Draft Electricity Capacity (No. 2) Regulations 2019

Alan Whitehead Excerpts

Monday 1st July 2019 General Committees

[Dr Alan Whitehead (Southampton, Test) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Hanson. The regulations are, as their title might suggest and as the Minister mentioned, closely associated with the Electricity Capacity (No. 1) Regulations 2019, which we discussed recently. As I am sure the Minister recalls, even if no one else does—I do not remember who else was on that Committee—we had some debate about the circumstances under which the regulations were drawn up.

As the Minister mentioned, the European Court heard a challenge to the capacity market’s existence and decided that it should be annulled, pending a proper examination of the circumstances under which state aid was first considered by the European Union and whether a proper analysis was undertaken such that it was safe to conclude whether state aid arrangements, not just for now but for the whole period of the capacity market, which has been conducting auctions since 2017, should be considered for annulment. That is the effective judgment reached by the European Court and it is now, as the Minister said, for the Court to review the process that it undertook. The Minister indicated that he thinks—I am afraid that is as far as it goes—that the review by the EU may be out by October 2019, although, as we considered in the last SI, it is quite possible that it will not be. In that SI, we took some precautions by setting a fall-back date by which time payments that had been collected or given out would be disbursed back from whence they had come or to whence they should have gone, and would count as not having been set up at all.

The circumstances of the T-3 auction that is suggested as a replacement for the T-4 auction, which might not go ahead as a result of the judgment, do not differ from that position at all. It is a provisional auction in the sense that whatever is collected or potentially disbursed will be held until the EU study of its processes for defining adherence to state aid is published. We do not have an absolute fix on when that will be, although, as the Minister said, he hopes it will be October 2019. The circumstances have not changed at all since the discussion that we had on the Electricity Capacity (No. 1) Regulations 2019: we are still waiting on that review.

We still have not, as far as I can see, considered any further the fact that the Court judgment was not just about a matter of process on state aid; it was also about a number of other factors relating to the consideration of demand-side management in the whole capacity auction process, and a number of other issues that were in the judgment and go beyond the mere matter of procedure.

It is not entirely accurate to say that this is just a matter of procedure that could be resolved very shortly, and the capacity market as we know it could continue to operate. However, that is the basis on which this SI has been set out: there will be a provisional T-3 auction that will become a real auction when the report is received, and business as usual will continue. But it is by no means clear that business as usual will continue. It is a matter of some concern to me that the Government do not appear to have made any provision or contingency plans for the fact that there may not be a perfect outcome and it may not be business as usual in the capacity market in future.

My first question for the Minister is: have any plans been made on a contingency basis in case the outcome from the EU is not as felicitous as the Minister thinks it will be? Has he considered whether the process of annulment could spread to capacity payments that have been made already, rather than just those that are held up at the moment or will be held up when the T-3 auction is undertaken? That is an important consideration, because all the capacity market’s eggs are in the basket of business as usual, but there will shortly—possibly as early as the autumn—be a review of the capacity market to reflect on the past five years and suggest pointers for the future. It may be an ideal opportunity to consider whether the capacity market can or should continue in its previous form, in which it fell foul of the European Court judgment.

With respect to the operation of the capacity market, the Minister may also wish to consider the outcome of recent auctions. The T-1 auction that was held in December last year provisionally cleared at 0.4p per kW—a startling outcome, bearing in mind that as late as February 2018, T-4 auctions were clearing at £8.40 per kW, and in February 2017 they were clearing at £22.50 per kW. In our last meeting on the subject, the Minister said that he felt that having an 11% margin on supply as we went into the winter was an indication that the capacity market was working well. However, an alternative interpretation of the margin and the low price at T-1 auction is that the capacity market is not needed because there is ample capacity. People are getting virtually nil in capacity payments for standing by to supply in the future.

Has the Minister any view on what the T-3 auction will bring about? Does he think that the market will reinflate, or does he consider that one factor for review may be that the extremely low price for capacity coming into the market may indicate a more structural change in how the capacity market will work in future? As he will know, T-3 auctions are very important in that respect, because those are the auctions at which long-term capacity can be determined for the future—as opposed to T-1 auctions, which are all about short-term capacity for next year. Has his Department reflected on how the auction itself might turn out, notwithstanding that for the time being we cannot actually pay those who have been successful in it?

The Opposition do not wish to oppose the draft regulations. We believe that it is important that the current chaos in the capacity market be resolved as much as is possible for the time being. The regulations will achieve that to some extent by securing a T-3 auction, albeit a provisional one, to stabilise the market and give some assurance to people who at present have very little idea whether they will get a capacity auction or where the money going in and out will end up. We do not want to oppose this, but, as I have outlined, we have a number of serious questions about the future direction of the capacity market and the research that the EU is doing in response to the Court’s judgement, which, as the Minister said, has been extended by way of judicial review and is still being contested, with some uncertainty as to its outcome.

Finally, I seek the Minister’s clarification on something else that I think is a welcome departure in this SI. Will he clarify how renewables and low-carbon energy in general can become eligible for obtaining some funding under capacity auctions? The Minister mentioned that renewable energy with some subsidies—but not subsidies sufficient to put them out of contention, by which I understand subsidies that have historically come under the terms of the renewables obligation, the feed-in tariffs and the contracts for difference—would continue not to be eligible, if those renewables were in receipt of those subsidies.

However, can the Minister tell me what subsidies would be eligible for those renewable and low-carbon sources of energy that are open for the capacity market? If there are none, does he consider it appropriate to pit completely unsubsidised renewable energy against other forms of energy in a capacity market auction, or should there be sub-auctions, even in unsubsidised circumstances, for renewable and low-carbon energy as against fossil fuel and high-carbon energy?