Draft Electricity Supplier Payments (Amendment) Regulations 2026
(Limited Text - Ministerial Extracts only)
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The Minister for Energy (Michael Shanks)
I beg to move,
That the Committee has considered the draft Electricity Supplier Payments (Amendment) Regulations 2026.
It is a pleasure to be in this Committee this afternoon, Sir Alec. The statutory instrument, which was laid before the House on 2 February 2026, amends regulations concerning the levies used to fund the operational costs of the Low Carbon Contracts Company and the 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, the LCCC also administers schemes modelled on the CfD scheme, including the dispatchable power agreement and the low-carbon dispatchable contracts for difference.
The LCCC acts as the revenue collection counterparty for the regulated asset base for new nuclear under the Nuclear Energy (Financing) Act 2022. It is anticipated that, subject to future policy decisions and the will of Parliament, the LCCC will conduct additional work to support Government under the Energy Act 2013. That includes work on a new scheme supporting the deployment of large-scale bioenergy with carbon capture and storage, as well as work related to proposals by the Department for Energy Security and Net Zero to support nuclear generation and around potentially supporting landfill gas generation. The ESC administers the capacity market scheme. Those schemes will incentivise the significant investment that is required in our electricity infrastructure, keep costs affordable for consumers and help to deliver our clean power mission while delivering on energy security.
In terms of the existing schemes, 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 most recent CfD auction—the seventh that we have had—secured a record 14.7 GW of new clean energy capacity across Great Britain, making it the most successful renewables auction in the country’s history. It brought forward a diverse range of renewable technologies while delivering a good deal for bill payers. The LCCC is currently signing the 197 CfDs with projects that were successful in that auction.
Under the Energy Act, DPAs are agreements modelled on CfDs. They 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 LCCC signed its first DPA on 19 November 2024, which related to the Net Zero Teesside power project. That pioneering project in the north-east aims to build the world’s first commercial-scale gas-fired power station with carbon capture and storage. Over the next three years, the LCCC is expected to sign additional DPAs, which will drive the private sector investment required to bring forward further power carbon capture and storage projects by the mid-2030s. The LCCC will be the counterparty for those, and funds have been included within the budgets before us to support that role.
The LCCC signed its first low-carbon dispatchable CfD with Drax on 4 November 2025. That agreement, which came before this House, will ensure that Drax generates electricity when needed between 2027 and 2031, thus bolstering our energy security. That was a good agreement for consumers, saving £6 a year on household bills compared with the arrangements in place under the previous Government.
The Government subsequently agreed heads of terms for an additional LCD CfD with EP Lynemouth Power Ltd on 6 February 2026. If a full contract is concluded in the coming months, it will further bolster our energy security by ensuring that Lynemouth can continue to generate between 2027 and 2031. The revenue collection contract with Sizewell C Ltd, the first project to use the regulated asset base model for new nuclear, became effective on 4 November 2025. Funds have been included in this budget to cover the LCCC’s operational costs for that RAB.
Turning to the ESC, the capacity market is the tried, tested and most cost-effective way of ensuring that we have electricity capacity when we need it. It provides all forms of capacity with the right incentives to be on the system and generate electricity when we need it by increasing generation or turning down electricity demand in return for guaranteed payments. The capacity auctions to date have secured the capacity that we need to meet the peak demand out to 2028-29. A T-1 auction is ongoing, and a T-4 auction will take place next week, securing most of the capacity that we need toward 2029-30.
In both the CfD and capacity market schemes, participants bid for support via a competitive auction, which ensures that costs for consumers are kept as low as possible. DPAs are allocated through a process involving competitive assessment, followed by shortlisting, then a final stage of bilateral negotiations between the developers and DESNZ. LCD CfD contracts are agreed following a structured negotiation process between DESNZ and the generator.
Revenue collection contracts under the RAB are agreed through a structured process involving Ofgem, the LCCC and DESNZ, which provides a stable, regulated revenue stream to projects during construction and operation. In turn, we expect the RAB to lower the cost of financing for nuclear—one of the biggest drivers of new project costs—resulting in better value for money for consumers.
The LCCC and the ESC’s effective administration of all those schemes has demonstrated their ability to deliver the schemes at a low cost to consumers. That is part of the reason why the LCCC has been working with DESNZ and other parts of Government to develop new schemes for incentivising the deployment of even more low-carbon technologies. For example, the LCCC is working with my Department to develop incentives that will be useful in bioenergy with carbon capture and storage. Although they have not been confirmed yet, contracts for such projects could potentially be entered into, following the process outlined in the 2013 Act.
