Electricity Supplier Payments (Amendment) Regulations 2016

Debate between Lord Deben and Lord Grantchester

Wednesday 2nd March 2016 Grand Committee

[Lord Grantchester (Lab)]

I thank the Minister for his introduction to the regulations. As he rightly says, they are mostly technical in nature and do not impact on policy to any large degree. The ESO regulations around the CFD counterparty to raise funds are largely operational and, quite understandably, are likely to be subject to amendment through operational experience in order to improve efficiency and increase transparency with a view to reducing the costs of the scheme for suppliers and their consumers.

All the amendments included in the regulations appear sensible and come with a very large acceptance on the part of stakeholders, both through consultation responses and through discussions at a stakeholder event in October last year. The main amendments are largely financial and will lead to changes between the balance of funding moving more towards the interim levy and away from the reserve payments. Notice periods for changing the interim levy rate will become more flexible, deadlines will become more helpful, and generally information, data and recognition of commercial sensitivities will improve the scheme’s operations. Within the structure of the scheme, that is commendable.

However, seeing the details of its workings, the CFD counterparty mechanism struck me as somewhat cumbersome. While I am sure that there are unlikely to be major changes to the structure, nevertheless the Minister might enlighten the Committee about why the scheme is set up with quarterly contributions to reserve funds and a yearly operational costs levy for the capacity market settlement body.

I understand the reasoning behind setting up the CFD counterparty in relation to Treasury implications and as the mechanism through which CFDs will be administered and paid, but I understand that suppliers strongly urged the Government to allow the CFD counterparty to operate a working capital model for funding cash flow and building reserves as a more commercial way to operate. Surplus levies could then be rolled into subsequent levy periods to smooth out volatility of payment. Can the Minister confirm whether reserves and operational cash flow costs are to be reconciled to suppliers every year and balanced?

In the reconsiderations of the scheme, did the Minister’s department put any thought into whether working capital arrangements at a marginal cost to public borrowing requirements could be less cumbersome and less costly to operate? In trying to widen and increase the pool of supply participants, are the Government confident that the costs on small independent suppliers are not constraining their participation? I am sure that the Minister will confirm that the CFD counterparty body will be audited, but are there other operational cost checks on the operation of the body?

Perhaps I may widen my remarks beyond the supplier obligation to CFDs in general for a moment. I take the opportunity today to ask the Minister whether the Government will set any technology requirements or specific exclusions for participants in the next auction. I am thinking here of onshore wind and solar technologies. Can the Minister confirm that they will still be allowed to participate so that these technologies can develop and generators will have a continuing route to market for returns on their investments? With the challenge of climate change and the changes required of the UK energy market, we wish to be technology neutral.

[Lord Deben (Con)]

My Lords, I declare an interest as chairman of the Committee on Climate Change, and I want to comment on these documents.

It is extremely helpful to have had the Minister’s clear explanation. Of course, congratulating a Minister means that you are then going to use the word “but”, and that I intend to do. One problem is that the public find all these matters impenetrable. I recognise that they are technically very complex, but I ask the Minister to seek better ways of explaining the system to a wider range of people. I spend a lot of my time doing that, and I hope that I get it right, but one of our difficulties in trying to convince people of the battle that we face on climate change is that many of the arguments are not easy to understand. Therefore, a constant desire to try to explain what we are doing and how it works in language which normal people can understand is very important. I do not expect, and I am sure that no one here would say, that the statutory instruments here will advance that cause. However, I do not want us to miss the opportunity of saying that what the Minister has so clearly said really needs to be said more widely, because there are many for whom difficulty arises simply because they do not understand.

Water Bill

Debate between Lord Deben and Lord Grantchester

Tuesday 25th March 2014 Lords Chamber

[Lord Deben (Con)]

My Lords, I declare a past interest as a former chairman of a water company in this country and I sit on the board of one on the continent of Europe. I hope that my noble friend will take the remarks of the noble Earl, Lord Selborne, very carefully because there is a tendency to think of water as if it is like any other utility. Of course it is not because water is different, wherever you take it from, and it will be under bigger pressure than ever before because of the effects of climate change and of demand increases.

