Baroness Verma
Main Page: Baroness Verma (Conservative - Life peer)
Viscount Ridley
I had not intended to intervene on this point, but I would like to make a similar point to the noble Lord, Lord O’Neill, although coming at it from a rather different direction. I agree with him that what we will see in terms of the capacity squeeze are price spikes, and, therefore, capacity coming back into use. In that context, it is very well worth noting that, at the cost end of the spectrum for the generators, there is an increasing view among markets—not a consensus, which would be the wrong word—that gas prices are likely to fall over the next few years. I do not know whether anybody saw the FT blog from Nick Butler yesterday, but he made the point that for four reasons gas prices are likely to fall. Not one of those reasons included shale gas; he was saying that, even outside the effect of shale gas, we are likely to see huge new resources coming on stream in the Mediterranean and East Africa and offshore in the Americas, that the LNG market will produce a much more globalised market in gas and that the Japanese uptick in gas demand following the closure of the Fukushima nuclear plant is coming to an end. Combine that with falling demand in India and China, and it is quite possible that we will see falling gas prices. It is quite possible that, as the noble Lord, Lord O’Neill, said, we will be able to see this mothballed plant come back into operation because of rising prices for electricity and falling prices for gas without having to, as it were, bribe them. It is important that we are not in the business of making life easy for producers but in that of making life as easy as possible for consumers of energy.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)
My Lords, I thank all noble Lords for this short debate, and I thank my noble friend Lord Jenkin for his amendment. Amendment 53BA proposes that payments under capacity agreements should be commenced by the settlement body within six months after the national system operator has run a capacity auction. The Government have confirmed their intention of running the first capacity market for delivery of capacity in 2018-19, subject to state aid approval. Capacity auctions will take place four years and one year ahead of the delivery year. For example, for the delivery year 2018-19, capacity auctions will be held in 2014 and 2017. Successful bidders at auction will be awarded capacity agreements which provide a steady payment for capacity in return for a commitment to deliver electricity when required in a delivery year or face a penalty.
Payment under capacity agreements will not occur until the delivery year. This is because we believe that payment should not occur until the plant is providing capacity. We do not want consumers to pay in advance for a service that they have not yet received. In addition, providing payment in the delivery year means that plant performance can be tested and, if necessary, penalties can be applied if performance is not as promised. If payments were made ahead of the delivery year, that would be impossible and might provide an incentive to game the system. Our position is therefore that capacity providers should be rewarded for delivery in a delivery year only, rather than in advance.
My noble friend questioned whether the capacity market’s first delivery year could be brought forward, and I suspect that that is likely to be the aim behind his amendment—in fact, he made it clear that it is. However, we have chosen a four-year gap for a good reason. If we do not have such a gap—for example, if we run a capacity audience in 2014 for delivery in 2015-16—new plant would not be able to participate, given the time required to build the plant, which was the point made by the noble Lord, Lord O’Neill. This would mean we would risk an uncompetitive auction with only existing plant competing in what could be a tight market. We believe that this would lead to a potentially inefficient auction and would risk consumers’ value for money, a point raised by my noble friend Lord Ridley.
We are not complacent about the security of supply. We recognise that Ofgem’s 2013 capacity assessment suggested that there may be a capacity problem in the middle of the decade. That is why we support National Grid and Ofgem’s current consultation on the need for and the design of a new balancing service for this period. If needed, this would keep existing plant on the system or get it back on if it had been mothballed for the period before the capacity market was in operation. This would be limited intervention and would mean that we do not have to run a full capacity auction with only existing plant competing. As such, the proposed measures offer a cost-effective means to ensure security of supply in the middle of the decade before the capacity market starts to deliver capacity in 2018-19.
I hope that I have reassured my noble friend that the measures we are taking are short-term interventions and, on that basis, I hope he will withdraw his amendment.
The Earl of Caithness
Should the situation be even more dire than my noble friend Lord Jenkin suggested, presumably there is nothing to stop the Government running a capacity auction just for the existing plant as a short-term measure. I know the Minister said she does not like it, but should the situation be very bad, or be forecast to become very bad, and the proposals for Ofgem and National Grid are not going to meet the requirement, surely it is perfectly possible to run a capacity auction in which existing plant holders could take part.
Baroness Verma
My Lords, I referred to that in my speaking notes. We are keen not to cause an imbalance in competition between new and existing plant. The proposal of my noble friend Lord Jenkin—and yourself—is that that is what would happen. It would generate an uneven competition.
Baroness Verma
My Lords, I will try to get the passion back into my voice. I was responding to my noble friend Lord Jenkin. If I can just give him a word of comfort: the current Ofgem and National Grid consultation will most likely focus on ensuring that some plant is held in reserve. I know that my noble friend is concerned that there will not be enough capacity in reserve. This is a short-term intervention to bring back already mothballed plant. The capacity market is a medium-term intervention that we hope will incentivise investment. We want to ensure that the market itself stands on its own in the coming years. We are trying to assist enough capacity on the grid.
I forgot to respond to the noble Lord, Lord O’Neill, and the noble Baroness, Lady Worthington, about the consultation on the SIs. We intend to consult from October on the detailed implementation of EMR. This will give noble Lords an opportunity to scrutinise the detail of the EMR ahead of Report. Further detail of our plans for secondary legislation can be found in the memorandum that we recently sent to the Delegated Powers and Regulatory Reform Committee. I hope that having given my noble friend that extra response, he now feels that he can withdraw his amendment.
