Drax Power Limited: Ofgem Investigation
Debate between Earl of Effingham and Lord Hunt of Kings Heath(1 week, 6 days ago)
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Lord Hunt of Kings Heath (Lab)
My Lords, I realise that it sometimes sounds counterintuitive. None the less, the carbon emitted during the supply-chain process, and in the process at Drax and places like it, is netted off by the growth in forestry, which absorbs the carbon. That is a well-accepted international approach. It produces 2.6 gigawatts at Drax, 4% of our electricity generation in this country, with over 2,500 people employed in the local region, and it is classified as renewable.
The Earl of Effingham (Con)
My Lords, the Government have introduced further environmental levies, which the OBR predicts will add an additional £2.8 billion to electricity bills between 2025 and 2030. Can the Minister please explain what support the Government will offer to consumers so they are not adversely affected by this move?
Lord Hunt of Kings Heath (Lab)
I remind the noble Lord that policy costs on bills have increased from £115 on average in 2010 to an estimated £309 in 2024, so a lot of this increase occurred under his Government and the previous Conservative and Lib Dem Administrations. If we are serious about going towards clean power and net zero then we have to accept that we must finance the development of new energy-generating structures, and that is the case for biomass. Equally, that has to be done under sustainability criteria regulations that will ensure it happens. As for the OBR, its analysis has highlighted that delayed action on reaching net zero will have significant negative fiscal and economic impacts.
Contracts for Difference (Electricity Supplier Obligations) (Amendment) Regulations 2024
Debate between Earl of Effingham and Lord Hunt of Kings Heath(3 weeks, 6 days ago)
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The Minister of State, Department for Energy Security and Net Zero (Lord Hunt of Kings Heath) (Lab)
My Lords, these draft regulations were laid before the House on 30 July 2024. This instrument forms an important part of the Government’s commitment to accelerate the deployment of carbon capture, usage and storage—CCUS. We believe this to be critical to deliver clean energy and accelerate our net-zero journey. As the Government recently announced, CCUS is vital as we enter a new era of clean energy, investment and jobs. By boosting this tried and tested technology, the UK has the potential to become a global leader in CCUS, delivering good jobs and economic growth for decades to come.
A critical element of the CCUS mix is the successful deployment of power CCUS—gas-powered electricity generators fitted with carbon capture technology. Power CCUS will complement the rollout of renewable energy, providing secure, flexible, non-weather-dependent low-carbon electricity, critical for a reliable energy system and achieving our mission of clean power by 2030.
The Government are committed to incentivising the deployment of power CCUS and this instrument will enable future payments to power CCUS plants under the business model known as the dispatchable power agreement. This agreement—the DPA—is the contractual framework to support power CCUS. It has been designed specifically to incentivise the investment and deployment of power CCUS in the UK. The DPA is a type of contract for difference and, like a contract for difference, uses the electricity supplier obligation to fund support payments. This levy is calculated and managed by the CfD counterparty—the Low Carbon Contracts Company—and collected from electricity suppliers, who are able to pass the costs on to their customers if they choose to do so.
In addition to the existing renewable contract for difference contract design, the DPA business model will provide an alternative payment based on a power CCUS generator’s availability. This availability payment is based on a generator’s availability of electricity generation and carbon capture, and associated carbon dioxide transport and storage network costs. Under the DPA terms, payments will reduce proportionally to reflect any reduction in a generator’s capture rate or generation.
The payment is made whether a generator dispatches power or not. This ensures that a CCUS power plant will run in response to market signals, ahead of unabated gas plants, but will not surpass cheaper renewables. This arrangement will strengthen security of supply, ensuring that a source of reliable low-carbon energy is available when the wind does not blow and the sun does not shine.
Let me be clear: this proposed instrument enables only certain types of payments under the renewable CfD and DPA contracts to be funded by the supplier levy. Any future support offer to a project will be subject to rigorous negotiation with partners. Any decision to award support will be subject to value-for-money and subsidy control tests to ensure best value for money for consumers.
In effect, this statutory instrument amends the Contracts for Difference (Electricity Supplier Obligations) Regulations 2014. The amendments will allow the payments made under the DPA to be funded by the supplier levy, by changing how the supplier levy rate calculation works in the regulations.
