Baroness Worthington
Main Page: Baroness Worthington (Crossbench - Life peer)Energy Bill
Baroness Worthington Excerpts
Lord Roper (LD)
My Lords, I have tabled Amendment 41 in this group to give the Minister an opportunity, to which she has already referred, to respond to the 11th report of the Delegated Powers and Regulatory Reform Committee. The committee felt that the proposal in Amendment 40 was not satisfactory as it would still give the authority power to confer functions on itself without the consent of the Secretary of State, even though the proposed new subsection would allow for such consent to be given generally in relation to the capacity market rules of a particular kind. In its report, the committee did not find that a totally satisfactory response. I ask my noble friend whether she will be able to give some consideration to this point and perhaps bring back at Third Reading an amendment to Amendment 40, which will go some way to respond to the committee’s report.
Baroness Worthington (Lab)
My Lords, I am grateful to the Minister for introducing this group of amendments. This goes to show that the Government are listening—at least to the Delegated Powers and Regulatory Reform Committee if not, perhaps, to all sides of the House. It has obviously had more success in amending the Bill than some of us in our many days in Committee over the summer. There are a number of amendments here, many of which implement the recommendations.
To strike a serious note, it is important that the Government have listened and accepted the advice of the Delegated Powers Committee. This is quite an extraordinary Bill. It is quite an extraordinary intervention into the market and it carries with it quite considerable enabling powers that give the Secretary of State a huge amount of discretion in how he or she will intervene in the electricity market. It is only right and proper that those powers are subject to the affirmative resolution procedure in as many places as possible, so there can be a degree of parliamentary oversight in what is going to be a hugely significant intervention into the market.
The noble Baroness spoke to some of the amendments which relate to the allocation of contracts for difference under the levy control framework. I seek some form of comfort, and confirmation from the Minister that we will not descend into a system of micromanagement, trying to split up the pot of money into ever smaller, more precise groupings of technologies. We have seen this happen with other DECC policies; with the renewable heat incentive, for example, and the banding of FITs. This temptation to micromanage, to carve up the market and pick winners to make sure that we have control over what comes forward can make for a regrettable situation. It is regressive because it does not allow the market to demonstrate where there is a success. It does not allow the market to find solutions.
I find it quite odd that I am here on the Labour Benches chastising the Conservative Government for not allowing the market to deliver. However, it is clear that this is the current thinking: that we should not allow the market and competition to dictate but somehow try to use the powers in the Bill to organise and plan everything from the top down. That is a recipe for disaster. I am sure that others will agree with me that where we have already seen that in operation, with FITs and RHI, it has been shown to be really sub-optimal. I only say that as an illustration of why it is so important that the many regulations which will flow from the Bill are subject to full and proper parliamentary scrutiny, so that we can try to prevent some of those worst examples being repeated on a much larger scale.
I am grateful to the noble Lord, Lord Roper, for tabling his amendment, which is intended to correct one of the few issues which the Government have not conceded in response to the Delegated Powers and Regulatory Reform Committee. I look forward to the noble Baroness’s response to that, because it is evidently important that it has been raised here.
Baroness Verma
My Lords, I thank my noble friend Lord Roper for Amendment 41, which would remove paragraph (b). I am aware that this is in line with the recommendation of the Delegated Powers and Regulatory Reform Committee.
Before concluding on my noble friend’s amendment, I will respond to the noble Baroness, Lady Worthington, on splitting and micromanagement of the levy control framework. We are not looking to pick winners, but to ensure that costs can be controlled and that new technologies can come to the market. Like the noble Baroness, we want to see greater competition and new entrants. The last thing that we would want to do is to micromanage that and pick winners and losers. However, as with all things, there needs to be some management of ensuring that costs do not overrun or become artificially maintained.
I say to my noble friend Lord Roper and other noble Lords that I will consider carefully the committee’s recommendation and my noble friend’s amendment to the proposed powers in Clause 28 with a view to addressing them at Third Reading.
