Motion to Approve
My Lords, this statutory instrument amends regulations concerning the levies that fund the operational costs budgets for the Low Carbon Contracts Company and the Electricity Settlements Company. LCCC administers the contracts for difference scheme on behalf of the Government, and ESC administers the capacity market scheme. Those schemes are designed to incentivise the significant investment required in our electricity infrastructure, keep costs affordable for consumers and help to meet our net-zero target, while keeping our energy supply secure.
Contracts for difference, or CfDs, 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 to all forms of capacity the right incentives to be on the system and to deliver capacity when needed by increasing generation or by turning down their electricity demand in return for guaranteed payments. In both schemes, participants bid for support via a competitive auction, which ensures that costs to consumers are minimised.
The next CfD auction—the fourth to date—planned to open in late 2021, 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 seek to secure up to 12 gigawatts of renewable electricity capacity in this round—double what was secured in the last round in 2019. It will thus allow a broad range of renewable technologies to come forward, while delivering the best possible 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 we need now and in the future. It facilitates investment in 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 we need to meet the forecast peak demand out to 2023-24. The next auctions, scheduled for March 2021, will secure most of the capacity we need out to 2024-25.
LCCC and ESC play a critical role in delivering the CfD and capacity market schemes. LCCC enters into and manages CfDs with low-carbon generators, collecting the supplier obligation levy from electricity suppliers, which it uses to make payments to generators under the CfD. ESC is responsible for all financial transactions relating to the capacity market, including collecting the supplier charge from electricity suppliers, which it uses to make capacity payments to capacity providers, but also managing supplier credit cover and capacity providers’ auction credit cover. This statutory instrument sets a revised operational cost levy for the LCCC and a revised settlement costs levy for the ESC, which the companies collect from suppliers to fund their day-to-day operations in administering the CfD and capacity market schemes.
It is important that LCCC and ESC are sufficiently funded to perform their roles effectively, given their critical role in administering these schemes. However, the Government are clear that both companies must deliver value for money and, with that in mind, we have closely scrutinised their operational costs budgets to ensure that they reflect the operational requirements and objectives for the companies. Savings have been identified in a number of areas. For example, £184,000 has been saved by reducing the number of desks that LCCC will have at its new office, reflecting changing work patterns.
LCCC and ESC are themselves very mindful of the need to deliver value for money, as their guiding principle is to maintain investor confidence in the CfD and capacity market schemes while minimising costs to consumers. They have taken a number of actions to date to reduce costs, such as bringing expertise in-house rather than relying on more expensive outside consultants. Because of actions such as those, CfD operational costs are falling both per contract and by overall generation capacity, despite the growing size of the CfD portfolio. It is a similar narrative for ESC. The company currently manages 54.4 gigawatts of capacity agreements with 513 capacity providers under the capacity market. This is expected to increase to 55.16 gigawatts of capacity and 546 capacity providers in 2021-22. Despite this increase, operational costs are expected to be marginally lower in 2021-22 compared to 2020-21.
The operational costs 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. Subsequently, 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 announced a pause in public sector pay rises for the majority of the workforce. Taking into account this outcome of the review and the wider economic landscape, LCCC’s remuneration committee decided to agree a pay pause for its staff for 2021-22. Consequently, an allowance contained within LCCC’s operational costs budget for pay rises that was included in the consultation has now been removed.
In conclusion, taking into account the removal of that allowance, the proposed operational costs budget for LCCC in 2021-22 is £20.736 million and £7.472 million for 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 the regulations. Subject to the will of Parliament, the settlement cost levy for ESC is due to come into force on the day after the day on which these regulations are made and the operational costs levy for LCCC by 1 April 2021. Finally, I assure noble Lords that the Government will continue to evaluate and monitor the costs of both companies, ensuring that costs to consumers are appropriately minimised. I therefore commend these draft regulations to the House.
My Lords, I thank the Minister for introducing this statutory instrument. I expect that, as the noble Lord looks at it, sensible as it is, he realises that the reasons for switching back to a one-year period are a lot more interesting than the actual return to an annual period. My main reason for putting my name down to speak was curiosity—to find out more about trends in the electricity market as a result of the pandemic.
