Electricity Supplier Payments (Amendment) Regulations 2017

Lord Prior of Brampton Excerpts

Tuesday 21st March 2017 Grand Committee

Moved by

[Lord Prior of Brampton]

That the Grand Committee do consider the Electricity Supplier Payments (Amendment) Regulations 2017.

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Prior of Brampton) (Con)]

My Lords, I beg to move that the Committee approves the draft Electricity Supplier Payments (Amendments) Regulations 2017. This instrument amends regulations concerning the contracts for difference scheme and the capacity market. Before diving into the specifics of the amendments we are discussing today, I will briefly explain these two schemes.

Contracts for difference, or CFDs, provide long-term price stabilisation to low-carbon generators, allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers. The scheme ensures greater certainty and stability of revenues to electricity generators by reducing their exposure to volatile wholesale prices, while protecting consumers from paying higher support costs when electricity prices are high. The capacity market provides regular payments to reliable forms of generation in return for such capacity being available when needed, thus ensuring that enough capacity is always in place to maintain security of supply. A fundamental aspect of both schemes is the competitive auction process for awarding contracts, which drives down costs to consumers.

The next CFD auction, with a budget of £290 million for less established renewables technologies, is on track to open in April. This will result in enough renewable electricity to power 1 million homes and reduce carbon emissions by around 2.5 million tonnes per year from 2021-22 onwards. It will also allow developers of innovative renewable technologies to deliver the best deal for bill payers. Three main capacity market auctions have been held each December from 2014 to 2016 to secure capacity four years ahead from 2018-19 to 2020-21. The latest of these secured 52.4 gigawatts of capacity at a price of £22.50 per kilowatt per year. In January 2017, an early capacity auction was also held to secure capacity for winter 2017-18. The auction secured 54.4 gigawatts of capacity at a clearing price of £6.95 per kilowatt per year.

The regulations we are considering today will implement a second tranche of minor and technical amendments to improve the efficiency and transparency of the CFD supplier obligation, the levy on suppliers that pays for the costs of CFDs. They build on a first tranche of changes approved by Parliament last year, which became law in April 2016. These further changes are being implemented later to allow time for necessary changes to be made to the settlement system, which determines the way that CFD payments are calculated and paid. Both the changes under consideration today, and those implemented last year, were the subject of a public consultation and received a largely favourable response. These regulations also amend the levies that fund the companies established to deliver the CFD and capacity market schemes.

--- Later in debate ---

[Lord Grantchester (Lab)]

I thank the Minister for explaining the amendments to these regulations. They seem eminently sensible, drawn from the experiences of operating the regulations, which are vital to reforming the electricity market and encouraging low-carbon electricity generation to ensure the UK’s security of supply. I also express my gratitude to the noble Lord, Lord Deben, for his helpful remarks as background to the regulations, and for underlining the importance of the progress we have made.

The amendments to the regulations should increase the cost-effectiveness of the two main measures, the CFD scheme and the capacity market, since they reduce the heavy-handedness of the belt-and-braces approach of the CFD counterparty, the Low Carbon Contracts Company, and that of the Electricity Settlements Company for the capacity market. The Minister’s introduction eloquently explained the improvements. These companies exist only to make payments for low- carbon generation or demand-side responses, and to collect these payments from suppliers. The companies must also cover their costs. The regulations set up the system to do this in as transparent, equitable and cost-effective a way as possible, allowing for a sensible amount of reserves as some guarantee. One would hope and expect these payments to balance out through the reconciliation process.

Much of the debate on these regulations in the other place focused on the probability of error. I could join in and tease the Minister by asking him about 20 scenarios, any one of which could be the one occurrence that could not be reconciled. However, that would be facetious. The modelling looks robust, indicating that the companies have the ability to raise the funding necessary in a modern, technologically efficient manner and make the payments required.

The regulations merely deal with the process of funding. The bigger question is the accuracy of the strike price, which is relevant to the setting up of this compulsory regime. Noble Lords will know that that is contained in the contracts agreements and is not part of these regulations. The two most controversial applications relate to nuclear power and the Hinkley Point C plant, and onshore wind.