Lord Jenkin of Roding
My Lords, I began my speech a few minutes ago by saying that I found the Minister’s response very disappointing, and I do not think that anything she has added since then alters my reaction. I am grateful to all those who took part in the debate, and particularly the points made by the noble Baroness, Lady Worthington, that it is very difficult to know how this will work until we have details of the statutory instrument that will implement it. I entirely endorse her demand that this must be available before Report so that we can make sense of it. She also agreed that we may be seeing more mothballed plants by 2020. That is an estimate that I am not in a position to either endorse or deny. She is also absolutely right that we have to get the demand side response appropriate, and I know that the Government are working on that.
The Minister said something with which I entirely agree: there must be no payments in advance. We cannot ask customers to pay for something before it actually happens. I never suggested that. If she looks at Hansard eventually she will see that I indicated, “provided the market payments can be made as soon as plant is available and commissioned”. That disposes of that argument entirely. I am not for a moment asking that payments should be made in advance. That is not how the system is supposed to work as I understand it. My noble friend also seemed to imply that we could not have different auctions for different years. For the life of me I cannot understand why it should not be possible to have an auction for people who would be able to bring back mothballed plant within, say, 18 months. If that were the conditions of the auction, the firms that have mothballed plant and could bring it back within 18 months would be able to bid for it. That does not mean that there would not be another auction, even perhaps operating in parallel. There will not be many takers in the early years. We were told the other day that contracts for CFD might be over a period—was it 60? That is the sort of numbers we are talking about. It should be perfectly possible to have different auctions for different periods with the payments made appropriate to the date of the auction. This needs to be examined more carefully and we should not just accept my noble friend’s assertion that it would simply muddle up the whole auction process. I do not believe that for a moment. We can be a great deal more subtle than that.
Baroness Verma
My Lords, let me assure my noble friend that mothballed plant will be able to participate in the capacity auction.
Lord Jenkin of Roding
Yes, but it will not be able to get any money until 2018-19. That is the point of this amendment. If they can bring the plant back and have capacity available for meeting the demand and operating under the SBR before that, and it is available and commissioned, why should they not get their money? Why do they have to wait another two years?
Baroness Verma
My Lords, let me again assure my noble friend that those who are successful in the capacity auction held four years out will receive a capacity agreement which guarantees them a steady payment in the delivery year.
Lord Jenkin of Roding
That is completely new. Does the Minister mean in advance of 2018-19? No, she is being advised from behind her. She may not have got that quite right.
I think that there is sufficient confusion on this that we must wait until we have the full details of how the scheme is going to work. That will require our having the details of the statutory instrument that implements it. I reserve my right to return to this matter.
Baroness Verma
No, my Lords. I have pointed out that we intend to consult from October on the detail of implementation. I have also referred to the secondary legislation. Further detail of our plans for secondary legislation is in the memorandum to which I think noble Lords have access.
Lord Jenkin of Roding
What my noble friend Lord Deben has said merely reinforces the condition that we will have every right to return to this matter on Report, because we are having to debate it in Committee with less than half the necessary information. I still think that there is a perfectly valid way through this, which is to have different auctions for different periods between the auction and the payment. For the life of me, I cannot understand why that could not happen. But it needs to be examined: there may be absolutely indisputable objections to it; at the moment, they have not been pointed out to me. However, I think that we have said enough and I beg leave to withdraw the amendment.
Lord Berkeley
My Lords, I support my noble friend. The amendment only says “prioritise”: it does not say only lowest-carbon providers should be involved. She has a very good point. The amendment, as other noble Lords said, is not the answer, but it does enable us to have a debate. Since most of the low-carbon providers are probably the independents, which are not part of the big six, this rather confirms the argument that I put in an earlier debate on Amendment 55, I think, that it would be fairer if there was a separation. There is a wonderful potential for the big six to keep many of the low-carbon providers out that they do not own. I look forward to hearing a little more from the Minister about how this can be resolved.
Baroness Verma
My Lords, I am extremely grateful to my noble friend for bringing some sanity to this debate. I begin by saying to the noble Baroness that whenever we talk about high carbon and low carbon we must also consider the costs to the consumer.
We are, through the Bill, ensuring the decarbonisation to which I know the noble Baroness is firmly committed. At the same time, it cannot be at any cost. Time and again I have stood at this Dispatch Box and said that it is really important that the measures we take do not have a profound effect on consumers’ bills. Currently, we are already seeing that there is a movement of will against the green agenda simply because people believe that the green agenda is putting extra on their bills. We are very careful in government to ensure that the measures we are taking decarbonise the energy sector at the same time as ensuring that energy is secure and that consumers do not pay heavily for the cost of our policies.
I know that the noble Baroness is passionate about this. She asked a number of questions and I will try to refer back to them. Yesterday we had a meeting. I have some notes that I hope have been distributed to the Lords’ informal scrutiny committee referring to the analyses that the noble Baroness asked about. If she does not have them, they will be made available. They give a broad outline of the analyses that we are using. But I remind the noble Baroness that it was the Conservative Party in opposition that in 2008 asked for the emissions performance standard. It was this party that was pressing ahead to ensure that we brought in decarbonisation and it was the noble Baroness’s party that opposed every action we took at that time. It is a little difficult for us to take the passion of opportunism that is now being demonstrated.
