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Electricity Capacity (Amendment) (No. 2) Regulations 2015

Volume 767: debated on Tuesday 24 November 2015

Motion to Consider

Moved by

That the Grand Committee do consider the Electricity Capacity (Amendment) (No. 2) Regulations 2015.

Relevant document: 1st Report from the Joint Committee on Statutory Instruments

My Lords, this draft instrument is an amending regulation to the main secondary legislation package for the capacity market scheme, part of the electricity market reform programme. The powers to make this implementing secondary legislation are found in the Energy Act 2013, which, following scrutiny in this House and the other place, received Royal Assent in December 2013 with cross-party support.

The two changes contained in the draft instrument are simplifications intended to make the process easier for applicants, and were overwhelmingly supported by respondents in the consultation, but before I explain them in more detail it may be helpful to the Committee if I say a few background words about the capacity market itself.

I remind noble Lords that the capacity market will address our medium-term electricity needs and ensure that there is sufficient electricity supply towards the end of the decade and beyond. In brief, the capacity market will achieve this by making a regular capacity payment to providers who are successful in capacity auctions. In return for this payment, providers must meet their obligations to provide capacity, or reduce demand, when the system is tight, ensuring that enough capacity is in place to maintain security of electricity supply.

Ensuring that families and businesses across the country have secure, affordable energy supplies that they can rely on is our top priority. That is why we already have firm mechanisms in place, working closely with National Grid and Ofgem, to maintain comfortable margins on the system over coming winters.

Beyond that, it is essential that generators have confidence that they will receive the revenues that they need to maintain, upgrade and refurbish their existing plant, and can finance and build new plant to come on stream as and when existing assets retire. Equally, we want to make sure that those who are able—without detriment to themselves and the wider economy—to shift demand for electricity away from periods of greatest scarcity are incentivised to do so.

That is why we have the capacity market. The first auction, held in December 2014, saw a good outcome for consumers, as fierce competition between providers meant that we obtained the capacity that we will need in 2018-19 at prices below the levels that many had expected. That translates into lower consumer bills.

This instrument makes two minor changes to improve the capacity market, based on feedback from stakeholders. First, this instrument substitutes a new definition of “relevant grant” in Regulation 17, and secondly it extends from five to 15 the number of days in Regulation 59(3) of the 2014 Electricity Capacity Regulations, to permit providers a longer period in which to submit credit cover after receiving a conditional pre-qualification notice.

The amendment to the definition of “relevant grant” will ensure that grants, the purpose of which is to support feasibility studies or research and development in relation to carbon capture and storage, will not preclude participation in the capacity market. The essential feature is that the CCS support should not have provided effective material support which has put a provider at an advantage compared to others which have not so benefited. This will not be the case for such early stage grants for CCS purposes: hence the amendment. The second amendment amends the number of days from five to 15 to allow applicants, after receiving a conditional pre-qualification notice, longer to submit credit cover.

My department consulted on the two changes in March 2015 and received 22 responses. The vast majority of stakeholders who responded were content with the changes proposed. I look forward to hearing what noble Lords have to say on these proposed changes. I beg to move.

My Lords, it is the first time that I have spoken in any meeting of the House since the Secretary of State announced that coal was going to come to an end within 10 years, and I congratulate the Government and the Secretary of State on that announcement, which is a major step forward. I disagree with a great deal of government energy and climate change policy but that is an excellent move forward, and I would like the Minister to note that and pass it on.

I have a couple of questions about the capacity market, although I have no issues with this statutory instrument. Will the Minister update us on interconnectors and the capacity market? There have been plans to bring on demand reduction aggregators but in the short term rather than the long term. I would like to think that we can bring on institutionalised demand reduction and aggregation much more than we have done in the past, something which is very much in the Government’s interests. On the reduction of fossil fuels, I recall that quite a number of the successful tenderers for capacity payments were coal generators. Do the Government have any plans to exclude them as we move forward to auctions?

We are now down to a very low level of margin, yet the National Grid and the Government seem fairly relaxed. Does that mean that a 20% margin in the past has been a waste of expensive resource that was not needed and that we should have been managing on much smaller margins? I should be interested to hear the Minister’s response on those issues.

I should like to make two observations. The Minister has said that the vast majority accept the proposals, so which respondents did not? I have no difficulty with the proposed change from five working days to 15, but there has been a suggestion in the public domain that electricity supplies could be fairly fragile in the coming months, particularly if we have very cold weather. How has that been built into the system? I am glad that feasibility studies were done and were accepted, but what is the comfortable margin of security of supply in the months ahead? Those are my questions: who did not support these proposals, and what do the Government consider a comfortable margin of security supply?

