(6 years, 10 months ago)
Lords ChamberMy Lords, the draft instrument seeks to amend two secondary legislation packages for the capacity market. The powers to make this implementing secondary legislation are found in the Energy Act 2013, which, following scrutiny in the House and the other place, received Royal Assent in December 2013, with cross-party support. The five changes contained in the draft instrument are essentially technical to improve fairness, ensure the competitiveness of auctions and provide important clarifications to scheme operations. They were supported by the majority of respondents in consultation.
Before I explain the changes in detail, it may be helpful as a reminder to noble Lords if I say a few words of background about the capacity market itself. Ensuring that families and businesses across the country have secure, affordable energy supplies that they can rely on is a top priority. We are facing challenges to electricity security of supply resulting from the closure of older plant and the move towards less polluting, but more intermittent and inflexible technologies, such as solar, wind and nuclear. That is why we have the capacity market; this scheme ensures that there will be sufficient electricity capacity in Great Britain for this winter and beyond. It gives generators confidence that they will receive the revenue they need to maintain, upgrade and refurbish their existing plant, and to finance and build new plant to come on stream as and when existing assets retire. It also ensures that those who are able to shift demand for electricity away from periods of greatest scarcity, without detriment to themselves and to the wider economy, are incentivised to do so.
It does this by offering capacity providers, who are successful in competitive auctions held four years and one year ahead of delivery, a steady, predictable revenue stream on which they can base their future investments. In return for these capacity payments, providers must meet their obligations to deliver electricity or reduce demand at times of system stress or face penalties.
The capacity market is working. Fierce competition between providers in the auctions held to date meant that we obtained the required capacity at prices below the levels many had expected. That is good for consumers as it translates to lower costs on bills. The capacity market is driving investment in new, flexible capacity. The most recent four-year-ahead auction secured over 3.4 gigawatts of new-build generating capacity, including combined-cycle gas turbines, open-cycle gas turbines, small flexible engines and battery storage, as well as 1.4 gigawatts of demand-side response.
The clear message from industry and investors is that the mechanism retains their confidence and is the best available approach for ensuring our long-term security of supply. Industry and investors also stress that regulatory stability is crucial but that the scheme, operating in a rapidly changing environment, must be regularly reviewed to ensure it remains fit for purpose. The changes set out in the instrument are the latest in a series of amendments that ensure the scheme is kept relevant and workable. I will briefly expand on the amendments.
First, the instrument amends the method by which the costs of the capacity market are recouped from suppliers. It was felt the current supplier charge arrangements potentially gave an unfair advantage to embedded generators—smaller generators connected to the lower voltage distribution network—and could distort the outcome of the capacity auctions. That arises because, under current arrangements, suppliers are charged according to their share of total demand at peak times, measured by the demand they place on the transmission grid. That is their net demand. By contracting with embedded generators to run over winter peaks, some suppliers are able to reduce their net demand and therefore their share of capacity market costs, with others having to pay more. With some of the savings inevitably being passed on to the embedded generators, such arrangements unintentionally risk giving them a double payment for what is essentially only one contribution to security of supply. The instrument addresses the issue by amending the basis of the capacity market supplier charge and settlement costs levy from net to gross demand. That is a fairer way of sharing costs between suppliers: it ensures suppliers’ costs reflect their overall demand and helps ensure a level playing field between different generators in the auctions.
Secondly, the instrument seeks to prevent new and refurbishing plants being overcompensated in the capacity market where they are also in receipt of aid through risk finance schemes such as the enterprise investment scheme, seed enterprise investment schemes and venture capital trusts. Currently, there is a risk of double subsidy, which would likely distort the outcome of the capacity auctions. To ensure fair competition and value for money for consumers, the instrument asserts that where a capacity provider has accessed investment through one of these risk finance schemes to fund capital expenditure, their capacity payments must be reduced until such a time as this has been off-set. These off-setting arrangements ensure that the total amount of aid is capped at the amount awarded in the capacity market auction.
Thirdly, the instrument seeks to remove an inconsistency in the way demand-side response capacity is de-rated relative to other capacity types. De-rating is the process by which the volume of a provider’s capacity is adjusted to reflect the reliability of the technologies being used. Unlike other participants, demand-side response providers can nominate a lower amount of capacity to bid into an auction than the capacity they estimated at pre-qualification stage, but that nominated amount is not currently subject to de-rating. The instrument addresses that by ensuring that the nominated value is de-rated, thereby improving the overall reliability of the capacity that is procured. I hope noble Lords have got that.
Fourthly, the instrument clarifies the requirement that capacity market participants maintain credit cover until they have fully discharged all the requirements against which the credit cover has been lodged. In addition, the instrument puts beyond doubt that a party’s credit cover will not be drawn down where a termination fee is due unless the termination fee is unpaid.
Finally, the instrument amends the name, but not the substance, of the capacity market warning—a notification that must be issued in specific circumstances under the scheme. Revision to the capacity market notice better reflects the nature of the notification and will be clearer for participants.
My department published two consultations on these changes during September and October last year. In total, 38 responses were received across the two consultations. There was significant support for the majority of the proposals raised. I look forward to hearing what noble Lords have to say about the proposed changes.