This is about working together to make sure that we not only see a decarbonised energy sector, but we make sure that consumers are not penalised heavily. The noble Baroness’s amendment seeks low-carbon technologies to be given preferential treatment in capacity market auctions. We consider that the capacity market is not the right means to deliver that objective. Decarbonisation is best achieved through other provisions that we have put within the Bill, including the introduction of contracts for difference and emissions performance standard as well as other policy interventions such as the carbon price floor and international carbon signals such as the EU Emissions Trading Scheme.
These measures are designed specifically to ensure that the economics of low-carbon generation are transformed in comparison to traditional thermal plant. The cumulative impact of these policies is such that we expect only 3% of our electricity generation to be provided by unabated coal in 2025 and none by 2030. Therefore, it is these policies that will drive the decarbonisation of the electricity sector that I know the noble Baroness wants to see, as do we all.
The capacity market, on the other hand, has been designed to ensure security of electricity supply at least cost to consumers. Again, I know that that is what the noble Baroness wants to see as an outcome. It does this by providing all forms of capacity with the right incentives to be on the system to deliver electricity when needed.
The capacity market is designed to be technology neutral and all types of capacity will be able to bid for capacity contracts, apart from those technologies already receiving support from other mechanisms. This means that no type of technology will be given preference in capacity auctions and all eligible capacity will be compared on the basis of cost.
The philosophy is one of humility and to use the power of markets. Sadly, neither I nor anyone in my department is blessed with perfect foresight. We do not know which technologies will be cheapest, what fossil fuel prices will be in the future, or what myriad other factors will determine the optimum path to decarbonisation. That is why we have designed a framework that aims to capture the power of the markets to achieve things at least cost. Prioritising the lowest-carbon generators in the capacity market would force the market to build capacity and commit capital when extending the life of an existing plant might be a better bet—both economically through lower costs to consumers and environmentally. A few years of a coal plant cleaned up to meet the emissions limits in the IED, but operating at low-load factors, while demand-side action, interconnection and CCS develop and more low-carbon capacity comes on, could be a more competitive outcome than committing capital to new gas plants.
Lord Deben
Before my noble friend sits down, I return to the question that I asked. This is not my amendment, and it is not one with which I agree. I did say that, as there is so much concern, it would be helpful to try to allay that concern. I wonder whether my noble friend feels that over the summer I could take her up on what she has just said so that we can allay the concern, which is widespread. People who are not known for being extreme, on either side, have suggested that this may work in a way that is inimical, so perhaps she would be willing to look at that and see what needs to be done to ensure that people are not unnecessarily concerned and do not unnecessarily attack a Bill that we all want to get through.
Baroness Verma
My Lords, as I said in my speaking notes, I and my officials will be happy to meet noble Lords. The invitation, of course, goes out to all noble Lords who are here today. I will make sure that that is extended to the Lords informal scrutiny committee.
Baroness Worthington
My Lords, I am very disappointed. If the noble Baroness cares to read Hansard, she will find that far from being an insane debate it is the Government’s position that risks looking insane. As you read over your own notes you will see the inconsistencies. You are saying that it is the least-cost way to get to our targets, which is what we all want to achieve. Yet, you are rigging the market in favour of new-build CCGTs, which by your own admission are not as effective as keeping on existing plant. That is the inconsistency and where the confusion comes from. There is lack of clarity from the Government and that is why the rest of the market has no idea what to do. Everyone who owns a coal plant is sitting, waiting to see whether this mess will ever be cleared up. You continue to operate in this way by refusing to acknowledge genuine concerns. This is not my personal agenda; I am merely reflecting back what I am being told by industry.
Baroness Verma
I am very aware that the noble Baroness is very passionate about this. I am also very aware that industry—I speak to industry regularly, like the noble Baroness—says that the means by which we are travelling through this Bill is absolutely right.
Baroness Worthington
Clearly, we speak to different people. Can you please answer me on whether we can see the Redpoint analysis on the impact of the IED on capacity? What I have found very frustrating throughout this process is that we have perfectly rational, interesting and varied debates in which people put forward their point, but they are then completely ignored by the Minister in response because she simply reads her notes. She is not even listening to me now. That is a reflection of the fact—
Baroness Verma
My Lords, I am listening very carefully. I am able to listen and also try to get some responses to the points the noble Baroness is raising.
Baroness Worthington
It would be helpful if they could come from you, would it not? But there we are. I am sorry this has become so annoying because you started this by making party-political points and by starting off by calling the previous debate, which was a perfectly rational debate, “insane”. I am afraid you have created a very poor feeling in an otherwise good debate.
Baroness Verma
My Lords, I think the noble Baroness has completely misunderstood the point I was trying to make. If she reads Hansard tomorrow, she will understand that the points I was trying to make were that we are all on the same sheet on this. What we are trying to deliver in the Bill is decarbonisation through a means that we think is right, and that must be at the least cost to the consumer. I am sure the noble Baroness would agree with that.
Baroness Worthington
I apologise for my lack of respect in referring to the noble Baroness, but, as you can see, this has got off to a very bad start. I hoped this would not happen because there is a very serious issue here to do with the degree of scenario planning that the Government have undertaken and the degree of rigour that they have applied to their analysis. I am very sorry that now we have lost sight of that very important point by what has just happened. I regret that deeply. I reiterate that this is a huge intervention into the market, and if you get it wrong, all sorts of unintended consequences will happen. It is simply not good enough to say that our models tell us that it will all be fine. We need to go out and talk to people in the real world, as I have done, and see what they are projecting for coal under the scenarios that we have in today’s market, the flexibilities that enable them going forward and building in the significant amount of money that is being redistributed to them through this mechanism. That is what I am seeking to explore. I have been very disappointed that there is not even an acknowledgement that this is an issue. I heard the noble Baroness’s offer of working on the detail of this over the summer; I will take it in good faith and hope that we can work through the detail.
