ensure that the levy works in line with policy intent. One alters how credit cover is calculated for a new gas supplier; one will allow Ofgem to draw down interest amounts owed by suppliers from credit cover if required; one ensures credit cover is topped up in all scenarios if drawn down; and one simplifies regulations covering mutualisation. A further change provides administrative savings if a gas supplier becomes no longer liable for the levy—for example, if it exits the market—by providing flexibility for Ofgem in how it administers the final GGL amount owed.

In conclusion, the changes made by this statutory instrument provide the basis for the green gas levy to be collected efficiently and at the intended rate over the lifetime of the green gas support scheme. The instrument will help Ofgem administer the policy effectively and as intended. By introducing efficiency measures, it will reduce administrative burdens for both Ofgem and gas suppliers, ultimately benefiting bill payers by reducing levy administration costs. I therefore commend these regulations to the Committee.

[Lord Teverson (LD)]

My Lords, I congratulate the Minister on a hugely extensive explanation of the SI. Unless I have missed something, which the noble Lord, Lord Lennie, will soon uncover, I will give the Minister the full support of the Liberal Democrat Benches on this SI.

[Lord Lennie (Lab)]

The noble Lord has high expectations. As with the scheme we just discussed, we were very supportive of this scheme when it came out and we still are. Supporting the injection of biomethane into the gas grid, replacing other gases, produces substantial carbon savings and is very welcome indeed. As such, I will not speak for long on this instrument, which simply makes changes to improve the administration of what is already a very positive scheme.

The extent of these changes is to improve the administration of the green gas levy, as the Minister said, to reduce the administrative burden for Ofgem and the gas suppliers that pay it, and to ensure a maintained link between the regulations and policy intent. We welcome the lower administrative burden for Ofgem. It is due, not least, to successful efforts during the passage of the Energy Bill, and it now has a specific mandate to support the Government to meet their net-zero obligation.

I have a few questions, which may help the noble Lord, Lord Teverson, in his curiosity about this. Where the instrument changed the green gas levy formerly, it implied that gas suppliers were paying too much due to how interest on funds is allocated. Specifically, interest that had accrued in Ofgem’s account was added to the levy collection target rather than deducted from it, which makes little sense. How did that apparent mistake happen? While it feels peculiar arguing against more money for a scheme that we support—for once, I am not suggesting that gas suppliers’ profits should be better used—it is important that such a scheme is administered fairly. What happened to the previous levies that were collected at too high a rate?

[Lord Callanan (Con)]

They were not taken.

[Lord Lennie (Lab)]

The instrument also allows the Secretary of State to review and update the maximum levy amount to ensure that the levy remains able to sufficiently finance the GGSS after 2008-09, as the Minister said. This of course makes sense, as it is a good scheme and should be financed, but I am cautious on both sides of the argument. If the Secretary of State is to have this new power, why was the scheme not initially created with it written in? Also, if the predicted funding requirement increase is in part predicated on a welcome increase in biomethane production, do the Government foresee a situation where the other reason for the increase—inflation, which I should note was previously caused by the Government—could make a decision to increase the MLA difficult? If so, what happens to the scheme and, if not, could the MLA not increase automatically?

I am curious about the de minimis payments the Minister mentioned. Is this expected to make a net loss or profit for the levy, and has any review been done of the administrative functions that make small payments disproportionately burdensome?

As the Minister said, the other changes are minor, so I will conclude, other than to restate that it is welcome that this positive scheme is being further improved.

[Lord Callanan (Con)]

I thank the noble Lord, Lord Teverson, for his very brief contribution and his support. I will come on to the questions from the noble Lord, Lord Lennie, in a moment.

As I said, the green gas levy is charged to licensed gas suppliers in Great Britain to fund the green gas support scheme. These policies make an important contribution to achieving our emissions reduction target by incentivising the production of biomethane and its injection into the gas grid. This reduces the emissions intensity of the UK’s gas supply and ensures the capture and use of emissions from waste, which is used as feedstock for green gas production.

The SI will ensure that the green gas levy can run optimally and will reduce administrative burdens for Ofgem and gas suppliers, thus reducing costs. It will also ensure that the levy is set as intended by altering the collection formula and by adding flexibility to the setting of the maximum levy amount. Overall, this will help the delivery of a cost-effective levy, benefiting policy administration and gas suppliers and, therefore, bill payers.

I will pick up the first question from the noble Lord, Lord Lennie. As I said in my introduction, the interest is charged two years in arrears. There has therefore been no net effect from what was an administrative error when the regulations were tabled. We want this modification to the SI approved now so that, when those interest payments subsequently become due, they will be used to subtract and not add to the overall amount—as was originally stated in error.

The further changes will improve the administration of the levy by Ofgem and for all gas suppliers, and the instrument gives us the opportunity to make these changes. The levy was launched on 30 November 2021, and the intervening years to this point have given us the opportunity to identify one or two minor technical changes to the levy to help reduce the administrative burden. In answer to the noble Lord’s second question, again, we do not expect the de minimis level to make any difference to the overall rate—it is purely that for those very few gas suppliers that have a tiny number of meter points, the administration cost of the levy exceeds the sum raised, so actually it will probably save money in the longer term. However, of course it has no effect on all the big suppliers.

I have dealt with both questions from the noble Lord, Lord Lennie, and I commend this regulation to the House.

Motion agreed.