Draft Electricity Supplier Obligations (Excluded Electricity) (Amendment) Regulations 2019

Alan Brown Excerpts

Monday 3rd February 2020 General Committees

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Nadhim Zahawi)]

I beg to move,

That the Committee has considered the draft Electricity Supplier Obligations (Excluded Electricity) (Amendment) Regulations 2019.

The draft instrument, which was laid before the House on 9 September 2019, amends the Electricity Supplier Obligations (Amendment & Excluded Electricity) Regulations 2015. The existing legislation supports the competitiveness of energy-intensive industries by providing for a scheme exempting eligible businesses from a proportion of the cost of funding renewable electricity. The draft instrument will amend the existing legislation to include the manufacture of grain mill products; clarify the application of state aid requirements, which exclude undertakings in difficulty from the scheme; and improve the scheme’s overall operation.

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

The Minister says that the exclusion relates to renewable energy. Will he confirm that it does not relate to the cost of nuclear energy, including the strike rate mechanism for Hinkley Point C?

[Nadhim Zahawi]

I was coming to the importance of the energy-intensive industries that are excluded. We exclude sectors that apply for that exclusion from any renewable obligations by up to 85%. I will address that further later on.

[Alan Brown]

The draft impact assessment says that this exclusion will be worth around £2.8 million per business in terms of the contract for difference mechanism for energy-intensive industries. I am just trying to get a handle on the total cost. Does that include the strike rate mechanism for Hinkley Point C? While the Minister is at it, will he explain whether this includes future capacity market auctions? There will obviously be a further round of CfD bids in the future. Will these industries be automatically exempt from them as well?

[Nadhim Zahawi]

The regulations deal with the cost of current renewables. Obviously, in the future, other mechanisms will be in place.

The sectors eligible for the existing exemption scheme employ around 350,000 workers and account for more than a quarter of total UK exports. Many are located in areas of economic disadvantage and provide good, well-paid jobs in those areas. While our industrial gas price is internationally competitive, our electricity prices for medium and large industrial users were the highest in western Europe in 2018. Clearly, electricity costs have a significant impact on the competitiveness of such enterprises. The industries affected operate in international markets, so higher electricity costs place them at a competitive disadvantage, resulting in the risk of carbon leakage, as it is referred to, where companies move production to countries with a less ambitious climate policy.

The existing legislation covering energy-intensive industries allows eligible businesses to receive an indirect exemption of up to 85% of the cost of funding renewable electricity schemes. Where an eligible business applies successfully for the exemption, its electricity supplier receives a reduction in its costs, which it passes on to the eligible business. This approach mitigates the cost of renewable electricity schemes, supports industrial competitiveness and provides certainty for business. The costs of the exemptions are distributed to all other electricity users.

“What does this SI do?”, I hear you ask, Mr Paisley. The regulations add the grain mill products sector to the list of eligible sectors and clarify the application of state aid requirements, which exclude undertakings in difficulty from the scheme. The regulations will also improve the scheme by ensuring that a business that uses a new meter will have to accrue only three months of data before applying, instead of having to wait until they have data from the previous year, as they have to now.

Where electricity meters are shared by more than one business, the proportion of electricity exempted will be updated more rapidly—it is currently done on an annual basis—making the system much more agile and responsive. Certificates will expire at the end of June, rather than March, reducing the risk of business facing a gap in the exemption. Businesses will also be able to submit quarterly reports on any day in that quarter, resulting in increased flexibility for them.

[Alan Brown]

When the Minister was clarifying what the regulations do, he mentioned that the scheme now includes grain mills and flour businesses. How many additional businesses will apply for an exemption? Will he estimate how many jobs that will protect?

[Nadhim Zahawi]

I am grateful to the hon. Gentleman for that question. For clarification, I want to return to his earlier point on the nuclear CfD. The EII applies to renewables costs only and not to the indirect cost of the nuclear CfD. Of course, it does apply to future renewable CfD auctions.

On the hon. Gentleman’s question, it will depend on the sector and the companies that apply from that sector. We are adding grain mills and, if they apply, they will be eligible. More than 200 UK businesses already benefit from energy-intensive industry exemptions, and we estimate they save about £300 million in electricity costs. We anticipate that about 15 businesses will be eligible through this further extension of the scheme.

The regulations will extend and improve the existing legislation supporting the competitiveness of energy-intensive manufacturing industries in the UK. I commend them to the Committee.

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[Alan Brown]

It is a pleasure to serve under your chairmanship, Mr Paisley. I pay tribute to the officials sat in the Box beside you. It always amazes me how they manage to get answers to bail out the Minister before he finishes his opening remarks.

