Draft Electricity Supplier Payments (Amendment) Regulations 2022

Alan Whitehead Excerpts

Wednesday 16th March 2022 General Committees

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

The SI is clearly not controversial, except for a number of points on which I would like to ask the Minister for clarification. The Opposition do not oppose the SI, and there will be no need for the Committee to divide today. I will restrict my remarks to questions for the Minister about the LCCC, the settlements body, the budgets, what that means for value for money, and a review of the functions of the LCCC and the settlements body. One would hope that the review of the workings of the capacity market and CfDs, which is supposed to be coming up, will include a review of a number of the issues that I will raise.

First, we have two separate bodies essentially doing the same thing. They were set up by different pieces of secondary legislation. Each body has a budget for its work, but they do the same work and even, I think, have the same address. They are essentially counterparty bodies—one for the capacity market and one for CfDs. It is beyond me why there is not one organisation with one set of costs and arrangements. I am sure the costs would be rather less than we have now. That may be something that the Government might like to include in a review of the workings of the capacity market and CfDs.

The report of that review was supposed to be with us in 2019, five years after the Energy Act 2013 was passed. It is still not here. I note that the explanatory memorandum states that

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

They have not been. What is the progress of that review? When is it likely to be laid before Parliament, if it is indeed ready? There has been a two-year hiatus in getting the report organised. Why has it been so difficult to it bring forward? If there is any time for reconsideration of any aspects of the report, perhaps some of the things that I raise—particularly the companies’ status—could be included in it.

My second question relates to the capacity market settlement body and how the funds for capacity auctions are being administered. I will shed a small spotlight on the recent T-1 capacity auction. The Secretary of State—I think it was the Secretary of State, rather than the Minister who is present this afternoon—decided that the amount to be procured in that auction would be identical to the amount of pre-qualified capacity in the auction. One can see fairly clearly that that move meant that there would not be an auction in the way that auctions are normally decided, in so far as all the capacity that decided to enter the auction would get a place because there was no room for anything pre-qualified to be outside the auction.

Indeed, that is what happened, and the auction closed at a very high price of £75—a record high for a capacity auction. I suggest that that was particularly due to the Secretary of State’s declaration that the amount to be procured would be identical to that which had been pre-qualified. Indeed, the amount that was procured was actually less than the amount that was pre-qualified, and that added to the inflation of the price in the capacity auction. I would be grateful for the Minister’s explanation, because there is a much higher price for capacity being procured and therefore administered by the settlements body than would otherwise have been the case, and there is possibly also a greater administrative cost.

The inflation in the budgets for the two bodies is actually quite staggering. For example, the CfD counterparty’s operational budget will increase by 14% between ’21 and ’22, by 10.3% between ’22 and ’23, and by 7% between ’23 and ’24. That is a cumulative increase over three years of 34%. That is enormous, by anybody’s reckoning, for any Government Department or sub-department or agency. I am not convinced that the explanation put forward today—that the CfD counterparty body will have a larger number of CfDs to deal with—justifies a cumulative 34% increase in budget over that three-year period, particularly as a similar, but smaller, increase is contemplated for the capacity market settlements body at the same time.

It is a considerable increase in budget, which, by the way, lands back on customers’ bills. Hon. Members will see in the explanatory memorandum that the estimated effect on household bills will be about 50p added to each customer’s bill per year. That is set out in the explanatory memorandum as one of those “only” calculations—“it is only 50p on bills”—but that is, of course, a cumulative £1.50 on bills over the settlement period. Indeed, the Government have levied similar increases on customer bills—for example, with the green gas levy—in order to deal with arrangements for the management of the market.

We are therefore faced with a number increases that are very small individually but collectively add up to quite a bit of money on customer bills, at a time when those bills are going through the roof. We need to find every method we can to ensure that bills are cheaper. Let us be clear: these measures will add to the problem, not take away from it. Is the Minister absolutely satisfied that the increase in operational budgets is justifiable? Is there merit in reviewing it, now or in the near future, to ensure that we have got the figures right?

I would like to run a final point by the Minister. As he knows, the LCCC, as the body responsible for CfDs, has the function of collecting the money where the difference between the strike price and the reference price on the CfD is positive and giving the money back where the difference is negative. What I mean by that is where a project has a CfD at a certain price, that price would normally be above the prevailing price on the electricity market. Where the price on the electricity market goes above the strike price, which it has done more recently with a number of bodies that have CfDs, the body that has a CfD starts paying the money back to the LCCC. The estimates for this year are about £1.5 billion to be paid back over a period, which is substantially larger than the operational budgets of these bodies, as hon. Members will see.

That arrangement being in place, I would have thought that a useful way of underwriting the operational budgets of such bodies would be to take those repayments back into account as part of the operational budget arrangements for the companies, so that prior to redistributing those moneys on the way back, they could incorporate part of that payback into their operational budget, circumstances permitting. Alternatively, if they build up reserves as a result of the payback arrangements, they could use those reserves for their operational budget instead of levying a further cost on customer bills, as they are at the moment.