My Lords, I am grateful to the Minister for reminding us of the long hours we spent on the primary legislation with the noble Lord, Lord Grantchester, who is in his place on the Labour Front Bench. We are sadly missing a previous Member of this House, Lord Jenkin of Roding, who understood absolutely all this very complicated legislation. Because it is so complicated it is not surprising that after a period of time we need to make some adjustments to it. It would appear that most people involved in this complicated market are in favour of the adjustments the Government wish to make to the previous legislation.
However, one of the areas in which I was involved in my early days in this House was the committee that looks at secondary legislation. In those days we looked quite carefully at the way government departments deal with these matters. There are rules laid down. Given that the way we deal with secondary legislation means we cannot really change it very much, it is important that government departments stick to the rules. I know that committee has highlighted this over the years. I draw the Minister’s attention to the fact that although they held consultations at the end of 2016, one of which closed in December, they did not respond to them until 22 March 2017. We will discuss another instrument in a moment and I will raise similar issues then.
I am happy to support what the Government are doing. It seems uncontroversial, but I charge the Minister, now he is in the department, with looking at the way they follow the rules on how we consult on and deal with secondary legislation.
(6 years, 10 months ago)
Lords ChamberMy Lords, these regulations amend the Electricity Supplier Obligations (Amendment & Excluded Electricity) Regulations 2015. They make provision for indirectly exempting eligible energy-intensive industries from part of the cost of funding the contracts for difference scheme. They aim to avoid putting these industries at a significant competitive disadvantage.
The transition to low-carbon—and the securing of our energy supplies—must be done in a way which minimises the cost to business and domestic consumers. Our industrial gas prices are internationally competitive but our industrial electricity prices have moved out of line with other European countries. The UK’s industrial electricity prices for large consumers in the EU 15 were the highest after Italy’s in 2016, as set out in The Clean Growth Strategy. This places UK electricity-intensive manufacturing industries at a competitive disadvantage and increases the risk of some deciding to relocate.
In order to meet our legally binding climate change and renewable energy targets, we have implemented a number of policies designed to incentivise generation of electricity from renewable resources. The costs of these policies are recovered through obligations and levies on suppliers, which pass these additional costs on to their customers. This results in electricity bills being higher than they otherwise would have been.
The CfD scheme is such a policy. It gives greater certainty and stability of revenues to electricity generators by reducing their exposure to volatile wholesale prices. The scheme is financed through a compulsory levy on electricity suppliers, which pass the costs on to domestic and business users through their electricity bills. The levy currently stands at almost £2.52 per megawatt hour. The funding costs of the CfD can reduce the attractiveness of the UK as an investment location and increase the risk that companies will invest or even move elsewhere. This is a scenario we wish to avoid, particularly as we exit the EU.
We intend to safeguard the competitiveness of those energy-intensive industries that are exposed to the additional costs arising from the CfD by exempting them from a proportion of these costs. An exemption scheme allows for real-time changes in energy use to be taken into account and provides certainty to business. The European Commission approved our state aid proposal to exempt certain EIIs from the cost of the CfD in December 2015.
The statutory instrument before us updates and improves the 2015 regulations. It brings them into line with the terms of our state aid approval, allowing us to commence the scheme. We recognise that the exemption will redistribute the cost of financing the CfD among other electricity consumers. We estimate that this will increase annual household electricity bills by around £1 between 2018-19 and 2023-24. None the less, we have taken steps to reduce consumer bills, which are now lower than they might otherwise be. Indeed, our energy efficiency policies reduced the average household energy bill by £161 in 2016. After taking account of the cost of policies for delivering cleaner energy, supporting vulnerable households and investing in upgrading our buildings, there was a net saving of £14 on the average household energy bill in 2016. Energy efficiency is the best long-term solution for tackling fuel poverty.
Since April, 70% of the £640 million per year energy company obligation has been focused on low-income households through the affordable warmth part of the scheme. This will upgrade the energy efficiency of more than 300,000 homes per year, tackling the root cause of fuel poverty. Certain households can also get £140 off their electricity bill for winter 2017-18 under the warm home discount scheme.
These regulations amend the original 2015 regulations. These amendments are necessary to bring those regulations into line with the Commission’s state aid approval. We are also making certain technical changes to the regulations to improve the administration of the scheme. The effects of the amendments include, among others: changes to eligibility; allowing new or restructured businesses to claim the benefit of the exemption; a requirement on beneficiaries to notify us, to help us ensure that they receive the exemption to the correct level and only if they are eligible; and allowing a company to apply for the exemption if it does not obtain electricity directly from a licensed electricity supplier.
The House of Lords Secondary Legislation Scrutiny Committee raised a number of points relating to consultation and timing, provision for direct competitors and the impact on consumer bills. I will summarise the main points. The policy to exempt eligible energy-intensive industries from a proportion of the costs of CfD had been subject to three previous consultations. The third consultation covered technical amendments to the regulations rather than policy changes, as the policy had already been consulted and agreed on previously. Our original intention was for these regulations to come into force at the end of February. However, some of the technical issues needed further consideration to ensure that the amended regulations achieve their aim. We involved stakeholders throughout the whole of this process.
