Baroness Verma
Main Page: Baroness Verma (Conservative - Life peer)Electricity Capacity Regulations 2014
Baroness Verma Excerpts
Baroness Verma
That the Grand Committee consider the Electricity Capacity Regulations 2014.
Relevant documents: 4th Report from the Joint Committee on Statutory Instruments, 6th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma) (Con)
My Lords, today we are considering the six instruments which form the implementing secondary legislation for the electricity market reform programme—namely, the draft Contracts for Difference (Definition of Eligible Generator) Regulations 2014, the draft Contracts for Difference (Allocation) Regulations, the draft Contracts for Difference (Standard Terms) Regulations 2014, the draft Contracts for Difference (Electricity Supplier Obligations) Regulations 2014, the Electricity Market Reform (General) Regulations 2014 and the draft Electricity Capacity Regulations 2014. I apologise from the outset: given that we are taking a large number of regulations together, I have some detailed speaking notes.
The electricity market reform programme is designed to encourage investment in secure, low-carbon electricity generation. The reforms that we will debate today will transform the electricity sector, supporting jobs, strengthening supply chains and boosting economic growth. The reforms have been strongly welcomed by the industry, and that is best demonstrated by the fact that it is already generating private sector investment in low-carbon electricity. Based on the information provided by projects, the eight renewables projects which have signed investment contracts—an early form of CFDs—will bring forward up to £12 billion of private investment. We hope that by delivering EMR this year, we can secure much more of this vital investment.
This investment, of course, is needed to ensure that we have a generation mix which responds to the challenge of climate change and meets our legally binding carbon and renewables targets. The investment is also necessary if we are to ensure that the lights do not go out. The UK faces very rapid closure of existing capacity as older, more polluting plant goes offline, and this needs to be replaced with a cleaner, more sustainable generation mix. To achieve this, we estimate that £100 billion of investment is required up to 2020.
The enabling powers to make this implementing secondary legislation are found in the Energy Act 2013, which completed its passage through Parliament last December. Since then, my department has finalised the policy detail for the two mechanisms for reform—contracts for difference and the capacity market. These two mechanisms are implemented through the draft regulations before your Lordships today. They have now been approved by the other place and, if approved by noble Lords this afternoon, are planned to come into force on 1 August.
Noble Lords may be aware that yesterday the EMR programme reached a significant milestone as we received state aid approval for the CFD for renewables, the capacity market and the five offshore wind projects which have secured investment contracts under the final investment decision-enabling for renewables process. This is a large step forward for the programme and, subject to today’s debate, will keep the Government on track to launch the first CFD allocation round and the first capacity market auction before the end of this year.
Passing these regulations will be another important milestone which will provide developers and financiers the certainty they need to continue making the investment our energy infrastructure requires. Timely delivery of the reforms will help to ensure that we are on track to meet our carbon and renewables targets and that we have cost-effective measures to keep the lights on.
One of the key objectives of EMR is to minimise costs to consumers, and delivery this year will also help ensure that the benefits to consumers are realised as soon as possible. A delay to implementation is likely to mean that more developers will seek support under existing mechanisms such as the renewables obligation, the closure of which the Committee will debate later. While these mechanisms have served us well, they do not deliver the same value for money to consumers and industry that CFDs provide.
Timely delivery of the reforms will also reinforce the UK’s reputation as one of the most attractive places to invest in energy globally. Industry and investors have demonstrated that they have confidence in the new arrangements and have already expended substantial resources in preparing for the introduction of EMR. It is vital that we maintain this confidence and along with it the vast economic benefits—not only in terms of our energy infrastructure but in terms of job creation in energy industries and supply chains. The EMR will deliver that.
I know that securing approval for the implementing secondary legislation will be strongly welcomed by stakeholders, who are keen to engage and invest in the new arrangements, and I hope I will effectively explain why the timely delivery of these reforms is so important.