The Government have shown how quickly they can alter their assessments and mechanisms for adjustment through Part 2 of the Energy Act 2016 in relation to onshore wind and the compensation payments in the FIT regime. On the prevention of double-counting of exemptions in the measure, exemptions from payments are available to suppliers which import renewable electricity from EU member states. This green excluded electricity—GEE—will not count towards electricity suppliers’ market share for calculating their CFD liabilities. This raises questions about security of supply; whether government policy is blind, whether British-based or not; the relative pricing of renewable energy in the UK and in the EU; and whether security-of-supply policy should seek to encourage import substitution. It also begs questions relating to Brexit; I could ask the Minister various hypothetical questions about the internal energy market and any likely scenarios of tariff applications. I imagine he would say that further amendments can be made as circumstances change.

I am grateful for the clarity provided regarding the operational budgets of the two companies and the professional fees increase, brought about by the inquiries of your Lordships’ Secondary Legislation Scrutiny Committee. I very much agree with the Government’s financial policy to expense rather than capitalise software upgrade costs.

I have a few questions about the regulations. First, on the amendment to allow CFD reconciliation determination after the 10th quarter to be classified as non-generation payments, is a longstop provision of time envisaged, or is that included in the general retrospective provisions? Could this be one of those 20 unknown unknowns? Secondly, following the onshore wind provisions in last year’s Energy Act and given that onshore wind is now so much cheaper, are the Government any closer to allowing onshore wind to participate in future CFD auctions now that the threat of UKIP has receded? Can the Minister update the Committee on the position following the consultation on onshore wind in November 2016? Thirdly and lastly, I understand that the net savings to be passed on to electricity consumers are not a cash item and cannot therefore be shown or guaranteed in some way. However, the memorandum states that the operational costs budget of the two companies will increase, resulting in an increase, albeit minimal, in household electricity bills. Will these two features balance out and the net effect on consumers be neutral?

Having said that, I am content to approve the regulations.

[Lord Prior of Brampton]

My Lords, I begin by echoing the comments of the noble Baroness, Lady Maddock, about Lord Jenkin. I was reminded of the Schleswig-Holstein question, to which the Duke of Wellington said that only three people knew the answer—and one was dead, one had gone insane and the other one had forgotten it. Fortunately, my noble friend Lord Deben has not forgotten it and spoke very eloquently about broader issues than those raised by the statutory instrument before us.

It was interesting to hear my noble friend’s story about how shopping for a freezer had changed in the space of a year—from being able to buy one rated from A to G, to one now rated A++ to B. That is just one small illustration of how technology has helped hugely in reducing the use of electricity. He is absolutely right that technology has significantly reduced bills.

[Lord Deben]

I am sorry but it is not just that the technology has changed; we have now shown people that it is not worth selling bad products. You have to use the technology and it is we politicians who have made that technology actually go into the marketplace, because it has been worth while. The Government should take credit for what they have done.

[Lord Prior of Brampton]

That is true. The incentives need to be there, but the fact is that technology is remarkable. Technology is going to do it. If we are going to solve the problem of carbon emissions, technology and incentives to use new technology—which is what the CFD programme is all about, as I understand it —are crucial.

My noble friend also spoke about the cost of electricity for business. It is an issue I take a particular interest in, given that it affects very energy-intensive industries, such as the steel industry, the glass and ceramics industries and other industries, including the potteries in places such as Stoke. It is difficult to know why our costs are higher. It is partly because of distribution and transmission, we are told, and partly because of the wholesale market, but I do not think we have a full answer to that. I have not read my noble friend’s report on this. It may suggest an answer. I will read it with interest. It is certainly a question that we need to answer. It is always very easy to blame the green lobby for the extra costs falling on high-energy consumers. My noble friend raises a question that needs to be answered.

I thank the noble Lord, Lord Grantchester, for supporting these regulations. He asked three questions. I shall write to him on them. I have been given the answer, but I cannot absorb it and give it to the noble Lord at the same time without just reading it out without thinking about it. He raised the more general issue of the impact of Brexit on the internal energy market and what tariffs there might be. I will have to give him the rather dull and predictable but honest answer that we will have to wait to see how the negotiations turn out.

The regulations the Government are seeking to amend through this instrument affect the CFD scheme through making some fairly minor technical amendments to improve the efficiency of the CFD supplier obligation and to amend the operational costs levies of the Low Carbon Contracts Company and the Electricity Settlements Company. As I read this, I do realise that this is quite complex, arcane stuff. These companies play a crucial role in delivering the CFD scheme and the capacity market scheme, and they must be sufficiently funded to perform their roles effectively. I have been struck by how the cost of offshore wind has come down in the last auction and how the capacity auction has driven prices down. The market is very powerful. I thank the noble Lord for his support for this measure?

Motion agreed.