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

Lord Grantchester Excerpts

Thursday 2nd July 2020 Lords Chamber

[Lord Grantchester (Lab)]

I thank the Minister for his introduction to the regulations, but I admit to being slightly thrown by how I understood them to work through to consumers. Let us hope that there are easy explanations.

As the Minister said, the aim is to limit the negative short-term impact on electricity suppliers of an unexpected increase in costs of the contracts for difference scheme due to the pandemic. The CfD scheme is the main mechanism for supporting new renewable electricity generation projects in the UK and, in outline, the government-owned Low Carbon Contracts Company, or LCCC, manages those generating contracts, collecting payments for generation from electricity suppliers, which pass on those costs to customers in their bills. As the Minister explained, there has been a shortfall in funds required to pay the generators in the second quarter of 2020 following a sharp fall in the demand for electricity ensuring a low wholesale price of electricity, leading to higher payments to generators as they have to be paid the difference between the wholesale price and the strike price agreed necessary to bring forward renewable generation. The Government have brought forward these regulations to assist with the consequences —for example, by extending a one-off loan to the LCCC to enable payments to generators without increasing the financial burden on suppliers and therefore consumers. I understand the time-sensitive nature of the regulations being approved so that they can come into force before the quarter reconciliation date of 9 July. I also understand that they will not impose burdens any more onerous than before or require different behaviours without sufficient time for reorganisations.

Regarding the consultations on the regulations, due to the urgency, I understand that a longer period than the one-month consultation undertaken was not practicable, yet the engagement seems to have been widespread and productive, resulting in the payback period being put back a full 12 months to avoid spikes in consumer prices during winter, and the sensible determination of the split between suppliers in accordance with their share of the market at that time, rather than at the time of the loan, which is to be made to the total cost of the LCCC irrespective of present market shares.

All that is clear and sensible. However, I have one or two anxieties on which it would be useful to have clarity from the Minister. The regulations are made for quarter two, from April to June. These measures may well need to be used again without recourse to more regulations if there are “similar exceptional circumstances”. Will the Minister confirm that the regulations will not be used for circumstances other than those due to the coronavirus pandemic? What similar exceptional circumstances might he envisage in the future? Temporary volatility of prices or seasonal demand fluctuations should be excluded, I would have thought, but would he care to determine any specific margin?

Furthermore, this pandemic may well continue and we are now into July. Will the Minister explain to the House how the effects of the pandemic are continuing to affect the market? What is the size of the loan that the Government are giving to the LCCC and therefore the size of the overhang in the market that will need to be reconciled in 12 months’ time? I believe the Minister mentioned the sum of £121 million in his introduction. We also need to consider the implications of the price cap legislation passed last year under the stewardship of Claire Perry, who appreciated the effects of energy prices on consumers. Has the Minister’s department had discussions with Ofgem regarding how these increased costs will be reflected in its future determination of whether the prices cap will continue into next year or not? It is important to get a general understanding of the expected effects and outcomes at this stage.

Under the Energy Act 2013, which governs this instrument, the Government sought to distance the Treasury from the implications of a support system for renewable generation. It is now back in the spotlight. What are the terms of the loan to the LCCC and how do this Government view this breach? The Minister may well reply that it is a temporary measure, but, as I have just said, it may not be a one-off for only one quarter. It would be helpful to understand the full circumstances of the instrument in that respect. Has the Treasury published any guidelines and made them publicly available?

No understanding of the impact has been undertaken, in the expectation that it will be positive and welcomed, at present. But it may not turn out that way in the long run, when the time comes for the sums to be passed back to consumers. On the assumption that it is only a one-off, one-quarter situation, can the Minister say what added rise in consumer bills due to this pandemic easement will come about in 2021? That the answer will be known now means that suppliers might begin to pass the cost on to consumers well in advance of these provisions, and thereby negate the main object of the loan to the LCCC. Perhaps the Minister can require Ofgem to report on this situation, so that the full fall in wholesale prices is not passed back to consumers, which is extremely worrying for many people.