Electricity Capacity (No. 2) Regulations 2019

Lord Grantchester Excerpts

Wednesday 17th July 2019 Lords Chamber

[Lord Grantchester (Lab)]

I thank the Minister for his explanation of the regulations before the House this evening. As he stated, they follow up on the Government’s Electricity Capacity (No. 1) Regulations 2019 passed in April. That brought forward modifications to the capacity market that would operate during the standstill period following the legal challenges to the state aid provisions. These were made on the assumption that the Commission’s and the Government’s positions were indeed correct and lawful.

These regulations continue on that assumption and reintroduce T-3 auctions to take the place of the consequentially delayed T-4 auctions, which will now take place in 2020, after which the outcomes and judgments will be known. In response to questions from your Lordships’ Secondary Legislation Scrutiny Committee’s 53rd report, the Minister’s department replied that the Commission’s investigation is expected to conclude before this winter and that delay into 2020 is very improbable, and that on the judicial review, the UK court hearing is most likely to take place in October. These auctions will not be taking place under any scenario other than a status quo achievement for the Government.

Bearing in mind that the UK’s state aid rules under the authority of the CMA will not diverge from the EU state aid rules in either a deal or a no-deal scenario, the Minister is suddenly in a strong position to declare that nothing has changed. But of course, nothing can be taken with any great certainty. That was the position in the debate on the earlier regulations. The circumstances of the T-3 auction do not differ from that position at all. It is a provisional auction in the sense that whatever is collected or potentially disbursed will be held until the EU study of its processes for defying adherence to state aid is published.

The concerns that were voiced around the House on April’s regulations are still valid as there has been no further consideration of the fact that the court judgment was not merely a matter of process on state aid but included factors relating to demand-side management in the capacity auctions. It is not a foregone conclusion that business will continue as usual. The noble Lord, Lord Stunell, reminded the House of that tonight.

In response to questions regarding the department’s plan B on an adverse judgment, the Government’s reply will be that they will make necessary adjustments. But what is the department’s timing on publishing its five-year review of the capacity market under the Energy Act 2013? Will that be before any judgment, such that the review may need to be withdrawn subsequently? Is the review now ready, after the Minister in the other place stated that the Government’s intention was to publish this summer? As the capacity market is still in the same position as last April, and the UK has an 11% margin in supply, I repeat: what is the rush?

In saying that, I repeat that I appreciate that the continuity and consistency of the capacity market is important to industry, and Labour would not wish to undermine either the security of electricity supplies or industry confidence in the capacity market as an investable mechanism to drive through change, bring about cost savings and value for money.

However, in one respect, the T-3 auction proposed under this order would help clarify the trend in clearance prices. In February 2017, the T-4 auction cleared at £22.50 per kilowatt. In February 2018, the T-4 auction cleared at £8.40 per kilowatt, and the latest auction in December 2018—admittedly the T-1 auction following the court hearings—cleared at a mere 0.4p per kilowatt. Ministers have repeatedly stated that having an 11% margin on supply was an indication that the capacity market was working well. What does the Minister expect the results to be for these forthcoming auctions? Does the latest price indicate that the capacity market is not needed, that there is ample capacity and that payments will be virtually nil for standing by to supply into the market? I echo the remarks of the noble Lord, Lord Teverson, about storage, and other aspects.

Labour does not oppose this order. It is important that the current chaos in the capacity market is resolved as much and as soon as possible. The regulations, although provisional, will stabilise the market, and judicial resolutions to the situation should be forthcoming shortly. Nevertheless, some serious probing is needed with regard to the future direction of policy in the capacity market.

Questions around the future of the capacity market are highlighted by the inclusion of subsidy-free renewable technologies to bid into the capacity market through this order. The capacity market was introduced to enable the energy market to transform from one based on fossil fuels to one based on new low-carbon technologies, while maintaining security of supply.

