Electricity Capacity Regulations 2014

Lord Oxburgh Excerpts

Thursday 24th July 2014 Grand Committee

We may all have started from different points but in the process of the Bill we have come to recognise that, for energy security and for its contribution to climate change and carbon reduction, this is the only show in town and we have got to make it work. I hope, therefore, that the Minister will give at least a few assurances that the department has the job in hand; that by the autumn and the commencement of the auctions on the CFD side, and by the time we have full clarification on the capacity mechanism, it is clear that it will benefit from wider participation; and that the big six will not dictate policy, supply and price in the way that they have done over the last few years.

[Lord Oxburgh (CB)]

My Lords, many of the points that I would have made have already been made by other speakers more eloquently than I could have. I simply make three separate small points.

First, the importance of the OLR to small businesses has been emphasised on every side. I hope the Minister will take this back to her department and seek urgent action on it. It is very important. The Government’s stated objective to bring in small companies and open up the market simply will not happen unless this is fixed.

My second point is more a comment. Does the Minister realise that the very process of consultation that the department has embraced, with the best intentions in the world, discriminates against small businesses? I read that there have been 30 separate consultations over the past 12 months. The big companies can take their responses in their stride—they have people who do nothing but write responses on their behalf—but for small companies it is a major burden. The department runs a serious danger of seeing responses from the big companies overemphasised in what is intended to be, with the best will in the world, an open consultation. The Government have to take that into account when responding to this process and acting on it.

I will not pursue the second point in detail, but it relates to the capacity mechanism, which we have not been discussing in detail today. The information we have received so far is not encouraging. Clearly, competition is important—many of us around the table here support that—but there is competition and competition. An awful lot depends on the precise and detailed rules associated with that competition.

To go back in history, we had the ROC system—we still do—which was introduced as a technology-blind mechanism. It did not matter what technology was used. The fact is that, given the structure of the ROC mechanism, only one technology could compete: wind. There was not really any competition between technologies. We are in serious danger of getting into the same apparent open competition, with the capacity mechanism as we see it now, without it being truly open.

Without going into detail today, I need to be persuaded that the capacity mechanism as we see it at the moment, given what has been published so far, is not heavily weighted in favour of the continuation of heavy use of coal. That is not consistent with the Government’s objectives, legally committed to, to climate change and carbon reduction. I would be very grateful if the Minister could describe how she sees the capacity mechanism playing out in the balance between coal and gas.

My final point—I declare an interest as honorary president of the Carbon Capture and Storage Association—is to ask the Minister why carbon capture and storage has not been included in the list of CFD-eligible technologies. I see no reason for that. We have had a competition on carbon capture and storage, and two companies were selected. I do not criticise the basis of that selection, but, if I remember rightly, five or six companies had done a lot of work on that competition. We would like those companies to continue to engage with carbon capture technology, because it is one of the legs of the Government’s low carbon strategy. I am a little surprised not to see it mentioned here, because it would at least give those companies that were unsuccessful in the main national competition something to think about and some encouragement to go forward.

[Baroness Worthington]

My Lords, I am grateful to the noble Baroness for her comments by way of introduction and for taking us through the instruments that we face today, and for the contributions of noble Lords from all sides to this debate.

Here we are again. I seem to remember that for most of last summer we were working through very similar topics and subjects. Now we see some of the detail flowing from that primary legislation before us.

I want to start by making a couple of general points before considering the instruments in more detail, when I will have a number of questions for clarification. First, this is our first opportunity to discuss the energy market reform package since the finalisation of the Energy Act. Between then and now, something quite significant happened in the Budget, when it was announced that the carbon price floor, which was a fundamental part of the EMR package, was to be frozen. Noble Lords will remember that during the passage of the Bill, that topic was debated at length, and we received many reassurances from department officials and from the noble Baroness, both in the House and in meetings, that the carbon floor price was integral, because that was to ensure that we move towards a low-carbon economy. However, the ink had scarcely dried on the Act before we saw a fundamental change announced in the Budget—there was no mention of it in the Pre-Budget Report, which I thought was quite odd—simply bringing it in.

That serves to highlight something that we have all commented on, which is that that instrument is not a firm policy. It is not bankable or something that investors can take into account as a material policy, because it is subject to change at the whim of a Chancellor. I think that we are less than two years into its operation and it has already been fundamentally changed.

My first question is: what impact did that decision in the Budget have on DECC’s dynamic dispatch model? By that I mean: how has it changed the forecasts that DECC now uses for capacity and what does it do to the fuel mix? If that is perhaps too complex an issue to go into here, I would welcome a note on this, because it is fundamental in thinking through how the EMR hangs together.

That leads me to my second general point. This is an incredibly complex set of regulations and, at some point, you have to try to take a step back and see how they all affect each other. It is a yarn of wool; you pull one end and the other gets affected. We are making a massive intervention in the market and this afternoon we have had something of a philosophical discussion, in which noble Lords have expressed differences of opinion over whether we should be more state-governed or more market-governed. What we have at the moment is, potentially, the worst of both worlds. We have a hugely state-driven system but with no power for the state to deliver. The state is entirely dependent on private entities coming forward to invest in this market. They will do so only if they feel they have clarity and confidence, and can understand the rules that they are being asked to apply. So we have a lot of micromanagement from government but no ability for government to make anything happen without the private sector. This morning Peter Atherton, a renowned commentator, stated after listening in on the budget announcements about the CFD:

“We are now in a world of staggering complexity, micro management and second guessing by the state”.

I am afraid that that is quite an accurate portrayal of where we are today.

We have also seen, just this week, that we have had state aid clearance. That was welcome although, as I understood it, there was a queue of state aid clearances with Hinkley as number one, then the rest of the CFD and then the capacity mechanism. We have not had a decision on Hinkley yet but we have on the capacity mechanism and have had the renewables part of the CFD cleared. Should we infer from that that there is something of a delay on the Hinkley decision? Can the Minister explain why we have received these judgments slightly out of the order in which we thought they were being considered and when we are likely to see pronouncement on Hinkley?

I mentioned that this is complex and that we need to take a step back to look at how all these parts interrelate. I now want to say something in relation to how these two major planks of the EMR package that we are considering today interrelate. Obviously, we have CFDs, which are there to bring on low-carbon capacity and to give guaranteed payments over a period of years to ensure that we can get capital-intensive projects away. We then have a capacity mechanism which, to give a shorthand definition, is designed to try to keep the lights on. However, there is something of a conceptual gap between these two mechanisms. I would really like to hear more from the Minister on that.

The reason that there is a gap is that CFDs reward low-carbon capacity. We are told that they will do this at some point through competition, where price will determine it. At the moment, it is not quite clear what the determinant is between somebody getting or not getting a CFD, so it is administratively decided. Nevertheless, that is the system. Then there is the capacity mechanism, which is designed to reward those people who are able to provide firm power and maintain system availability. In order for the capacity mechanism not to double reward, the decision has been taken that anybody receiving a CFD will not be eligible for the capacity mechanism. That essentially means that there is a class of CFD-eligible technologies which are firm—they provide you with available, predictable and, more importantly, dispatchable power—but are not being given any reward for that element.

To clarify: if we consider biomass or CCS, they are very different to wind or solar in that they can be fired up at will and used to meet spikes in demand. They therefore have an inherent value that is not rewarded through the capacity mechanism or the CFDs. How does the department value that element of capacity—the firm, low-carbon power that is coming on? I would appreciate an answer to that question.