In conclusion, it is quite wrong of the Government to pray in aid least cost to consumers. This Government introduced the carbon floor price, which has disadvantaged the UK relative to the rest of Europe for virtually no perceived outcome at the moment. We are already paying the carbon floor price. It is already impacting on our businesses and consumers. This is a Treasury money-raising exercise. If you are the party interested in keeping costs low for consumers, that is the policy you should be looking at, not the very sensible suggestion of trying to ensure that the capacity mechanism does not have unintended consequences in terms of carbon. It is absolutely clear that the quickest and cheapest way to decarbonise the economy is to switch out of coal and into gas. You can shake your head if you want to, but you need to go back to history and look at what has happened. You can build as many renewables as you like, but if you get coal and gas wrong, you will not get to those low-carbon intensities. That is the issue I am trying to get to, and for you to use least cost and cost to consumers as excuses for doing that is really deplorable when you think of the carbon floor price. I think you need to go back and think about that. I beg leave to withdraw the amendment.
Lord Roper
My Lords, I do not intend to delay the Committee unduly on this point, but I echo what has been said by the noble Lord, Lord Grantchester, and my noble friend Lord Crickhowell. I have spoken before on the remarkably trenchant language which the Delegated Powers and Regulatory Reform Committee used in its fifth report—and, in its sixth report, as we have heard from the noble Lord, Lord Grantchester, it is still very concerned, particularly on the regulations on the capacity market that we are considering. Therefore, it is essential that we have detail of the regulations that are going to be introduced well before we come to Report.
Baroness Verma
My Lords, I am extremely grateful to my noble friend Lord Jenkin and the noble Lord, Lord Grantchester, for prompting this debate on the delegated powers within the capacity market and contract for difference provisions.
Clause 26 enables the Secretary of State to make provision to impose requirements, via electricity capacity regulations, in addition to those stipulated in capacity agreements. The requirements can be imposed on persons including licence holders, other persons carrying out functions in relation to capacity agreements and current and former capacity providers.
I understand that my noble friend Lord Jenkin is concerned that the provisions in this clause are too broad. However, the Government consider that the ability to address this provision in secondary legislation is needed as the requirements may change with time. The need to consider certain matters when preparing advice regarding the operation of the capacity market may also change as the market evolves, as has been the experience in international capacity markets, such as those in the United States.
With regard to Clause 26(3)(b) about placing restrictions on the use of generating plant, certain requirements may need to be imposed to ensure a fair and transparent auction and to mitigate or close off gaming opportunities that could otherwise drive up costs for consumers. In particular, it is imperative that we know the range and type of capacity, irrespective of whether the capacity operator intends to bid at auction, and we need to ensure we can address gaming opportunities, such as a plant operator notifying its intention to close in order to drive up the capacity price. Clause 26(3)(c) allows the Secretary of State to impose requirements relating to participation in a capacity auction. An example of how we envisage using this power is that we may wish to require a plant to participate in a capacity auction if it has notified the delivery body during the pre-qualification process that it is its intention to do so.
It may be necessary to place other requirements on those who have ceased to be capacity providers—that is to say, they have assigned or traded their capacity agreements—in order to determine whether they complied with their obligations while they held the agreement. For example, requirements relating to the inspection of plant or property other than as a condition of entry into a capacity auction, as described in Clause 26(3)(d), may be imposed by the Secretary of State.
The powers in Clause 32 allow the Secretary of State to amend or repeal certain sections of the Electricity Act 1989 and the Energy Act 2004 and to make subsequent amendments to any other enactment as the Secretary of State considers appropriate as a result of provisions made by electricity capacity regulations or capacity market rules. I recognise that my noble friend has particular concerns over the provisions in paragraph (d), which allows the Secretary of State to make consequential amendments to any other enactment that he considers appropriate. I should emphasise that our intention is to limit the use of the power in Clause 32(d) to making amendments that are consequential on, or to avoid duplication and contradiction of, existing primary or secondary legislation on implementing the capacity market. For example, if we modify the standard conditions of licences under the provisions of the Electricity Act, the powers for which are set out in Clause 31, it may be necessary to make a consequential amendment to Section 33 of the Utilities Act 2000. This contains general provision about standard licence conditions and includes in Section 33(1) a list of powers under which licence modifications have been made. Furthermore, any provisions to amend primary legislation through the powers in this clause will be subject to a proper level of parliamentary scrutiny through the affirmative resolution procedure.
I now turn to the amendments proposed by the noble Lord, Lord Grantchester, relating to the level of parliamentary scrutiny of regulations made under Chapters 2 and 3 of this Bill. These amendments would make all regulations subject to the affirmative resolution procedure, aside from those relating to electricity capacity regulations: information and advice and those under Clause 7(10) which set out how long a person who has ceased to be a CFD counterparty is continued to be treated as such. These would be subject to the negative procedure. The amendments are consistent with the recommendations of the Delegated Powers and Regulatory Reform Committee. As I have said in previous debates, the Government welcome the committee’s report and I can reassure the noble Lord that it is being given careful consideration. I commit to consider the amendments further and will respond in due course. I commend that Clauses 26 and 32 stand part of the Bill, and hope that the noble Lord will feel content to withdraw his objection.
