Electricity Generation: Local Suppliers

Kwasi Kwarteng Excerpts

Wednesday 14th October 2020 Commons Chamber

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

Thank you, Mr Deputy Speaker; I was going to make very much the same point. I congratulate the hon. Member for Ceredigion (Ben Lake) on securing today’s debate, and I will make the same point: I have never seen an Adjournment debate with so many interventions. They were all extremely gracefully and graciously accommodated in his speech, so many congratulations to him.

The hon. Member has spoken eloquently about the need for local communities to be able to supply electricity, and I think there are strong arguments in its favour. I know that similar views have been expressed to me and the Department by many Members. I am fully aware that my hon. Friend the Member for Waveney (Peter Aldous) has also done his bit to try to drive the issue of local supply up the agenda.

I know that the hon. Member for Ceredigion supports a campaign for electricity generators to sell directly to local consumers, for all the benefits he suggested in terms of local employment. I think he or one of the many intervenors used the phrase “local buy-in”, and those arguments are fully appreciated.

In my remarks today, I will address the matter in quite a technical way and give the specific reasons why we as a Government feel that this particular provision is not something that we would adopt, but I suggest to him that local community participation has to be on the agenda. It is certainly something that I as the Energy Minister will be willing to engage with and have a discussion about.

With regard to the licensing—we will talk a little bit about that—changing the licensing framework to suit the business models identified by his campaign appears attractive, but the danger—and we always have to be mindful of dangers in government—is that it would create wider distortions elsewhere in the energy system. I will talk to those directly. Instead of the hon. Gentleman’s proposal, I would urge stakeholders and hon. and right hon. Members across the House to engage with the ongoing work that the Government are undertaking with Ofgem to support flexibility and innovation more generally. Then perhaps we can come to a view about how the local element can play its part in the solution.

[Wera Hobhouse]

Is the Minister not aware that the main problem is the lack of a level playing field? Basically, the smaller providers cannot compete with the bigger providers, and therefore we need this change.

[Kwasi Kwarteng]

I am fully aware of that, and I will come on to it. I have only 10 minutes, so I ask the hon. Lady to bear with me; I will address that point later in my remarks.

Electricity and gas supply licences, as I am sure everybody in the Chamber knows, are usually granted on a Great Britain-wide basis. However, Ofgem has powers to award supply licences for specified areas and specified types of premises, and that can allow licensees, once they have the licence, to specialise and offer more targeted and potentially innovative products and services. The holder of such a licence could supply customers only in the specified geographical area and specified types of premises, with the full terms and conditions of the licence applying otherwise. That means that there is already provision through this licence to have local provision. Electricity suppliers can apply to Ofgem for a derogation from a particular provision of the supply licence, and if it is granted, provisions of the supply licence will not apply to them. There is already some degree of flexibility.

[Olivia Blake]

Will the Minister give way?

[Kwasi Kwarteng]

No, I am afraid I am very hard pressed for time. I may have time later to take an intervention, but I need to press on with my remarks.

Ofgem, as I have suggested, has been consulting widely on how to use such facilities more effectively to bring innovation to the specified locality, as it were, in this retail market. I understand that the consultation closed on Monday 12 October, and I hope that small-scale generators who wish to supply local communities have responded fully to the consultation.

The hon. Member for Ceredigion mentioned, very ably and relevantly, the Licence Lite provision, which allows aspiring suppliers or local generators to apply for a supply licence and receive relief from compliance with industry codes. On existing mechanisms, the Electricity Act 1989 already allows the Secretary of State to exempt, by scale, electricity suppliers from having an electricity supply licence if they meet certain conditions. There have been examples, certainly in my tenure as Energy Minister, of people successfully applying for exemptions.

Being an electricity supplier, as I am sure the hon. Gentleman knows, confers the right of the licensee to supply electricity to customers, but it also bestows certain obligations, and that is very important to remember. Those obligations include payment of a proportion of network costs. Clearly, if one is operating in a situation where one is not a licensee, then one can avoid paying the costs on which the whole system depends. That is a critical issue. In some instances, the Licence Lite regime can remove this burden, but clearly we would not want to go down a route where large numbers of suppliers are simply exempting themselves from those obligations.

Network charges, as people will understand, are levied on all users of the network, and they send signals that reflect the costs that users impose on the network. There are a range of signals to encourage generators to locate close to sources of demand, and placing a source of generation close to areas of high demand will mean that the generator gets paid credits for helping to avoid further investment in the high-voltage transmission network. Essentially, that means suppliers are incentivised to be in areas of high demand. There will be a commensurate problem in areas of low demand, because how would they attract the relevant suppliers? Ofgem is working to reform these signals through improvements to network charges, and it is also working to develop local markets for flexibility, which goes to the core of what I think the hon. Gentleman is talking about.

I do not believe—and I think the Government, thankfully, are of the same opinion—that artificially reducing network costs for local electricity suppliers is going to be highly efficient, because it could distort the market. One is essentially incentivising a behaviour that may not be economical in the first instance, and that would mean higher costs falling on other consumers, which would increase as more local suppliers were subsidised. Creating a special category of local supplier brings its own complexities, and there may well be unintended consequences as a result.

Having said that, I commend the hon. Gentleman for thinking very deeply and creatively about this issue. This is part of an ongoing conversation. He was quite right to say at the beginning of his remarks that a lot of the structures that we have today reflect the conditions and circumstances before we legislated for net zero, and in many cases reflect conditions that operated 30 or 40 years ago. There is an ongoing discussion to be had about how best to adapt our institutions to modern circumstances.

[Peter Aldous]

My right hon. Friend has highlighted some of the challenges that the Government face. As we have heard from Members around the Chamber, we have shown enormous potential for local community energy supply to play a full role in decarbonisation and the covid recovery. Will the Government be setting out in the forthcoming energy White Paper how we fully realise this potential and meet these challenges? When can we expect to see that White Paper?

[Kwasi Kwarteng]

My hon. Friend is straying into ground that is not necessarily covered in this debate. I am very hopeful that the energy White Paper will be published soon. I think the Secretary of State said in front of the Business, Energy and Industrial Strategy Committee that it would be published in the autumn, and we are still in the autumn, so I am hopeful that it will come imminently.

[Ben Lake]

Should legislative changes be required—I think there is support across the House for that, as has been demonstrated this evening—how best can we work with the Minister to carry through any opportunities that are identified as necessary?

[Kwasi Kwarteng]

Well, a very good start is a debate such as this. It has been a real eye-opener for me. I am delighted to see so much interest. I would suggest that people engage with the Department and engage with me. I am very happy to discuss these issues, which are absolutely fundamental to the energy transition that the hon. Gentleman mentioned. As I said, this is part of an ongoing conversation. I am hopeful that the energy White Paper will come hastily enough for my hon. Friend the Member for Waveney.

We have to focus on the flexibility of the whole system in terms of the current regulatory regime. If we get that right, then we can bring the innovation and perhaps some of the centralisation that the hon. Gentleman, and other hon. and right hon. Members, want to see. The prospects are considerable. We could see innovation and growth. We could see cost reductions and, most fundamentally, carbon reductions. I think that with a co-operative spirit, we can get very far. The hon. Gentleman’s actual proposal perhaps creates more problems than it solves, but I am very willing to debate and discuss that with him on a subsequent occasion.

I thank the hon. Member for Ceredigion for raising this issue and thank all Members who participated in this short but interesting debate.

Question put and agreed to.