Draft Electricity Capacity (Amendment) Regulations 2017

Barry Sheerman Excerpts

Thursday 19th October 2017 General Committees

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Richard Harrington)]

I beg to move,

That the Committee has considered the draft Electricity Capacity (Amendment) Regulations 2017.

It is a great pleasure to serve under your chairmanship, Mr Davies, and to see the shadow Minister, the hon. Member for Southampton, Test. The Opposition Whip and I were texting him, but I knew he would be here. I am sure I will face a reasoned and thought-out speech, which we Ministers do not like, but which will be a pleasure to hear in his case.

The draft regulations will amend two secondary legislation packages for the capacity market. The powers to make and implement the secondary legislation are found in the Energy Act 2013, which received Royal Assent in December 2013 with, I am pleased to say, cross-party support following scrutiny in the House and the other place. I will explain the changes in detail, but first, for hon. Members who are less familiar with the capacity market, I will explain it in terms as I understand them.

The capacity market is an insurance policy to ensure that the necessary supply is always available. The money is used to ensure that power is available as demand from the grid goes up and down, perhaps because a particularly interesting horse race or an episode of “EastEnders” is on the television, or more typically because of a good cold snap—or a bad cold snap, depending on how one looks at it. In many cases, suppliers are paid when supply is not needed, but the market has allowed us to have a consistent and readily available source of capacity for all contingencies. That main purpose received cross-party support. It is for Members on both sides and for the Government to secure that capacity, and they have done it pretty well.

[Mr Barry Sheerman (Huddersfield) (Lab/Co-op)]

This stuff will be quite difficult to digest not just for the Committee but for our constituents, who have to pay a hell of a lot of money for their electricity. I hope the Minister will go into some detail about risk finance schemes and applicant credit cover, because I cannot go back to my constituents in Huddersfield, who are highly intelligent people, without an explanation.

[Richard Harrington]

I agree with the hon. Gentleman’s analysis of the good burghers of Huddersfield, because I come from Leeds—

[Mr Sheerman]

We tend to look down on Leeds.

[Richard Harrington]

I could not possibly comment, but we are all Yorkshiremen, including you, Mr Davies—not that that would affect your chairing of the Committee.

From memory, the actual cost of the capacity for our constituents is about £2 a year on their bill. I am not making light of it, but for what we get from it as a country and for what suppliers get for their customers, I think it is good value for money. There have been power cuts in other countries—even in quite developed places such as California and Australia—where they did not have such a sophisticated system, so there is a risk. When I said it was for hon. Members on both sides to ensure capacity, I did not mean just members of this Committee; the whole of Parliament in 2013 realised that this was a good thing to do.

I will go into more detail, and if the hon. Gentleman then feels that I have not answered his questions I will be able to do so—it will be nearer lunch time, and he may feel that I have covered most of it.

[Richard Harrington]

I agree, as I think most other people would, because generally the system works. To use the layman’s language I always use—being a Yorkshireman, I try to simplify things in a way so that I understand them; I cannot claim to have the technical expertise of the shadow Minister on this—the regulations propose a tweaking of something that works, rather than radical and complete change. I will make some progress, and if hon. Members would like to ask questions or intervene, they should obviously do so, subject to your largesse, Mr Davies.

The five changes in the draft instrument are essentially technical. They will improve fairness, ensure the competitiveness of auctions and provide important clarifications to scheme operations. The Department held a fairly lengthy public consultation on the changes and the majority of respondents agreed with them—more than 75%. I agree that it is important that people know how much the market costs, but if we did not have a capacity market and every individual had the choice of paying £2 or x pounds to make sure they do not have blackout periods, I am sure that most people would probably pay it anyway. It is not like that, but thinking about it in terms of what it means to customers and our constituents is right, as the hon. Member for Huddersfield mentioned. All the technical stuff we are here to discuss does not matter if in the end it boils down to continuity of supply at that price. He was absolutely right to mention that, as was my right hon. and learned Friend the Member for North East Hertfordshire.

We have the capacity market to ensure—as is the Government’s job—that we always have sufficient electricity capacity in Britain for the winter periods and for periods of exceptional demand. We need to give generators the confidence that they will receive the revenues they need to maintain, upgrade and refurbish their existing plants, and to finance and build new plants to come on stream as and when existing assets retire. They have to think ahead, and knowing that they are going to get these funds is part of their planning.

The capacity market also ensures that those who are able to shift demand for electricity away from periods of greater scarcity, without detriment to themselves and the wider economy, are incentivised to do so. It does so by offering capacity providers who are successful in these competitive auctions—there are two types; some bid for one year ahead and some for four years ahead—a steady, predictable revenue stream on which they can base their future investments. In return for those capacity payments, providers must meet their obligations to deliver electricity at times of system stress, or not deliver it if it is not needed, or face penalties.

[Mr Sheerman]

On the longer four-year period, we have a rapidly changing energy market, and many of us are delighted with the diversity of more sustainable energy providers coming on and providing a lot of our energy needs. Will the four-year period allow us to have that more flexible, diverse energy market?

[Richard Harrington]

That is a valid question, as I would expect from the hon. Gentleman. Having both four years and one year takes care of that. Four years is needed because of the investment cycle; suppliers have to plan and have some consistency. Things change a lot, and there is a lot of uncertainty when predicting four years ahead.

[Mr Sheerman]

There might be an election.

[Richard Harrington]

I believe that is extremely unlikely, but we all have our views on that subject; certainly, if this measure is voted down today, I am sure the Prime Minister will have no choice. In all seriousness, the hon. Gentleman makes a valid point, but if it were left only to the shorter, one-year cycle, I cannot see people taking the kind of investment decisions needed. Of course, it is arguable—some might say they want 10 years. When the rest of the electricity supply market—not the capacity market but the normal supply market—starts to build huge wind turbine farms and gets planning permission to build nuclear power stations and all those other things, those are all judged on 20 to 30-year cycles, so it is difficult.

The officials think that four years and one year are right, but it is always up for review, and if the market changed completely we would want the flexibility to be able to act. For the moment, it works. It sounds arrogant for Government to say it, but I think most people think the capacity market is working. Self-evidently, it is working.