Electricity Supplier Payments (Amendment) Regulations 2022

Debate between Lord Lennie and Lord Oates

Monday 21st March 2022 Grand Committee

[Lord Oates (LD)]

My Lords, we on the Liberal Democrat Benches support these regulations so I will not take up too much of the Grand Committee’s time, but there are a number of questions which I hope the Minister will be able to address.

I fondly remember discussing these regulations—the previous, equivalent regulations—back on a cold afternoon last February. At that time, I asked the Minister why the review of the operation of the electricity market, which under Section 66 of the Energy Act 2013 is required after five years and so was due in 2018, had still not been completed and reported three years after it was due. The Minister said:

“We expect it to be laid in Parliament shortly.”—[Official Report, 23/2/21; col. 811.]


The Explanatory Memorandum accompanying these regulations says almost exactly the same the thing, stating that

“the findings for the review are expected to be laid in Parliament shortly.”

Can the Minister tell us what the Government’s definition of “shortly” is, and give us some reassurance that we will actually see the outcome of this review? Has it been completed? If it has, why has it not been laid yet? Had it been completed when we discussed it last year, when the Minister said it would be laid shortly? I hope that he can give us some reassurance on this matter. The reasons given were Covid and Brexit. Obviously, we understand that Covid was a big blow—although Brexit was due two years after we had voted to leave—but we really need some reassurance about when we will see the review.

I will make just a few other points. When we discussed forecasts last year, we were discussing only one year’s levy because of Covid uncertainties. The Government now say that they are confident that they can forecast electricity demand with sufficient accuracy to reinstate the multiyear format. I note that the Minister has explained how the Government expect to see demand falling, albeit modestly, over that period. I wonder whether he could say something about how the Government are factoring in all the complexities of the massive price spike, and what that might do to demand, alongside the new demands of electric vehicles and heat pumps, et cetera.

As has been noted, the operational costs are up 40% over the levy period, and that is on top of the 19% increase that we debated last year. I recognise that there has been an expansion in the CfDs that the organisation is responsible for overseeing, and we welcome it, but I hope that the relentless pressure down on costs which the Minister talked about really will be applied continuously. I wonder whether some further economies of scale can be achieved, because both these organisations, as I understand it, operate from the same address. Are there functions that could be merged to save more money?

On the subject of the expansion of CfDs, I wonder whether the Minister can tell us where we are on the CfD for hydrogen. I note that it is the number two request on the CBI’s call for measures from the Government in terms of growth—number one, incidentally, is to close the public investment gap in terms of retrofitting commercial and domestic buildings. Perhaps the Minister could tell us whether that CfD on hydrogen will be forthcoming soon.

In terms of costs on bills, the Explanatory Memorandum estimates that these will be 50p on domestic consumers’ bills and between £30 and £1,200 on business bills, depending on their electricity usage. Obviously, 50p may seem a small amount, but I am slightly confused because I believe that the Explanatory Memorandum for the last levy-setting regulations said that it would be increased by 40p. It seems odd that this is only 50p over the period. Clearly, although these are small amounts, they all add up. People are facing crippling bills at the moment, so it is important that we keep an eye on that and on how we can drive down costs.

Another point I want to ask the Minister about relates to page 5 of the Explanatory Memorandum—which was presumably prepared some time ago—which talks about inflation of 5% having been allowed and discusses omicron and so on. However, this was clearly before some of the price spikes happened, and obviously before the Russian invasion of Ukraine. The CBI and other commentators expect inflation to peak somewhere around 8% to 9%, and there is increasing feeling that that level of inflation may be sustained for a longer period than was initially anticipated. In his reply, can the Minister tell us whether these new inflationary pressures in the system have been taken into account? If they have not, as some of them are fairly new, can he tell us how things might be adjusted over the period of the levy?

Finally, if there is a surplus and the money is paid back to consumers, can the Minister tell us whether there is a way of ensuring that the electricity supply companies deliver that rebate back to consumers if they effectively have to pay the charges in the beginning?

[Lord Lennie (Lab)]

My Lords, I thank the Minister for his explanation of the regulations before the House. They are essentially non-controversial and, on this lonely side of the House, we do not take issue with them. As we have heard, the regulations update the rates for the operational costs levy and settlement costs levy, which fund the operational costs of the LCCC and the Electricity Settlements Company, respectively. As these two private companies share staff and facilities, these levies are set together.

After a single year of unpredictably and reduced electricity demand during the pandemic, first, it is welcome that this process has been able to return to a three-year system, allowing stakeholders greater visibility of the estimated operational costs, as well as reducing the administrative burdens on the two companies and on us here. Given the situation, it was sensible to reduce the periodicity, and I am glad that we have returned to normal.

Both the LCCC’s contracts for difference and the Electricity Settlements Company’s capacity market are measures that encourage low-carbon electricity generation and ensure security of supply, which is a noble intention. As my colleagues in both Houses have argued whenever these issues have arisen, since these arrangements came into place in 2013, a levy system, which will be passed on to customers by the electricity firms, is possibly the most regressive way of making these arrangements. The figures involved are certainly not large, as the noble Lord, Lord Oates, said, especially when looking only at the impact on the yearly changes, as is the case with the explanatory notice, but with energy bills increasing substantially amid a wider cost-of-living crisis, it is certainly the case that every little bit helps. Has the Minister therefore given any consideration to other methods that could facilitate the costs of these arrangements not falling on the customer?

I would also like to ask some questions about the consultation that took place ahead of the laying of this regulation, both on questions coming from it and the consultation itself. The consultation ran for four weeks and received only one response, from Scottish Power. While the perspective of this large stakeholder was welcome, I am sure the Minister would agree that having a single response to any consultation is not ideal. It is no fault of Scottish Power, but there were gaps in the responses leaving questions mostly unanswered, and inherent biases from a single respondent were unavoidable. Perhaps when this is revisited in three years’ time, the Minister could consider a longer consultation for a broader spectrum of responses to be generated.

One aspect of Scottish Power’s response that I would like to pick up upon surrounds budget lines related to providing policy support to BEIS, which Scottish Power recommended be kept under review. In their response, the Government committed to returning funds allocated here to suppliers. As this is the case with any unused funds, will unallocated funds from this aspect be ring-fenced for return, and, more importantly —as the noble Lord, Lord Oates, has said—will steps be taken to ensure that this is passed on to customers, given that any adjustment to their bills will have already been enacted?

It was also pointed out that the year-on-year budget rises are not insignificant, reaching approximately 40% over the four years from this financial year to the last of the three years this regulation covers. The Government rightly say that this is not unprecedented, given that at least in the case of the Electricity Settlement Company, the Explanatory Memorandum suggests that the body has only become more efficient, but I would be grateful if the Minister could elaborate a little on where the cost increases come from.

I look forward to the Minister’s responses to these questions.