Electricity Capacity (No. 1) Regulations 2019

Lord Grantchester Excerpts

Wednesday 3rd April 2019 Lords Chamber

[Lord Grantchester (Lab)]

I thank the Minister for his introduction and explanation of the regulations before the House. They are necessarily very technical and controversial as they involve the capacity market, state aid and a judicial review of the actions being taken by the Government.

This instrument was the subject of a lengthy report from Sub-Committee A of your Lordships’ Secondary Legislation Scrutiny Committee. The Government are embarking on a high-risk strategy and the committee’s 20th report concludes with the recommendation that,

“the House may wish to explore further how the Government are proposing to ensure that the Capacity Market can continue to operate in the future”.

The noble Lord, Lord Tope, raised this issue among his concerns.

As the Minister has explained, the situation arises following a case brought by a demand-side response provider, Tempus Energy, to the European Court of Justice that the construction of the capacity market discriminates against its interests. The European Commission has suspended the state aid clearance following the ruling, producing what may possibly be a lengthy standstill position that will impact on delivery year T1 2019-20, which is due to begin on 1 October 2019 and could continue beyond October 2020. Does the Minister agree that a delay of this magnitude beyond 2020 could bring about a complete suspension, or indeed termination, of the capacity market mechanisms with a high degree of certainty that that may result in unwinding the whole scheme, which has been in place since 2014? What is the Government’s risk assessment of that outcome?

I appreciate that the Minister is in severe difficulty as this period brings into play the interplay between the UK’s exit and the complexities around the state aid regimes of the EU and the UK post any implementation period and deal or no-deal scenarios. The Government seem to be making risky assumptions that not only will the ruling be swift but that this is only a procedural issue on the implementation of the state aid approvals. Does the Minister agree that the judicial review case negates those assumptions and that the robustness and fairness of the capacity market is secure?

The noble Lord, Lord Stunell, has raised serious issues in relation to this situation and the way the Government have implemented the scheme. Perhaps I may further underline the contention that the capacity market has not been entirely equal in the Government’s assessment to providers and that the Government appear to be adjusting the mechanisms as they consider their approaches to the first five-year review? Would not a safer and less risky strategy have been to halt all auctions and bring forward the review of the workings and results of the capacity market against the original objective; namely, that the capacity market was set up to bring forward long-term new technological capacity to reform the energy market away from fossil fuels?

As the Minister has explained, the UK has an 11% capacity margin and these T1 auctions are mostly short-term capacity builders. Can he outline how and why a suspension pending these reviews while the ruling is being reconsidered could be interpreted to undermine more longer-term solutions coming on board? I appreciate that the confidence of industry investors is crucial, but what is the rush? This shadow system outlined in the Minister’s remarks at the beginning, on the assumption that the ECJ ruling is merely procedural and confirmatory, appears to have the backing of industry generally. I am grateful for the considerations on the issue from Simon Markall on behalf of Energy UK.

I appreciate that continuity and consistency of the capacity market is important to industry and that competition between technologies could be maintained through policy evolution. Any perceived lack of level playing field in winning CM contracts could be solved while maintaining the working capital and cash-flow stability of the market through these shadow, deferred, contingent mechanisms under the instrument. Labour would not wish to undermine either the security of electricity supplies or the market that relies on this scheme. We understand that, over the longer term, industry confidence in the capacity market as an investable mechanism is an important driver for change, with cost savings and value for money overall. Nevertheless, there are concerns that the transfer from fossil fuels towards renewable and nuclear fuels is not proceeding at pace—as the debate yesterday on the climate emergency revealed.

The capacity market has brought forward essentially only one combined-cycle gas plant of 400 megawatts against recent open-cycle gas plants, which are more polluting. The Government have given contracts to diesel generators—more polluting than coal—when they refused to set a decarbonisation target for 2030. The response that the nuclear industry is in turmoil despite a sector deal agreement underlines the situation. The 2 gigawatts of new interconnectors is slightly beside the point.

I assure the Minister that I appreciate that progress has been made. I welcome the share of electricity from low-carbon sources now reaching 56%. Nevertheless, the issue is not being taken seriously enough or the necessary pace of change being achieved. I ask the Minister to commit to publishing the Government’s five-year review of the electricity market reform this summer and for it to include a full review of the capacity market. Can he assure the House this afternoon that the Government have a full appreciation of all the risks by outlining all the discussions the Government have undertaken with the Commission? With that assurance and the assurances that the Treasury will guarantee all the conditional payment obligations to be underwritten, that his department will continue dialogue with all parties on this review and that this instrument is supported by industry, I am happy to approve it today.