I have no quarrel with this instrument. I accept that, as the contract for difference operational costs levy and settlement costs levy need to be fixed, and the amounts get spread over the estimated total demand, and with the pandemic having made that harder to predict, it is being done for only one year rather than three. I am sure that it would be quite difficult to work out the contingency over a three-year period.
That raises the question of whether there are short- falls from the current period of reduced demand and how they have been covered. Was there an adequate contingency, or is there any carryover? I seem to recall —I think it might have been back in the summer—that we examined the statutory instrument dealing with the government loan and delayed payback mechanism, which was adjusted to delay by four quarters instead of three due to reduced electricity demand during Covid. The reduction in consumption then was caused by industry shutdowns, although domestic energy consumption had gone up.
We have just had the heavy winter months; I suppose we are still in them. Are there now any more figures on how lockdown, children at home and working from home have influenced domestic consumption? What is the overall picture of business consumption, and is there any sectoral analysis? I appreciate the Minister may not have that to hand.
It is recognised that longer-term changes in working practices have accelerated due to lockdown, with more working from home likely to continue. Looking at what has happened in the various stages of the pandemic and lockdown, is this predicted to lead to more or less electricity consumption overall? For example, is the change from office consumption to home consumption broadly neutral, or is there an overall increase with both homes and offices in use? If there is a shift from commercial use to domestic use tariffs, how will that affect prices?
Paragraph 7.7 of the Explanatory Memorandum highlights, as the Minister has done, that among the reasons for a £3.251 million budget increase on costs is that the next CfD auction will support up to double the capacity of renewable energy. The more green energy the better, but consumers will want to know when electricity costs will come down in order to incentivise switching to electricity and away from domestic use of gas. It is somewhat ironic that there are currently incentives to replace old gas boilers with new gas boilers, when new homes will not be allowed to have gas boilers from 2025. However, right now, at least where I live, homes with electric heating tend to stick on the market because of the running costs. This is getting relatively urgent and has to be addressed because we do not just want new homes to switch. We surely want many more people to consider switching.
I have no objections to this SI and I realise that my questions are additional issues. If the Minister has to reply in writing, then that is acceptable.
My Lords, it is a great pleasure to follow the noble Baroness, Lady Bowles of Berkhamsted, and I was intending to raise many of the issues she has just raised. I will still raise them, but it may now take me less time to do so. She has really put her finger on the concerns relating to the switch from the three-year basis to the one-year basis and some of the thinking behind this. I thank my noble friend for setting out the effects of these regulations very clearly and for what he said about the capacity auction—I will come back to that later, if I may.
These regulations relate to the contracts for difference schemes, which, quite rightly, encourage low-carbon electricity generation, and to the capacity market, which helps ensure security of supply. These are clearly central to government policy, which I am sure is supported in principle across the House.
The levy for the contracts for difference counterparty was previously first assessed on an annual basis. It then went to a three-year process, where the levy was fixed for three years in advance. We are now returning to a one-year basis because of the significant drop in demand for electricity in the last year. I understand all of that and support the regulations, but I am wondering what thinking there is about whether there will be a reversion to a three-year basis. I think these regulations will continue until they are superseded, so the basis will be the same. It would be interesting to hear if the Government have given any thought in the medium or long term to a return to a three-year basis, particularly in light of the Prime Minister’s road map outlined yesterday?
Clearly, this is central to the way we approach the whole issue of energy security and indeed green energy going forward, and the drive to net zero. Like the noble Baroness, I wonder what the thinking is about what happens once the pandemic ends or we come largely out of it, and whether there will be a long-term difference in the way that energy needs to be supplied. Will there be a switch to more people working from home—I am sure there will—what will be the effect of that and of people presumably not going to restaurants on the way to work for breakfast, and so forth? What will be the effect of a change from one type of transport to another? Clearly, all this needs to be considered and factored in. On a broader front—I appreciate that this is well beyond the immediate scope of these regulations—what thinking have the Government given to this issue? If my noble friend does not have the details, I would be very happy for him to write to me.
