Electricity Capacity (No. 2) Regulations 2019

Lord Stunell Excerpts

Wednesday 17th July 2019 Lords Chamber

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

My Lords, the capacity market is a key element of the Government’s strategy for maintaining the security of electricity supplies in Great Britain. This instrument will help maintain a strong security-of-supply position into the future. The capacity market secures the capacity required in Great Britain during periods of peak demand through competitive, technology-neutral auctions normally held four years and one year ahead of delivery. These are known as T-4 and T-1 auctions. Those who win capacity agreements—known as capacity providers—commit to providing capacity during periods of system stress in exchange for receiving capacity payments.

I will briefly provide some context before expanding on the provisions of this draft instrument. On 15 November 2018, the General Court of the Court of Justice of the European Union annulled the European Commission’s state aid approval for GB’s capacity market, introducing a “standstill period” until the scheme can be reapproved. The judgment means that the UK Government are not able to award capacity agreements or make capacity payments unless and until state aid approval is obtained. The Commission is currently conducting a state aid investigation for the capacity market, and we are working with it to ensure it can reapprove the scheme as quickly as possible.

We have taken steps, through an earlier instrument—the Electricity Capacity (No. 1) Regulations 2019—and associated changes to the capacity market rules, to maintain the operation of the capacity market, to the extent possible, while state aid approval is obtained. The steps we have taken to put in place these interim arrangements are currently subject to judicial review proceedings, which we are robustly defending. The House of Lords Secondary Legislation Scrutiny Committee has highlighted the continuing uncertainty for the capacity market resulting from these judicial review proceedings and from the Commission’s state aid investigation.

This second instrument put before the House today focuses on future auctions, which will not proceed unless and until the capacity market has state aid approval. This means the instrument is unlikely to be impacted by the judicial review. First, the instrument makes changes to enable the T-4 auction for the 2022-23 delivery year, which was postponed following the state aid judgment, to be replaced by a one-off T-3 auction. It will only be held if state aid approval has been received and would be held in early 2020. Secondly, this instrument makes changes to remove or reduce what might otherwise be unnecessary burdens on business in relation to credit cover.

Applicants seeking to enter certain types of capacity market unit—for example, those that are unproven or not yet constructed—into a capacity auction are required to provide and maintain credit cover. The instrument adjusts the credit cover requirements for a CMU entered into both the upcoming T-3 and T-4 auctions, to enable the credit cover obligations for both auctions to be satisfied jointly rather than separately.

It also extends the existing suspension of credit cover obligations, provided for by the Electricity Capacity (No. 1) Regulations 2019, to the three upcoming capacity auctions likely to take place in 2020. It makes changes to ensure that when the suspension of credit cover is lifted, following state aid reapproval, existing exceptions to credit cover requirements still operate as intended. Finally, the instrument makes changes to support the participation of certain unsubsidised renewable technologies in future auctions.

The capacity market was always intended to include all unsubsidised technologies. Some types of renewable technology, such as biomass, have always been able to participate provided they are not receiving other specified low-carbon subsidies. However, when the capacity market was conceived, wind and solar required subsidy, so were not included in its technical rules. With unsubsidised renewables now a prospect, the capacity market rules have recently been amended to allow wind and solar to participate.

This instrument supports this change by requiring state support for new-build renewable CMUs, which has been declared under the rules to be deducted or repaid from capacity payments. This enables renewable technologies in receipt of subsidies—other than those which exclude them from the scheme entirely—to participate without cumulation of state aid received through the capacity market and other schemes. Alongside these regulations, we have also laid complementary amendments to the capacity market rules, which govern the technical and administrative procedures relating to capacity market operation.

These regulations are necessary to ensure the smooth running of the capacity market in the period after state aid approval is received, and to broaden the participation of renewable technologies. I commend the draft regulations to the House.

[Lord Stunell (LD)]

My Lords, I will ask the Minister some questions, and I express some surprise that, in his presentation to the House, he did not mention demand-side response, which was the subject of an intervention I made on a previous occasion, and the reason why the state aid ruling was made by the European court. As it is absolutely at the centre of the reason why this matter has not been settled and the UK Government’s proposals were rejected, the Minister owes the House a little more detail about that, particularly because, as I understand it—he made the point himself—all the paperwork in front of us today is conditional on implementation on receiving state aid approval from the EU. At the moment, that is still outstanding.

That arose from an action taken at the European Court back in 2015 by a small company called Tempus Energy, which claimed that the system was discriminatory against those who sought to reduce electricity consumption as opposed to increase electricity generation. The outcome of that was that its claim led to the UK’s scheme being sent back for a rethink.

The way it is supposed to work is that firms bid into the auction at the price they need, either to keep existing plants open to generate electricity or to create new capacity from scratch. It does not deal adequately with the situation of companies which have come forward with a commercial proposition that they will reduce overall electricity consumption. That is surprising because, in fact, overall electricity consumption is falling, not rising. The Government itself recently took account of that, having for a long time somewhat denied the relevance of it to the whole question.

Having said all that, it is surprising that the Minister has not referred to the ECJ judgment, in particular to paragraphs 203 to 207 of it, and paragraphs 27(e) and 69 of the official guidance put in support of that judgment. Has the Minister read those paragraphs, and if he has, does he think that the plain and ordinary meaning of them could in any way be construed as a simple technical reprise as opposed to an outright rejection? How certain is he that the judgment of the European Court was not, as the Minister in the House of Commons alleged it to be,

“a challenge to the nature of the UK capacity market mechanism itself”?—[Official Report, Commons, 19/11/18; col. 1090WS.]

It seems that it is not very easy to make that stand up, and as regards our taking a decision today, it needs at least a little amplification and clarification.