[Lord Henley]

I am grateful to the noble Lord, Lord Grantchester, for his support for this instrument, and I look forward to that support in a few minutes when I conclude my words. At the same time, he called for a halt. Since we are talking about security of supply, I simply cannot go along with him. It is the Government’s view, widely supported by the industry, that the capacity market is the best way to deliver security of electricity supply at the lowest cost to consumers. We will debate this matter tomorrow at Question Time. It is important that we have security of supply and that we have it at the best price. As I said in my opening remarks, our current security of supply positon is robust. I cited the figure that we reckon the margin this winter will be— over 11%, the highest for five years. That shows that the market works.

A number of concerns have been raised and a number of questions put, and I hope I can deal with them. I will first get on to the question of uncertainty and engagement that the noble Lord, Lord Tope, raised, echoed by the noble Lord, Lord Grantchester. It is important to recognise that there is uncertainty. We appreciate that any judgment of the Court of Justice of the European Union creates uncertainty and potential difficulties for the industry.

As I made clear, the Commission is investigating the scheme, and recently confirmed that it is moving on to the next phase. This is an important step as we work to reinstate state aid approval for the capacity market as soon as possible. We are working with the Commission to ensure that we have everything necessary to reconsider the scheme as quickly as possible. I assure the noble Lord, Lord Tope, that we will continue to engage regularly with stakeholders; we will provide them with updates on progress and the re-notification process, and clarity on arrangements during and following the standstill period.

We are confident that the Commission will approve the scheme following its investigation. We hope that that investigation will conclude ahead of October 2019, the start of the 2019-20 delivery year. We consider it very improbable—although it is possible—that the decision will be delayed into 2020. In the unlikely event of a negative state aid decision, or no decision, by October 2020, the instrument will terminate capacity agreements and, as I said in my opening remarks, any entitlement to receive capacity payments. Supplier payments then held by the settlement body will also be returned, which will ensure that supplier payments cannot be held indefinitely.

The noble Lord, Lord Tope, asked about the position after a no-deal Brexit. The Government have made it clear that no deal is exceedingly unlikely. However, while the UK remains a member state or is subject to an implementation period following a negotiated withdrawal, the current state aid regime will apply and the Commission will need to approve the scheme. The Government intend there to be a domestic state aid regime after the UK leaves the EU. The draft State Aid (EU Exit) Regulations 2019 are currently before Parliament. In a no-deal exit, the UK will be subject to a domestic state aid regime, for which the Competition and Markets Authority, rather than the Commission, will be the regulator. This assumes that the draft State Aid (EU Exit) Regulations are agreed by both Houses and made. If, at the time the UK leaves the EU, the Commission has not yet approved the scheme, it will then be a matter for the CMA to investigate and approve that scheme.

The noble Lord, Lord Tope, asked whether the decision of the court itself was purely procedural. This question was echoed by the noble Lords, Lord Stunell and Lord Grantchester. The court gave examples of where the Commission should have had doubts and should have investigated them, but it did not rule that the design was incompatible with state aid requirements. We have carefully considered each issue raised through that court judgment and remain confident that the design of the capacity market is compatible with the state aid requirements. We cannot pre-empt the outcome of the Commission’s investigations, but we are confident that the scheme will be approved by the Commission following investigation, not least because it has approved six other capacity markets since 2014.

The noble Lord, Lord Stunell, asked whether the capacity market did not sufficiently support demand-side response. As I made clear, the purpose of the capacity market is to ensure security of supply, at least cost, for the consumer—something we all desire to achieve. It is technologically neutral and allows all types of capacity, including DSR, to participate without discrimination.

The design of the capacity market provides for features that support demand-side participation, including lower credit cover, participation as price takers and three metering options. The Government are also taking broader action to support DSR, as set out in the smart systems plan. The five-year review of the capacity market, which the noble Lord, Lord Grantchester, asked about, will also explore further ways in which DSR participation can be supported.

The noble Lord, Lord Grantchester, also asked about the judicial review and the case raised by Tempus. We are confident about our position. The Government will robustly defend this challenge and, as I said, we are confident in the steps we are taking to reinstate the capacity market and to operate the scheme to the fullest extent possible during the standstill period within state aid constraints.

Turning to renewable generation and carbon reduction, the noble Lord, Lord Grantchester, implied that we were not serious about switching to low-carbon electricity generation. As he will be aware, we are committed to switching away from coal. We have announced that we will be giving up coal in 2025 and increasing the share of renewables and gas in electricity generation while reducing the cost of renewables. We have seen a dramatic reduction in the cost—I recently cited the figures for offshore wind—and we have invested £92 billion in clean energy since 2010. We have quadrupled our renewable electricity supplies since 2010 and the share of electricity generated from low-carbon sources reached a record high of 56% in the third quarter of 2018, with 33% from renewables. I hope the noble Lord will accept our commitment in that area.