I thank my noble friend for what he said about the capacity auction, which I understand from him today is to be in March of this year. I do not know whether he has a precise date; that would be interesting to hear. I welcome too what he said about the increased ambition and the technologies it embraces.
In conclusion, on a broader front—as I say, I certainly support the regulations—in view of COP 26 in Glasgow in November and the accelerated action towards the goals of the Paris agreement and the UN Framework Convention on Climate Change, which I certainly welcome, will Her Majesty’s Government commit more resources to this vital international endeavour? The Government have done much and I know that my right honourable friend the Prime Minister is personally committed to this, but with the welcome arrival of President Biden and indeed of John Kerry as special envoy on climate, what bilateral discussions are we having with the USA and what future resources are we committing to net zero? As I say, if my noble friend does not have details, I will be very happy to learn about them in writing.
My Lords, it is a pleasure to follow the noble Lord, Lord Bourne of Aberystwyth, and I thank the Minister for introducing these regulations.
I am not opposed to the regulations as I believe they are standard practice in the electricity industry. However, like the noble Baroness, Lady Bowles of Berkhamsted, I am curious about certain issues. I am concerned about the impact of the pandemic on the commercial, business and hospitality services and above all on the jobs of many people working in these sectors. I am concerned about the long-term consequences for livelihoods and the impact on the electricity industry and the use of electricity by consumers. I note that there has been a downturn in demand for electricity in the business sector, given that so many people now work from home, and that the House of Lords Secondary Legislation Scrutiny Committee considered this an instrument of interest because it involves changes to business practice and regulation.
The Department for Business, Energy and Industrial Strategy says that it would have preferred to propose new levy rates for the next three financial years to reduce the administrative burden on the sector, as it did in 2017, but that electricity demand has fallen significantly during the pandemic and that this uncertainty makes it difficult to forecast electricity demand beyond the 2021-22 financial year. The department estimates that the amounts of money for business and domestic consumers will not be great.
Notwithstanding that fact, I have some questions for the Minister. Like noble Lords who have previously spoken, I will be quite content to receive those answers in writing if he does not have them today.
Is it possible to estimate domestic electricity consumption and is there a change in such consumption as more people are now working from home as a result of the pandemic? What has been the corresponding level in terms of payments or revenue received? Has there been a read-across to the winter severe weather period, given that electricity companies have models for predicting weather patterns and increases in electricity consumption uptake? Is it possible to estimate on a cross-departmental basis with the Department for Work and Pensions the number of people who are in fuel poverty because their level of income benefit dependency does not allow them to pay for their electricity? That particularly applies to the domestic sector.
In what ways is the Covid pandemic reducing demand for electricity in the business environment, in both the private and public sectors? Will that change with the re-opening of the economy, as per the plan outlined by the Prime Minister yesterday? Has there been a marked decrease in the commercial, business, industrial and public sector environments? Is it possible to put a figure on this? Also, I understand ministerial limits, but does the plan involve BEIS working with the Treasury to get business working again on an incremental basis to underpin our economy? Will the plan provide an update on electricity consumption in the business and commercial sphere? What representations have been received from those sectors?
Will there be further legislative measures beyond 31 March 2021 to prevent insolvencies? The Minister has brought forward previous statutory instruments, the last of which is due to expire at the end of March. I am surprised that no full impact assessment is required for these statutory instruments whenever there is an impact on the uptake of revenue in respect of electricity bills for the business sector. What is the assessment of the impact on electricity bills of changes to people’s lives and working environments as a result of working from home? I look forward to the Minister’s response.
My Lords, I am delighted to follow the noble Baroness, Lady Ritchie of Downpatrick. I thank my noble friend the Minister for introducing the regulations, which I intend to support. I am also grateful to the Secondary Legislation Scrutiny Committee for its report and the two paragraphs it allocated to this issue, which it obviously does not deem to be one of great concern. However, I would like to press my noble friend on a couple of issues arising from that report and the Explanatory Memorandum.