It is important that the LCCC and the ESC are sufficiently funded to perform their roles effectively, given their critical role in administering those schemes, which I have just outlined. However, the Government are clear that both companies must deliver value for money. With that in mind, we have closely scrutinised their operational cost budgets to ensure that they reflect operational requirements and objectives for the companies. The LCCC and the ESC are very mindful of the need to deliver value for money as one of their guiding principles.
Operational costs per contract are expected to fall by 27% per CfD across the budget period, despite the growing CfD portfolio, because of a number of actions to bring down costs. The narrative is similar for the ESC, which expects the number of capacity market electricity meters to exceed 1.2 million over the budget period—a 450% increase on current meter numbers. The ESC intends to invest in a system architecture redesign to manage the growth and minimise costs, and it estimates that costs per meter will fall by 23%. The operational cost budgets for both companies were subject to consultation, which gave stakeholders and others the opportunity to scrutinise and test the key assumptions in the budgets and, importantly, ensure that they represent value for money.
These regulations revise the levies currently in place to enable the companies to collect enough revenue to fund their 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 on the day after these regulations are made. The operational cost levies for the LCCC will come into force by 1 April in each of the relevant financial years.
I assure Members that the Government are mindful of uncertainties in setting a budget for the next three years, such as world events impacting on energy demand and policy decisions on new schemes that have not yet been taken. Consequently, we will keep the companies’ budgets under careful review throughout the budget period to ensure that the cost to consumers is minimised. I commend the draft regulations to the House.
Michael Shanks
I am grateful for all those technical questions on the statutory instrument before us. Let me turn to the more general questions that were asked. I welcome the support from the shadow Minister, the hon. Member for West Aberdeenshire and Kincardine; it is always a great pleasure when he supports things that this Government are doing. Unfortunately, he does not do it often enough.
On costs, the Chancellor made a decision in the Budget to take £150 off bills. That has come through in the price cap period, taking into account the need for investment in the network in order to pick up the slack from the time that the shadow Minister was in government—I think he was the Minister for networks for a period. The work to build the grid that the country needs was not done then, so we need to invest in the grid now, but that is a significant investment in bringing down bills, and we stand by the promise to take £300 off bills by the next election.
There are two fronts here. The cost of living is the most important thing facing people across the country, and it is the thing that every bit of Government is seized of taking action on. That is why the £150 was important. Equally, there is no shortcut to bring down bills in the long run, so it is important to say that this work is over the lifetime of the Parliament, to ensure that we put in place the measures that get us off more expensive gas.
The shadow Minister referenced AR7. The outcome from that in terms of cost was that the prices came in at 40% cheaper than the cost of building and running new gas power stations. That is fundamentally the difference here. His party has taken the decision to reference the wholesale cost of gas—given the events of recent days, I wonder whether it might revisit that—while completely ignoring the cost of building and operating the new gas power stations that would be necessary. That power does not just come out of nowhere.
On refusing to publish the analysis, I have the benefit of taking my written questions incredibly seriously, so I signed off the answer to that written question myself, and that was not in fact the answer. I do not know whether it was the shadow Minister who asked the question, but the answer that was sought was in the footnote to the AR7 publication, so we did not have to publish more. It was there in the footnote, if his colleagues had bothered to read it.
We have made it very clear that we will publish a response to the Fingleton review very soon. We had hoped to do that in the past few days, but, given all the things that are going on, we will publish it as soon as we possibly can. We are determined to move forward on the recommendations, because the shadow Minister is absolutely right; we need to build more nuclear much faster in this country.
Let me turn to the hon. Member for South Cambridgeshire. I am delighted that the Lib Dems still take credit for some things that they did in government—although not so much austerity and tuition fees. We will move past that, because I know she does not like to talk about those days.
The hon. Lady is right to raise the uncertainty in the middle east. That underscores how important it is that we focus on our energy sovereignty here in the UK. This is clearly a turbulent time, but, in truth, we have been living through an uncertain world for a very long time. The only way we can get off the volatile series of ups and downs that we have seen in fossil fuels over decades is to build clean power here in the UK and control the nuclear, the renewables and the storage that goes along with it, which is absolutely critical.
These schemes are really important, and we have seen CfDs and other things being exported to other countries, because they are seen as the way to reduce the cost of capital. That feeds through into all consumer bills, which we are determined to reduce. I welcome the cross-party consensus on the Government’s energy policy—it is a delight to see.
Question put and agreed to.