Electricity Capacity (No. 2) Regulations 2019

Lord Teverson Excerpts

Wednesday 17th July 2019 Lords Chamber

[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 ---

The noble Lord also asked how the capacity market supported DSR. The purpose of the market is to ensure security of supply by giving capacity providers the right incentives to be on the system to deliver energy where needed. It is, as I have made clear, including with the noble Lord, Lord Grantchester, a number of times, technologically neutral.

[Lord Teverson]

I understand entirely the argument that a number of years are required for physical capacity to build what was originally the coalition Government’s hope that gas would come online. But what I do not understand is this: by having that exclusively for supply side, a whole area of the capacity market is denied by demand response. By the time you come around to the short-term one-year deals, where demand response can come in, you have already filled a major proportion of the capacity market. It therefore discriminates against that sector—or do I completely misunderstand this?

[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.