I understand that the regulations and the CfD scheme are the main mechanism for supporting new renewable electricity generation projects in Britain, and that the CfD counterparty enters into and manages CfDs with low-carbon electricity generators, so this is something we wish to support. I want to press my noble friend on whether there have been more surges in electricity supply of late, and whether this is because more of us are working from home, as other noble Lords have referred to, and fewer people are using electricity in the workplace.
Paragraph 33 of the Secondary Legislation Scrutiny Committee’s 44th report sets out the increases that BEIS estimates as the total impact of the new levy rates. They sound very reasonable: 40 pence
“on the average annual household electricity bill”
—noble Lords will be interested to know from my noble friend whether that will go up if we continue to work from home—and
“£30 for a typical small-sized business (using around 250 megawatt hours per year) and £1,200 for a typical medium-sized business (using around 10 gigawatt hours per year).”
The department concludes that rates will be
“less than 0.1% of these users’ electricity bills”,
so I presume that those figures will not have changed.
Paragraph 12.1 of the Explanatory Memorandum attached to the regulations states, quite emphatically:
“The impact on business, charities or voluntary bodies is limited.”
However, as there has not been an impact assessment, we do not know that for sure, so can my noble friend confirm that nothing of concern—to charities or voluntary bodies in particular—was raised in this regard in the consultation?
To what extent is the renewable electricity supply to which the regulations refer going to satisfy all the needs of those of us who will be asked to buy electric vehicles? Under the regulations, what will be the impact on future generations and auctions—particularly the next one—of the fact that more electric vehicles are being driven by private drivers, company drivers and, indeed, public transport, with many buses now running on electricity alone? It greatly concerns me that no one has yet told me—I would be delighted if my noble friend could do so—what the source of all the new electricity to run these e-vehicles will be.
I am still bruised by the fact that, as a rural dweller, I was encouraged to buy a diesel car, which I did, and I am now paying quite expensive tax for the privilege of running it. That is reflected in a higher polluter rate for diesel. I would like to know from somebody, at some time, that we will not pay a premium on electric vehicles because it is a very new form of power for vehicles, as opposed to the combustion engine.
Finally, I refer to paragraph 14.3 of the Explanatory Memorandum, which states that conclusions of the review of the first five years of operation of Section 66 of the Energy Act 2013, which introduced a number of aspects of the operation of the electricity market reform programme, were due and are now delayed. It would have been very helpful to have had the review before Parliament before we are asked to consider the regulations before us today. I understand that the delay is due in part to the fact that this department in particular has been very busy with preparing for the UK’s departure from the European Union and the impact of the Covid-19 pandemic. However, it would be helpful to know today when my noble friend expects the findings of the review to be laid before Parliament and when we might have the opportunity to study them.
With those few remarks, I look forward to my noble friend’s reply, but I wish the regulations before us today a swift passage through Parliament.
My Lords, I declare my interest, as set out in the register, as chairman of the advisory board of Weber Shandwick UK. I thank the Minister for his helpful introduction, and it is always a pleasure to follow the noble Baroness, Lady McIntosh of Pickering, as we entered the House on the same day.
As the Explanatory Memorandum highlights, the electricity market is complex and opaque, perhaps necessarily so because of the various mechanisms that have been put in place to ensure that sufficient capacity is available as we restructure and decarbonise the electricity supply. The complexity has been compounded by the uncertainty in predicting demand as a result of the pandemic. It is regrettable that the Government cannot go forward with their previous three-year levy settlement but, of course, given these uncertainties, I understand the need to revert to the one-year basis.
Given the complexities of the market, I would be grateful if the Minister could assist me with the answer to a number of questions arising from the Explanatory Memorandum. First, paragraph 7.7 states that the increase in the CfD counterparty’s budget is
“due to a number of factors, including ... the inclusion of Pot 1 Technologies (onshore wind and solar)”
in allocation round 3. My understanding had been that onshore wind was driving down costs and that the cost pressure on CfDs was to keep offshore wind competitive with it. Can the Minister clarify this matter for me?