Before we commence the debate I will briefly describe the six statutory instruments under consideration. The first five instruments implement the contracts for difference regime. The Contracts for Difference (Definition of Eligible Generator) Regulations and the Contracts for Difference (Allocation) Regulations provide the starting point by setting out, respectively, which persons are eligible generators for the purposes of applying for a CFD and the eligibility criteria which must be met. The Contracts for Difference (Definition of Eligible Generator) Regulations define an eligible generator by reference to a person’s relationship to the generating station; and define those generating stations which are eligible generating stations by reference to the technology used by the generating station. The regulations include a list of 15 low-carbon technologies which are eligible for a CFD.
The allocation regulations stipulate qualification requirements that an eligible generator must satisfy in order that the application for a CFD by that generator may take part in the CFD allocation process, and provide for a three-tier appeals process in relation to the eligibility assessment. The qualification requirements include, for example, that an applicant’s project has secured relevant planning consents and that a grid connection agreement is in place. Applicants wishing to construct or alter offshore wind generating stations will be required to provide evidence of a Crown Estate agreement for a lease; and all projects generating 300 megawatts or more will be required to show that an approved supply chain plan is in place.
To avoid projects benefiting from a double subsidy and to ensure value for money, generating stations already in receipt of funding from another government support scheme, such as the RO, are excluded from the subject of a CFD application under the regulations.
Noble Lords should note that my department also intends to introduce, through future amendment to the regulations, a non-delivery incentive to discourage speculative or strategic applications where there is little or no prospect that they will deliver on CFD commitments. We are also exploring measures that prevent an applicant who has engaged in such behaviour from applying for a CFD in respect of a generating station on the same site as that included in such a speculative application, for a period of time that will cover at least the allocation round subsequent to that in which the CFD was offered or entered into.
The allocation regulations set out the parameters for the allocation process. Included as part of this is how applications are to be assessed by the delivery body; how the budget for each round is notified to those wishing to apply for a CFD; and how an allocation framework applies to an allocation round. The allocation framework is a separate document that sets out the CFD auction process in detail, including the individual rules that apply to each auction, and may, where the allocation regulations permit it to do so, set out supplementary qualification requirements. Having a non-statutory document in the form of an allocation framework helps the Government effectively to balance the need for regulatory certainty for investors with the flexibility needed to adapt the auction rules to changing circumstances or to close loopholes that undermine the integrity of the auction process. It would not be practicable to subject any changes in the auction rules to any parliamentary procedure as doing so might constrain the Government’s ability to deal quickly with a problem that has been identified with the technical auction rules.
Baroness Worthington (Lab)
Can the Minister clarify something for me? There are seven instruments listed on the Order Paper, including the Renewables Obligation Closure Order.
Lord Jenkin of Roding (Con)
My Lords, my noble friend the Minister has made a very brave and thorough attempt to explain all these complicated regulations to the Committee and I do not envy her her task. This is an immensely complicated business, and I approach this as one who has spent many months over the last two or three years dealing with these matters—first on the Energy Bill, now the Energy Act 2013, and in the months since then. I see that I am surrounded by a very select band of aficionados who have been doing the same, and I think that between us we have the capacity to put some questions to my noble friend.
I entirely endorse the description of the scrutiny committee, which reported a few days ago. In paragraph 9 of its report, it said:
“The number of statutory instruments laid, and the highly detailed nature of their provisions, are not conducive to a rapid understanding of their effect”—
to which I can only say, “Hear, hear!”. Of course, the committee expresses some anxieties about how far consumers can be helped to understand these measures. In response to that, the then Minister for Energy undertook to provide what he described as an,
“additional, succinct explanation of the legislation”.
I invite noble Lords to look at Appendix 1 to the Select Committee report. I m not sure that the six pages of detailed description can match what Mr Fallon said on that occasion. This is a serious problem. The scrutiny committee was clear that much more needed to be done to explain this complicated system to consumers.