Lord Whitty
My Lords, my name is also on this amendment and I sat on the same committee, as the noble Earl, Lord Caithness, indicated. We are debating that whole subject on Monday night. The noble Lord, Lord Cameron, and the noble Baroness spelt out the general thesis of that report and I do not intend to repeat it.
I say to my noble friend Lord O’Neill that I do not think he entirely deserves the strictures from the noble Lord, Lord Deben, on fictional characters, but he does like to stir up a little controversy. In a sense, the title that we chose for that report in the sub-committee was intended to pre-empt the sort of attack that my noble friend Lord O’Neill produced. It is that no country is an island in relation to energy supply—not Scotland or Great Britain. Indeed, the other part of the United Kingdom, Northern Ireland, is already utterly dependent on interconnectivity both for its gas and electricity. The idea that we should ignore interconnectivity as part of the solution, particularly when we are discussing capacity markets and capacity mechanisms, seems to ignore something obvious. Certainly, by the end of our deliberations on that committee, it became obvious to us.
The noble Earl, Lord Caithness, asked what the Secretary of State’s response was to the committee. I thought that we had a very good session with the Secretary of State. He took it up. He obviously had some briefing and had to be a little cautious, particularly on delivery within the European context, but he was keen that we should take it up. To be fair to the Government, they have picked up this point but it is not yet reflected in the Bill.
The amendment of the noble Baroness, Lady Parminter, gives the Government a chance to have another look at this and see what relationship there is between an attention to interconnectivity and both the contracts for difference, which could include a contract for difference for generation occurring outside the United Kingdom, and the capacity mechanism, which should also include provision for interconnectivity to be part of it. Indeed, it is an obvious part of an overall capacity mechanism. Two-way connectivity must be a way of bringing down costs across Europe as a whole with the development of an internal market which at present does not really exist, despite what the Commission claims on occasion. That must be to the benefit of the costs of investment in energy as a whole and ultimately to the price to the consumer, whether a domestic or industrial consumer.
The message from our report—and that message also lies behind the requirement that the amendment would place on the Government—is to develop a UK strategy in order to push forward the European agenda on this, but with particular reference to those bits of interconnection between us and Ireland, us and France and potentially further afield in Norway, Iceland and Holland. For all those reasons, this needs to be seen as a way of meeting our energy requirements.
Unfortunately, in this context, the Government are not being as ambitious as the Secretary of State was in his response to the committee. They are saying that connectivity would effectively be regarded as a passive contribution. For example, in the letter that the noble Baroness wrote recently—noble Lords may have seen it—she says that if interconnection provided 2 gigawatts then clearly that would have an effect on overall costs and would be of benefit. However, that is looking at it in a very passive way. If we developed a strategy, we could look at the matter in a more constructive and creative way as one of the major contributions of the diversity of sources to meeting all our objectives: energy security, decarbonisation and lowering the price to industrial and domestic consumers.
Interconnectivity is big in that respect, and significant in avoiding disruption and shortages. My noble friend Lord O’Neill ought to look at this matter again and accept, without determining what the outcome of such a strategy should be, that part of the jigsaw must be a strategy on interconnectivity. I therefore strongly support the amendment.
Baroness Verma
My Lords, I am grateful to my noble friends Lady Parminter and Lord Teverson, and the noble Lord, Lord Whitty, for providing me with an opportunity to respond on the very important issue of electricity interconnection.
I turn first to Amendment 55ZB on electricity interconnection. The physical linking of the GB electricity market to others in Europe has the potential to offer a range of benefits, as my noble friend has ably set out. The Government firmly believe that greater levels of interconnection would be good for Britain and build on the 4 gigawatts that we have. A large number of interconnector projects are at different stages of development, including to Norway, Belgium, France and Ireland. Indeed, when you add up the capacity of potential projects, it comes to more than 12 gigawatts.
The UK Government are already playing an active role in seeking recognition of several UK interconnection projects as European projects of common interest under the EU regulation on guidelines for trans-European energy infrastructure. This regulation, which the UK Government were actively involved in negotiating, aims to accelerate the development of cross-border energy infrastructure with a view to completing the internal energy market.
Successful projects are due to be announced in early autumn, and will benefit from streamlined planning procedures and, where necessary, a mechanism to agree cross-border cost allocation. They will also be eligible to access financial instruments such as loan finance, grants for feasibility studies and, potentially, grants for works under the Connecting Europe Facility—a pot of €5.1 billion over seven years. The Government also continue to discuss interconnection with our counterparts across Europe. My noble friend may be aware that the Prime Minister committed last year to supporting the development of an interconnector with Norway, and we have signed a memorandum of understanding with Iceland to explore the possibility of linking our markets.
In part, the large number of projects in development is due to work that Ofgem has been doing to develop a new regulatory approach for interconnection. This “cap and floor” model retains the market incentives for interconnection but reduces some of the risks to revenue that merchant developers face. This regulatory model is initially going to be applied to the project with Belgium, Project Nemo. Cap and floor has real potential in driving forward interconnector investment but, by its very nature, looks to consumers to potentially take on some risk in return, which will need careful consideration. Ofgem is taking this into account as part of its wider integrated transmission planning and regulation project, in which it is exploring whether there needs to be enhanced planning or strategic evaluation of future interconnection.
I should also like to highlight two further important developments that are taking place. First, developers invest on the basis of price differentials on either side of the link. Ofgem is working to ensure that Great Britain’s electricity prices reflect scarcity to a greater extent, thereby increasing the incentives for investing in interconnection. Secondly, on 27 June, the Government committed to continuing to explore ways in which interconnected capacity can participate in the capacity market. This is not simple and no other country has found a way to do this, but a solution could further increase investment appetite. It is worth reflecting that the single market is about not only the infrastructure between member states but the way in which that infrastructure operates.
