Lord Crickhowell
Main Page: Lord Crickhowell (Conservative - Life peer)
Viscount Ridley
My Lords, I had not intended to intervene on this amendment and I shall do so extremely briefly, mainly because I have been moved by the words of my noble friend Lord Deben and the noble Lord, Lord O’Neill, to say that I heartily agree with them. As I do not always agree with them on everything, I suspect that that is terrible news to them, but I think that this little outbreak of what one might call “free-market anti-capitalism” is a very good point. The point of competition is to drive co-operation between producers and consumers—to cause producers to do things that help consumers both by innovation and by the lowering of prices. I shall not go on any further; I just wanted to record that fact.
Lord Crickhowell
My Lords, I had not intended to intervene but, while listening to this debate and agreeing with what has been said, particularly during the recent speeches, I was also glancing at the Explanatory Notes to the Bill. It is rather interesting that under Chapter 6 the Government have an essay on access to markets. The notes refer to wholesale market liquidity as,
“an important feature of a competitive market. It provides market participants with a route to market, risk management opportunities and investment and operational signals”.
It goes on to talk about the importance of liquidity and, further down, it says:
“Independent developers have played an important role in delivering new capacity in the renewable and gas generation sectors and could play a key role in meeting the Government’s goals and deliver essential investment in the future, provided market conditions are right”.
Having said all that, surely it is entirely appropriate that, when we get on to electricity market reform and the duties placed on the Secretary of State, the points made by my noble friend in this amendment should indeed be there. If these are the matters that the Government consider important in their introduction to Chapter 6, it must surely be right that this should be one of the factors that the Secretary of State has to take account of. It should therefore be listed in the Bill.
Baroness Verma
My Lords, I thank my noble friend Lord Jenkin and the noble Baroness, Lady Worthington, for their amendments and for the opportunity to debate some of the important issues that they have raised. In relation to Amendment 52, Clause 5 sets out the matters to which the Secretary of State will have regard when carrying out specific EMR functions to meet the objectives of EMR. Effective competition is fundamental to delivering the Government’s energy policy objectives of having energy security, keeping consumers’ bills affordable and decarbonising our energy sector. EMR will deliver the greener energy and reliable supplies that the country needs at the lowest possible cost, which is good news for the consumer, by reducing exposure to volatile and rising fossil fuel prices and securing electricity supply.
Increasing competition in the electricity market drives down prices and promotes innovation—hence competition will be considered in the context of the requirement at Clause 5(2)(d) to consider the likely cost to the consumer. For example, we are designing the capacity market in a way that promotes competition —in particular, between incumbents and the new entrants that my noble friend Lord Jenkin is anxious to see. By providing a steady revenue stream in place of dependence on volatile scarcity prices, the capacity market will help to ensure that we can enable broad participation. Furthermore, we are incentivising new investment in plants by offering longer-term contracts to new plants, which will enable the costs of capital to be spread over longer periods. This will be important in ensuring that new independent entrants can compete with incumbents, as they would be likely to find it difficult to access finance with a short-term contract.
However, it is important to note that independent generators are a broad mix. They are not just medium or small-scale firms. Some are large European or international utilities, such as GDF Suez, which do not currently have a major presence in the UK wholesale or retail market. To ensure that we capture the interests of this broad group, we have been working, and will continue to work, with the independent generators’ group on the design of the capacity market.
The Government are also addressing problems affecting competition within the market. This includes poor liquidity in the wholesale electricity market and tariff complexity in the retail energy market. We are working with Ofgem to tackle these now, and have taken back-stop powers in relation to both areas in this Bill to ensure that reforms can still be driven forward if Ofgem’s proposals are either frustrated or delayed.
We recognise that it is important to help independent generators to secure access to the market. We are aware of their concerns that it is becoming more difficult to secure a power purchase agreement and that terms have declined. We have been working to gain a better understanding of the complex PPA market and the investment issues for independents. Since last year’s call for evidence on access to markets, we have undertaken analysis of the issues and the potential options for addressing them. I hope to provide further information to the Committee on this very shortly.
The ultimate aim of electricity market reform is to allow all forms of electricity generation to compete fairly, and therefore to enable the least-cost mix of generation and demand-side measures necessary to meet our decarbonisation targets, ensure security of electricity supply and keep costs to consumers as low as possible. I hope that noble Lords will be reassured that competition is therefore at the heart of the design of all EMR functions. Consequently, it is the Government’s view that my noble friend’s amendment to Clause 5 is unnecessary.
Turning to Amendment 52A, throughout the development of EMR we have been clear on the objectives of these reforms. They have been set out in our published documents, from the EMR White Paper of July 2011 onwards, and the objectives set out in Clause 5 reflect these. The amendment would add the duties set out in Sections 3A to 3D of the Electricity Act 1989 to these objectives in Clause 5. However, the Electricity Act 1989 relates to the operation and regulation of the market, which is a different purpose from the new mechanisms that we are introducing through EMR. Contracts for difference and the capacity market are designed to complement the existing market structure and have been developed with the specific objective of moving to a secure, low-carbon energy mix at least cost to the consumer.
Furthermore, the amendment would risk causing duplication. For example, Section 3A(2)(a) of the Electricity Act 1989 relates to ensuring that electricity demands are met, and this would duplicate Clause 5(2)(c) of the Bill. We have made clear the importance of considering the cost to consumers at Clause 5(2)(d).
I turn now to Amendments 54 and 55, linking the principal objectives and duties in Clause 33 to the Secretary of State in relation to the capacity market. The purpose of this clause is to align the principal objective and general duties of the authority, in carrying out functions in the capacity market, with its principal objective and duties in the current electricity market. The reason this clause does not apply to the Secretary of State is that Clause 5(2) in Chapter 1 sets out what the Secretary of State must have regard to in relation to making capacity market regulations, as well as other EMR functions.
As I have already indicated, encouraging competition will be central to the way that the Secretary of State makes capacity market regulations. Promoting competition will be an effective way of achieving the aims of having regard to ensuring security of supply to electricity consumers and having regard to the likely cost to electricity consumers. We feel that it is impractical to require the Secretary of State to have regard to two separate lists of matters: those in Clause 5 as well as the principal objective and general duties in the Electricity Act 1989.
I hope that I have been able to reassure my noble friend and the noble Baroness, Lady Worthington, with my explanations and that my noble friend will feel content to withdraw his amendment.