Electricity Capacity (Amendment) Regulations 2023

Lord Callanan Excerpts

Wednesday 5th July 2023 Grand Committee

Moved by

[Lord Callanan]

That the Grand Committee do consider the Electricity Capacity (Amendment) Regulations 2023.

[The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)]

My Lords, these regulations were laid before the House on 12 June 2023. Before I outline the provisions made by this draft instrument, I will provide some context. The capacity market is at the heart of the Government’s strategy for maintaining the security of electricity supply in Great Britain. Through capacity auctions, we secure the capacity needed to meet future peak demand under a range of scenarios, based on advice from the capacity market delivery body, the National Grid Electricity System Operator.

Existing and new-build capacity compete in technology- neutral auctions, held one year and four years ahead of delivery, to obtain agreements. Those which win capacity agreements, known as capacity providers, commit to making their capacity available when needed in return for guaranteed payments. This supports the necessary investment in new and existing capacity to ensure security of electricity supply. The most recent capacity auctions, held in February 2023, secured the electricity capacity that Britain needs to cope with peaks in winter demand for 2023-24. Capacity providers that fail to deliver against their obligations are subject to financial penalties. Capacity payments are funded by electricity suppliers, which recover this cost from electricity consumers.

Since its introduction in 2014, the capacity market has contributed to investment in just under 17.5 gigawatts of new, flexible capacity to replace older, less efficient plant as we transition to a net-zero economy. To ensure that the capacity market continues to function effectively, we regularly make adjustments to the implementing legislation based on our day-to-day experiences of operating the scheme. Although the future geopolitical context is, of course, still uncertain, we recognise that the world is likely to face continued challenges next winter around the security of energy supply, considering Russia’s illegal invasion of Ukraine. The Government continue to work closely with Ofgem, the gas and electricity system operators, and all relevant stakeholders to build on the measures we put in place for winter 2022-23 and ensure we have the appropriate tools available to secure our energy supply for winter 2023-24.

The changes we are making to the capacity market this year, through both this draft instrument and changes to the capacity market rules, focus on longer-term changes that will impact capacity auctions held from February 2024 onwards, for delivery from winter 2024-25. In this context, this draft instrument makes changes to three electricity capacity regulations to deliver technical improvements that support the functioning of the capacity market, which have been identified and explored over the past year through consultation.

--- Later in debate ---

[Lord Lennie (Lab)]

My Lords, I thank the Minister for setting out the instrument and giving us advance warning that more is to come shortly. The capacity market is at the heart of maintaining a secure and reliable electricity system. It provides all forms of electricity capacity on a system during periods of electricity shortage and stress, such as when it is extremely cold or when the wind is low while demand is high. As the Minister said, the capacity market works by allowing eligible bidders to compete in T-1 or T-4 auctions on a one-year or four-year basis ahead of when they must deliver capacity. A successful bidder is awarded a capacity agreement which requires delivery during times of stress.

As the Minister said, this instrument makes changes to three areas of regulation. First, Regulation 10 of the 2014 regulations obliges the Secretary of State to set out whether capacity auctions are to be held. The change will require the Secretary of State to publish a decision only if the Government determine that an auction will not be held, helping to improve administrative efficiency. Does this effectively enrol a current capacity provider into the scheme automatically?

Secondly, Regulation 34 of the 2014 regulations allows capacity providers to seek termination of their capacity agreement with a view to becoming eligible to participate in the contracts for difference scheme. I think the Minister said that they are mutually exclusive as things stand. Currently, the LCCC, as the counterparty, has to give notice of such an intention. However, it cannot know in advance if the CMU will be successful in its bid for a contract for difference.

This instrument means that notice comes from a capacity provider seeking termination of their capacity agreement in order to become eligible to apply in a contract for difference allocation round. How many capacity providers have thus far been unable to use the process set out in Regulation 34? The Minister may say all of them, but how many would have wanted to use the termination process? Have the Government made any assessment of the impact of this, and will this change be kept under review?

Thirdly, I turn to Regulation 41 of the 2014 regulations. Capacity providers can be financially penalised, as the Minister said, if they fail to provide capacity in times of stress. Currently, the settlement body has 21 days to calculate the relevant penalty and to invoice capacity providers which must pay such penalties. This instrument increases the timeframe to 35 days. Does that mean that penalties that should have been paid were previously missed because they were not calculated in time? If so, could the Minister indicate the value of those? By contrast, is this change expected to increase the number and value of penalties that are enforced? I look forward to the Minister’s response.

[Lord Callanan (Con)]

First, I thank the noble Lords, Lord Naseby and Lord Lennie, and the noble Baroness, Lady Walmsley, for their valuable contributions on an important subject for the nation’s electricity supplies.

As I mentioned in my introduction, the capacity market is our main mechanism for ensuring the security of electricity supply. To address the point made by the noble Lord, Lord Naseby, I say that it has already secured the majority of Great Britain’s capacity needs right out to 2026-27, because the Government take no chances with the security of supply. We continue to believe that the capacity market is an effective insurance mechanism, providing secure and affordable electricity that families and businesses can rely on.

The capacity market is, indeed, tried and tested. The fact that it has supported investment in just under 17.5 gigawatts of new-build, flexible capacity since its introduction demonstrates that it can bring forward the capacity needed to meet future peak demand and replace older capacity as it retires and as we transition to a net-zero economy.

Furthermore, we continue to take steps to ensure its ongoing, efficient and effective operation. The Government are committed to ensuring that the right policy tools are in place for delivering a secure and affordable electricity system as we transition to net zero. That includes regularly assessing the performance of the capacity market and, as we are debating today, exploring improvements to the scheme.

As we noted in our 2023 government response to the capacity market consultation, we have set out a two-phased approach for reforms in the capacity market. This instrument seeks to implement purely technical amendments under the first phase to improve the administrative arrangements. In the next phase of reforms to the capacity market, the Government intend to undertake further analysis and development on the remaining proposals prior to taking a final decision on implementation. This includes proposals to align the capacity market with net zero, such as reducing the emission intensity limits for new-build plants and enabling low-carbon capacity with low capital expenditure to access multi-year agreements.

We will also look ahead to the future as part of the review of electricity market arrangements programme. REMA is exploring options to create an electricity market design that will enable us to transition efficiently from fossil fuels to renewables and other forms of low-carbon generation, which I hope will make us more resilient to overseas energy shocks and ensure energy security.