The Government, with the support of Ofgem and National Grid, are playing an active role in the development of the European technical codes that will govern how trading over interconnectors will work in practice. This is essential if the full benefits of the infrastructure investments are to be realised.
The Lord Bishop of Chester
I raised a specific point about the extent to which existing capacity, which may get as high as 12 gigawatts, is taken into account in energy security. To what extent is the Government’s strategy on energy security dependent on the interconnection?
Baroness Verma
I apologise. I had a note for the right reverend Prelate the Bishop of Chester, but I forgot to allude to it. The loss of supply from interconnection, like other forms of capacity, would be handled by the system operator in the same way as additional capacity would be sought through the National Grid’s balancing services. There would be a mechanism in place.
The Lord Bishop of Chester
The noble Baroness may want to write to me rather than answer now, but if supply gets tight under the scenario that Ofgem has said is possible—although we hope it will not come to that—does continuation of the Government’s current strategy at that point depend on the availability of electricity at a level between the current 4 gigawatts and the prospective 12 gigawatts?
Baroness Verma
My Lords, it might be wise for me to write in detail to the right reverend Prelate and the Committee with a fuller answer.
Lord O’Neill of Clackmannan
Given that the Minister is not opposed to the amendment in principle, if the words “12 months” were removed from it and the amendment were to be retabled on Report, would she look at it in a more sympathetic light?
Baroness Verma
I see that the debate has changed the mind of the noble Lord, Lord O’Neill, but, as with all debates in Committee, I shall go away and look carefully at Hansard to make sure that I have understood the debate fully.
Lord O’Neill of Clackmannan
I am just an old hand at this game. Ministers who do not have very much to offer Committees sometimes throw them bones and say, “We like the principle but not the text; were you to change it, we might look sympathetically at it”. That is the kind of thing that prevents unnecessary tensions and allows people to leave with a wee bit of a skip in their step. I was merely asking because I am sure that some of the old greybeards on the noble Baroness’s side would say that that is one way of throwing bones to other Members. Is she in a bone-throwing mood?
Baroness Verma
My Lords, as I have said, I read Hansard with great care to see what responses I can give to noble Lords, but I consider every amendment very carefully and, of course, pay great consideration to each and every point that is raised.
Lord Teverson
Perhaps I may thank the noble Lord, Lord O’Neill, for the consideration he has given to this side and for his suggestions. That was an excellent analysis of how things should work.
Baroness Verma
My Lords, I thank the noble Baroness, Lady Worthington, for her amendment and for prompting the debate on strike prices for CFDs. Amendment 55ZC raises the important point that the draft strike prices we published on 27 June must be set at a level capable of incentivising investment. This is extremely important, and I am grateful for the opportunity to reassure noble Lords. As they will be aware, the draft strike prices were published on 27 June with their supporting detail for consultation in the draft EMR delivery plan on 17 July.
I would like to provide reassurance to the Committee that the Government have put extensive effort into ensuring that strike prices are set to balance the objectives of EMR stated in the Bill we are debating currently. They are to drive the necessary investment to meet our important targets while ensuring security of supply and value for money for consumers. The Bill ensures that all the functions exercised under it will take these important objectives into account. I therefore reassure the noble Baroness that the intent of this amendment is being achieved without the need for a further statutory requirement.
Further, we are working hard to ensure the process through which final strike prices are set is transparent, robust and informed by a full range of expert input, including from consumer groups. Our reason for consulting on the draft strike prices is to allow industry and all other stakeholders to scrutinise the figures and the evidence used to develop them and provide us with feedback to inform the final strike prices.
The strike prices proposed by the Secretary of State in the draft delivery plan were informed by two pieces of independent advice: first, analysis provided by National Grid to help the Secretary of State understand the potential impacts on the Government’s objectives, including the potential generation mix that the decision may incentivise, from different strike prices; secondly, that analysis has been subject to independent scrutiny by a panel of technical experts, as the noble Baroness said. Both these reports were published alongside the draft EMR delivery plan and copies were deposited in the Libraries of this House and the other place.
Turning to the setting of strike prices for investment contracts, as we set out in our update on Final Investment Decision Enabling for Renewables, which was published on 27 June 2013, strike prices for renewables generation will use the strike prices published in the final delivery plan. The potential terms, including the strike price, for any investment contract for Hinkley Point C will be set through bilateral negotiation, with specialist advice sought as appropriate and rigorous scrutiny of proposals.
I will write to the noble Baroness regarding the supplier obligation. I hope that she will withdraw her amendment.
Baroness Liddell of Coatdyke
My Lords, I have great sympathy with what my noble friend has said. The noble Lord, Lord Oxburgh, drew attention to the fact that we see in DECC no institutional memory. We should put alongside that the fact that Ministers rotate regularly. There needs to be somebody or some organisation in the middle that is the honest broker. When I was the Energy Minister, I had a panel of experts which was hugely valuable to me. It involved people such as Dieter Helm and had real gravitas. It was really useful to be able to bounce ideas off people, but this proposal takes it to another level. My noble friend said that people in the very enclosed world of energy policy have often had opportunities to work in the big six or for some of the significant players in the field. It is useful to know who is taking these decisions. To the noble Earl, Lord Caithness, I would say that sometimes you have to spend a penny to save a penny. If you spend your money on getting people who can stop you making mistakes, you will avoid spending not just millions but perhaps billions of pounds making mistakes just for the sake of a few ha’pennies to ensure that you have proper advice. My goodness, government spends enough on consultants. Why not put some of that money to good use getting some expert advice?