I thank the Minister for his introduction of the regulations. The amendment they contain is minor and uncontroversial, extending to carbon capture and storage the possibility that it could participate in the capacity market. The Government now seem to recognise the potential of CCS, as evidenced by the amendments recently agreed in the Energy Bill, now passed to the other place. They had previously not considered CCS as sufficiently relevant operationally to the capacity market, and this amendment allows that CCS projects which will in the first instance have received grant support or funding arrangements for early stage developments can now qualify for participation in the capacity markets. The essential feature is that this early stage support should not materially put the provider at an unfair advantage compared with others without that support. The greater matter is that any provider that can shift demand away from periods of greater stress without detriment should be encouraged.

I am content that this proposal was overwhelmingly supported by respondents to the consultation. Will the Minister clarify the Government’s intention a little further? While it is true that there is not as yet any deployed carbon capture and storage in this country, is it intended that CCS will eventually pre-qualify for capacity auctions in its operational phase?

It has been understood from the Government’s scoping document earlier this year that the operation of CCS plant operational support would take place through a form of modified contracts for difference rather than through capacity auctions. I would be grateful if the Minister could signal the Government’s intentions as early and comprehensively as he can to provide certainty about the direction of travel to developers. This amendment, and future intentions, could begin to allow the development of an industry that could be very valuable for the long-term use of fossil fuels. The noble Lord, Lord Teverson, has congratulated the Government on their plans to phase out coal generation, and we certainly support this direction of travel.

My Lords, I thank the noble Lords, Lord Teverson and Lord Grantchester, for their kind words regarding the speech given by my right honourable friend the Secretary of State, Amber Rudd, last week in relation to the withdrawal of coal-fired power stations, with the aim of doing that by 2025. It was most kind and gracious of them to say what they did.

I turn first to the questions raised by the noble Lord, Lord Teverson. Yes, we are looking at interconnectors, I think to Norway and Ireland, in addition to the existing interconnectors as part of the capacity issues that we are addressing, and we are looking at the possibility of them elsewhere, including Iceland. That is a large part of what we are doing.

The Statement on coal was of course subject to a consultation, as the noble Lord will know, which opens in spring next year, I think, subject again to ensuring that we have the necessary capacity in relation to gas-fired stations coming on stream. Still, a clear market signal was given in the speech. Demand reduction is a significant part of what we are doing, and of course there will be a demand response auction as well in the new year.

With regard to the system margin causing concern, there is a trigger for this. At the moment we are very confident of the 5.1% margin with regard to the announcement of the most recent one. To the noble Lord’s suggestion that a 20% margin is more than we need, I suppose the answer must be yes—that must follow. However, obviously one wants to stray on the side of safety so we are seeking to address this. Although the margin is comfortable, we have to look ahead. The next few years look comfortable but we need to bring on the new nuclear and look at other forms, such as small modular reactors and so on. That, too, is important.

I turn to the questions raised by my noble friend Lady Byford. First, on the consultation, I think I am right in saying—the team behind me will correct me if I am wrong—that out of the 22 responses, 21 were supportive.

It is a huge majority that a lot of parliamentarians would be content with; it is roughly 95%, so it is pretty convincing. If the noble Baroness wants more information, I am happy to supply it.

The second question was a very fair one: what is a satisfactory margin? It is dependent on many factors. As I say, we are confident that 5.1% is a sufficient margin but it is on the tight side so we are trying to build in additional capacity. It is dependent on many factors, most obviously the weather, as well as political factors, such as where gas is coming from. I remember from my very first visit to the National Grid in Wokingham that someone, armed with the Radio Times, was trying to assess whether there was going to be additional demand on the system, such as England playing a football match. Notoriously, at half-time—or into penalties, as it inevitably goes—people go and put the kettle on. Work is done on looking at factors like that. So there are lots of additional factors, but 5.1% seems to be a sufficient margin although, as I say, on the tight side.

I turn to the questions from the noble Lord, Lord Grantchester. Regarding the ongoing position with CFDs, my right honourable friend the Secretary of State announced in her speech that there would be contracts for difference in 2016, and we will set out nearer the time what the technologies are; I suspect that some will not be there, such as onshore wind, but that is just a view. We will set out closer to the time the precise way that that will work. I very much welcome his kind words.

If the Minister will allow me, I would like to come back on one point. I welcome his comments on interconnectors; they are something that over the past five years or so the Government have got more into, and they are an important part of energy supply. I recognise what he was talking about. However, I had the impression that there was an impediment to interconnectors bidding into the capacity mechanism system. That is as I understood it but I may be wrong. If that is the case, are the Government trying to rectify it? It is an important area of increasing competition that could reduce the cost to consumers.

I was unaware that there was a problem. However, 2015 is the first year in which the capacity market extends to interconnectors, so we are anticipating some activity. I hope that that satisfies the noble Lord, who asked a very fair question.

Motion agreed.