Baroness Verma
My Lords, I thank all noble Lords for their helpful remarks and questions. It has been a well informed discussion. These are complex measures and, quite rightly, my noble friends and other noble Lords have asked for clarification. If I do not respond to any questions raised during the debate, perhaps it might be helpful if I undertake to write to noble Lords and place copies in the Library. There were a large number of questions and it may well be that we have overlooked some of them.
I start with the questions posed by my noble friend Lord Jenkin. I would like to put on record my apology to my noble friend for responding to his letter rather late. There were gremlins a-playing and I can only blame them. I hope my noble friend will agree that usually I try my level best to give prompt—and maybe lengthy—responses to questions that he and other noble Lords put to me in the department.
We want to ensure that independent generators are very much part of what we are trying to deliver; making sure that the lights stay on, and driving down costs to the consumer through competition. A number of questions were put to me around that matter. My noble friend raised the issue but other noble Lords have added their concerns about why it cannot be April rather than the October date that has been laid out. I will try my utmost to bring the date as far forward as I can and I will be happy to meet independent generators to give those assurances. However, noble Lords who know me will know that I would rather play on the side of caution. Rather than over-promise and then fail to deliver, I would prefer to put in place a date I feel I can deliver. That does not stop me—I hope my noble friend and other noble Lords will take away this assurance—from pushing to get an earlier date, but I felt I could deliver on the October date.
As always, my summer holiday will be spent pushing dates with officials, but perhaps my noble friend can take back to the independent generators that the date is not set in stone; that it is there because I would rather not over-promise. I am willing to work closely with the independent generators and I would be happy to meet them and reassure them. Perhaps my noble friend will take up that offer.
My noble friend asked how much capacity will be procured. The Secretary of State confirmed on 30 June that the first delivery year will procure 53.3 gigawatts for 2018-19. These will be procured at two auctions: one later this year will procure 50.8 gigawatts, and the second phase in 2017 will procure 2.5 gigawatts. He also asked if the indicative CFD budget included the contract for the capacity measure. The answer is no. The interactive budget numbers published this morning relate only to the CFD mechanism.
My noble friend inquired about the Bill’s impact on the CFD. My department’s latest analysis suggests that household electricity bills will, on average, be about 6% lower per year over the period 2014-30 under EMR compared to meeting the Government’s objectives under the existing policy instruments. It is estimated that the annual electricity bills of businesses will be around 7% to 8% lower.
Lord Jenkin of Roding
I am grateful to my noble friend for that. She reiterated the statement made this morning by her Secretary of State regarding 6%. I hope that my noble friend Lord Deben will forgive me for asking this question again. The sums spoken of in the EU Commission’s consent for state aid are very large. Unfortunately, I sent the numbers to Hansard, so I do not have them in front of me. My question is: how much of that represents subsidies that will have to be paid by consumers? The Minister will know that I have another amendment, which we will be discussing in October, to the Infrastructure Bill, under which I am asking for us to know what it will cost consumers. This is the same question. It is not the overall cost; it is how much of the cost of contracts for difference will fall on consumers.
Baroness Verma
I am extremely grateful to my noble friend for that clarification. I hope that I will be able to respond to that. If not, if my noble friend will allow me, I will write to him.
I am always pleased by the great energy with which the noble Viscount, Lord Hanworth, contributes to our debates but, as my noble friend Lord Deben pointed out, we had a very dysfunctional system before, so we need to go forward by ensuring collectively that the systems we have put in place since privatisation allow for greater competition, for costs to be driven down and, especially, that we are meeting our carbon commitments as well as ensuring security of supply.
I do not agree with the noble Lord’s premise about how we are approaching this. These are complex instruments and, with complex instruments, we have to ensure that people reading them can understand them. I undertake to try to make the instrument easier to understand. The noble Viscount showed me a big pile of notes. Sadly, all of us have had to drive through those because of the complexity of the Energy Bill 2013 and what we are trying to deliver through it.