It is often possible in a small area to provide a small programme of water supply at a lower price because it is being tailored particularly and for very narrow demands. We are going to have to find better ways of sharing water supply in any case because of what is happening in this country, so the point that my noble friend Lord Selborne raises is very important. I have read carefully my noble friend’s comments about the Bill. None of us wants to reduce the amount of competition which the Bill provides, but I hope that the Minister will give some reassurance which goes beyond merely saying that Ofwat has the powers to deal with this. That is because I share my noble friend’s doubts that Ofwat has those and whether those powers would stand up in law—certainly, whether they would stand up were the law part of the very valuable European legal structure under which we operate. Thank God for the European Union, or we would never have the water supply which we have today. Our water would be much less clean and we would have much lower standards. We owe a great deal to our membership of the European Union on this, as on most other things.

However, on this particular issue we have to ensure that the Bill does not put us into a position in which de-averaging—one of the ugliest words in the English language—becomes a serious problem. I hope that the Minister will be able to reassure me that the legal situation is fully covered because I, too, think that there is sufficient precedent to make anybody reasonably concerned.

[Lord Grantchester (Lab)]

My Lords, I declare my interests as a farmer, thereby living in a rural area. Like the noble Earl, Lord Selborne, I am concerned with the effects generally on rural areas. While there are risks, I am not sure that this is the case here. We support the introduction of competition into the non-domestic market and take the issue of de-averaging very seriously. The noble Lord, Lord Deben, has spoken about how we must, indeed, be assiduous in making sure that price averaging is maintained as far as possible. However, we are satisfied that Ofwat has all the necessary regulatory tools to enable it to limit the effects of de-averaging.

Competition can also be about bringing innovation to the market in services and introducing efficiencies. However, we remain concerned that these amendments, which have been tabled by the noble Earl, Lord Selborne, might allow incumbent suppliers to constrain the development of future markets, thereby reducing the benefits that competition could bring.

Energy Bill

Debate between Lord Deben and Lord Grantchester

Tuesday 2nd July 2013 Grand Committee

[Lord Grantchester]

My Lords, I will speak also to Amendment 25 in this group. Amendment 12 ensures that, on a decarbonisation order being made, the existing requirement on the Government under Section 5 of the Energy Act 2010 to report on CCS developments every three years is not removed.

The Explanatory Notes state that,

“the repeal of the three yearly progress reporting requirement on decarbonisation and Carbon Capture and Storage contained in section 5 of the Energy Act 2010 … is to remove duplication, since the scope of these reporting requirements is covered by clause 3 of this Bill”.

However, that fails to recognise that under the Bill there is no certainty that there will be any reporting on CCS. Repealing the triennial reporting on both but bringing in requirements only on decarbonisation means that in effect there will be no reporting on CCS. This would be very unsatisfactory. Section 5(1)(a) maintains reporting on CCS.

The first and latest report on CCS was made in 2012. It is a very useful document which outlines the components of the Government’s CCS road map and the funding of research and development initiatives, including pilot projects. It outlines the development of the UK’s storage atlas, identifying nearly 600 storage sites across the UK. The report also puts into context UK action to support CCS by comparison with initiatives in other countries; for example, the US has two commercial-scale projects already under construction, with commencement of operation scheduled for 2014.

CCS is a hugely important technology for the decarbonisation of energy. My noble friend Lord Whitty has already mentioned EU Sub-Committee D. Its report emphasised the critical need for technologically and commercially viable CCS to be fitted to new coal-fired power stations in order to hit our carbon savings trajectory by 2050. While there has been slow progress at EU and UK level, the UK could yet achieve leadership through successful pilots, adequate resources and a clear regulatory framework. We have some of the best storage capacity in Europe. We have decades of offshore engineering experience that can be applied to this new sector.

Progress has certainly been unnecessarily slow. The introduction of contracts for difference in this Bill, together with the £1 billion made available to support demonstration projects, is intended to move things forward in the UK. We expect significant progress to be made in the coming years and regular reports on progress are therefore necessary. Future reports should continue to expand assessments of developments in other countries, including policy developments in the EU and projects under way elsewhere, such as in China, so that lessons can be learnt and our own strategy informed by the latest advances in other countries.

It is vital that Parliament is kept abreast of these CCS developments and we see no reason why the passing of the Energy Bill in 2013 should remove this useful requirement to report.

