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Draft Contracts for Difference (Electricity Supplier Obligations) (Amendment) (Coronavirus) Regulations 2020
29 June 2020

The Committee consisted of the following Members:

Chair: Caroline Nokes

† Afriyie, Adam (Windsor) (Con)

Ali, Tahir (Birmingham, Hall Green) (Lab)

† Baynes, Simon (Clwyd South) (Con)

† Begum, Apsana (Poplar and Limehouse) (Lab)

† Bradley, Ben (Mansfield) (Con)

† Carter, Andy (Warrington South) (Con)

† Clarke, Theo (Stafford) (Con)

† Daly, James (Bury North) (Con)

† Eagle, Maria (Garston and Halewood) (Lab)

† Fell, Simon (Barrow and Furness) (Con)

† Gideon, Jo (Stoke-on-Trent Central) (Con)

Grady, Patrick (Glasgow North) (SNP)

Jarvis, Dan (Barnsley Central) (Lab)

† Kwarteng, Kwasi (Minister for Business, Energy and Clean Growth)

† Tomlinson, Michael (Lord Commissioner of Her Majesty's Treasury)

† Twist, Liz (Blaydon) (Lab)

† Whitehead, Dr Alan (Southampton, Test) (Lab)

Hannah Bryce, Committee Clerk

† attended the Committee

First Delegated Legislation Committee

Monday 29 June 2020

[Caroline Nokes in the Chair]

Draft Contracts for Difference (Electricity Supplier Obligations) (Amendment) (Coronavirus) Regulations 2020

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I beg to move,

That the Committee has considered the draft Contracts for Difference (Electricity Supplier Obligations) (Amendment) (Coronavirus) Regulations 2020.

It is a delight to open the debate under your chairmanship, Ms Nokes. I will try to explain clearly the rationale behind this draft instrument. The regulations aim to limit the negative short-term impact on electricity suppliers of an unexpected increase in the costs of the contracts for difference scheme, which members of the Committee will know is integral to offshore wind and electricity power generation.

The Low Carbon Contracts Company is a Government-owned, arm’s length company that manages CfDs. In simple terms, it gets money in from energy suppliers that is used to pay to manage contracts for difference auctions. It is, in effect, a levy on suppliers. The regulations aim to alleviate the burden on energy suppliers, who would be forced by the rules to pay the LCCC when there are fears about working capital. Because there has been a huge drop in energy demand, the LCCC would have needed to raise the levy to get enough funds from energy suppliers to pay the generators.

I took the view with officials that this is not the time to impose additional burdens on the working capital of energy suppliers. As a consequence, the Government have agreed to provide a loan of up to £100 million to the LCCC to allow it to continue to pay CfD generators this quarter without increasing the financial burdens on energy suppliers, who, as we know, are in a vulnerable state. The loan is governed by a separate agreement between the Department for Business, Energy and Industrial Strategy and the LCCC and is not covered by the regulations.

The regulations make four technical changes to the existing Contracts for Difference (Electricity Supplier Obligations) Regulations 2014 to, in effect, defer payment. There is no question but that these costs will have to be paid; we are simply deferring the obligation for this quarter.

In brief, the regulations first reduce each electricity supplier’s obligation, in a quarterly obligation period, by the amount of financial assistance provided by the Government to the LCCC—the £100 million loan I referred to. Secondly, they increase each supplier’s obligation four quarters later. The obligation is therefore reduced in this coming quarter, but it will go up correspondingly in four quarters’ time. Thirdly, the regulations enable the LCCC to take into account anticipated receipt or repayment of financial assistance provided by the Government when setting the obligation for one quarter.

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I very much welcome this measure, which is a reasonable step given the current circumstances. I want to ask the Minister this question now, to give him time to reflect. If, during this period in which electricity suppliers have extended terms, one of them was to go out of business, what clawback mechanisms might there?

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That is slightly outside the scope, but I understand where my hon. Friend is coming from. There are a number of measures that we would go into: there is the SLR—the supplier of last resort—and there are measures for mutualisation of cost. I also remind him that this happens every summer, regardless of covid. It is a highly competitive space, and a number of energy suppliers come in and out of the market at will, so this is very much in the run of ordinary business. This measure is related to the specific challenge of covid and to deferring payments in the way that he described.