I thank my noble friend Lord Deben for his intervention. First, I put on record our appreciation for all the work that he does as chairman of the Climate Change Committee, his great understanding and the very useful support that we gain from the work done by him and his committee. I agree completely that we need a real mixed portfolio of technologies and that, although energy security is crucial, we must not lose sight of our commitment to reduce carbon emissions by 80% by 2050. Therefore, it is important that, when we are talking about the need for energy security, in everything we do we are mindful of that target as well.
My noble friend also asked whether we were doing enough to push for competition. Vigorous competition and transparency is the key to keeping prices as low as possible, and to raise consumer confidence in the market. It is in a much better place today than it was when we first came to power in 2010. That is because there are now many more players in the market—although, I entirely agree, not enough. We have to open up markets and make them certain for the smaller players so that we do not have them disappearing, as they did when we the big six took over by consuming them.
The noble Lord, Lord Whitty, asked whether consumers understood what EMR was. I know that many of us have stood at the Dispatch Box with that question in mind because it is incredibly complex. I can assure the Committee that I have looked at different ways of making sure that the message goes out to the consumer. Ultimately all of us are working to ensure that consumers are the beneficiaries and can understand the policies that we are trying to deliver. As with all complex pieces of legislation, it is about how we bundle it up without losing the underlying measures that we are trying to deliver. I will take the noble Lord’s views back to the department and instruct it again to try to talk in a language that has more outreach. But with complex legislation, there are limits to what we can do.
The noble Lord also asked what engagement we have had with consumer groups. He is aware that we have been closely involved with all stakeholders, including consumer groups. They have been part of every discussion and we have consulted them on everything that we are doing. It is important to say that as far as we are aware, we have not tried to exclude anyone, but have taken their views on board. The noble Lord also asked about allocation rounds and whether they should operate on a quarterly basis. An allocation round takes about three to six months, depending on whether there are any appeals. This means that the earliest another allocation round could be scheduled would be around May or June next year, when we know how many contracts have been signed and are able to reallocate any unspent budget.
The noble Lord also said that there was not enough support for solar. The noble Baroness, Lady Worthington, also mentioned that. We work closely with the solar trade associations and others to assess the RO grace periods and other issues that have been raised by them to ensure that full participation is possible in the CFD auctions. The amount of money allocated to Part 1 in this allocation round and in the indicative budget for October 2015 will enable around 1.6 to 1.8 gigawatts of solar PV deployment, and potentially more depending on the strike price at which individual projects will bid for.
The noble Lord, Lord Oxburgh, asked about consultations, particularly with smaller players in the market. I can assure him that more than 30 consultations have been published on EMR since last summer and overwhelmingly, a number of them were to ensure that we had given support to stakeholders, particularly the smaller players. We wanted to ensure that they could understand the reforms and effectively engage in the consultation process. If the smaller players feel that they have not been involved enough we must do more, but the department has worked incredibly hard to engage at all levels with smaller players. The noble Lord, Lord Oxburgh, and the noble Baroness, Lady Worthington, asked why CCS was not mentioned. It is an eligible technology and I draw the Committee’s attention to Part 10 of the allocation regulations which enables the Secretary of State to direct the CFD counterparty to offer, for example, two CCS generators.
The noble Baroness asked about the impact of a dynamic despatch model on capacity. It is quite complex so if the noble Baroness will allow it, I will write to her and to other Members of the Committee.
Baroness Worthington
On a point of clarification, I did not ask whether CCS was eligible; I stated that I knew that it was and asked whether the standard contract terms in the third regulation before us were suitable for CCS. That was my question.
Baroness Verma
In direct response to the noble Lord, Lord Oxburgh, who did ask that, I think that I have laid that out clearly. I will wait for some inspiration to come my way in answer to the noble Baroness. Concerning coal in the capacity market, I say to the noble Lord, Lord Oxburgh, that the purpose of the capacity market is to ensure security of electricity supply, providing all forms of capacity with the right incentives to be on the system and to deliver energy when it is needed. Ruling out existing coal would add unnecessary cost to consumer bills. In addition, it acts as an important bridge while new nuclear and renewables come online, leading to a natural need not to have more coal.
