I beg to move,
That the draft Electricity Supplier Payments (Amendment) Regulations 2021, which were laid before this House on 21 January, be approved.
The statutory instrument amends regulations concerning the levies that fund the operational costs budget for the Low Carbon Contracts Company and the Electricity Settlements Company. The Low Carbon Contracts Company administers the contracts for difference scheme on behalf of the Government and the Electricity Settlements Company administers the capacity market scheme. Those schemes are designed to incentivise the significant investment required in our electricity infrastructure; to keep costs affordable for consumers; and to help to meet our net zero target while keeping our energy supply secure.
Contracts for difference provide long-term price stabilisation to low-carbon generators, allowing investment to come forward at a lower cost of capital, and therefore at a lower cost to consumers. The capacity market ensures security of electricity supply by providing all forms of capacity with the right incentives to be on the system and delivers capacity when needed by increasing generation or by turning down electricity demand in return for guaranteed payments.
In both schemes, participants bid for support via a competitive auction that ensures that costs to consumers are minimised. The next contracts for difference auction, the fourth to date, is planned to open in late 2021, and will be available to both established technologies such as solar PV and onshore wind as well as less-established technologies such as floating offshore wind. As the Prime Minister announced in October, we are seeking to secure up to 12 GW of renewable electricity capacity in this round—double that secured in the last round, which was held in 2019. That will allow a broad range of renewable technologies to come forward while delivering the best deal for bill payers.
The capacity market is tried and tested, and is the most cost-effective way of ensuring that we have the electricity capacity that we need now and in future. It facilitates investment in the existing capacity to remain in the market, and drives innovation in financing new capacity to be built. The capacity auctions held to date have secured the capacity that we need to meet the forecast peak demand at 2023-24. The next auctions, which will open tomorrow with the T-1 auction, and on 9 March with the T- 4 auction, will secure most of the capacity that we need in 2024-25.
The Low Carbon Contracts Company and the Electricity Settlements Company play a critical role in delivering the contracts for difference and capacity market schemes. They enter into and manage contracts for difference with low-carbon generators, and collect the supplier obligation levy from suppliers, which they use to make payments to generators under contracts for difference.
The statutory instrument sets a revised operational cost levy for the Low Carbon Contracts Company, and a revised settlements cost levy for the Electricity Settlements Company, which they collect from suppliers to fund their day-to-day operations. It is important that the LCCC and the ESC are sufficiently funded to perform their roles effectively, given their critical role in administering those schemes. However, the Government have made it clear that both companies must deliver value for money, and with that in mind we have scrutinised closely their operational cost budgets to ensure that they reflect their operational requirements and objectives. Savings have been identified in a number of areas. Both the LCCC and the ESC are mindful of the need to deliver value for money, as their guiding principle is to maintain investor confidence in the contracts for difference and capacity market schemes while minimising costs to consumers. They have taken a number of actions to date to reduce costs, and it is because of their actions that costs are falling both per contract and by overall generation capacity despite the growing size of the contracts for difference portfolio.
My hon. Friend rightly points out that contracts for difference have meant a massive leap forward in our investment in wind technology and a decrease in costs for consumers. Does she agree that this is a perfect way to increase production of hydrogen as well, and will she consider meeting me to discuss how we can use contracts for difference in hydrogen production?
My hon. Friend is, as ever, a champion for Teesside, where, the work under way to help grow the future hydrogen capacity for our country is absolutely cutting edge. I will be absolutely thrilled to meet him to discuss this matter more fully. For now, the CfDs will be for the existing and established technologies, but he is not wrong that the future is bright for hydrogen. I look forward to meeting him to discuss it more fully.
We expect to increase to 55.16 GW of capacity and 546 capacity providers in 2021-22. Despite the increase in those numbers, the operational costs are expected to be marginally lower this year than last. The operational cost budgets for both companies were subject to consultation, which gave stakeholders the opportunity to scrutinise and test the key assumptions in the budgets and, importantly, to ensure that they represent value for money. The budgets remain unchanged save for one amendment, which I will briefly summarise. The consultation was published before the outcome of the 2020 spending review was known. The review had announced a pause in public sector pay rises for the majority of the workforce. Taking into account the outcome of this review and the wider economic landscape, the LCCC’ remuneration committee decided to agree a pay pause for its staff in 2021-22. Consequently, an allowance contained within LCCC’s operational cost budget for pay rises that was included in the consultation has now been removed.