Finally, the regulations enable the LCCC to repay any financial assistance provided by the Government, using moneys collected from electricity suppliers after the reconciliation process following the relevant quarterly obligation period. In effect, all we are doing is delaying the payable period so that it does not force energy suppliers to go out of business in the way my hon. Friend suggested.

I must stress that this deferral will give suppliers more time to prepare for the increase in payments and provide greater confidence about the level of additional costs they will face in the second quarter of 2021. I must also stress that the Government are committed to upholding the self-financing nature of levies in the energy system. There was no question of our providing some sort of grant or subsidy to the LCCC. We fully expect that whatever moneys are deferred will be paid eventually to the LCCC and that it will be able to sustain its function regardless of Government intervention.

These legislative changes are technical in nature. They needed to be made ahead of the LCCC’s quarterly reconciliation process, which determines suppliers’ obligations for the current quarter. That is expected on 9 July, at the end of next week. Subject to the will of Parliament, this instrument will enter into force the day after it is made. I commend the regulations to the House.

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The SI before us is, in one way, quite uncontroversial; it is eminently justified and reasonably undertaken, given the present pandemic and the problems it is creating for energy companies in relation to the payments into and out of the LCCC. The Opposition do not object to it; on the contrary, we support it and think it will help considerably with the difficulties energy companies have in both ways as they react to the LCCC’s concerns regarding this pandemic.

To add to the Minister’s admirable explanation of the regulations, my understanding is that they reduce the obligations on energy suppliers to pay a levy to the LCCC in one quarter and increase those obligations by the amount that they were decreased in that particular quarter four quarters later, so that there is no long-term difference to the overall arrangements as far as obligations are concerned, but the effect is delayed by a year.

The recent effects are twofold. First, energy prices are very low, which means that organisations and companies that take money from the LCCC for their generation receive a greater amount. The difference between the strike price—for example, for an offshore wind farm—and the reference price is greater when energy prices are low, so generators will be paid more out of the funds that the LCCC holds at that time. There is an effect on the money going out of the LCCC to generators as a result of low energy prices.

Secondly, there is very low demand. As prices are determined on a megawatt-hour basis, the amount of revenue coming into the LCCC to pay for the money going out is also decreased. It is a perfect storm of lack of resource for the body that is supposed to keep the money coming in and going out and to settle what is happening in between. It is likely that the LCCC will not have sufficient resources in its reserves or its immediate revenue to easily deal with that without putting a large new imposition on energy companies to balance the books in the meantime. That is my understanding of the situation behind the regulations.

I do not mean this in an unkind way, but the regulations kick the can down the road for a year to deal with the immediate problem and crisis that we are in. The answer to the intervention rightly made by the hon. Member for Windsor is that when the levy is reassessed in a year’s time, it will be based on the then market share of those companies, not their market share today. So if there are changes in market share, or indeed, if certain companies have no market share by that point, that would be reabsorbed among other companies that will thereby have a greater amount of market share, so it will come to the same amount of levy as would have been the case today.

The issues surrounding the levy and the measure being proposed give rise to a couple of questions, although not to opposition to the measure, and I would be grateful if the Minister could address these questions. They are not intended to be hostile or to trip the process up, but to reflect on some of the consequences of what is being proposed and how that reflects across other areas.

First, the statutory instrument sets out measures whereby it is possible for this measure to be used again without recourse to a further piece of secondary legislation if there are “similar exceptional circumstances”, as the explanatory memorandum states. It is important for the Minister to set out today what he thinks those similar exceptional circumstances might be in future.

It would clearly be inappropriate for the measure to be used if there was just a temporary dip in energy prices, or there was lower seasonal demand than anticipated, and for no other reason than that was slightly in excess of predictions. This is a wholly exceptional circumstance, inasmuch as there is a combination of low prices, low demand and the likelihood of that continuing for quite a while under the circumstances of the present pandemic. I hope the Minister can say that it would not be the intention of the Government to use the changes that have taken place with this SI for anything other than similar exceptional circumstances such as the present pandemic.

My second point is that a hike in the requirement for the LCCC in the next quarter—as the Minister says, that would have to be settled by 9 July—would undoubtedly have had implications for customer prices had it gone ahead, because levy payments are routinely passed on to customers by energy companies when those payments are made. The same thing will therefore happen four quarters from now, when we may or may not have a price cap on energy prices. As the Minister will know, Ofgem is required to report each year—as the price cap develops—on market conditions either being present or not being present, in order to advise the Government on whether the price cap should be continued or discontinued for the next year.