The noble Baroness, Lady Worthington, asked about Hinkley Point C. The Commission considers the UK’s Hinkley Point C state aid notification as part of the normal process. We are working closely with the Commission. As the noble Baroness will be aware, these things take time to go through the various stages, but it is not significant to us that it is taking this long, because it is a big project. Of course we need to ensure that we comply with all the things that the Commission expects of us on state aid issues.
The noble Baroness asked about existing coal stations bidding for capacity agreements of up to 15 years. As I said to the noble Lord, Lord Oxburgh, all types of generation can in theory bid for a capacity agreement of up to 15 years. However, we do not expect any existing coal capacity to do so. The thresholds have been set so that the capital expenditure would have to be of a level similar to building a new plant to qualify for a 15-year agreement, so even if an existing plant could justify making that level of capital investment, it would be unlikely to do so. Modelling demonstrates that the wider market conditions, such as the carbon price floor, will make coal uneconomic in the 2030s. As I said to the noble Lord, Lord Oxburgh, ultimately it is about value for money for the consumer and energy security—both objectives that I do not believe for a minute noble Lords opposite or other Members of the Committee would be against.
The noble Baroness also asked whether the Secretary of State could change the auction parameters, such as the amount of capacity to procure, without consultation. The regulations give the Secretary of State the power to determine auction parameters, including the amount of capacity to procure, before each auction. They are not subject to consultation; they are made when published. The Secretary of State has the flexibility to change them between the pre-qualification period and when the auction takes place so as to be able to take account of issues such as the amount of capacity that has been pre-qualified and the plant that has opted out but will remain operational.
The noble Baroness also asked why the Government did not use the capacity market to support other means of capacity, such as interconnection or demand-reduction programmes, rather than support dirty coal. The capacity market is open to a wide range of capacity, from gas to CHP, as well as technologies including demand-side response and storage. All are eligible to participate in the first, main capacity auction. As we announced last year, we were unable to find a way to include interconnector capacity to allow it to participate in the first auction. However, that is an issue only for 2014, and interconnection will be eligible to participate early in 2015. We will bring forward amending legislation in early 2015 to facilitate that.
The noble Baroness also asked about eligibility for fixed generators in receipt of low-carbon support. The capacity market is open to technologies as long as they are not in receipt of other low-carbon support, such as a carbon capture and storage grant or a long or short-term operating reserve contract.
Baroness Worthington
Some of my questions have perhaps been a bit lost in translation. One of my questions on coal was also specifically about the definitions of new plant. If you get a 15-year contract under the new plant definitions in the capacity mechanism, should it not therefore mean that you are equivalent to a new entrant or a new plant under the EPS regulations? When we were debating this back in the summer of last year, nobody was aware that coal could qualify for 15-year contracts. I would really welcome a comment on that.
In terms of the demand-side management, I know that the generators are eligible but my question was more about whether there will be any room for them, given that we have 56 gigawatts of thermal capacity chasing an auction of fewer than that. It is conceivable that existing generators will be able to outbid them in that T-1 auction. I seek reassurances on how the Secretary of State is going to ensure that there will be space for the demand side to bid in.
Baroness Verma
I am grateful to the noble Baroness but I do not think that it got lost in translation. I responded to her but perhaps my response was not full enough, so it may be helpful if I undertake to write to her and to the Committee on that issue, as well as on the issue that she has just raised.
As I have said from the beginning of this debate—and it is now two hours later—the delivery of these new arrangements will be a significant achievement. They will ensure that we keep the lights on and ensure a clean, sustainable and competitive mix of electricity generation. We also want to do that in a way that secures value for money. I have always made the point to noble Lords that it is really important, as well as reducing carbon emissions, to look at value for money because, ultimately, all our measures have an impact on consumers. I commend these instruments to the Committee.