Baroness Verma
My Lords, I thank the noble Lord, Lord Whitty, for his amendments. Amendments 55ZF and 55ZG would set up an expert panel to provide independent advice to the Secretary of State on setting strike prices, development of contract terms and whether to issue CFDs or investment contracts. These are extremely important matters and I am grateful to the noble Lord for the opportunity to debate them.
The Government wholly agree with the noble Lord that independence, expert scrutiny and engagement with a wide range of stakeholder views are important principles. For the purposes of setting strike prices for renewable technologies, we are ensuring that the process through which those strike prices are set is transparent, robust and informed by a full range of expert input and stakeholder consultation. On 17 July, we launched a consultation on the proposed strike prices to allow industry and all other stakeholders, including consumer groups, to scrutinise the evidence and analysis that informed them. We are asking for their feedback to inform the final strike prices.
Further, to ensure that the strike prices proposed by the Secretary of State in the draft delivery plan were informed by independent advice, we asked National Grid to conduct analysis to help to understand the potential impacts of strike prices on government objectives. We also commissioned an interim panel of technical experts to scrutinise that analysis impartially. Both those reports were published alongside the draft EMR delivery plan and copies deposited in the Libraries of this House and the other place.
The process allows us to be confident that the strike prices are informed by robust evidence in an appropriately transparent way. We have been able to use existing powers to appoint the interim panel of technical experts, so they are already performing their scrutiny role. Following Royal Assent, we intend to establish an ad hoc advisory group, with Clause 139(2)(c) providing the spending authorisation to support this work. This, with the steps described above, will ensure that the Secretary of State makes an informed decision having considered a full range of views before setting the level of support in the final delivery plan. However, I do not agree that these principles need to be delivered by creating a new public body; we are already delivering them.
On setting strike prices for investment contracts, as we set out in our update on Final Investment Decision Enabling for Renewables, published on 27 June 2013, strike prices for renewables generation will use the strike prices published in the final delivery plan. The Government have appointed external specialist advisers to help to ensure that any investment represents value for money. We will publish summaries of reports from these advisers alongside the contract, in the event that agreement is reached, when it is laid before Parliament. In addition, the Government made commitments and amendments in the Bill in the other place to ensure that investment contracts are transparent. For all these reasons, we do not think it is necessary that there is separate scrutiny of whether an investment contract should be offered by the counterparty.
Finally, the noble Lord raised concerns that the contract terms should be subject to scrutiny and that there should be independent scrutiny before the counterparty offered a contract. I strongly agree that the terms on which the CFD or investment contracts are set need to be scrutinised. However, I consider that this should be done not by a separate expert panel but by the industry and consumer groups at large. This is why, over the past year, we have been working with an expert group consisting of industry and consumer group representatives in the development of key terms, something that I am sure the noble Lord, Lord Whitty, will welcome.
We have also had extensive discussions with industry, consumer groups and others with regard to how contracts will be allocated. The allocation process will be run by National Grid which will act within rules set out in secondary legislation to allocate CFDs to eligible applicants. The intention is that the allocation process will be rules-based and relatively mechanistic to allow investors and developers to make an informed decision about their chance of being allocated a contract. If an applicant is successful, National Grid will direct the counterparty to offer it a contract. Therefore, we do not think it appropriate to include another process which would add considerable complexity to the system.
We will shortly be publishing the CFD contract spine and further detail of the allocation process, which builds on the draft contract terms and operational framework published in November 2012. This will allow industry and other stakeholders to examine the terms of the contract and the allocation process and to discuss them further with my officials. Renewables investment contracts will be based on the final standard form CFD and therefore will be subject to the same scrutiny as aforementioned.
Before I ask the noble Lord, Lord Whitty, to withdraw his amendment I shall give some further information. He asked about the structures advising the Secretary of State and the counterparty beyond Ofgem and National Grid. For the first panel, we used a procurement process but, following Royal Assent, we intend to establish an ad hoc advisory group. We have not only made a policy commitment to establish a panel of technical experts but already appointed an interim panel to ensure they are operating in a timely and effective manner.
On reviewing strike prices, we have the opportunity to revise them through the annual updates to the delivery plan, and we intend to do that to set strike prices at an appropriate level.
My noble friend Lord Jenkin asked whether there would be enough accountability. We recognise that there is a need for robust accountability and transparency with such powers, which is why we introduced a duty on the Secretary of State to report on the Government’s activities in relation to all EMR functions provided for under Part 2. There is also a five-year review in Clause 55.
The noble Lord, Lord Berkeley, asked who made up the panel. I have a list of the members and their résumés. I think it would be helpful to the Committee if I do not spend time going through them but write to members of the Committee on the make up of the panel. I hope the noble Lord, Lord Whitty, will withdraw his amendment.
Lord Whitty
I thank the Minister for that detailed reply, and I thank my noble friends Lord O’Neill and Lady Liddell and the noble Lord, Lord Oxburgh, for supporting this amendment. I think the Minister missed an essential point. Obviously, the Government have made great efforts, and a lot of people in the industry and even in consumer groups think they have been properly consulted in the process of reaching the stage we are at. However, consultation is not the same as having a firm, continuous source of advice, independent of the department.