To conclude, taking into account the removal of this allowance, the proposed operational cost budget for the LCCC in 2021-22 is £20,736,000 and £7,472,000 for the ESC. The amendments revise the levies currently in place to enable the companies to collect enough revenue to fund these budgets. Any levy collected that is not spent will be returned to suppliers at the end of the financial year in accordance with regulations. Therefore, subject to the will of Parliament, the settlement cost levy for the Electricity Settlements Company is due to come into force on the day after these regulations are made, and the operational costs levy for the LCCC by 1 April 2021. I commend these draft regulations to the House.
The Minister has done the heavy lifting in this debate by explaining to us the detail of the regulation before us. She has also explained very succinctly why it is necessary to operate the calculations concerning the operational budgets both for the CfD counterparty body and for the settlement body as far as the capacity market is concerned on a one-year basis rather than a three-year basis, as has previously been the case in the House. The reason is that the operational levy costs rate for both bodies is effectively calculated by dividing a proposed annual budget by the total forecast electricity demand for the future. Under present circumstances, we are finding it very difficult to find out what electricity demand will be for the next year given the substantial fluctuations in demand that have occurred with the covid pandemic. Consequently, it seems sensible to allocate the total operational budgets for these bodies on a one-year basis, rather than on a three-year basis as has happened since 2018. The arrangement from 2018 onwards aimed to ensure that suppliers had no surprises, and had a much better view of their liability in respect of these operational budgets, because those budgets are recovered by levies on suppliers, and as I will state in a moment, those levies are passed on to customers. We do not oppose this statutory instrument, because in the circumstances it is sensible.
My first question for the Minister relates to her intentions regarding the periodicity of this arrangement in future years. I assume it is her intention to revert to a three-year settlement at the earliest opportunity, that this proposed one-year arrangement is because of the force of present circumstances, and that there is no suggestion by the Government that we should go back to the pre-2018 arrangements. I would be grateful if she stated that very clearly for us this afternoon.
The second question I have for the Minister relates to the method for recovering these operational budgets. We have already talked about how it works; the operational costs are recovered from suppliers according to the calculations I have described. Those costs—the Minister has set the CfD counterparty budget costs at £20.7 million for this year—are recovered by the levy on suppliers, and the suppliers pass those costs on to customers, which means that customers’ bills go up. This is not an enormous part of the whole levy process, but it is not an insignificant part of it; it is calculated that the cost for the CfD counterparty body alone will add something like 40p to customer bills this next year. Indeed, there is quite a startling rise since the previous period of settlement. My calculations are that there will be about a 17.5% rise this year.
As we progress with the auctions, and progress down the road towards the 40 GW of offshore wind by 2030, to which we have committed, inevitably those operational costs will rise substantially, so the levy will also rise substantially. Whether it will continue to rise by 17% a year I am not sure, but certainly that is a very substantial increase, and I suspect those increases will continue over the period.
In addition to this, in the White Paper that has just been published, a new levy is suggested on gas bill payers to facilitate the development of green gas, anaerobic digestion and associated activities. I thoroughly support that development, but not necessarily raising the money for it by a continuation of the levy mechanism.
Finally, if we do go ahead with the regulated asset base arrangement as far as nuclear power is concerned, that will create a huge additional levy on bill payers for the future. We have a pattern here of levies being put on customers’ bills to underwrite these activities. I happily concede that it is certainly a very small levy compared with others, but I think the Minister would agree that every little bit adds up. We have a picture in front of us, potentially, of a very substantial increase in customers’ bills to pay for these sorts of arrangements.
When the Minister reviews the arrangement at the end of the one-year hiatus, what will her thinking be on whether there are different ways of paying for those counterparty costs? Will the answer always be a levy on customers, or are there other ways of facilitating this, so that the cost does not fall on the customer? I think she will agree that that is probably the most regressive way of funding these arrangements; there are certainly better ways. It may be that the matters before us should be subject to one of those better ways.
I agree with the Labour shadow Minister that the regulations are relatively straightforward, so we will not oppose them either. There are, however, a number of questions that still need to be answered.
First, paragraph 14.3 of the explanatory memorandum slips in the fact that a review of the operation of the electricity market reform programme was supposed to have been undertaken by December 2018. It is completely unacceptable that that report is now effectively more than two years out of date, and blaming Brexit and covid does not really stack up. What is the timeframe for that report’s coming before Parliament? What is the mechanism for presenting the findings of the review, and what will the scrutiny arrangements be, so that the Opposition parties can challenge it?
