Electricity Capacity Regulations 2014

Lord Whitty Excerpts

Thursday 24th July 2014 Grand Committee

Therefore, I do not want anything I have said to make the Minister feel that I am not extremely grateful for the enormous amount of work that she, other Ministers and the Government as a whole have done to deliver this. However, let us not lose at the last moment a crucial part of it, which is to make sure that every single one of the opportunities for competition shall be open. Without that, we will find ourselves in the hands of people who have not so far distinguished themselves by an understanding of the national—or, I sometimes think, the international—good. Can we just bring the two dates together?

[Lord Whitty (Lab)]

My Lords, as the noble Lord said, we knew that this was a massive task for the Government and that very detailed regulations have to go through. I think we are all a bit upset that we are here on the last Thursday before the recess, and that we have to deal with all these regulations at the same time. I guess that very few of us, even though we are aficionados, as the noble Lord, Lord Jenkin, said—although that probably exaggerates the degree of sentimental attachment we have to the process—do not find it difficult to come to grips with these regulations today. I will underline a bit the process that the noble Lord, Lord Jenkin, and the Select Committee referred to—the difficulty of coming to terms with it in this way.

The appendix supplied by the Minister or her Secretary of State is very helpful, but it is an idiot’s guide. This particular idiot is happy that it is there, because it helps me through the regulations before us this afternoon, but what is needed is a comprehensive narrative: one which participants in the industry and consumers of its output understand. At the moment, none of it is understood out there, even among people who are engaged in the industry. It is certainly not understood by consumers and will not be when some aspects hit them—either literal consumers of energy or people faced with various developments in their part of the country.

I do not want to get deeply into the ideological debate that has been going on here. From the beginning, we recognised that this is not exactly free competition, but not exactly reverting to the CEGB either—I think that at one point, the noble Lord, Lord Lawson, called it Gosplan, which I think was going a bit too far. Nevertheless, this is not quite a free and open market. There is not, strictly speaking, technological neutrality here; we have different systems for the capacity market against the CFD non-fossil fuel market, and we have differences within the renewables sector in terms of government intervention. Let us not pretend that we are starting from a level playing field, but we need to ensure that the outcome is that there are more participants in the system than there are now. One energy Minister, who has now moved on, said that we want to have not the big six but the big 60,000. I rather fear that the CFD side of this in particular is unlikely to deliver 600, let alone 60,000, new participants.

I hope that the noble Lord, Lord Jenkin, is right. We are a little behind on the capacity mechanism; this is the first time that we have seen an outline of it, which is very helpful. I hope that he is right that it will allow more participants to get in. Given the further detail that we have on the CFD side, I am not sure that it will allow more participants than we were hoping for when we started this exercise.

I want to make some points about small businesses, by which I mean independent generators. They may be quite large in relative terms, but they are not the big six. I have some particular points that relate to the renewable technology that is probably cheapest, the one that comes down fastest in price, the most easily installed and the one that has least planning and public opposition: the solar industry. That seems to be seriously disadvantaged by the detail of these rules. Some of my points apply to independent generators in general, but I will focus on the solar sector.

The solar sector has been extraordinarily successful here and internationally in many ways, but it has become the victim of its own success. Successive Governments have changed the terms regularly through the RO process, so individual firms—they are mainly small firms in that sector—and potential investors are confused about what will be the level of subsidy through the whole RO process. That is now compounded by what is happening on the CFD side of the provision.

The budget makes that slightly worse, I think, because the level of subsidy allocated to what are regarded as established technologies—which includes solar: what are established and what are not is a bit of definitional fuzz—is £50 million. According to the industry’s calculation, that would probably deliver 1 gigawatt. The Government are probably too constrained by what they put in their indicative plans, because until quite recently, the price was coming down and the number of installations was going up, so they decided that they would not only introduce the degression under the RO but that they would also, under the new system, not allocate it a significant amount of the budget because they thought that we were already approaching the level in their forward plans.

That seems to me pretty daft. If you have a successful industry and a successful regime with a level of understanding, and that industry largely consists of small companies, it needs the highest degree of stability possible. Uncertainty is always complained about by the big six but the people whom uncertainty really hits are those who invest their own money and who need to attract new investors into their area. That applies to the solar area and other sectors as well.

The other disadvantage—maybe the Minister will put me right on this—is that FITs will apply to small-scale solar. Between 5 megawatts and 10 megawatts the RO will have been withdrawn right at the beginning of the RO process—this may apply to the next regulation we are discussing. Whereas it will be phased out in general by 2017, it will be withdrawn from that sector immediately and there will be no CFD equivalent. That is the very sector which the Government in UK Solar PV Strategy Part 1: Roadmap to a Brighter Future were emphasising only a few months ago as being a major part of our conversion to low-carbon technology. The sector that was on the roofs of factories, flats, schools and universities—and to some extent in the countryside, although that runs into planning problems occasionally —is the very sector that seems suddenly to have no support, or no clear support. I would be grateful if the Minister could tell me whether that is a wrong analysis, and that there will be some support for middle-range solar regimes within that period because it is an area of possible significant expansion. In other countries, such as Germany, there has been substantial investment in this sector and to some extent it is included in building regulations in Germany and other parts of the continent.

The solar sector made a number of other points that may apply more widely as well. There is the regularity of auctions at once per year and the attached qualification that if you have failed in the bid, you cannot qualify for the next period. That would obviously have a significant impact the longer the timescale is between auctions. The sector is arguing for quarterly rather than yearly auctions. It could be that at the beginning of this process there could be a move towards more frequent than annual auctions. Of itself, that would benefit SMEs. Since we are differentiating by technology, but we want all technologies to be in there, government policy should set a technology minimum for all those technologies to which the CFD process applies.

There are very substantial costs—this is a general smaller-business issue—in the prequalification period. The Government need to find a way, if they are genuinely to open the market, to ensure that those costs are minimised. It seems to me that these regulations will probably increase the costs beyond what the industry was originally thinking. The likely outcome of this process is even more costs upfront for companies that may or may not win an auction. The Minister will know that some of these sectors argued against auctions, and this is the knock-on of that argument. Nevertheless, now that we are having auctions, it must be recognised that auctions do, to some extent, disadvantage smaller operators and independent generators.

There is a particular point where the issue of qualification seems to arise. The Contracts for Difference (Allocation) Regulations refer to qualifications in relation to agreements to connect. The solar sector and the onshore wind sector argue that the agreement to connect is at the end of the process. If you have to wait for qualification until you have a full-scale agreement with the grid to connect, the rest of the process cannot work. They seemed to feel that they had had some understanding from the department that it should be the offer effectively from the grid rather than the agreement at the end of the day that should stipulate that they were eligible—otherwise they are going to engage in yet more expenditure until the point where the agreement is signed, sealed and delivered.