Electricity

Alan Whitehead Excerpts

Monday 1st March 2021 Commons Chamber

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

The Minister has done the heavy lifting in this debate by explaining to us the detail of the regulation before us. She has also explained very succinctly why it is necessary to operate the calculations concerning the operational budgets both for the CfD counterparty body and for the settlement body as far as the capacity market is concerned on a one-year basis rather than a three-year basis, as has previously been the case in the House. The reason is that the operational levy costs rate for both bodies is effectively calculated by dividing a proposed annual budget by the total forecast electricity demand for the future. Under present circumstances, we are finding it very difficult to find out what electricity demand will be for the next year given the substantial fluctuations in demand that have occurred with the covid pandemic. Consequently, it seems sensible to allocate the total operational budgets for these bodies on a one-year basis, rather than on a three-year basis as has happened since 2018. The arrangement from 2018 onwards aimed to ensure that suppliers had no surprises, and had a much better view of their liability in respect of these operational budgets, because those budgets are recovered by levies on suppliers, and as I will state in a moment, those levies are passed on to customers. We do not oppose this statutory instrument, because in the circumstances it is sensible.

My first question for the Minister relates to her intentions regarding the periodicity of this arrangement in future years. I assume it is her intention to revert to a three-year settlement at the earliest opportunity, that this proposed one-year arrangement is because of the force of present circumstances, and that there is no suggestion by the Government that we should go back to the pre-2018 arrangements. I would be grateful if she stated that very clearly for us this afternoon.

The second question I have for the Minister relates to the method for recovering these operational budgets. We have already talked about how it works; the operational costs are recovered from suppliers according to the calculations I have described. Those costs—the Minister has set the CfD counterparty budget costs at £20.7 million for this year—are recovered by the levy on suppliers, and the suppliers pass those costs on to customers, which means that customers’ bills go up. This is not an enormous part of the whole levy process, but it is not an insignificant part of it; it is calculated that the cost for the CfD counterparty body alone will add something like 40p to customer bills this next year. Indeed, there is quite a startling rise since the previous period of settlement. My calculations are that there will be about a 17.5% rise this year.

As we progress with the auctions, and progress down the road towards the 40 GW of offshore wind by 2030, to which we have committed, inevitably those operational costs will rise substantially, so the levy will also rise substantially. Whether it will continue to rise by 17% a year I am not sure, but certainly that is a very substantial increase, and I suspect those increases will continue over the period.

In addition to this, in the White Paper that has just been published, a new levy is suggested on gas bill payers to facilitate the development of green gas, anaerobic digestion and associated activities. I thoroughly support that development, but not necessarily raising the money for it by a continuation of the levy mechanism.

Finally, if we do go ahead with the regulated asset base arrangement as far as nuclear power is concerned, that will create a huge additional levy on bill payers for the future. We have a pattern here of levies being put on customers’ bills to underwrite these activities. I happily concede that it is certainly a very small levy compared with others, but I think the Minister would agree that every little bit adds up. We have a picture in front of us, potentially, of a very substantial increase in customers’ bills to pay for these sorts of arrangements.

When the Minister reviews the arrangement at the end of the one-year hiatus, what will her thinking be on whether there are different ways of paying for those counterparty costs? Will the answer always be a levy on customers, or are there other ways of facilitating this, so that the cost does not fall on the customer? I think she will agree that that is probably the most regressive way of funding these arrangements; there are certainly better ways. It may be that the matters before us should be subject to one of those better ways.

--- Later in debate ---

[Anne-Marie Trevelyan]

I thank hon. Members for their valuable contributions to the debate. I will do my best to answer their questions and commit to replying by letter or having meetings with any of them if they wish to follow up on any of the issues that I do not cover.

In answer to the hon. Member for Southampton, Test (Dr Whitehead), periodicity for future years of pricing is not yet determined. However, as he rightly set out, the challenges of the past year have meant that we felt it was more appropriate to look at it on a single-year basis this year, hoping, clearly, that things will settle and we will get back to some sort of normality in the year ahead.

The budgetary increase for the LCCC is in fact 19%. There are three main reasons for that. It is partly due to the impact of covid on energy and insurance markets. The LCCC will now be managing an increased number of CfDs in the year ahead. It is also having to move to a new building this year because the one it has been in is being demolished, so that is a technical reason for having to invest in a new site. The hon. Member for Kilmarnock and Loudoun (Alan Brown) raised the question of savings. In fact, with the new building, the LCCC has taken the opportunity to look at staff working patterns and the flexibility that some staff will want to use, and that has brought a saving of £184,000 on the overall costs, which is a good thing.

Interestingly, in relation to the hon. Gentleman’s point about pumped hydro, he is the second person today who has raised that with me and asked that we can look at it, so I look forward to speaking to him and others on the subject. There are three pots for the contracts for difference. Pot 1 will cover onshore wind and solar, pot 2 is for the less developed technologies like tidal, wave and geothermal—that is perhaps where pumped hydro might sit if we look to do that—and pot 3 is for offshore wind, which is obviously a fast-growing sector. I hope that answers hon. Members’ questions, but if there is anything I have missed, I am happy to write to them.

The hon. Member for Strangford (Jim Shannon) raised the important question of the challenges with fuel bills for many of our constituents following a really difficult year. I was in fact discussing exactly that with Ofgem this morning, and we will be doing a piece of work to make sure that we are as apprised as we can be of the challenges.

[Dr Whitehead]

The question that I asked at the end of my contribution was whether, in the light of those increases and of greater increases in the future, as I think we both agree will be the case in terms of counterparty costs, the Minister is actively thinking about other ways of funding that, or is she happy to continue with the levy arrangements we have discussed this afternoon?

[Anne-Marie Trevelyan]

It is very much a live issue, and, across the multiplicity of the energy resources that we are looking at, we are thinking very much about how we will do that. I am very happy to meet the hon. Gentleman, if he would like, to discuss that in more detail in the weeks ahead.

I hope that I have been able to provide the necessary assurances for hon. Members to approve the statutory instrument, and I am grateful to them for indicating their support. As I said at the start of the debate, the regulations that the Government are seeking to amend through this instrument will revise the operational cost levies for the LCCC and ESC. These companies play a crucial role in delivering the contracts for difference scheme and the capacity market. They must be sufficiently funded to perform that role effectively, but those costs must be kept to a minimum. It is my view that the operational budget for 2021-22 strikes an appropriate balance between ensuring that companies are adequately funded and that consumer bills are minimised. I therefore commend the regulations to the House.

Question put and agreed to.