Paragraph 7.7 of the explanatory memorandum states that the cost of new premises is outwith the control of the CfD counterparty. Why are those costs outwith its control? Why are new premises needed? Does the need for new premises take into account the fact that it looks like many companies will be doing much more homeworking and hybrid working?
Paragraph 10.8 of the explanatory notes explains that the CfD counterparty budget has been cut to reflect the Chancellor’s squeeze on public sector pay. The Minister touched on that, but the cuts are £111,000. How many employees had their pay frozen to generate a saving of £111,000?
On the capacity market, what steps have been taken to reduce the reliance on diesel generators? How much of the capacity market is based on fossil fuel generation? There is no point in continuing to move towards net zero when the capacity market relies on fossil fuel generation, so the Government need to address that.
Paragraph 7.7 of the explanatory notes also confirms the much-increased capacity in the auction. I certainly welcome the increased capacity in the forthcoming auction, but can the Minister advise us on whether the procurement process will be amended to incentivise the use of local content in the UK supply chain to ensure a proper green recovery? Does she understand that if procurement continues to be based on price only, then the likes of CS Wind in Cambeltown and BiFab yards across Scotland will never win enough work to compete on price regularly? They can do the quality, but they need sustained work to get to a place where they can compete on price.
What steps will be taken in this auction to ensure that offshore wind projects in Scotland are not prejudiced due to the grid charges? It is outrageous that generators connecting in the north of Scotland still have to pay to connect to the grid, but generators connecting in the south of Great Britain are paid to connect to the grid. It is completely unfair and needs to be revised. I would like to know when the Government will do that, and what they will do to ensure that generators in Scotland are not prejudiced in the forthcoming auction.
Now that we have an increased target for offshore wind generation of 40 GW by 2030, what steps is the Minister taking to speed up the development of an offshore grid to help to facilitate this transformation? Will there be ring-fenced pots for wave and tidal in the forthcoming auction? What consideration has she given to power purchasing agreements to free up investment in the development of these emerging technologies? Also, what is she doing to ensure a route to market for pumped hydro? One of our colleagues has suggested a CfD for hydrogen. Would she agree to that? We also need a CfD mechanism for pumped hydro storage; that could double storage capacity. SSE is ready to go with a new pumped hydro scheme at Coire Glas, and Drax has developed proposals for an additional pumped hydro scheme at the Cruachan dam, but a route to market is critical to free up private investment.
Paragraph 12.4 of the explanatory notes states that these proposals will account for only 0.1% of a typical consumer’s bill, but as the hon. Member for Southampton, Test (Dr Whitehead) asked, what will be the cumulative effect of the CfD process on bills? If a user is struggling to pay for their electricity, they use less electricity, so the impact on their bills will be much higher, because they use less electricity than a typical consumer. We need to remember that the bills of the people who are really struggling—the fuel poor—will be more adversely affected in real terms. What will the Government do to take account of that, and what assessment has been made of the cumulative impact? As we move towards net zero and the ever-increasing CfD rounds, what measures will be put in place to protect the fuel poor? This will be particularly relevant when it comes to funding heat decarbonisation. The Committee on Climate Change has estimated that something like £250 billion-worth of expenditure will be needed to decarbonise our heating systems. It is impossible to imagine that that can just be put on users’ bills, so other mechanisms will be required.
While I am mentioning costs, I cannot help but mention the Government’s obsession with nuclear power. The £92.50 strike rate for Hinkley will look even more ridiculous once the next option round is completed. The fact is that both units at Hinkley will probably not be operational until 2028, while the existing nuclear power plants will go offline in 2022 and 2024. If the UK manages to keep the lights on for a few years without that nuclear power, that alone will put the baseload argument to bed. It is complete bunkum, and the Government need to move away from their obsession with nuclear and their determination to get Sizewell C signed. As the hon. Member for Southampton, Test, says, that would place an unacceptable burden on the bill payers of the UK, and it would be helpful if the Government woke up and realised that.
Will the Government finally update their estimate and appraisal system, which makes the bizarre assumption that nuclear costs will fall in the future? The Department for Business, Energy and Industrial Strategy’s system favours nuclear and is prejudiced against onshore wind, so it needs to update its processes.
