Electricity Capacity (No. 1) Regulations 2019

Lord Tope Excerpts

Wednesday 3rd April 2019 Lords Chamber

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)]

My Lords, the capacity market is a key element of the Government’s strategy for maintaining the security of electricity supplies in Great Britain. Britain’s current security of electricity supply is robust. The forecast electricity margin for winter 2018-19 is over 11%, the highest for five years, showing that the capacity market works.

This draft instrument will help maintain a strong security of supply position into the future. It contains modifications needed for the operation of the capacity market, pending fresh state aid approval by the European Commission, and makes arrangements for a positive or negative state aid decision.

Before I go into detail on the draft instrument, it may be helpful to provide some context and background on the capacity market. The capacity market ensures that there will be sufficient electricity capacity in Great Britain during periods of peak electricity demand. It secures the capacity required through awarding capacity agreements in competitive, technology-neutral auctions held four years and one year ahead of delivery. Those who win agreements—known as capacity providers—commit to providing capacity during periods of system stress in exchange for receiving capacity payments. The revenue from capacity payments incentivises the necessary investment to maintain and refurbish existing capacity and to finance new capacity. It also ensures that those able to shift demand for electricity away from periods of greatest scarcity are encouraged to do so.

In November 2018, the General Court of the Court of Justice of the European Union annulled the European Commission’s state aid approval for GB’s capacity market and introduced a standstill period until the scheme can be reapproved. The judgment was based on the procedure the Commission followed when it approved the capacity market, not the substance of the capacity market itself. The judgment prevents the UK Government making capacity payments unless and until the scheme has state aid approval. It changes neither the Government’s commitment to delivering secure electricity supplies at least cost to consumers, nor our belief that capacity market auctions remain the most appropriate way to do this.

The Commission is investigating the scheme’s compatibility with state aid rules and recently confirmed it is moving on to the next phase. We are working with it to ensure that it has everything necessary to reapprove the scheme as quickly as possible. We are confident that the scheme will be approved and payments to agreement holders that have met their obligations during the standstill period will be allowed.

The Department for Business, Energy and Industrial Strategy published a consultation proposing modifications to allow the capacity market to operate as far as possible during the standstill period, following the General Court’s decision in December last year. Sixty-one responses were received, from a wide range of stakeholders, and there was significant support for the majority of the proposals raised.

The House of Lords Secondary Legislation Scrutiny Committee highlighted uncertainties associated with the state aid process. We are confident that the draft instrument helps address those uncertainties.

I will briefly expand on the provisions of the draft instrument itself. First, to maintain industry confidence, the instrument includes modifications that ensure that capacity payments currently prevented by the court’s judgment can be paid to capacity providers after state aid approval is obtained. These payments will remain linked to capacity providers’ performance of their obligations under their capacity agreements. Secondly, in recognition of the disruption caused to capacity providers, this instrument adds flexibility to termination, penalty and credit cover requirements during the standstill period. Thirdly, the instrument sets the conditions for rearranging the one-year-ahead auction that was originally planned for earlier this year, securing the capacity required for winter 2019-20. Agreements awarded by this auction will be conditional on state aid approval, allowing the auction to be run before there is state aid approval.

Moving on, this instrument allows the settlement body to hold payments made by suppliers to fund the scheme where suppliers choose to pay during the standstill period. It also enables the collection of all outstanding supplier charges for the standstill period upon receipt of state aid approval. This provides certainty that, upon state aid approval, capacity payments will be paid promptly.

Finally, in the unlikely event of a negative state aid decision or no decision by October 2020, the instrument will terminate capacity agreements without any entitlement to receive capacity payments, and will require supplier payments held by the settlement body to be returned. We have also laid complementary amendments to the capacity market rules, which govern the technical and administrative procedures relating to capacity market operation.

These regulations are necessary to provide legal certainty and confidence to industry about how the capacity market will operate until state aid approval is received, and I commend them to the House.

[Lord Tope (LD)]

My Lords, I am grateful to the Minister for a full and clear explanation of both the regulations and the need for them, which arises from the CJEU ruling. As he has said, the majority of the industry clearly supports these regulations, they are necessary, and they go a considerable way to reduce uncertainty. Therefore, we certainly will not oppose them and will support them.

First, on the theme of uncertainty, the Secondary Legislation Scrutiny Committee, to which the Minister referred, concluded its report to your Lordships by referring in paragraph 18 to the “considerable uncertainty” and suggesting that we might wish to explore further how the Government propose to deal with it. I will be brief, because this is not my subject. Can the Minister tell us specifically how the Government will continue to engage with the industry—I am sure they will wish to reassure the industry that that will be the case—and what steps they will take to try to perhaps restore and certainly to keep the confidence of the industry and investors at what is inevitably a very uncertain time?

Secondly, probably the greatest uncertainty at this precise moment, which is not particular to this industry, is our place within the European Union. The regulations are brought forward at this stage on the assumption, quite rightly, that we are members of the European Union and that we will remain members of the European Union during the implementation period of a negotiated withdrawal agreement. The inevitable question comes: what if that is not the case? We may all hope—I certainly do—that that is the case; indeed, I hope that we remain members of the European Union, full stop. But at this moment, many would argue that the most likely scenario is a no-deal withdrawal, not in weeks but days. That may happen. Can the Minister give us any guidance as to what preparations have been made and how ready the Government are to deal with that scenario if, unfortunately, it actually happens?

My third point was raised in the other place when it debated the regulations yesterday. There was strong doubt whether the CJEU ruling was based solely on procedural grounds, as the Minister said and the documents on the regulations state. It was suggested that other grounds were included in the ruling; it would be useful to know whether the Government recognise that to be the case and, if so, what steps they are taking to deal with those other concerns.

I thank the Minister again for bringing the regulations to the House. They are necessary in the light of the ruling and the uncertain times we are in, and I wish them a fair way for such time as they are needed.

[Lord Stunell (LD)]

My Lords, first, I support what my noble friend said and pick up in particular his final point about the scope of the judgment in the European Court.

I thank the Minister for his reply to my Written Question last week. I am pleased to have had the Answer, although not so pleased with what the Answer was. The point I was raising, which I want to raise now, is that in looking at the capacity market, the UK Government have not made sufficient allowance for demand reduction strategies. They have looked purely at providing capacity to fulfil forecast future electricity demand.

We know from the predictions made over the past decade and the reality of electricity consumption that those predictions have, year after year, been wrong, assessing an electricity demand that has not been reached. In other words, electricity demand is not rising as rapidly as the predictions, and the calculations being used by the Government in drawing up state aid do not provide a level playing field between cash available to those delivering additional capacity and cash available for those who have strategies to reduce the demand for electricity.

My Question sought to explore that point, but the reply I had was that that was not the case: there is an allowance for demand reduction and, if I understood the reply, it would be possible, at least in theory, for those with a strategy to reduce demand to draw on the same aid as is available for those who would provide additional capacity to meet demand. Is that the case? In particular, is the calculation of the time period over which a capacity building strategy is calculated and over which a demand reduction strategy is built the same?

The point being made to me by those who might be willing to provide a strategy to reduce demand is that it is not a level playing field. My understanding of the European court decision is that it was not just a technical and procedural point: the court believes that the British Government are fiddling the figures and not providing a level playing field for both sides of that equation. I would like the Minister to provide a more complete answer than the one he gave me last week and perhaps he will explain to noble Lords how in the future the requirements of the European court judgment will be met and how the calculations will be put on a more even footing so that we can do what is surely more sensible, which is to spend taxpayers’ money on reducing demand rather than spend it on fulfilling capacity commitments which are in fact unduly onerous and pessimistic.