Draft Contracts for Difference (Electricity Supplier Obligations) (Amendment) (Coronavirus) Regulations 2020

Kwasi Kwarteng Excerpts

Monday 29th June 2020 General Committees

[The Minister for Business, Energy and Clean Growth (Kwasi Kwarteng)]

I beg to move,

That the Committee has considered the draft Contracts for Difference (Electricity Supplier Obligations) (Amendment) (Coronavirus) Regulations 2020.

It is a delight to open the debate under your chairmanship, Ms Nokes. I will try to explain clearly the rationale behind this draft instrument. The regulations aim to limit the negative short-term impact on electricity suppliers of an unexpected increase in the costs of the contracts for difference scheme, which members of the Committee will know is integral to offshore wind and electricity power generation.

The Low Carbon Contracts Company is a Government-owned, arm’s length company that manages CfDs. In simple terms, it gets money in from energy suppliers that is used to pay to manage contracts for difference auctions. It is, in effect, a levy on suppliers. The regulations aim to alleviate the burden on energy suppliers, who would be forced by the rules to pay the LCCC when there are fears about working capital. Because there has been a huge drop in energy demand, the LCCC would have needed to raise the levy to get enough funds from energy suppliers to pay the generators.

I took the view with officials that this is not the time to impose additional burdens on the working capital of energy suppliers. As a consequence, the Government have agreed to provide a loan of up to £100 million to the LCCC to allow it to continue to pay CfD generators this quarter without increasing the financial burdens on energy suppliers, who, as we know, are in a vulnerable state. The loan is governed by a separate agreement between the Department for Business, Energy and Industrial Strategy and the LCCC and is not covered by the regulations.

The regulations make four technical changes to the existing Contracts for Difference (Electricity Supplier Obligations) Regulations 2014 to, in effect, defer payment. There is no question but that these costs will have to be paid; we are simply deferring the obligation for this quarter.

In brief, the regulations first reduce each electricity supplier’s obligation, in a quarterly obligation period, by the amount of financial assistance provided by the Government to the LCCC—the £100 million loan I referred to. Secondly, they increase each supplier’s obligation four quarters later. The obligation is therefore reduced in this coming quarter, but it will go up correspondingly in four quarters’ time. Thirdly, the regulations enable the LCCC to take into account anticipated receipt or repayment of financial assistance provided by the Government when setting the obligation for one quarter.

[Adam Afriyie (Windsor) (Con)]

I very much welcome this measure, which is a reasonable step given the current circumstances. I want to ask the Minister this question now, to give him time to reflect. If, during this period in which electricity suppliers have extended terms, one of them was to go out of business, what clawback mechanisms might there?

[Kwasi Kwarteng]

That is slightly outside the scope, but I understand where my hon. Friend is coming from. There are a number of measures that we would go into: there is the SLR—the supplier of last resort—and there are measures for mutualisation of cost. I also remind him that this happens every summer, regardless of covid. It is a highly competitive space, and a number of energy suppliers come in and out of the market at will, so this is very much in the run of ordinary business. This measure is related to the specific challenge of covid and to deferring payments in the way that he described.

Finally, the regulations enable the LCCC to repay any financial assistance provided by the Government, using moneys collected from electricity suppliers after the reconciliation process following the relevant quarterly obligation period. In effect, all we are doing is delaying the payable period so that it does not force energy suppliers to go out of business in the way my hon. Friend suggested.

I must stress that this deferral will give suppliers more time to prepare for the increase in payments and provide greater confidence about the level of additional costs they will face in the second quarter of 2021. I must also stress that the Government are committed to upholding the self-financing nature of levies in the energy system. There was no question of our providing some sort of grant or subsidy to the LCCC. We fully expect that whatever moneys are deferred will be paid eventually to the LCCC and that it will be able to sustain its function regardless of Government intervention.

These legislative changes are technical in nature. They needed to be made ahead of the LCCC’s quarterly reconciliation process, which determines suppliers’ obligations for the current quarter. That is expected on 9 July, at the end of next week. Subject to the will of Parliament, this instrument will enter into force the day after it is made. I commend the regulations to the House.

--- Later in debate ---

[Kwasi Kwarteng]

I will deal with the three points made by the hon. Gentleman in reverse order. He will have noticed that the Treasury has made all sorts of interventions across the whole economy. That does not mean that the Treasury should sustain its intervention in every business that has been furloughed. Similarly, with the LCCC, I made the decision that these were exceptional circumstances that warranted an exceptional response. It is in that sense that the Treasury has intervened; there is no notion that this will be ongoing. I want to put his mind to rest about that. Secondly, that is a loan—essentially, a working capital facility of £100 million that we expect to be repaid

On the hon. Gentleman’s second point about Ofgem and the price cap, that is something to which I am not privy. Ofgem will have a discussion about the price cap; it knows the circumstances of the energy suppliers and about the legislation. I have had weekly rounds with the sectors and the energy suppliers, and twice-weekly conversations with Ofgem, in which we have talked about a lot of those issues. They fully understand the context in which the draft instrument has been laid, so I do not think that there will be any kind of read-across in what Ofgem will do, and I strongly suspect that the price cap will be in force for a number of years to come.

[Dr Whitehead]

Does the Minister recognise that the draft instrument could mean inflated customer levies in a year’s time when that effect comes through?

[Kwasi Kwarteng]

I do not think that the hon. Gentleman or I have any idea what the circumstances will be next year. Lots of things operating in the market may or may not reduce wholesale gas and electricity prices. It would be very foolish for him or me to speculate about the state of the wholesale market in 12 months’ time. Ofgem will take into account a whole range of factors; some may relate to deferred payments, which we had to bring in to alleviate the pressure on the suppliers, and the hon. Gentleman recognised that as a good thing. There is no way that he or I can say exactly what the effect will or will not be on the price cap or on bills in 12 months’ time.

The first issue that the hon. Gentleman really goes to the heart of the matter. This is an exceptional time. A friend of mine—a banker—said to me, “If there ever was a case of force majeure, the covid crisis is it.” The Government have made exceptional interventions, of which this is one. There is no sense in which we would use the powers in the draft instrument to intervene on a regular basis in the market for the LCCC. I fully assure the hon. Gentleman that we will only do so in exceptional circumstances. He will understand that the very nature of exceptional circumstances means that we cannot predict here or now the specifics of what they might be, just as a year ago, we could not say that covid-19 was going to come upon us in February and March of this year—nobody foresaw that, or certainly not the timing. The very nature of exceptional circumstances should give him some assurance that we will only use the legislation in exceptional circumstances. I cannot here and now give him chapter and verse about what those exceptional circumstances would look like.

The Government are committed to the regulations, and I commend them to the Committee.

Question put and agreed to.