Baroness Worthington
“(2A) The Secretary of State shall as soon as reasonably practicable, and no later than five years from enactment of this section, by regulations provide that contracts for difference are subject to a competitive tendering process.
(2B) These regulations shall be subject to the affirmative resolution of both Houses of Parliament.”
Baroness Worthington
My Lords, briefly, we had a good and thorough discussion about the need for greater competition in the Bill; I do not intend to fully rehearse all the earlier comments. The amendment is intended to ask the Government when we will move away from an administrated, bilateral negotiation of CFDs to a more competitive tendering process. It seems that the entire Bill is subject to state aid approvals from the EU. I am sure that one of the main tenets of the argument being put to the EU will be that we are treating all technologies equally—that there is element of competition and a proper tendering process. That is not currently the case as the Bill is drafted at the moment. There is no indication in the legislation of a timeline to which the Government are working. There is no hint at when we will be moving to this competitive process. We hear that that is the intention but there is nothing in the Bill that compels it to be the case.
The reason for this amendment is to ask, if this amendment were accepted, that within five years of enactment the process of bilateral negotiation would cease and we would move to a competitive tendering process. Five years is perhaps too long or too short; I am not saying that it is a precise number. The point is that we cannot carry on for very long in this bilaterally negotiated world, where there is really no transparency at the moment and we do not see technologies being treated equally.
These are my two questions. What is the timeline to which the Government are working to get to this more competitive process? Can the Minister comment on any feedback that she has had from the EU on the need to get to this state and to move away from the bilateral negotiations?
Baroness Verma
My Lords, I thank the noble Baroness, Lady Worthington, for this amendment. It offers us another opportunity to debate the important matter of competition within EMR. Amendment 7 relates to the competitive allocation of CFDs. I begin by reassuring the noble Baroness and noble Lords that we have carefully considered competition throughout the design of EMR. Of course, CFDs themselves will enable new low-carbon generation to compete in the market.
We recognise the role that the competitive allocation process, including auctions, can play in ensuring least-cost decarbonisation for consumers. Indeed, the Secretary of State has stated that the reforms in the Energy Bill are specifically designed to,
“blaze a trail towards competition”.
However, we view the competitive allocation of CFDs as a means to ensure low costs to the electricity consumer rather than as an end in itself. Competitive allocation can help drive value for money only when market conditions allow. Key tests of the market conditions include the supply of new low-carbon generation exceeding the amount we need to meet our decarbonisation commitments, and there being enough potential players to ensure sufficient competitive tension.
Moving to competitive allocation before these conditions are met may increase risks to developers and costs to the consumer, without necessarily bringing the benefits of a competitive allocation. Of course, it is possible that the conditions for competitive allocation may be met relatively soon. In respect of most renewable technologies, we have said that we will consider moving immediately to allocation rounds and introducing constraints for certain technologies or groups of technologies, which might have the effect of triggering auctions for those technologies. In respect of nuclear and carbon capture and storage technologies, our officials are already working with stakeholders to explore how competitive tenders could work for those technologies. Where competitive allocation processes are not feasible or effective, I can reassure noble Lords that any final allocation decision will still be subject to strict value-for-money considerations and an assessment of an overall budget constraint.
Therefore, I say to the noble Baroness and to noble Lords who have expressed the concerns behind this amendment that we do care about value for money, but I do not think that a requirement to run competitive allocation processes within five years of enactment of the Bill is the right way to ensure value for money. Instead, we should focus on the action that we are taking to improve underlying conditions for new low-carbon generation and reduce barriers to entry, which may enable a faster move to competitive allocation processes. As I set out in an earlier debate, these include Ofgem’s ambitious package of reforms to improve market liquidity and meet the needs of independent generators, and our amendment to the Energy Bill to allow for the establishment of a power purchase agreement scheme, which will bring greater competition to the PPA and generation market.