Secondly, as the noble Baroness, Lady McIntosh, said, the EM notes that the Secretary of State is required under the Energy Act 2013 to review a number of aspects of the operation of the electricity market reform programme, including CfDs, the capacity market and the transitional arrangements from the renewable obligations, as soon as practicable five years after the passage of that Act. That means by the end of 2018. Can the Minister explain why the Secretary of State is in breach of this duty because, unlike the noble Baroness, I am a little less accepting of the excuses—I will not call them explanations—provided in the EM? It says that this is due to a range of factors, including the Covid-19 pandemic and Brexit, but the pandemic did not begin until more than a year after the trigger date for the report and Brexit had been known about for two years prior to that date. The EM tells us we will get the review “shortly”. Please can the Minister be a little more precise, as it is obviously important that we see it as soon as possible?
As the market is currently structured, these levy increases are obviously necessary so that the CfD counterparty and the settlement body can continue to discharge their duties, drive technological innovation and secure capacity as we decarbonise our energy supply. Nevertheless, we are in an unsatisfactory situation. The EM tells us that an impact assessment has not been prepared for the regulations because of the low-level impact on electricity consumer bills. They are estimated at just 0.1% of those bills, just 40p, the EM tells us, on the average annual domestic bill, rising to an extra £1,200 in the case of medium-sized businesses. These figures may be small as a proportion of overall bills, but we have all heard of the straw that broke the camel’s back. Many businesses and consumers could not be in a worse position to absorb added costs as a result of the effects of the pandemic. We all know that these latest increases come on top of a steady accumulation of costs on consumers. Is it not time that we had a proper look at this whole area, as the noble Baroness, Lady Ritchie, suggested?
The fundamental problem is that we are trying to pay for the decarbonisation of our energy supply through consumer electricity bills. This is a profoundly regressive approach to securing a public good, namely, combating climate change. As my noble friend Lady Bowles highlighted in her comments, this also makes decarbonising our heating systems even more difficult than it would be anyway because it continues to load costs onto a cleaner energy source, so further disincentivising people to move off gas towards heat pumps and other technologies, something we must achieve if we are to have any hope of meeting net zero. How will that objective be achieved unless we rebalance the costs of decarbonisation more equitably and reverse the perverse incentives that have been created towards gas?
In conclusion, I fully support the Government in their ambitious net zero targets and in their ambition for expanding renewables, but does the Minister not recognise that we will not maintain public support for the radical transformation that net zero requires unless we ensure that it is delivered justly and equitably? That is just not happening now.
I thank the Minister for his explanation of the regulations before the House tonight. They are essentially non-controversial, and on this side of the House, we do not take issue with them. The contracts for difference regime has been moderately successful in bringing forward renewable energy developments at least cost to the consumer and in reforming the previous energy market. As the Minister explained, the CfD counterparty is the responsible body managing it. It collects levies from energy suppliers for its budgetary costs. The capacity market has a similar body, the settlement body, that collects levies to pay generators the agreed capacity market payment systems’ costs. Both bodies work together, and the two are connected, as in both cases capacity market interventions are dependent on overall anticipated energy demand levels.
In preparing for this instrument, I note that I am the only person still in post after the passing of the initial Energy Act 2013 and subsequent instruments on supplier payments, the last one being in March 2018. The energy market has changed substantially over that period, yet the CfD regime has provided long-term price stability for low-carbon generators and has incentivised investments to come forward at generally the least cost to consumers. The lights have been able to stay on and switched throughout that period. I congratulate the Government on that.
In 2018, we agreed with the Government that the best stability, certainty and consistency to suppliers’ levies would be maintained by setting budgets three years ahead. While appreciating the present circumstances of the pandemic, the recent fall in energy demand and the extension of the CfD and capacity market to greater development from more energy sources and generators, the amendment today in favour of a one-year costs regime is understandable—albeit that the situation will be constantly monitored. Can the Minister commit that a return to three-yearly terms will be restored as soon as possible? That would be important to hear. The noble Lord, Lord Bourne, a previous Energy Minister, posed several further questions around a return to three-yearly budgets.