The Minister may say that it was always anticipated that the capacity market framework would allow the participation of renewable technologies at some point, so he is now confirming that this is that point. Despite any margin of supply, does the Minister expect that the capacity market will be a permanent feature? Can he clarify the difference under paragraph 7.14 of the Explanatory Memorandum whereby some renewables are excluded should they receive support from contracts for difference, the renewables obligation or the feed-in tariffs, whereas other participants receiving other forms of support can have their capacity payments adjusted to reflect other state support payments? Paragraph 7.15 states that regulation 49A of the principal regulations for low-carbon generation support is amended to allow this change.

The Minister in the other place stated on this point that onshore wind, offshore wind and solar technologies will now be able to participate, and the noble Lord the Minister has repeated that. Now that the Government believe that the capacity market is the right mechanism for achieving security of supply at the lowest cost to consumers, can he now give a further update on the position of onshore wind? As it is the cheapest source of low-carbon energy, is it now a hollow achievement for it to be allowed to bid into the capacity market when it is banned from obtaining planning permission? Can the Minister now publicly endorse that onshore wind will be allowed to bid into the CfD framework on an equal basis?

In the report Quantifying Benefits of Onshore Wind to the UK, published yesterday by Vivid Economics—a group that does scenario modelling for the Treasury—it was stated that UK customers could achieve a £50 annual saving to their bills through onshore wind being made available. Will the Minister give his assessment of this report and indicate when onshore wind may participate in the UK’s energy market?

Finally, under paragraph 7.18 of the Explanatory Memorandum, it states that other technical issues have been addressed in this order. They do not seem to be material, but nevertheless I would be grateful if the Minister could write to me with an indication of which have now been improved. With the misgivings stated, I can approve the order before the House tonight.

[Lord Henley]

My Lords, I am grateful to all three noble Lords for their interventions and I will try to deal with as many of the questions as possible. I believe I have a certain amount of time in which to respond. I am not quite clear when the usual channels want to return to other matters but I imagine that, whenever it is, it should be seen as a limit rather than a target. Therefore, I will try to keep my responses as brief as possible, and there are possibly one or two that I hope noble Lords will accept in writing. I am thinking particularly of the last point on the Explanatory Memorandum made by the noble Lord, Lord Grantchester.

I think we are all, to some extent, singing from the same song sheet in that we all have the same clear aim of wanting to head in the direction of getting to zero carbon by 2050, as we made clear in our recent announcement. It might be that others feel that it can be done quicker or in different ways, but we are all trying to do the same thing and to see that we achieve increasing amounts of electricity generation by low-carbon means. As noble Lords will be aware, we have achieved a great deal—consumption is down to something of the order of 5% coming from carbon.

We also believe that the capacity market is the right mechanism for delivering security of supply at the lowest cost to consumers. I will write to the noble Lord, Lord Teverson, who asked for detailed figures on the overall costs of that over the years. The noble Lord, Lord Grantchester, asked whether we could speculate about future auctions in the light of the continuously lower prices achieved at repeated auctions. Obviously, it would be wrong for me to speculate in any way about what price might be obtained—that is not what one does in advance of an auction—but it is encouraging that the price has come down. We still believe that that process is necessary and the right way to deal with these matters.

The noble Lord, Lord Grantchester, also asked about the five-year review. I can tell him that it will be published soon. I cannot give him a precise date at this stage but I will say “soon”, “shortly” or something of that sort. However, it is certainly on its way and I very much hope that we can look at it in more detail in due course.

I turn now to the points raised by the noble Lord, Lord Stunell, particularly about the judgment of the European court and the decisions by the Commission. He said that the judgment was more than just procedural. The court identified elements of the capacity market which should have given the Commission doubts about whether the scheme was compatible with state aid requirements. That meant that the Commission should have conducted an in-depth investigation before deciding whether to approve the scheme. Importantly, however, the court did not rule that the design of the capacity market was incompatible with state aid requirements or direct that changes be made to the mechanism. We have carefully considered the matter. When I say “we”, I mean department officials and my right honourable friend the Minister for Energy. I cannot confess that I have read the detailed paragraphs that the noble Lord referred me to, but we have carefully considered each of the issues raised in the court judgments, and we remain confident that the design of the capacity market is compatible with the state aid requirements, including in the way the system is designed in respect of demand-side response.