Draft Electricity Capacity (No. 2) Regulations 2019

Jonathan Djanogly Excerpts

Monday 1st July 2019 General Committees

[The Minister for Energy and Clean Growth (Chris Skidmore)]

I beg to move,

That the Committee has considered the draft Electricity Capacity (No. 2) Regulations 2019.

It is a pleasure to serve under your chairmanship, Mr Hanson. The draft regulations were laid before the House on 12 June 2019.

The capacity market is a key element of the Government’s strategy to maintain security of electricity supplies in Great Britain. This statutory instrument will help to maintain a strong security-of-supply position into the future. The capacity market ensures that there will be sufficient electricity capacity in Great Britain during periods of peak electricity demand, securing the capacity required through competitive technology-neutral auctions, normally held four years and one year ahead of delivery, ingeniously known as T-4 and T-1 auctions. Those who win capacity agreements, known as “capacity providers”, commit to providing capacity during periods of system stress in exchange for receiving capacity payments.

The draft regulations will help to maintain the effectiveness of the capacity market by allowing a one-off, three-years-ahead or—no prizes for guessing—a T-3 auction to be held in early 2020, to replace the T-4 auction that was postponed from early 2019 following the European Court of Justice judgment that annulled state aid approval for the capacity market. The regulations will also support the participation of certain unsubsidised renewable technologies in future auctions, and make minor changes to the existing credit cover requirements for upcoming capacity auctions likely to be scheduled for early 2020.

Before I explain those changes, I will first set out the context in which they are being introduced. On 15 November 2018, the general court of the Court of Justice of the European Union annulled the European Commission’s state aid approval for Great Britain’s capacity market, and introduced a standstill period until the scheme can be reapproved. The judgment means that the UK Government are not able to award capacity agreements, or to make capacity payments, unless and until state aid approval is obtained following the European Commission’s current investigation. We are working with it to ensure that it has everything necessary to reapprove the scheme as quickly as possible.

We discussed those issues and took steps, through the first instrument in this series—the Electricity Capacity (No. 1) Regulations 2019—and associated changes to the capacity market rules to maintain the operation of the capacity market, to the extent possible, while state aid approval is obtained. The steps we have taken to put in place those interim arrangements are subject to judicial review proceedings, which we are robustly defending.

The House of Lords Secondary Legislation Scrutiny Committee has highlighted the continuing uncertainty resulting from those judicial review proceedings and the Commission’s state aid investigation. This draft instrument therefore focuses on future auctions that are needed and will not proceed unless and until the capacity market has the state aid approval. The instrument is therefore unlikely to be impacted by the judicial review.

My Department carried out a public consultation from 7 March 2019 to 4 April on the changes that will be implemented under the draft regulations. That consultation received 42 responses from a range of stakeholders. The majority broadly supported holding that T-3 auction in early 2020. Respondents also supported allowing additional types of renewable technology to participate in the capacity market. The instrument also addresses concerns that running the T-3 auction in parallel with the usual T-4 auction in early 2020 could result in unduly burdensome credit cover requirements for some participants.

I will now expand briefly on the main provisions of the draft instrument, first on that T-3 auction. The instrument makes changes to enable the T-4 auction for the 2022-23 delivery year, which was postponed following the state aid judgment, to be replaced by the one-off T-3 auction. If held, that auction will be scheduled for early 2020. It will only be held if state aid approval has been received.

[Mr Jonathan Djanogly (Huntingdon) (Con)]

In the event of a no-deal Brexit, does this all fall away in so far as the judgment could not be enforced?

[Chris Skidmore]

In the event of a no-deal Brexit, there will be many issues of state aid requirements to which we are no longer subject. While we continue to be a member of the European Union, as we are, we must continue to legislate according to the principles of our membership. The state aid judgment issue is one that, having worked with the Commission closely, we believe will be resolved. We will ensure that we will be a law-abiding country.

The Commission is in the process of investigating and we anticipate that it will have concluded that investigation, and decided whether to approve the capacity market, by 31 October. On the effect of a no-deal Brexit, if the UK leaves the EU without state aid approval from the Commission or an implementation period, approval under the UK’s domestic state aid regime would still be required, and responsibility for investigating state aid cases would transfer to the Competition and Markets Authority. Therefore, the issue of state aid will not go away; it is a question of whether it will be under EU state aid requirements or UK requirements in the future.

Secondly, the regulations make changes to remove or reduce what might otherwise be unnecessary burdens on business in relation to credit cover. Applicants currently seeking to enter certain types of capacity market units—such as new technologies that are unproven or those not yet constructed—into capacity auctions, must provide and maintain credit cover. The regulations adjust the requirements for CMUs entered into both of the upcoming T-3 and T-4 auctions, to enable the credit cover obligations for both auctions to be satisfied jointly rather than separately. That will help to reduce bureaucracy.

The regulations extend the existing suspension of credit cover obligations provided for by the Electricity Capacity (No. 1) Regulations 2019 to the three capacity auctions likely to take place in 2020. They make changes to ensure that when the suspension of credit cover is lifted, following state aid re-approval, existing exceptions to credit cover requirements will still operate as intended.

Finally, the regulations make changes to support the participation of certain unsubsidised renewable technologies in future auctions. Some types of renewable technology, such as biomass, have always been able to participate in the capacity market provided they are not receiving other specified low carbon subsidies. Although the capacity market was always intended to include all unsubsidised technologies, when it was conceived wind and solar required subsidy and so were not included in the technical rules. With such unsubsidised renewables now a prospect, the capacity market rules were recently amended to allow wind and solar to participate for the first time.

The regulations support that change by requiring state support for new build renewable CMUs declared under the rules to be deducted or repaid from capacity payments, which enables renewable technologies in receipt of subsidies, other than those which exclude them from the scheme entirely, to participate without cumulation of state aid received through the capacity market and other schemes. Alongside the regulations, we have laid complementary amendments to the capacity market rules, which govern the technical and administrative procedures relating to capacity market operation.

The regulations are necessary to ensure the smooth running of the capacity market in the period after state aid approval is received, and to broaden the participation of renewable technologies. That is important the week after we committed to net zero emissions by 2050. I commend them to the Committee.