Those are fairly modest suggestions for the Minister. I will be grateful if he considers those points, if he thinks that they are reasonably valid. If he does not think they are, perhaps he will say so. They all have the objective of ensuring that what we have, as far as the counterparty bodies are concerned, is the most efficient way of running them; the most appropriate way of procuring the finances to make sure that they run in the best possible way; and the best possible way of organising them so that they are as lean as possible in the operation of their duties.

[Greg Hands]

I thank the hon. Member for Southampton, Test for living up to the name of his constituency—he set some testing questions for us. Let me deal with the five questions that he asked.

First, why are there two companies? It is worth stating that the two functions are very different: the capacity market and running the contracts for difference auctions. I am sure the hon. Gentleman is fully aware of that. The idea is also to separate out the liabilities of the two companies. During the consultation on electricity market reform, investors and other stakeholders believed that it would be better to have two legally separate companies to keep the liabilities separate. We rolled them together because, in essence, they are funded in a similar way, but they have two different functions. However, I appreciate the hon. Gentleman’s testing question about that.

The hon. Gentleman is right that the report due under the Energy Act 2013 has been delayed. That is, essentially, because of the pandemic and to ensure that it did not get in the way of the recent contracts for difference auction by taking people off that. The recent CfD auction that started in December is the largest ever—in fact, larger than the previous three auctions put together. We will publish the report in due course. I expect to see advice on it shortly.

The hon. Gentleman asked why the Secretary of State and/or I recommended increasing the amount that was bought at the recent capacity market auction. It was a prudent decision, in these times of high and volatile energy prices, to ensure that we were as covered as we could be going into next year. The Secretary of State and I very much took the same view—we always take the same view in the Government; there is never such a thing as different views—that it was a very prudent decision to be able to maximise that. The hon. Gentleman asked whether that resulted in a higher price. The answer is no. There was obviously a very high price going in to that auction, reflecting high energy prices at the moment.

[Dr Whitehead]

Is the Minister saying that the exact comparability of the pre-qualifying amount of capacity for the T-1 auction and the amount of capacity that the Ministers decided was the right thing, which was an increase in the recommendation, was a coincidence? Or is he saying that that was carefully designed to ensure that the capacity available and the capacity bid for was the same?

[Greg Hands]

I thank the hon. Gentleman for that further question. I would not say that it was a coincidence, but what we wanted to do was make sure that the British consumer had the maximum positive protection looking forward, particularly at a time of high and volatile gas and electricity prices combined with the previous parts of the auctions and the previous years rolled into that one period. For example, the previous T-4 auction meant that, overall, the ’22-23 capacity market year, which we are about to go into, is the second cheapest yet because of the cheaper prices in previous auction years. Although there was a high price paid in the T-1 auction this year, when we look at the whole period, we took advantage of lower prices to have the second cheapest delivery overall in terms of the capacity market for ’22-23.

The hon. Gentleman asked some fair questions about the budget increases. The budgets overall put less than 50p on the average electricity bill in the previous year, 2020-21. He is right that there is a significant increase; I have laid out why and shall do so again, but this is not a big part of consumers’ electricity bills.

The hon. Gentleman made the perfectly reasonable point that surely we should do everything we can to make bills cheaper, and that is exactly why the Chancellor announced on 3 February the package of measures to help households and bill payers through council tax payments and the different support funds for those who do not qualify for the council tax rebate but none the less have high energy prices.

The budget increase reflects the increase in the number of CfDs. Over this budget period, there has been a 400% increase as a result of the success of the Government’s renewables policy and of more renewable energy providers wanting to take part. That will mean a necessary increase in the number of people needed to go through all the bids in the CfD process. There are also more capacity market providers and the development of new technologies such as power CCUS. I also remind the hon. Gentleman that during the consultation, no one was against this proposal. I do not think that we received a response from him—

[Dr Whitehead]

rose—

[Greg Hands]

But it is never too late to make one.

[Dr Whitehead]

I wonder whether the Minister would like to reflect on the numbers taking part in the consultation. Does he have an answer as to how many people responded to that? What conclusions does he think can be drawn from the total number of responses?

[Greg Hands]

I am happy to answer that. We had one response during the consultation, which was not from the hon. Gentleman but was from one of the power companies. The one response was not principally against the increase in the cost of the scheme. The increase in the cost, particularly in the LCCC, reflects a hugely increased workload with the 400% increase in the number of CfDs during the course of the budget period.

Finally, on the LCCC paying back the money, to put it more in the vernacular, when it comes to the strike price referencing the reference price, I do not think that it is practical to take that into the LCCC’s budget or in some way to pay for the LCCC that way. This is the right way to pay for the LCCC. The scheme is working in the way that it is designed to.

[Dr Whitehead]

If the Minister does not think that that is the case, does he think that some method of making sure that those repayments go back directly to customers rather than indirectly, as is the case at the moment, might be a better way of doing things?