First, Regulation 4 relates to the way an electricity supplier’s daily contributions paid to the CfD counterparty is calculated. This instrument amends Regulation 4 to enable the definition of generation payments such that the supplier obligation can be charged for payments related to the activities of a dispatchable power plant fitted with CCUS technology. This includes amendments to take into account: the electricity generation capacity made available by a generating station on a given day; a generating station’s achieved carbon dioxide capture rate or capture capacity on a given day; the incurred CO2 transport and storage capital costs incurred for transporting such captured carbon dioxide and if required, associated carbon dioxide; transport and storage network revenue shortfalls proportionate to a DPA-supported generating station which arose on that day.
Secondly, Regulation 7 of the 2014 regulations sets out how the CfD counterparty estimates the quarterly obligation payment that electricity suppliers will be required to provide to the counterparty. This instrument amends Regulation 7 to ensure a consideration of matters related to a dispatchable power agreement-supported generating station are taken into account, including the carbon dioxide transport and storage network capital costs and, if required, revenue shortfalls, and the amount of carbon captured.
Together, these amendments allow a CfD counterparty to estimate, raise funds and ultimately pay a DPA-supported CCUS-enabled power plant. The existing payment calculation, based on the amount of electricity generated by renewable CfD-supported generating stations is retained and unaffected.
These proposals have been long considered as the power CCUS business model has been updated. This has included update publications in December 2020, May 2021, October 2021 and April 2022. The instrument was formally consulted on from December 2023 and received a range of responses from electricity suppliers, power operators, a trade body and a consumer-focused charity. Respondents were broadly in agreement with the principles laid out. My department continues to engage closely with industry in the development of the CCUS sector.
In summary, this instrument represents a positive step forward in the delivery of the Government’s ambitious CCUS programme and 2030 clean power mission. It will lay the regulatory groundwork to encourage the deployment of power CCUS and begin to unlock the great economic and jobs opportunities that we see coming from this important development. I beg to move.
The Earl of Effingham (Con)
My Lords, His Majesty’s Official Opposition welcome the Government’s Contracts for Difference (Electricity Supplier Obligations) (Amendment) Regulations 2024. These regulations will enable licensed electricity suppliers to make payments to natural gas power plants fitted with carbon capture, usage and storage—also known as CCUS—technology. In 2023, we introduced funding for CCUS with the plan to make up to £20 billion available to support the early development of CCUS, so we welcome this step as an essential part of reaching the net-zero target, and we are pleased to see that the current Government are continuing our work in this area.
On these Benches, we both aspire to and understand the need to reach net zero, and there is indeed consensus from all on the 2050 target. The use of carbon capture technology will play an important role in achieving that goal, and this amendment introduces incentives for suppliers to produce low-carbon electricity—an objective with which we agree.
However, we seek clarification from the Minister. When in government, we committed to deploying CCUS technology in four industrial clusters by 2030. Can he please inform the Committee as to whether his Government will also commit to working towards and reaching that same target?
Lord Hunt of Kings Heath (Lab)
My Lords, I welcome the noble Earl’s welcome for the statutory instrument. He is right that a lot of the original work was undertaken by the previous Government. I think I said in my opening speech that most of the consultations took place under the auspices of the previous Government, so there is clearly consensus about the key role of CCUS.
I had expected greater attendance and that we might have debated the principles of CCUS. For me, it is an essential part of the transition. We will need gas-powered electricity generators for years to come. They give the flexibility we need in relation to renewables and having nuclear as a baseload. If we can have it abated then that would clearly decarbonise our energy structure, but it can also play a key role in the industrial use of energy.
On the noble Earl’s question, I say gently to him that, in a sense, the previous Government’s £20 billion seemed rather a theoretical figure. We have had to work hard with our colleagues across government to get to the almost £22 billion that we have announced. Clearly, that money is to be spent on building the foundations for the industry. Basically, the funding we have announced is being invested in our first projects. These include the underpinning CO2 transport and storage networks and three CO2 capture projects. Other projects will join later, but these are subject to agreement across government. Of course, the noble Earl will know that we will have the Budget and spending review decisions very shortly. I will have to wait till those decisions are made before I respond on where we will go next.
I thank the noble Earl for his general support for this instrument. I believe we need as much political consensus as possible in relation to net zero, and the general support for CCUS is very welcome.
Carbon Dioxide Transport and Storage (Determination of Turnover for Penalties) Regulations 2024
Debate between Earl of Effingham and Lord Hunt of Kings Heath(3 weeks, 6 days ago)
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The Minister of State, Department for Energy Security and Net Zero (Lord Hunt of Kings Heath) (Lab)
My Lords, these regulations, which were laid before the House on 30 July, are technical but, we believe, necessary. They are part of the implementation of the economic regulation framework for carbon dioxide transport and storage established in the Energy Act 2023.