The allegation put to the European Court was that our UK system was discriminating against those who had a commercial appetite to reduce electricity consumption as opposed to having proposals to provide generation. I hope the Minister will say that is not true and contradict the advice I have been given that, the way the system is designed at the moment, those who want to reduce consumption—the capacity supply industry—have to make sure they have a payback period in 12 months, whereas those on the demand side are given 15 years. That inequality is leading to discrimination, which means that DSR is extremely difficult to bring within the scope of the support that these regulations are intended to provide.

I hope the Minister will be able to give us some reassurances about the amount he has read and the legal interpretation of it he has, as well as something about demand-side response and getting that playing field level for all those who want to contribute to carbon reduction in the UK via the electricity market.

[Lord Teverson (LD)]

My Lords, I know the Minister always likes to hear optimism and congratulations on energy policy from these Benches. I will start with that, in that I am pleased that renewables—I understand the caveat about unsubsidised renewables—will be able to bid for the capacity market in future. The irony, somewhat, is that the form of renewables that costs the least and is most likely to be unsubsidised—onshore wind—has been banned by the Government. I think others will speak about that area later in this debate.

The capacity market came into operation in about 2014, which to us in this House probably sounds like yesterday, but in the development of the energy market—decarbonisation and the way in which variability, storage technology and all those other areas have moved forward—there has been a big change. The question we should come back to—as well as many of my noble friend Lord Stunell’s excellently made points—is: where do we need to go with the capacity market at this stage?

In this statutory instrument we have more of the same, to catch up with what we have not been able to do because of the European Court of Justice decision. I suggest that the capacity market, which was essential back when the Energy Act put it into place, is more questionable at the moment. I ask the Minister: what has the cost of the capacity market been to date? In recent years, what percentage of annual electricity consumption has the capacity market contributed? I am trying to get an idea of the scale of this instrument’s use and how important it has been. One thing is quite obvious: I understand that there has been an auction during this period of standstill. Given that there is no panic about this, do we need this capacity at all?

I repeat my noble friend’s points about demand-side management. It has been a characteristic of energy policy that we have always prioritised supply and capital investment, following demand, rather than trying to reduce demand and looking at the demand side rather than the supply side of the equation. Will we be in a position where demand-side response—the aggregators and that side of the industry, so important to our future —is able to compete not just in the one-year bids but in the three- and four-year bids? Will that now be the case? Where are we on storage? I believe that it is still not included as a sector that can bid for the capacity market. I hope that I am wrong on that, but I would be interested to hear that from the Minister.

So my real question is: how does the Minister see the capacity market moving in the future? I would love to see in the new energy White Paper—I hope the Minister will tell us this evening when it will be published—onshore wind coming back on to the system.

In terms of this particular statutory instrument, yes, it does the business, but we need a far more strategic approach to this part of the market than we have at the moment.

--- Later in debate ---

[Lord Henley]

I might have to write in greater detail, but both T-1 and T-4—the short term and longer term—deal with the point about discrimination. I might be wrong, but I will think about that and come back to the noble Lord.

[Lord Stunell]

I am sure that the Minister is aware that for the cost of a gigawatt of generation capacity, you could have a great deal more demand reduction capacity, but only if the right trading environment is in place. If I can offer support to my noble colleague on the Front Bench, it does mean that by the time you have built the generating capacity, the case for the demand-side reduction shrinks. The noble Lord’s argument that six months was therefore justified in the one case, and 15 years was necessary in the other, is precisely the point that the European Court of Justice felt was evidence that the European Commission had not looked thoroughly enough at the UK Government’s scheme. I would have expected him to be saying that this aspect had been reviewed in bringing forward alternative regulations to the House.

[Lord Henley]

Again, it might be better if I write to the noble Lord on that point. He is aware that the Commission—which we support on this—is not happy with that judgment. It needs to be looked at and, as I made clear earlier, we are working with the Commission to ensure that it has everything it needs to continue considering that wider state aid approval for the regime as quickly as possible. I will write to both noble Lords on that point. I made it clear to the noble Lord, Lord Teverson, that I will also write with a more detailed letter on the cost of capacity auctions and the amount of capacity that has been used in the past.

The noble Lord, Lord Teverson, also asked about storage. Both he and I have stressed on other occasions that we see storage playing a great role in the world of energy in the future. I can give an assurance that storage is able to compete in the capacity auctions and has been able to since the outset. I have dealt with the question from the noble Lord, Lord Grantchester, about when we will publish the five-year review; as I said, we hope to do so shortly. That will not be the end of the process, which will identify areas of the capacity market’s design where further amendments may be necessary.

The noble Lord, Lord Grantchester, also asked about support under some schemes preventing renewables participating in the capacity market altogether, where other schemes simply deduct from the capacity market payments. It remains appropriate to exclude CMUs which benefit from contracts for difference, the renewables obligation and feed-in tariff payments, as those are the most likely and significant alternative support for CMUs participating in the capacity market. That prevents the accumulation of state aid. Less significant forms of support do not exclude renewable CMUs from the capacity market. Instead, the rules require new-build wind and solar generation to declare this support, so that it can be deducted from capacity payments. What a capacity provider is authorised to receive under state aid, in addition to its capacity payments, does not need to be declared or deducted.

I turn to a matter rather beyond this debate: our general policy on onshore wind. I can tell both noble Lords who raised the subject that I know of no plans to change that policy. We have seen great improvements in offshore wind, which has the great benefit over onshore wind of being in windier, flatter places where it is possible to build even bigger windmills than are possible on land, as I think even the noble Lord would agree. I therefore cannot offer him any hope that our policy is about to change on that.

Lastly, the noble Lord asked about the energy Green Paper, which we still hope to publish before we break for the summer. He will have to be patient for only another four or five days.

I have dealt with most of the points raised and offered to write on others. I beg to move.