The names that the noble Baroness will supply us with may be exactly the kind of names we would want on a Committee of this sort. It is impossible to avoid all possible accusations of conflict of interest in this because the energy field is fairly esoteric. Nobody can be as pure as Caesar’s wife in this area, as we have probably all found, but they would demonstrate a degree of expertise. The Minister described it as an ad hoc technical advisory group, which does not provide the confidence needed in the industry, among the public, parliamentarians and consumers, that this process is being put on the best possible basis with the best possible technical, consumer, economic and legal advice.
The noble Lord, Lord Jenkin, raised the issue of judicial review. All Ministers are beset with advice from officials saying, “If you do this you will be subject to judicial review”. There are both positives and negatives from that. The process in this proposed new clause would protect people against frivolous attacks on judicial review. It would mean that the Minister had to go through a process with a body embedded in statute, had some responsibilities to Parliament and consisted of people with a wide range of technical, legal and financial expertise. I am afraid that reference to an ad hoc committee is not the same. It was also argued that it is Parliament’s job. It would probably help Parliament in the guise of select committees, as my noble friend Lord O’Neill suggested, to do its job in relation to what are vital contracts that will last for an enormously long time and have tremendous implications for our future energy situation. At the very minimum, the Government need to recognise that reassurance is needed that the proper process has been gone through.
The noble Lord, Lord Oxburgh, who is no longer in his seat, mentioned continuity. People who are appointed for four and eight years in this area will outlast every Minister and most officials. It is important that that kind of expertise is retained. I would think of extending the terms if I were writing the proposal properly. The Government may have views on that. Having that separate from the day-to-day responsibilities of Ministers and officials, and the month-to-month responsibilities of a regulator is an important part of the process that we are putting into law. We are moving into unknown territory in some respects and doing so by a leap of faith—one that is well informed by those who have been involved, but not understood by those who have not been involved.
It would be a protection for Ministers, as well as for the process, the counterparty and the Secretary of State, if we had a body with this authority, independence and statutory backing. I am disappointed that the Minister is not tempted to go down this road. As I said, I never expected her to pick up the exact wording, but this concept needs to be maintained in our minds. It may well be that we will return to this later in the proceedings. I beg leave to withdraw the amendment.
Baroness Worthington
My Lords, I am grateful to my noble friend Lord Berkeley for tabling this amendment for no other reason than that we found out that very interesting fact. We cannot support this amendment. I have great sympathy with the concerns that have been raised that 25 years may be too long, but the way this amendment is phrased means that it would capture all renewable technologies. There is a great range of technologies that the strike prices are seeking to bring forward, and at the moment it seems that the majority of them might be conversion to biomass. I do not think you would want to lock that in to 25 years. I support the spirit behind the amendment of questioning and trying to understand the different lengths of contracts. That is something that we could discuss, but I do not think this amendment should make its way into the Bill.
We now have the draft delivery plan and the strike prices for renewables. The plan contains some suggested lengths for contracts, but I do not think we yet have anything similar for CCS and nuclear. We are expecting some more information on that in early August, when we will all be having a much deserved and well earned rest. It would be helpful if the Minister were to say something about that in her response.
Baroness Verma
The amendment moved by the noble Lord, Lord Berkeley, seeks to ensure that renewable technologies in receipt of a CFD have a contract life of at least 25 years. As the noble Lord is no doubt aware, we have recently published more detail on the contract terms, building on the operational framework of November 2012. This reconfirms our position that the appropriate contract length for payments to renewable technologies receiving a generic CFD remains 15 years.
In determining the length of the CFD, we considered a number of factors. The 15-year length is based on a trade-off between value for money for consumers, affordability within the levy control framework and bankability for investors. For the purpose of setting the contract lifetime, we have assumed that investors will require debt to be repaid within the CFD life. Therefore, having too short a contract length could impact on the cost of debt finance, given the increased exposure to wholesale price risk. Our analysis also indicates that investors discount very heavily the last few years of revenue from a project, particularly when compared to the social discount rate. Taking all these factors into account, extending the length beyond 15 years would not necessarily be significantly valued by the investor but would come at a cost to consumers.
In addition, the noble Lord may be aware that guidance from the European Commission states that support must be less than the accounting life of the asset. Extending the lifetime duration as the noble Lord proposes would extend a CFD beyond the asset life of a number of renewables technologies, which are generally less than 25 years. All these factors suggest to us that a contract life of 15 years is still appropriate.
I should also make clear that just because there is a generic contract, that does not prevent the Secretary of State directing the counterparty to issue a contract which differs on certain terms where that is considered appropriate. We have retained the ability to do this and would look to treat such occurrences on a case-by- case basis.
The noble Baroness, Lady Liddell, asked about the uncertainties of risk, mitigating them and ensuring appropriate rates of return. The strike price provides certainty on levels of support for the length of the contract. There will also be some change in legal protections. More details on the CFD terms will be published in early August, as the noble Baroness, Lady Worthington, said.
The noble Baroness, Lady Worthington, asked about nuclear and CCS. As she knows, we are currently in negotiations on a nuclear project, so I am not able to comment further on that point. On CCS, it may be better if I write to her. I hope that the noble Lord, Lord Berkeley, will withdraw his amendment.
Lord Berkeley
My Lords, I thank the Minister for her reply and am grateful to all noble Lords who have spoken on the amendment. I did not expect that it would be accepted but we have had a good debate. The noble Earl, Lord Caithness, indicated that I had a go at him for not liking windmills, which is not true; I did not mention his name.