The noble Baroness asked for an update about state aid. As she knows, we do not comment on discussions that we have with the Commission on state aid. As noble Lords might expect, it is likely to place importance on competition, as we do. However, I assure the noble Baroness that those conversations on state aid are taking place.
The noble Baroness also asked about the timescale for moving. Throughout my speaking notes I have tried to reassure the noble Baroness that we move as fast as we can. I therefore urge the noble Baroness to withdraw her amendment and be reassured that the Government take her concerns very seriously.
Baroness Worthington
I thank the Minister for her response. I am not fully reassured by her comments, but I am grateful for them. There is a bit of a problem here. The basic premise is to try to get to a point where all technologies can be treated equally. However, as the noble Baroness points out, not all technologies are at the same stage of development, so we find ourselves in quite an odd situation. We cannot allow this to persist. We must apply a discipline and a timetable to ourselves to ensure that when we move to the next decade, we will arrive at a point where we are able to compare apples and pears more adequately. We want to get to a position where, for the sake of the consumer, we fund only technologies that can deliver cost-effectively.
It is very good to hear the Minister mention value for money, as that is at the heart of my concern. At the moment we have strike prices here and there, and different contract lengths. We must seek to simplify this so that the best technologies can come forward. That will obviously take time. I hope that we can move swiftly to a much clearer and more competitive process, and I hope that time will achieve that. I beg leave to withdraw the amendment.
Baroness Worthington
Baroness Worthington
In moving Amendment 22, I will speak to Amendments 23 and 24 in the same group. I will not detain the House any longer than is needed.
This amendment raises a very important issue that should be at the heart of the Energy Bill, and which the legislation is not sufficiently clear on at the moment—the nature of the contracts for difference. Noble Lords may remember that in a very early draft of the Bill—the one that went into pre-legislative scrutiny—there was a hint that it might be possible to sign a one-way contract for difference. That underscores any potential profit for a contract holder, but completely removes the downside risk. That means that if the contract holder was due to pay money back because the wholesale price was higher than the strike price, they could keep that money. The wording has now been changed sufficiently for that not to be in the current Bill, but there is still a question mark over the degree of latitude that the Secretary of State has over these contracts for difference.
I seek a strong reassurance on behalf of consumers and bill payers that we will not sign contracts in cases where, if the strike price is below the wholesale price, that money will simply end up in the profits of the company that holds the contract. It must flow back to the consumer. For this to be a fair system, we want to see contracts for difference that provide a stable price for the holders, but they should not be completely guaranteed profits over and above that. That is an important concept. I look forward to hearing the noble Baroness reassure me that one-way contracts will not be signed, and that all contracts for difference will be two-way.
Baroness Verma
My Lords, I thank the noble Baroness for her amendments and for prompting the debate on the matter of payments to suppliers. I am pleased to reassure her that the intention of her amendment is already delivered in the Bill. The purpose of Clause 11 is to allow the Secretary of State to make regulations to ensure that the counter party can pass payments from generators under the CFD on to suppliers and, furthermore, that the regulations we are consulting on specify that this must happen.
Amendment 22 provides that the regulations must set out the amounts to be paid to suppliers. I want to be clear why some flexibility is needed here and therefore why there is not already such a duty within the Bill. It is indeed the Government’s intention that surpluses will be returned to suppliers. A duty would, however, fix that this happened by way of a repayment of sums. The Bill as drafted allows us instead to use payments from CFD generators to offset future supplier payments. Offsetting such payments could be more efficient than making payments out to suppliers and then asking for payments back in again. This could provide more value for money for consumers and greater transparency of costs and savings.
Amendment 23 states that sums passing to suppliers must be rated at zero. I want to reassure noble Lords that if it is appropriate for sums to be paid back to suppliers—for instance when, as the noble Baroness has said, under a CFD the reference price is above the strike price—then the counter party is required to do so through draft regulations. However, sometimes the reference price will not be above the strike price and the sums to pay back would be zero. This amendment could lead to unintended consequences where the counter party has to pay suppliers money it does not have. This would then need to be recovered from suppliers, and this uncertainty is likely to be passed through to consumers and ultimately lead to increased consumer bills.
