Electricity Capacity (Amendment) Regulations 2017

Debate between Lord Grantchester and Baroness Maddock

Wednesday 25th October 2017 Lords Chamber

[Baroness Maddock (LD)]

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.

[Lord Grantchester (Lab)]

My Lords, I also thank the Minister for his introduction to the regulations before your Lordships’ House. I agree with him that they are by and large technical in nature. I second the remark by my noble friend on the Liberal Democrat Front Bench that we miss Lord Jenkin for all the understanding he brought to the House on these quite technical matters.

We are in favour of the amendment regulations tonight because they introduce refinements, clarifications and new wording to manage the system around the operation of the capacity market. From my reading of the Explanatory Memorandum, which is excellent— I thank the Minister’s department for its clarity—I commend the Minister and his team for introducing these regulations to correct the imperfections in the original instrument, which could have led to double payments and loopholes that could have been exploited to the detriment of the consumer. However, that is not to say that there is universal approval for the capacity market. There is a debate to be had regarding whether it has achieved its objectives and whether it is good value for money. While strictly speaking the capacity market is not the subject of the regulations, I nevertheless have one or two questions to put to the Minister on how it is operating.

I liken the capacity market to a quasi-insurance policy. I agree that the lights going out would be a catastrophic event with severe consequences for the Minister, his Government and the nation. The capacity market is designed to ensure that this will never happen. This winter, 2017-18, is the start of the first delivery year and the date from which payments will start, even though there have been five capacity market auctions to date. The contracts for these auctions are for either one year or four years. What is the grossed-up value of these contracts, which I understand is somewhere near the total cost of the capacity market for availability of energy sources until 2021, excepting that there are also the one-year contracts to be awarded for the next three years? Is it useful to consider this figure in assessing the value-for-money aspects of the policy against achieving its objectives? The Minister in the other place suggested that the increase in customer bills amounted to £2 per customer per year. My question to the Minister is to understand the grossed-up figure that has been paid to generators and, from that, the size of the bill to the public.

The answer to the question regarding the success of this quasi-insurance is mixed. First, there will be no blackouts—I am sure that the Minister will be able to sleep well at night—but perhaps he could give some assurances regarding the “black start” that would be needed to re-energise the network following any blackout.

Secondly, has the certainty of return from the capacity market brought forward investments, especially in new gas build? Here, the policy does not seem entirely to be working. Do the plans to which the Minister drew attention in his opening remarks finally translate into certainty of new build being on the horizon?

Thirdly, is the cost to the consumer worth while, and has it been effective? I think that I can reply on the Minister’s behalf and say that to a certain extent it has already brought benefits in that the spikes in cost in marginal supplies to the grid have been reduced. Volatility has been lessened, which has already reduced net costs through bills to the consumer. Nevertheless, how likely would blackouts have been without the existence of the capacity market? That is the ultimate insurance question.

Lastly, has the capacity market brought flexibility and a diverse mix of energy sources to security of supply? On the demand-side response, the auctions are only for one-year contracts, which could hardly be described as bringing certainty. Can the Minister confirm whether there are plans to bring forward four-year auctions for DSR? Have the Government considered bringing forward the statutory review date of this policy from being four years into its operation? There could be other points along the way that are sooner than that at which some of these questions could bring forward further amendments.

Electricity Supplier Obligations (Amendment and Excluded Electricity) (Amendment) Regulations 2017

Debate between Lord Grantchester and Baroness Maddock

Wednesday 25th October 2017 Lords Chamber

[Baroness Maddock (LD)]

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.

[Lord Grantchester (Lab)]

I thank the Minister again for his clear introduction to the regulations before the House tonight. As on the previous regulations, the amendments to the 2015 regulations are largely technical, although in this case it is largely as a result of receiving state aid approval which requires these amendments. The Government have also brought forward other technical amendments to clarify the 2015 regulations and to improve their workings. I am content to approve the regulations as they reduce the disadvantages to energy-intensive industries, but they give rise to many serious questions concerning the impact of the policy and the relative effect on different businesses and their competitiveness.

The main contentious issue arises from the exclusion in these regulations of the intended extension of relief to energy-intensive businesses that do not qualify as having high energy costs as specified in the order. While the European Commission was happy to approve the 2015 regulations, subject to the alterations we are debating tonight, it was not happy to include the extension the Government sought for businesses other than those specified as being energy intensive.

In the 32nd report of your Lordships’ Secondary Legislation Scrutiny Committee, dated 27 April 2017, it seems the Government are happy to drop this altogether with the thought that the CFD exemption will not have a significant effect on competition within the UK after all. Can the Minister clarify what sort of businesses these are, what their response is to the change in the Government’s position and what the cost is of the competitive disadvantage that they no longer consider significant? Has the assessment changed following dialogue with the commission? The Government’s answer refers only to the UK. What is the competitive position of these excluded businesses internationally? On Brexit, perhaps the Minister could outline the Government’s intention regarding state aid provisions that are part of EU membership once we leave. Is it the Government’s intention merely to amend the regulations to include the original intention once the UK has indeed left the EU?

The Secondary Legislation Scrutiny Committee was also critical of the Government’s short consultation in summer 2016—the noble Baroness, Lady Maddock, drew attention to this feature of the department as well. Perhaps the complexity of the provisions and the adjustments in the Government’s response could entail further and more meaningful consultation regarding the numerous interactions between various government policies influencing renewables and the energy-intensive industries. There are also many questions around the costs of the exemptions for energy-intensive industries on other business and consumers.

One of the questions debated in the other place concerned the fall in the costs added by these regulations, from £1.80 to £1 a year on consumer bills. The Minister in the other place seemed unable to explain the significant drop. What is the grossed-up cost of this measure? Is that what has changed, or the estimates of the number of businesses in the intensive energy sector? How is the discrepancy to be explained? This highlights the complexity in analysing and understanding the impact on businesses and how they will react.

The Government have said they are developing a package of measures to support businesses to improve their energy use and efficiency. The Government are said to be revitalising the Green Deal. They are also considering the costs to the charitable sector. Could the Minister add to these statements tonight and give any indication of timescales? The Government have launched an independent review of the cost of energy, to be chaired by Professor Dieter Helm, in response to the report of your Lordships’ Economic Affairs Committee. Can the Minister update the House on this?

The costs to the consumer of the various government schemes are also subject to the levy control framework. This has also come in for severe criticisms from many sides, including the National Audit Office. Once again, the Government have realised they must have a rethink and start a review. How is that review progressing?

Although the regulations today can be approved in so far as they clarify various measures the Government are undertaking, nevertheless there are huge issues around the Government’s framework that demand swift resolution.