Draft Electricity Supplier Obligations (Excluded Electricity) (Amendment) Regulations 2019

Nadhim Zahawi Excerpts

Monday 3rd February 2020 General Committees

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Nadhim Zahawi)]

I beg to move,

That the Committee has considered the draft Electricity Supplier Obligations (Excluded Electricity) (Amendment) Regulations 2019.

The draft instrument, which was laid before the House on 9 September 2019, amends the Electricity Supplier Obligations (Amendment & Excluded Electricity) Regulations 2015. The existing legislation supports the competitiveness of energy-intensive industries by providing for a scheme exempting eligible businesses from a proportion of the cost of funding renewable electricity. The draft instrument will amend the existing legislation to include the manufacture of grain mill products; clarify the application of state aid requirements, which exclude undertakings in difficulty from the scheme; and improve the scheme’s overall operation.

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

The Minister says that the exclusion relates to renewable energy. Will he confirm that it does not relate to the cost of nuclear energy, including the strike rate mechanism for Hinkley Point C?

[Nadhim Zahawi]

I was coming to the importance of the energy-intensive industries that are excluded. We exclude sectors that apply for that exclusion from any renewable obligations by up to 85%. I will address that further later on.

[Alan Brown]

The draft impact assessment says that this exclusion will be worth around £2.8 million per business in terms of the contract for difference mechanism for energy-intensive industries. I am just trying to get a handle on the total cost. Does that include the strike rate mechanism for Hinkley Point C? While the Minister is at it, will he explain whether this includes future capacity market auctions? There will obviously be a further round of CfD bids in the future. Will these industries be automatically exempt from them as well?

[Nadhim Zahawi]

The regulations deal with the cost of current renewables. Obviously, in the future, other mechanisms will be in place.

The sectors eligible for the existing exemption scheme employ around 350,000 workers and account for more than a quarter of total UK exports. Many are located in areas of economic disadvantage and provide good, well-paid jobs in those areas. While our industrial gas price is internationally competitive, our electricity prices for medium and large industrial users were the highest in western Europe in 2018. Clearly, electricity costs have a significant impact on the competitiveness of such enterprises. The industries affected operate in international markets, so higher electricity costs place them at a competitive disadvantage, resulting in the risk of carbon leakage, as it is referred to, where companies move production to countries with a less ambitious climate policy.

The existing legislation covering energy-intensive industries allows eligible businesses to receive an indirect exemption of up to 85% of the cost of funding renewable electricity schemes. Where an eligible business applies successfully for the exemption, its electricity supplier receives a reduction in its costs, which it passes on to the eligible business. This approach mitigates the cost of renewable electricity schemes, supports industrial competitiveness and provides certainty for business. The costs of the exemptions are distributed to all other electricity users.

“What does this SI do?”, I hear you ask, Mr Paisley. The regulations add the grain mill products sector to the list of eligible sectors and clarify the application of state aid requirements, which exclude undertakings in difficulty from the scheme. The regulations will also improve the scheme by ensuring that a business that uses a new meter will have to accrue only three months of data before applying, instead of having to wait until they have data from the previous year, as they have to now.

Where electricity meters are shared by more than one business, the proportion of electricity exempted will be updated more rapidly—it is currently done on an annual basis—making the system much more agile and responsive. Certificates will expire at the end of June, rather than March, reducing the risk of business facing a gap in the exemption. Businesses will also be able to submit quarterly reports on any day in that quarter, resulting in increased flexibility for them.

[Alan Brown]

When the Minister was clarifying what the regulations do, he mentioned that the scheme now includes grain mills and flour businesses. How many additional businesses will apply for an exemption? Will he estimate how many jobs that will protect?

[Nadhim Zahawi]

I am grateful to the hon. Gentleman for that question. For clarification, I want to return to his earlier point on the nuclear CfD. The EII applies to renewables costs only and not to the indirect cost of the nuclear CfD. Of course, it does apply to future renewable CfD auctions.

On the hon. Gentleman’s question, it will depend on the sector and the companies that apply from that sector. We are adding grain mills and, if they apply, they will be eligible. More than 200 UK businesses already benefit from energy-intensive industry exemptions, and we estimate they save about £300 million in electricity costs. We anticipate that about 15 businesses will be eligible through this further extension of the scheme.

The regulations will extend and improve the existing legislation supporting the competitiveness of energy-intensive manufacturing industries in the UK. I commend them to the Committee.

--- Later in debate ---

[Nadhim Zahawi]

I will take the last point first. My hon. Friend the Member for South Thanet raises a powerful point. At the beginning of my remarks, I referred to carbon leakage. We need to get smart about how we support industry, and of course move towards net zero, for which we are the first developed nation in the world to legislate. It is the law of the land that we will get to net zero by 2050.

However, I will share an example that I hope will allay some of my hon. Friend’s fears. I think it was nine years ago or less when we delivered the first offshore wind contracts. They came in at about £140 per megawatt hour; they are now at £40 per megawatt hour, and we account for something like 36% of global offshore energy production. That is an extraordinary tale of innovation and backing from Government, to repurpose, effectively, our energy production towards renewables—towards net zero. The hon. Member for Kilmarnock and Loudoun tried to make it a trade-off between nuclear, renewables and offshore, but I do not think it is as simple as that. I am a chemical engineer by background and the hon. Gentleman will know, I hope, that, while offshore wind and solar are of course important parts of the portfolio mix that we will produce as we transition to net zero, we need a baseload, because if the sun is not shining and the wind is not blowing, we will have a problem. That is why nuclear is an important part of the mix.