I turn now to Amendment 24. Clause 11(2) allows for regulations to include provision for the counter party to calculate any amounts it might owe to suppliers against specific criteria. It also enables regulations to allow for such calculations to be carried out on behalf of the counter party. Although we expect a settlement agent to carry out such calculations on behalf of the counter party, this amendment would impose a duty which would remove the long-term flexibility to consider how to carry out the calculations, whether in-house or otherwise, in the most cost-effective way. I hope that the noble Baroness has found my explanation reassuring.
Baroness Worthington
I am grateful for the reply. It does obviously reassure me that if something is paid back to suppliers it will be done in a sensible way, and indeed offsetting might be the most sensible way. How will the regulator ensure that the sums paid back are then handed on to consumers? Will there be regulations to that effect?
Baroness Verma
My Lords, as I said earlier, I think there needs to be some flexibility. Where money is returned to suppliers they have a choice between paying it out as dividends and salaries or using it to reduce costs to consumers. We believe that, as we have a competitive market, benefits should be passed on to consumers. It would be in the interests of suppliers to pass the money on to consumers. I suspect that as the market becomes far more competitive it will be in their interest to try to vie for as many consumers as they possibly can. I think we need to be able to allow that flexibility and not constrain it. On that basis, I hope that the noble Baroness will withdraw her amendment.
Baroness Worthington
I am grateful to the noble Baroness for bearing with me in answering my subsequent question and for her response. I am not fully reassured that this whole system is going to be very transparent or beneficial for the consumer. I do not want to rehearse the arguments we had earlier about the lack of competition, but we have seen previous examples of this. If there had been a truly competitive market and proper downward pressure on prices, would we have seen the large big six companies using their capital to buy back shares? I do not think so. Also, we have seen it with the introduction of the EU emissions trading scheme in which generators all opted to take a massive windfall by passing on the full costs of the ETS, even though they were not being incurred because all the allocations were free.
I say this only because these are recent examples of the regulatory system failing consumers and not being sufficiently strong and firm with the big six in ensuring that they make the right decisions. In this day and age, with pressures on the cost of living being so acute, these companies have to avoid a form of corporate overconfidence which does not put the consumer first, as the noble Lord, Lord Teverson, said. I am sure that we will come back to this again, but I am happy to beg leave to withdraw the amendment.
Lord Oxburgh (CB)
My Lords, this, too, is intended to be a helpful and supportive amendment. During the various clauses that we have debated today, the costs of natural gas to consumers and the effect on their prices have come up time and again. As we go forward into the coming decades, gas from the North Sea will get progressively less, and we shall be more dependent on imported liquefied natural gas, or LNG. The market shows strong seasonal spikes already, with the winter price significantly higher than that in the summer.
This amendment offers the Secretary of State an extra tool in his tool box for controlling gas prices that are paid. It allows the Secretary of State to invite bids from anyone who supplies gas to undertake to make available to the market an agreed amount of gas over an agreed period at not more than a particular price. It is not clear that this will be necessary, but it could be. I beg to move.
Baroness Worthington
My Lords, I support Amendment 49 of the noble Lord, Lord Oxburgh. Throughout the evening and the passage of this Bill we have discussed the need for competition and for keeping downward pressure on price a great deal. It is clear, as the noble Lord, Lord Oxburgh, has pointed out, that the majority of the increases in consumer and business bills in recent years have been down to the increase in gas prices.
It is regrettable that we heard recently from British Gas that it had decided to withdraw a project to enhance and expand its gas storage capabilities. This is another sign that there is insufficient downward pressure on prices. It probably suits British Gas quite well to have prices rising, because that leads to higher profits. It is probably the wrong body to make any kind of economic assessment on whether it makes sense for them to invest in gas storage. There has to be some form of intervention from government to ensure that there is timely investment in gas capacity.