I look forward to hearing from the Minister. As I say, I will not oppose the regulations, but there are a lot of questions still to be answered. The Government’s overall energy policy needs to be updated, and they need a clear near zero strategy. I am more than happy to meet the Minister to discuss this at any time.
I thank the Minister for her presentation and for setting the scene so well.
Regulation 2 sets a rate for the operational cost levy and the electricity system operator regulations from 1 April 2021 in the midst of a pandemic with people being at home and unable to go out, putting immense financial pressure on them, especially those who are furloughed. I would therefore like the Minister to confirm that we have taken the opportunity to ensure that all levies that are to be imposed will not see the consumer adversely impacted. Further, does she believe that we have built-in protection for the consumer at this level against price gouging and monopolies? Consumers must get fair energy prices. I seek confirmation that there will be protection for the consumers. The hon. Member for Kilmarnock and Loudoun (Alan Brown) referred to the fuel-poor. I also make a plea for those consumers and seek to ensure that protection for them—indeed for all consumers, but especially for them—will be in place.
People are working from home and kids are on the tech all day to do their homework. The level of consumption has massively increased in a huge number of homes. We must consider this at all levels, especially now. I would like to ensure that this seemingly small and straightforward measure will not adversely impact the ordinary person financially. We must also look out for the fuel-poor, of whom there are more in my constituency than there were a year ago, and I believe that is the case in every other constituency as well.
I thank hon. Members for their valuable contributions to the debate. I will do my best to answer their questions and commit to replying by letter or having meetings with any of them if they wish to follow up on any of the issues that I do not cover.
In answer to the hon. Member for Southampton, Test (Dr Whitehead), periodicity for future years of pricing is not yet determined. However, as he rightly set out, the challenges of the past year have meant that we felt it was more appropriate to look at it on a single-year basis this year, hoping, clearly, that things will settle and we will get back to some sort of normality in the year ahead.
The budgetary increase for the LCCC is in fact 19%. There are three main reasons for that. It is partly due to the impact of covid on energy and insurance markets. The LCCC will now be managing an increased number of CfDs in the year ahead. It is also having to move to a new building this year because the one it has been in is being demolished, so that is a technical reason for having to invest in a new site. The hon. Member for Kilmarnock and Loudoun (Alan Brown) raised the question of savings. In fact, with the new building, the LCCC has taken the opportunity to look at staff working patterns and the flexibility that some staff will want to use, and that has brought a saving of £184,000 on the overall costs, which is a good thing.
Interestingly, in relation to the hon. Gentleman’s point about pumped hydro, he is the second person today who has raised that with me and asked that we can look at it, so I look forward to speaking to him and others on the subject. There are three pots for the contracts for difference. Pot 1 will cover onshore wind and solar, pot 2 is for the less developed technologies like tidal, wave and geothermal—that is perhaps where pumped hydro might sit if we look to do that—and pot 3 is for offshore wind, which is obviously a fast-growing sector. I hope that answers hon. Members’ questions, but if there is anything I have missed, I am happy to write to them.
The hon. Member for Strangford (Jim Shannon) raised the important question of the challenges with fuel bills for many of our constituents following a really difficult year. I was in fact discussing exactly that with Ofgem this morning, and we will be doing a piece of work to make sure that we are as apprised as we can be of the challenges.
The question that I asked at the end of my contribution was whether, in the light of those increases and of greater increases in the future, as I think we both agree will be the case in terms of counterparty costs, the Minister is actively thinking about other ways of funding that, or is she happy to continue with the levy arrangements we have discussed this afternoon?
It is very much a live issue, and, across the multiplicity of the energy resources that we are looking at, we are thinking very much about how we will do that. I am very happy to meet the hon. Gentleman, if he would like, to discuss that in more detail in the weeks ahead.
I hope that I have been able to provide the necessary assurances for hon. Members to approve the statutory instrument, and I am grateful to them for indicating their support. As I said at the start of the debate, the regulations that the Government are seeking to amend through this instrument will revise the operational cost levies for the LCCC and ESC. These companies play a crucial role in delivering the contracts for difference scheme and the capacity market. They must be sufficiently funded to perform that role effectively, but those costs must be kept to a minimum. It is my view that the operational budget for 2021-22 strikes an appropriate balance between ensuring that companies are adequately funded and that consumer bills are minimised. I therefore commend the regulations to the House.
Question put and agreed to.