I do not need to repeat what I said earlier about the potential of CCUS, but one of the key points here is the potentially monopolistic characteristics of carbon dioxide pipeline transportation and storage infrastructure. A framework of economic licensing and regulation is necessary to prevent anti-competitive behaviours by infrastructure operators and ensure protections for users and consumers.
Under this framework, an operator of a carbon dioxide transport and storage network requires a licence that permits charging users of the network a fee for delivering and operating the network. The licence will determine the “allowed revenue” for a transport and storage operator, reflecting its efficient costs and a reasonable return on its capital investment. The economic regulator, Ofgem, will oversee charges and determine whether costs can be passed on to users in accordance with the agreed economic framework.
To ensure that the economic regulation framework operates as intended, Ofgem has enforcement powers to ensure compliance with licence conditions and provide appropriate redress for any regulatory breaches. Such redress includes the ability for Ofgem to impose financial penalties on licence holders for contraventions of the licence, up to a maximum amount of 10% of company turnover. That the maximum amount of penalty cannot exceed 10% of company turnover is established in the primary legislation; the regulations that we are discussing today specify how a company’s turnover is to be determined for the purpose of calculating the maximum amount of penalty that could be imposed.
The amount of financial penalty imposed will not automatically be set at the maximum; the maximum penalty of 10% of turnover is a cap, not a target. Any penalty imposed should be reasonable and appropriate, considering all the circumstances of the case. The regulations before us today set out that turnover is to be calculated based on the revenue from the company’s ordinary activities, excluding trade discounts, VAT and other taxes. This includes revenue from goods and services provided by the company, whether authorised by the licence or not.
The turnover is usually based on the company’s revenue for the business year preceding the date of notice of the penalty. However, if the business year is not 12 months long, the turnover is adjusted proportionally. This is consistent with general accounting practices. Any financial assistance from public bodies or publicly owned companies that is directly linked to the company’s ordinary activities, or is provided under a carbon dioxide transport and storage revenue support contract, is included in the turnover calculation.
Ofgem is required by the primary legislation to prepare and publish a statement of policy outlining its policy and approach to enforcement and penalties in the carbon dioxide transport and storage sector. This statement of policy should include the factors and circumstances considered in decisions on whether to impose a financial penalty and in determining the amount of any financial penalty. Ofgem has consulted on documents explaining how it will conduct its enforcement activities and issue penalties in its role as the economic regulator of the CCUS sector. The consultation closed in early July; Ofgem has now considered and published its response.
To conclude, these regulations are technical but necessary, providing clarity on what is meant by “turnover” when determining the maximum amount of a financial penalty that can be imposed by Ofgem. We see these regulations as an essential part of the economic regulation framework for carbon dioxide transport and storage, designed to overcome market barriers to deploying CCUS infrastructure in the UK and achieving net zero while protecting the interests of users and consumers of this infrastructure. I beg to move.
The Earl of Effingham (Con)
My Lords, these regulations are made using the powers created in the Energy Act 2023. They form part of the implementation of the economic regulation framework for CO2 transport and storage involved with carbon capture, usage and storage—CCUS—which we have just debated.
This measure will introduce a framework of economic licensing and regulation to prevent anti-competitive behaviour and to avoid the potential monopolistic characteristics of CO2 pipelines. Operators of carbon dioxide transport and storage networks will operate with licences that allow them to charge gas plants for using their CCUS services. This licence will determine the revenue that the CO2 transport and storage operators can receive. Ofgem will oversee the charges and determine whether the costs can be passed on to users.
As we have heard, Ofgem will have the power to address any regulatory breaches with a financial penalty of up to 10% of company turnover. However, it will not automatically be set that high; the 10% is a cap, not a target, and Ofgem will have to publish a statement of policy to explain any penalties.
His Majesty’s Official Opposition support this regulation. I will use the words of my colleague in the other place, as he put it so well:
“The regulations address a technical point arising from the Energy Act 2023 and follow on from the ambitions of the previous Government. This is a necessary measure to clarify the technical detail of how big the maximum fine can be, and we are 100% behind it”.—[Official Report, Commons, Fourth Delegated Legislation Committee, 9/10/24; col. 4.]
Lord Hunt of Kings Heath (Lab)
I am very grateful to the noble Earl. I emphasise two points. First, the 10% is a cap, not a target, as he rightly said. Secondly, Ofgem has now published its statement of policy, so we have the clarity that industry needs. Having said that, I am most grateful to him for his support. I beg to move.