Kicking the can down the road for a year means that the market arrangements for the price cap will need to be determined next year rather than this year, in the light of those changes. I am not sure that Ofgem has the remit, in terms of its requirement to report on the price cap and market conditions, to take the circumstances that will cause this change in the requirement for the levy—and, hence, potential price rises—into its consideration of the price cap. I would be grateful if the Minister can give me his thoughts on that and explain whether that has been taken into account with this SI.

My final point is that the LCCC was, as I am sure the Minister will recall, introduced in the Energy Act 2013 only because the Government wanted to introduce a levy payment to the disbursement system that did not impact on the Treasury and that effectively guaranteed payments by Government backing. It was a method of keeping the whole thing outside the Treasury and, hence, independent of the whole process. Indeed, there was discussion at the time about whether that would work efficiently. It did work efficiently, so there has been no further issue with that. Through this process, however, the Government are effectively bringing the Treasury back into the dealings of the LCCC.

Although I appreciate that this is a temporary measure, or a measure for exceptional circumstances, which require exceptional actions to be taken, does the Minister consider that this breaches, in some long-term way, the understanding that was undertaken at the time of the passing of the 2013 Act? Does he perhaps also consider that it might be prudent in the light of this piece of secondary legislation to consider whether, for future purposes, the LCCC ought to be effectively brought within Treasury guidelines, so that, rather than having a body that is theoretically independent but actually has occasional support, we have a body that is clearly backed, supported and resourced, if necessary, by the Government, so that these sorts of issues do not materialise in the future?

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I will deal with the three points made by the hon. Gentleman in reverse order. He will have noticed that the Treasury has made all sorts of interventions across the whole economy. That does not mean that the Treasury should sustain its intervention in every business that has been furloughed. Similarly, with the LCCC, I made the decision that these were exceptional circumstances that warranted an exceptional response. It is in that sense that the Treasury has intervened; there is no notion that this will be ongoing. I want to put his mind to rest about that. Secondly, that is a loan—essentially, a working capital facility of £100 million that we expect to be repaid

On the hon. Gentleman’s second point about Ofgem and the price cap, that is something to which I am not privy. Ofgem will have a discussion about the price cap; it knows the circumstances of the energy suppliers and about the legislation. I have had weekly rounds with the sectors and the energy suppliers, and twice-weekly conversations with Ofgem, in which we have talked about a lot of those issues. They fully understand the context in which the draft instrument has been laid, so I do not think that there will be any kind of read-across in what Ofgem will do, and I strongly suspect that the price cap will be in force for a number of years to come.

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Does the Minister recognise that the draft instrument could mean inflated customer levies in a year’s time when that effect comes through?

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I do not think that the hon. Gentleman or I have any idea what the circumstances will be next year. Lots of things operating in the market may or may not reduce wholesale gas and electricity prices. It would be very foolish for him or me to speculate about the state of the wholesale market in 12 months’ time. Ofgem will take into account a whole range of factors; some may relate to deferred payments, which we had to bring in to alleviate the pressure on the suppliers, and the hon. Gentleman recognised that as a good thing. There is no way that he or I can say exactly what the effect will or will not be on the price cap or on bills in 12 months’ time.

The first issue that the hon. Gentleman really goes to the heart of the matter. This is an exceptional time. A friend of mine—a banker—said to me, “If there ever was a case of force majeure, the covid crisis is it.” The Government have made exceptional interventions, of which this is one. There is no sense in which we would use the powers in the draft instrument to intervene on a regular basis in the market for the LCCC. I fully assure the hon. Gentleman that we will only do so in exceptional circumstances. He will understand that the very nature of exceptional circumstances means that we cannot predict here or now the specifics of what they might be, just as a year ago, we could not say that covid-19 was going to come upon us in February and March of this year—nobody foresaw that, or certainly not the timing. The very nature of exceptional circumstances should give him some assurance that we will only use the legislation in exceptional circumstances. I cannot here and now give him chapter and verse about what those exceptional circumstances would look like.

The Government are committed to the regulations, and I commend them to the Committee.

Question put and agreed to.

Committee rose.