Back in 2018, the first three-yearly term was set up after the workings of the regime settled down into familiar regularity from the start of the initial regime under the Energy Act. It is interesting to reflect that the same concerns expressed then are being repeated today and it would be interesting to hear the Minister’s interpretations on the outcome of the experiences against the expectations at that time. In 2018, the main concerns were operational costs and how the levy rate was increasing to cover them, given that they all pass through to consumers.
At that time, there was enormous cost inflation—some 700%—to cover the following three years from 2018 until this statutory instrument. Can the Minister give the outline of how costs indeed rose over that period now that, once again, over a potential one-year period, a further 18% cost rise is envisaged? How have the relative costs of operations between the various cost factors changed over this time? The number of participants from inception to 2018 increased from 46 to 447. What is the number of participants now and how is it expected to increase, given a further large increase in offshore wind deployment as well as the opening of the CfD regime to onshore wind?
Operational costs should have reduced as a percentage of the whole scheme to 0.6% in 2020, against the expected forecast in the fall of gross energy demand of some 2%. Can the Minister update the House on the actual figures on how the outcome of a further 18% increase in operational costs and levies is being transferred through? That seems to be a huge rise. At this precarious time for the economy, the rise will be reflected in increased energy bills, albeit that the Explanatory Memorandum forecasts that this will translate only to a 40p per annum increase on the average household bill.
The considerations of the Minister’s department over the longer period, beyond the pandemic experiences, have been expressed throughout this debate. It would be useful to understand some of those considerations from him. The noble Baroness, Lady McIntosh, as well as the noble Lord, Lord Oates, raised the point that the review of the Energy Act is now long overdue.
With the increased pressure to decarbonise the economy faster in the much-awaited green recovery expected soon, and with the extension to further technologies, policy changes and investment still required, does the Minister expect these sorts of increases in levies to continue, or will his department begin thinking of alternative ways to fund CfD levies into the future? It is important to keep paying attention to the requirement that development must be at the least cost to the consumer. It is fundamental to hear from the Minister and his department further long-term investment cost schedules now that the energy White Paper has been published.
First, I thank all noble Lords who contributed to the debate. I am delighted that the noble Lord, Lord Grantchester, is still following this brief from 2013. He showed that in the excellent contribution he made and in the knowledge he portrayed in his questions. I hope that my answers can do his memorable state justice.
As I set out in my opening speech, the companies and the Government have taken steps to ensure the proposed operational cost budgets allow the companies to perform their crucial roles effectively while representing value for money for consumers. I believe that these twin aims will be achieved if this draft regulation is approved. However, the noble Lord, Lord Grantchester, did make an important point, and I will not pretend the 19% increase in the LCCC’s budget is not significant; it clearly is. I do believe, though, that this is a justifiable increase, and I will set out, for the benefit of the House, why that is.
The increase in the budget reflects a number of factors, in particular the company’s important role in helping to meet our legally binding net-zero target while minimising costs for consumers. The CfD scheme has proven that it can deliver large-scale, low-carbon generation while driving down costs. The cost of offshore wind, for example, as noble Lords have pointed out, fell by two-thirds between the first CfD auction, held in 2015, and the third auction, held in 2019. This proposed budget will allow the LCCC to play its part in delivering the next CfD auction, which will bring forward more low-carbon electricity while further pushing down technology costs and, in doing so, bring us closer to meeting our net-zero target.
I should also point out to the House that the LCCC is facing a number of costs beyond its control in 2021-22, such as the increased uncertainty in energy demand arising out of Covid-19. A number of noble Lords have referred to that. This has necessitated an increase in its existing contingency for lower-than-expected electricity demand—and other world events, such as Covid-19, have also pushed up insurance premiums for companies.
As the CfD portfolio expands, that increases the likelihood of a legal dispute arising between the LCCC and a generator. Consequently, the proposed budget increases the existing contingency for such disputes from £2.1 million to £3 million. The level of this increase has been informed by the costs of past and present legal disputes. It is important to consider that these two contingencies—one focused on electricity demand and the other on legal disputes—may not be needed. If that is the case, the funds raised from the levy to cover these costs will be returned to electricity suppliers. Excluding these contingencies, the overall increase in the budget equates to approximately 9%.