Gas prices fluctuate between the summer, when demand is low, and winter, when it is high. If we can smooth that out and provide a more stable price throughout the year, it makes sense to have a tool in the armoury, as the noble Lord, Lord Oxburgh, has said, to facilitate this. I am sure that the Minister will come back with some thoughts on this. It is quite a new element to introduce to the Bill at this late stage and perhaps an amendment of this kind is not the way to deliver it, but I strongly support the sentiment behind it. As the noble Lord, Lord Oxburgh, has pointed out, we are seeing our North Sea gas reserves diminish and we are moving into a more international situation in which we rely on gas from many different parts of the world. Much of it is being delivered by ship. Ships can change course in the middle of the ocean if they see fit, if offered a better price. Our reliance on gas needs to be underpinned and secured through greater capacity and gas storage.
I hope that the Minister can say something about how the Government intend to bring more of this to ensure that we are not facing a situation where it is in everyone’s interest apart from the consumer to have gas prices rising continually, and that there is some way in which they can intervene to bring investment to this important aspect of energy security and affordability.
Baroness Verma
My Lords, I am grateful to the noble Lord, Lord Oxburgh, for his amendment, which returns to the matter of gas storage that he raised in Committee. My department published analysis and made a Statement in the other place on 4 September on precisely this issue and I am glad to discuss it today.
The amendment is intended to enable the Secretary of State to make arrangements to provide capacity payments in exchange for the supply of gas more securely, or at lower prices, than would otherwise be possible. I should make it clear from the outset that the capacity market is not intended to support the gas market. Rather, the capacity market is an integral part of our electricity market reform programme.
On the face of it, this amendment aims to facilitate a simple and attractive concept: cheaper and more secure gas for consumers. While the Government recognise that rising energy bills are a worry for many households and businesses, this amendment is not the solution. It is difficult to imagine that any supplier of gas would sign a contract to sell gas at a future date at a discount to the prevailing market price. The capacity payment is required to offset the risk to the supplier of being out of pocket and it would need to top up any shortfall to the point where there would be no net benefit to consumers.
Specifically, it has been argued that capacity payments may facilitate the construction of additional gas storage capacity, which offers the potential to buy cheaply in summer and store the gas until it can be sold when prices are higher in winter, as the noble Baroness, Lady Worthington, pointed out. This is a service that the market currently provides. Storage capacity is currently increasing, with two facilities having been completed in the past 18 months and two more facilities under construction. There are 10 more projects with major planning consents in place, which are awaiting the right commercial signals to invest. Where the market is not already providing this signal, supporting a storage project through subsidy, whether by a capacity payment or other means, would just transfer the risk currently faced by the market to the Government. In other words, it would be passed on to consumers and taxpayers.
DECC considered in detail the case for supporting gas storage. Analysis shows that, although there are interventions that could enhance our gas security, under most scenarios they would not do so cost-effectively. All options risk adding disproportionate costs to energy bills and risk distorting a well functioning GB gas market. We will not be taking these interventions forward and do not envisage needing the powers that these amendments propose.
As I explained earlier, we are introducing a capacity market to provide for capacity payments to ensure security of our electricity supplies. This is because the electricity market faces new challenges. These include the planned closure of a large proportion of our existing generating capacity and an increased amount of low-carbon generation. That means that there is an increased need for additional reliable capacity. The capacity market is specifically designed to address this.
These issues do not translate to the gas market. The security of gas supply outlook is robust. There is spare supply capacity: the available capacity of nearly 700 million cubic metres a day is far in excess of even the highest recorded daily demand of 465 million cubic metres. The gas system also has greater flexibility to rectify demand/supply imbalances within the balancing period and, for gas, unlike electricity, there are readily available means for storage which the market is currently expanding. The Government therefore do not consider this amendment to be necessary. I hope that the noble Lord, Lord Oxburgh, has found my explanation reassuring and on that basis will withdraw his amendment.