Electricity Generation: Local Suppliers

Olivia Blake Excerpts

Wednesday 14th October 2020 Commons Chamber

[Ben Lake]

I am grateful for that point, because one of the heartening news developments of recent weeks has been about the lithium in Cornwall. It is clear that those deposits will be crucial if we are to make this transition.

The question that arises from the shift that I described is whether a system with potentially millions of moving parts could be managed in a centralised way even if we wanted it to be. I believe that local generation to meet local demand offers a possible answer.

[Olivia Blake (Sheffield, Hallam) (Lab)]

I congratulate the hon. Gentleman on securing this debate, which is of the utmost importance. Does he agree that fantastic community projects such as Sheffield Renewables should be better supported by the Government to provide local renewable energy, and that that support should be enhanced as we try to tackle the climate emergency?

[Ben Lake]

The hon. Lady’s point is an important one: we need to make sure that community schemes are supported. It also anticipates where I want to take my speech next, so I am doubly grateful.

The potential capacity of local community-owned energy is quite astounding. A 2014 UK Government report stated that community energy projects could contribute as much as 3,000 MW of electricity generation capacity by 2020. Unfortunately, we have not quite met that target, but the potential is striking nevertheless.

That potential is frustrated by the antiquated rules that govern our energy markets, which were designed primarily in the 1990s and were suited to a different system of large power stations and a handful of utility companies. Unfortunately, those rules still rule the roost, and they create insurmountable cost barriers to any community energy initiative that wishes to sell the electricity it generates directly to local households and businesses.

A report by the Institute for Public Policy Research shows that the technical and operational challenges involved in becoming licensed to supply energy to customers lead to initial costs exceeding £1 million. There have been attempts to address that. A few years ago, Ofgem launched Licence Lite, which was aimed at creating a less onerous set of supply licence conditions for specific types of new, innovative supply business models. Unfortunately, that has proved complex and has not been well used to date. To its credit, Ofgem has also launched an expanded Sandbox service to allow innovative companies to apply for derogations from the traditional licensing regime and stipulations, and it has extended its ability to grant those derogations to certain local generators.

However, the most effective solution would be to introduce greater proportionality to the licensing system, to ensure that the costs and complexities of being a licensed electricity generator are proportionate to the scale of its supply. If the costs are proportionate, it becomes financially viable for smaller-scale renewable generators to supply electricity, and, in turn, new community-owned schemes would become viable.

--- Later in debate ---

[Kwasi Kwarteng]

I am fully aware of that, and I will come on to it. I have only 10 minutes, so I ask the hon. Lady to bear with me; I will address that point later in my remarks.

Electricity and gas supply licences, as I am sure everybody in the Chamber knows, are usually granted on a Great Britain-wide basis. However, Ofgem has powers to award supply licences for specified areas and specified types of premises, and that can allow licensees, once they have the licence, to specialise and offer more targeted and potentially innovative products and services. The holder of such a licence could supply customers only in the specified geographical area and specified types of premises, with the full terms and conditions of the licence applying otherwise. That means that there is already provision through this licence to have local provision. Electricity suppliers can apply to Ofgem for a derogation from a particular provision of the supply licence, and if it is granted, provisions of the supply licence will not apply to them. There is already some degree of flexibility.

[Olivia Blake]

Will the Minister give way?

[Kwasi Kwarteng]

No, I am afraid I am very hard pressed for time. I may have time later to take an intervention, but I need to press on with my remarks.

Ofgem, as I have suggested, has been consulting widely on how to use such facilities more effectively to bring innovation to the specified locality, as it were, in this retail market. I understand that the consultation closed on Monday 12 October, and I hope that small-scale generators who wish to supply local communities have responded fully to the consultation.

The hon. Member for Ceredigion mentioned, very ably and relevantly, the Licence Lite provision, which allows aspiring suppliers or local generators to apply for a supply licence and receive relief from compliance with industry codes. On existing mechanisms, the Electricity Act 1989 already allows the Secretary of State to exempt, by scale, electricity suppliers from having an electricity supply licence if they meet certain conditions. There have been examples, certainly in my tenure as Energy Minister, of people successfully applying for exemptions.

Being an electricity supplier, as I am sure the hon. Gentleman knows, confers the right of the licensee to supply electricity to customers, but it also bestows certain obligations, and that is very important to remember. Those obligations include payment of a proportion of network costs. Clearly, if one is operating in a situation where one is not a licensee, then one can avoid paying the costs on which the whole system depends. That is a critical issue. In some instances, the Licence Lite regime can remove this burden, but clearly we would not want to go down a route where large numbers of suppliers are simply exempting themselves from those obligations.

Network charges, as people will understand, are levied on all users of the network, and they send signals that reflect the costs that users impose on the network. There are a range of signals to encourage generators to locate close to sources of demand, and placing a source of generation close to areas of high demand will mean that the generator gets paid credits for helping to avoid further investment in the high-voltage transmission network. Essentially, that means suppliers are incentivised to be in areas of high demand. There will be a commensurate problem in areas of low demand, because how would they attract the relevant suppliers? Ofgem is working to reform these signals through improvements to network charges, and it is also working to develop local markets for flexibility, which goes to the core of what I think the hon. Gentleman is talking about.

I do not believe—and I think the Government, thankfully, are of the same opinion—that artificially reducing network costs for local electricity suppliers is going to be highly efficient, because it could distort the market. One is essentially incentivising a behaviour that may not be economical in the first instance, and that would mean higher costs falling on other consumers, which would increase as more local suppliers were subsidised. Creating a special category of local supplier brings its own complexities, and there may well be unintended consequences as a result.

Having said that, I commend the hon. Gentleman for thinking very deeply and creatively about this issue. This is part of an ongoing conversation. He was quite right to say at the beginning of his remarks that a lot of the structures that we have today reflect the conditions and circumstances before we legislated for net zero, and in many cases reflect conditions that operated 30 or 40 years ago. There is an ongoing discussion to be had about how best to adapt our institutions to modern circumstances.