Our original intention had been to provide relief to direct competitors—businesses which do not meet the eligibility criterion on electricity intensity but which manufacture the same product as eligible companies in the same sector. This was to create a level playing field and prevent market distortions within sectors. We submitted a state aid notification to the European Commission to address this issue. However, the Commission does not think our proposal is compatible with the relevant state aid guidelines. We are currently considering alternative options which may be open to us within the scope of these guidelines.
These draft regulations will make the necessary changes to the 2015 regulations to allow us to exempt eligible energy-intensive industries from up to 85% of the indirect costs of funding the CfD scheme. As well as providing these businesses with greater long-term certainty, the measures set out in these regulations will reduce the price differential between eligible energy-intensive industries and their international competitors, mitigating against the risk that these companies are put at a significant competitive disadvantage and might choose to move their production abroad. I commend these regulations to the House.
I am grateful to the Minister for ranging a little wider than the regulation before us. I was going to ask him about how some of this fitted in with the Government’s wider policy aims, particularly on decarbonisation. I recognise that industries that are intensive users of energy find some of the decarbonising regulations quite difficult. I recognise that there is a balance to be struck, but I would be interested to know whether the department has looked carefully at or has any figures about what the balance will be on decarbonisation after this.
The Minister also replied a little to the criticisms of the Secondary Legislation Scrutiny Committee. I read with interest what it had to say because six weeks are recommended for consultation, but there were precisely five weeks, and it is rather bad practice to consult across the summer holiday period, which is what the Government did. That was pretty unfortunate. They were trying to get regulations in place by February 2017. In the end, they did not come until March, so I think something is not working quite right in the Minister’s department. He is fairly new there, so I challenge him to see whether in the next year it can have less criticism from the Secondary Legislation Scrutiny Committee when it brings forward matters such as this.
Apart from that, I recognise that the Government are trying to balance several things: how they can help industries that are intensive users, the regulations for decarbonisation and state aid rules from Europe. I recognise that that is not easy. I hope they have it right. I cannot profess to understand some of the very complicated matters in these types of regulations—I wish we had Lord Jenkin of Roding here as he would put us right if we had got it wrong. We are happy to support these regulations as far as they go. I hope we are not supporting something that we will regret in future.
(6 years, 10 months ago)
Lords ChamberMy Lords, I am not able to answer that question. It is not specifically related to the Question in front of us, but it is none the less extremely important and I will write to the noble Lord later.
My Lords, can the Minister tell us why the Government have extended from 12 months to 18 months the period in which the energy company obligation will operate, and why they have put a cap on boilers in that transition period? Could the Government use the upcoming Budget to make sure that emergency funding is available to the most vulnerable for boiler repairs and replacement?
My Lords, I believe that the ECO is there until 2028. I do not recognise the 18-month figure that the noble Baroness mentions, but I will check that afterwards. As for how we spend the money under the energy company obligation, there is clear evidence that it is better put towards longer-term improvements such as insulation than the short-term repair of boilers. However, part of the ECO is spent on boiler repair.
(7 years, 5 months ago)
Grand CommitteeMy Lords, I accept that noble Lords who have spoken regard this order as a curate’s egg and that it does not go as far as they would like. I will try to address the more general questions raised by all three noble Lords. The Government feel that the supplier obligations have proven to be remarkably successful, but we have probably pushed them as far as they can go. That is why we have decided to cap the supplier obligation at £640 million. The noble Baroness, Lady Maddock, and the noble Lord, Lord O’Neill, think that we should go further. If I might slightly oversimplify it, I think I am right that the noble Lord, Lord O’Neill, feels that we should consider raising taxation more generally to solve this issue, whereas the noble Baroness, Lady Maddock, thinks that we could take money from other areas that we are spending money on to put more money into this area.
To start with the noble Lord’s point, our response is not to increase central taxation. He mentioned a figure of £12 billion, and the noble Lord, Lord Grantchester, came up with a figure of £20 billion to 2030. That level of increased taxation is simply not an option—at least not for our Government. Our response to the issues that the Prime Minister has focused on is not to raise general taxation, but to try to address the issue by improving the productivity of the country, which is why we have an industrial strategy. Frankly, to load a lot more general taxation on to our economy cannot be a way to improve productivity. I do not know whether that view will be shared by the leader of the Opposition—who knows these days?—But it is certainly not an option for us to raise central taxation. The noble Baroness, Lady Maddock, said that there must be other areas that we could take money from.
For example, we know that people who live in cold or damp homes, particularly elderly people, cost us a huge amount in the health service. Over the years, NEA has run various schemes and has looked carefully at this. That is one area where we could look to see whether we could get some money because it will save money in the long run.
I understand that argument, but it would take five minutes to have a whole list of other parts of the population, whether it is people who have mental health problems or learning difficulties or old people who are lonely. There are lots of people we would like to do more for and from whom there will be knock-on benefits to the NHS, social services and the like. As the noble Baroness will know well, the trouble with politics is that choices have to be made. It is very easy to say that we should take more money from this group and give it to that, but if only life was so simple.