Amendment 25 would make the annual requirement follow the enactment of the Bill rather than as stated in Clause 3(3). The Energy Bill is intended to deliver a big increase in investment in low-carbon electricity in the UK. The measure of its success will be the rate of reduction of carbon intensity of electricity over time. This Committee has already debated the setting of targets for carbon intensity that are intended to give investors confidence by requiring that the Government maintain policies beyond 2020 to decarbonise electricity. However, we should not forget that there is a near-term challenge significantly to reduce carbon intensity in the UK as soon as possible.

As my noble friend Lady Worthington has pointed out already, there is significant potential to reduce carbon intensity simply by acting to ensure the merit order of existing plant is optimised. Unfortunately, a combination of low coal prices and high gas prices has led in recent years to a significant increase in carbon intensity. Between 2011 and 2012, carbon intensity rose from 450 grams per kilowatt hour to 530 grams per kilowatt hour as coal plants that would normally provide load-following capacity began to baseload.

Recent closures of plant due to sulphur restrictions under the large combustion plant directive should help to reverse this unfortunate trend. However, if we are serious about managing our carbon emissions and proceeding on a cost-effective path to our legally binding targets, we need a policy framework that rewards plant that are the cleanest and most efficient and that penalises the most polluting. Only then will the merit order be such that we are achieving our goals at least cost—knocking more than 200 grams off our carbon intensity without the need to subsidise any new plant at all.

The Government must not treat the carbon intensity of our electricity as an afterthought. It is one of the most important measures of progress and is how we can judge the success, or otherwise, of the Bill. The Minister may point to the annual reports contained in the Digest of UK Energy Statistics as a reason for not introducing annual reporting. However, this is a lengthy document, not intended for a parliamentary audience and, indeed, not even laid before Parliament. The triennial report produced in 2012 is a much more concise and useful document. It should be made an annual report, and this amendment seeks to deliver that.

While we are on the subject of the reporting of carbon intensity, does the Minister agree that, in the future, there will be demand for much more frequent reporting than annually? As the mix of electricity changes to contain more varying forms of power—from wind, wave and sun—there will be times of the year and times of the day when supply is high and prices will fall and also times when the opposite is true. Reporting the carbon intensity of electricity in real time will enable customers to see when it makes most sense, environmentally and economically, to use electricity. Reporting in real time would enable the development of tariffs that allow customers with flexible demand to profit from moving their demand to times when electricity is cheapest. The development of electricity storage solutions would also be facilitated as a business model, whereby demand is absorbed during times of high low-carbon supply and delivered back to the grid at times of low supply.

At the moment there are a number of applications that purport to report the real-time carbon intensity—GridCarbon and Realtimecarbon being just two. However, it is not clear whether these applications, which take data from the national grid and use them to calculate the carbon intensity of all the plant delivering electricity to the transmission, are accurate. A considerable volume of renewable generation—several gigawatts—is connected directly to the distribution network and may not be being captured by these grid-based applications.

It is time that the Government took a lead in developing a gold-standard methodology for providing this information and I would be grateful if the Minister could comment on whether her department can undertake this important task. I beg to move.

[Lord Deben]

My Lords, perhaps I might counsel the Minister to be very careful about accepting these amendments. They seem to confuse a range of different things. They also demand a degree of reporting that might get in the way of the action that I hope will be carried through. The reporting system we have at the moment was designed by Parliament. It stipulates that there should be reports from outside the ministry on the ministry’s and the Government’s performance. If there are areas where it is not done properly, I, as chairman of the climate change committee, would want to know that, in order to see whether we should produce reports in areas that we do not cover at the moment.

I am very concerned about the current desire to report so often as we go along that we do not actually do things. I see this throughout government. We have to be extremely careful. There are two kinds of issue here. The idea that we should have reporting more often than once a year, and that we should have real-time reporting, are issues of such concern that it would perhaps be better if we did not proceed down that route during consideration of the Bill, where there are many decisions to be made on specifics.

I am also unhappy about the proposed constant series of carbon intensity targets. That would be a totally different way of looking at the matter from the suggestion that we needed an interim target to give some kind of parameter and scale to what we are looking at. If we are going to start tying people down to very much closer targets, it will raise issues that go much further than the Bill, towards the way in which government and industry interrelate. I hope that on this occasion the Minister will feel that this is something that should be thought about more carefully before we take on board what is proposed.