This SI is an ad-hoc arrangement indicative of a reactive Government and the fact that, over the years, energy policy has kept chopping and changing. We need a strong focus and a coherent policy that will deliver the lowest-cost renewable energy to bring down the overall energy cost for households and businesses. That means scrapping the nuclear white elephants and forgetting the mad plan for small modular reactors. It is one for the future—it is fantasy—and we should focus here and now on renewables.

The Minister explained that the costs for Hinkley Point C nuclear are not exempted for energy-intensive industry, so it makes no sense that there is an exemption from offshore wind costs. Offshore wind now has a £40 strike price per megawatt hour, whereas Hinkley Point C has a £92.50 strike price for a 35-year concession, compared with a 15-year concession for offshore wind. Industries are exempted from offshore wind costs, but not nuclear. That sends out the wrong message about the value of renewable energy.

The Minister said that 200 businesses currently have exemptions. Where are those 200 businesses located and how many jobs does that support? Perhaps the Minister can write to me; I do not expect a response right away. How many energy-intensive businesses have been assessed as ineligible to date? As the explanatory memorandum points out, those that are deemed ineligible will have to pay more costs for their energy, to carry the exemptions of new businesses that come on stream. How many have been classed as ineligible, and will that be reviewed?

How do the Government assess the business impact element that deems energy-intensive industries less competitive compared with rivals and therefore eligible for this exemption? Do they take any other factors into account? The Minister mentioned the fact that gas energy is very competitive in the UK compared with international rivals, but electricity is not. Are they looking at any other comparators? For example, the value of the pound has plunged, which is supposed to be good for manufacturing and exports. Where do all those things fit in the bigger picture?

Paragraph 7.4 of the explanatory memorandum suggests the cost per household is just £4 per annum, which, I accept, on balance should not be too big a burden, although we have to recognise that we have fuel-poor households. However, paragraph 10.4 suggests that if the Government look to change the exemption threshold, it would have a big effect on householders, including the fuel-poor. What is the scale of the impact assessments the Government make and how often do they look at this? Do they recognise that a tipping point could be reached?

Paragraph 14.1 of the explanatory memorandum suggests that the Government will conduct a review in 2023. What will be the terms of reference for that review? Will it report in 2023 and start beforehand? How will it be reported back to Parliament? Why 2023? That seems quite arbitrary.

How sustainable is it to continue to have householders carry the cost of energy for energy-intensive industries? Will the long-awaited energy White Paper address this looking ahead? How does this policy fit in with the net-zero targets and how does it incentivise switches to cleaner or local renewable energy for energy-intensive industries?

What assessment have the Government made of the energy demands of those companies, their carbon footprint, and how proposals such as carbon capture and underground storage can be used to bring down their carbon footprints, as well as other ways to reduce their energy costs?

Going forward, we need onshore wind: it is the cheapest form of electricity generation, which should help both energy-intensive companies and householders. According to the Committee on Climate Change, we need to almost triple our onshore wind capacity by 2035, so what plans do the Government have to do that, and how do they fit in with these measures?

I am not minded to vote against the regulations, as we have accepted similar measures for other energy-intensive industries in the past, and this is just an add-on to those. However, it would be good to hear some further clarifications.

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[Alan Brown]

On the topic of not offshoring manufacturing, does the hon. Gentleman agree with Matt Cole that the UK Government should include in future CfD auctions an incentive for bidders to use UK-based supply chains? At the moment, there is no quality assessment, so it is “lowest price wins”, but that could be changed with the correct tender assessment process.

[Craig Mackinlay]

I understand the hon. Gentleman’s point about domestic supply chains. I am not an interventionist in supply chains and the UK economy in the same way that his party is, so I probably would not agree with him about that.

To develop my point to a conclusion, if—for example—steel is being produced in a foreign jurisdiction in a way that is not so efficient per tonne and number of kilowatt hours, and we then use fossil fuels to import that steel on a ship, we do nothing for the planet in terms of overall CO₂ reductions.

I welcome the proposals, but I envisage various industries arguing for this policy to be extended over time, which will cost domestic consumers more and more, so some care is required. Much as I support what is being done today, there is a greater discussion to be had about the whole renewables industry and how it is financed, because at the end of the day, those who are suffering fuel poverty will only have their poverty exacerbated by such moves.

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[Alan Brown]

Obviously there has always been an argument that Hinkley Point C is required to provide the baseload, but when the original case was made for it we were told that if it was not commissioned by December 2017 the lights would go out, because there would not be sufficient baseload in the UK to keep the lights on. We are clearly way past December 2017. I think that the very earliest it will be commissioned, with a good tailwind, is 2025. It could be beyond that, so it kind of negates that argument for baseload, does it not?

[Nadhim Zahawi]

Not quite, because obviously the baseload is still needed. We have been able through efficient and safe operation to mitigate the delay, but obviously we do not want further delay.