As to our investment in nuclear, I was at Hinkley Point C last week, to see the first-in-a-generation nuclear reactor project. It is remarkable, not just for what we are building, but for the apprenticeships coming through in the industry. It is a real revival of the nuclear industry. We are also investing in innovation around SMRs with Rolls-Royce, and in the future of advanced modular reactors.

[Alan Brown]

Obviously there has always been an argument that Hinkley Point C is required to provide the baseload, but when the original case was made for it we were told that if it was not commissioned by December 2017 the lights would go out, because there would not be sufficient baseload in the UK to keep the lights on. We are clearly way past December 2017. I think that the very earliest it will be commissioned, with a good tailwind, is 2025. It could be beyond that, so it kind of negates that argument for baseload, does it not?

[Nadhim Zahawi]

Not quite, because obviously the baseload is still needed. We have been able through efficient and safe operation to mitigate the delay, but obviously we do not want further delay.

[Dr Whitehead]

How dispatchable and flexible does the Minister think nuclear power in the future will be, bearing in mind that that is what we particularly will need, in terms of baseload, for the future variability of the majority of our energy supply? Does he think nuclear power can provide that dispatchability and flexibility to ensure that the system works as well as he hopes it will?

[Nadhim Zahawi]

It needs to be part of the mix—that is my very strong view. We will, quite rightly, have a portfolio tilted heavily towards renewables, and leaning into offshore wind even more than we have done to achieve the 36% that we have achieved; but it is certainly worth our continuing to make the investment. The technology is moving fast—whether that is fusion, in 10 or 20 years’ time, or AMRs or SMRs, which we are also very excited about. It absolutely needs to be part of the portfolio mix.

I want to return briefly to the points that the hon. Member for Kilmarnock and Loudoun made. The reason for the 2023 review date is that it is aligned with the Commission’s review of the energy and environmental aid guidelines in 2022. As to his question about the grain mill sector, it submitted sufficient evidence that satisfied our trade in electricity intensity criteria. We consulted businesses in a robust and open way, and published the Government’s response on 17 October. I made the point about nuclear earlier.

The shadow Minister asked a number of important questions about state aid and an alternative definition. Of course, state aid will be very much part of the free trade agreement negotiations, when they begin, and will be included in the level playing field position paper that the Government will publish soon. As the hon. Gentleman will know better than most, during the implementation period the UK will be bound by EU law, including state aid law, until the end of 2020.

[Dr Whitehead]

We are legislating this afternoon and presumably need to consider the circumstances under which state aid will not be applicable, because we will be bound by EU law only temporarily. Is the Minister saying that in the long-term future, we will continue to act as if the state aid rules are unchanged? Alternatively, is he saying that we will not do that and that we will need new legislation at the end of the transition period to effect that position?

--- Later in debate ---

[Nadhim Zahawi]

Let me be clear: during the implementation period, we have to follow EU state aid rules. The legislation that we are considering today will continue to apply under EU state aid rules. Therefore, the EU definition will continue to apply. We will issue guidance around that test. I cannot say to the hon. Gentleman today what the negotiations will produce, other than that we will deliver a position paper on the issue. That is what he must assume the decision he is making today is based upon.

[Dr Whitehead]

We still do not know what constitutes a company in difficulty.

[Nadhim Zahawi]

So let me come to the hon. Gentleman’s second point around whether we can include companies that do not pass the direct exemption, although it can be indirect because part of their business may come into competition with those companies that are exempt. Again, that will depend on the UK’s future subsidy regime. During the transition period, EU state law will continue to apply. I hope that offers him clarification.

On the hon. Gentleman’s final point about whether this is a further levy, it is not a new levy. It is a redistribution of the existing CfD levy. As he rightly pointed out, the amendment will mean a 20p addition to annual household bills.

I thank you, Mr Paisley, and hon. Members for their valuable contributions to the debate. The regulations will extend and improve the existing scheme that exempts eligible energy-intensive businesses from a proportion of the cost of funding renewable electricity. It is worth remembering that it is only a proportion of the cost, not the full cost. That will support the competitiveness of our energy-intensive manufacturing industries in the UK.

Alongside the regulations, we will support our manufacturing industries to become more energy and resource efficient and reduce their greenhouse gas emissions through several programmes, including the industrial energy transformation fund, which offers £315 million of additional support; a low carbon hydrogen production fund, which offers £100 million of further support; and the transforming foundation industries industrial strategy challenge fund, which is £166 million.

The Government are serious about delivering their net zero commitment by 2050 and leading the world. That is not just good for the environment, but good business, which I know is dear to your heart, Mr Paisley, and the hearts of your constituents. Therefore, I commend the regulations to the Committee.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Electricity Supplier Obligations (Excluded Electricity) (Amendment) Regulations 2019.