Noble Lords have also touched on what this budget increase means for electricity consumers. That is indeed important. I agree that we have to scrutinise every penny that goes on to consumer bills, but I also believe that in this case there has been sufficient scrutiny. Given the important role both companies play in our electricity system, a bill impact equating to less than 0.1% for the average consumer is proportionate and justifiable.
Virtually everybody who spoke—certainly the noble Baronesses, Lady Bowles and Lady Ritchie, my noble friend Lord Bourne, and the noble Lords, Lord Oates and Lord Grantchester—raised the important question of why we were setting the levy for the next financial year only, when we set the last set of levies, in 2018, for three financial years. We are amending the levy rates for 2021-22 only, instead of for the next three years, because of the impact of Covid-19 on electricity demand forecasting. Electricity demand has reduced significantly during the pandemic. Increased uncertainty with regard to a number of factors used to forecast electricity demand makes it extremely difficult to do so beyond the 2021-22 financial year. LCCC’s operational cost levy rate is calculated by dividing its annual budget by the total forecast electricity demand for the corresponding financial year. If demand is lower than forecast, LCCC will not be able to raise enough income from the levy to meet its budgeted costs. Therefore, a robust forecast of electricity demand is needed for each financial year to set the levy accurately.
My noble friend Lady McIntosh asked whether we needed an impact assessment. As she correctly said, an impact assessment has not been prepared for this instrument because of the relatively low levy impact on electricity consumers’ bills.
My noble friends Lord Bourne and Lady McIntosh, and the noble Baronesses, Lady Ritchie and Lady Bowles, asked about the impact of Covid on electricity demand and household bills. I will write to noble Lords on that, setting out what information we currently have on the deployment.
The noble Baroness, Lady Bowles, and my noble friend Lord Bourne asked about our ability to forecast electricity demand accurately and whether we would therefore set the levy for more than just one financial year. In the next round, we intend to return to the status of setting the levy for three financial years.
My noble friend Lady McIntosh asked about the consultation, on which I have responded. The noble Baroness, Lady Bowles, asked about the contingency for reduced electricity demand and why it has increased. The contingency in the proposed 2021-22 budget has increased by £0.75 million compared to the 2020-21 budget because of the impact of Covid-19. The pandemic has resulted in a reduction in electricity demand. LCCC’s forecasts predict that reduced demand will continue into 2021-22, but the landscape is extremely uncertain, as the Government may need to take further actions that impact on demand; for example, the emergence of new variants may require them to take extra measures in the short term to counter this threat, although we are confident that vaccines can be adapted to mitigate it in the medium term. To reflect this increased uncertainty and to mitigate the risk of LCCC having to rely on BEIS for cashflow, the electricity demand contingency has been increased by £0.75 million, bringing it to £1.5 million overall in 2021-22. As I said earlier, if the contingency is not used, it will be returned to the companies.
My noble friend Lady McIntosh and the noble Lords, Lord Oates and Lord Grantchester, asked when the five-year review of the energy market would be laid before Parliament. I am deeply conscious of the fact that this review is now overdue. We expect it to be laid in Parliament shortly.
The noble Lord, Lord Oates, asked about the operational budget being funded via a levy on electricity consumers rather than general taxation, a point raised many times in this House. The costs of decarbonisation should be shared fairly among consumers. Levying costs for supporting the deployment of clean electricity in this way enables electricity consumers to pay towards the costs associated with increasing the proportion of renewable electricity supply, from which they subsequently benefit. The contracts for difference scheme was designed to deliver value for money for consumers and it is doing so, with costs falling in every auction held to date. The CfD is entering a new phase in which renewable projects could even reduce consumer bills, as they are now much cheaper than alternative forms of generation. The LCCC must therefore be adequately funded if it is to perform its role in delivering the CfD effectively.
A number of other, more general questions were asked about energy policy and decarbonisation. If noble Lords will forgive me, I will not take up the time on these regulations by answering those, but I will write to them separately. I think that I have addressed all the points raised during the debate. I therefore take pleasure in commending the regulations to the House.