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Electricity Supplier Obligations (Green Excluded Electricity) (Amendment) Regulations 2023

Volume 828: debated on Monday 20 March 2023

Motion to Approve

Moved by

That the Grand Committee do consider the Electricity Supplier Obligations (Green Excluded Electricity) (Amendment) Regulations 2023

My Lords, these regulations, and the Electricity Supplier (Excluded Electricity) (Amendment) Regulations 2023, were laid on 8 and 20 February 2023 respectively, and were recently debated in the other place.

The purpose of the Electricity Supplier Obligations (Excluded Electricity) (Amendment) Regulations 2023 is to improve the operation of the EII exemption scheme. This will ensure that access to the scheme for existing recipients is not negatively impacted by the effects of the Covid-19 pandemic, and that new applications can benefit from the scheme earlier than would otherwise be possible.

The purpose of the Electricity Supplier Obligations (Green Excluded Electricity) (Amendment) Regulations 2023 is to ensure that electricity suppliers in Great Britain contribute to CfD scheme costs more in proportion to their market share, regardless of whether they source electricity from the EU or the UK.

I acknowledge the Joint Committee on Statutory Instruments, the Secondary Legislation Scrutiny Committee and the other place, all of which have provided helpful reviews of these regulations.

These statutory instruments amend the Electricity Supplier Obligations (Amendment & Excluded Electricity) Regulations 2015 and the Contracts for Difference (Electricity Supplier Obligations) Regulations 2014.

The Electricity Supplier Obligations (Amendment & Excluded Electricity) Regulations 2015 provide for a scheme that helps to mitigate the risk of carbon leakage by exempting eligible businesses from a proportion of the costs of funding renewable electricity and minimise the risk of companies or production moving to overseas territories with less robust net-zero targets. These are costs associated with funding the renewables obligation, the contracts for difference and the small-scale feed-in tariff schemes. The costs associated with these schemes are passed on by electricity suppliers through their electricity bills. They have a particularly high impact on foundation industries such as steel, paper, chemicals and cement, which are critical to many infrastructure projects and provide well-paid, highly skilled jobs across the United Kingdom. As foundation industries, these businesses are critical in the development of new projects, including offshore wind, and therefore play an important role in the transition to net zero.

The exemption also provides relief for new and emerging industries, such as battery manufacturers—critical to electric vehicles—and manufacturers of semi-conductors, which are of key importance to the UK high-tech economy. They provide jobs not only directly but indirectly, such as in the aerospace and automotive sectors. They employ people from Cornwall to Kent and from Grangemouth to south Wales.

The original legislation was put in place in 2017 and since then over 320 businesses have benefited from the exemption. Businesses which applied in 2017 are now due to be reassessed under the regulations; they will need to be reassessed this year using the last three years of data. For these businesses, this will include the 2020 and 2021 trading periods. This new instrument makes amendments that will allow businesses to exclude data from that period, which, of course, does not reflect the normal course of their business, thereby preventing an unintended consequence from the Covid pandemic’s effect on industry.

This instrument also allows companies applying for an exemption to apply for relief with one quarter of financial data, rather than two. This will help and encourage businesses and start-ups to apply for relief.

The sectors eligible for the existing exemption scheme employ around 400,000 workers and account for more than a quarter of total UK exports. Many are located in areas of economic disadvantage and provide good, high-paid jobs. In the UK, our electricity prices for medium and large industrial users were the highest among the EU countries in 2021. Clearly, electricity costs have a significant impact on the competitiveness of such enterprises. The industries affected operate mainly in international markets, so higher electricity prices place them at a competitive disadvantage, resulting in the risk of carbon leakage, whereby companies choose to move their production to countries with less ambitious climate policies.

Existing legislation covering energy-intensive industries allows eligible businesses to receive an indirect exemption of up to 85% of the costs of funding renewable electricity schemes. Where an eligible business applies successfully for the exemption, its electricity supplier receives a reduction in the costs, which, in practice, it passes on to the eligible business. That approach mitigates the costs of the renewable electricity schemes, supports industrial competitiveness and provides certainty for businesses. The costs of the exemption are distributed to all other electricity users.

I turn to the contracts for difference scheme, which is the Government’s flagship renewable electricity support scheme. It is designed to offer long-term price stabilisation to new low-carbon generators, and to incentivise investment by giving greater certainty of revenues to electricity generators by reducing their exposure to volatile wholesale prices. This scheme has been very successful in driving the substantial deployment of renewables at scale in Great Britain while rapidly reducing the costs to electricity consumers. Payments to electricity generators supported by the CfD scheme are funded through a compulsory levy on electricity suppliers in Great Britain, known as the supplier obligation. Individual suppliers contribute to the costs of the schemes in proportion to their share of the British electricity sales market.

Electricity suppliers may currently apply to seek a partial green excluded electricity exemption from their supplier obligation to make contracts for difference payments. That is through the importing of renewable electricity generated in an EU member state and supplied to customers in Great Britain. Now we have left the EU, the aim of the change is to address that distortion by removing the exemption.

The proposed excluded electricity regulations amend the existing legislation to improve access to the EII exemption for new companies, by reducing the period for which financial data must be provided on initial application from two financial quarters to one. They also allow companies which are reapplying for eligibility to provide three years of data over the last five years and to exclude data from, for example, 2020 and 2021 from their application to account for the impact of the Covid-19 pandemic.

The green excluded electricity amendment of the CfD regulations will remove the availability to electricity suppliers in Great Britain of a partial CfD scheme cost exemption. The exemption currently allows electricity suppliers to reduce their liability to pay CfD scheme costs to the extent that they import green electricity from the EU. That results in suppliers’ cost obligation being proportionally further away from their market share. Now we have left the EU, that is no longer appropriate. Moreover, the removal of the exemption means that all electricity supplied by a supplier, no matter where it was produced, will have the supplier obligation applied to it in the same way.

In conclusion, the Government, in consultation with industry, have seen a clear rationale for the amendments to the regulations to improve the operation of the EII exemption scheme, and, through removing the green excluded electricity exemption, to bring a closer alignment between a GB electricity supplier’s market share and its proportion of the contracts for difference scheme costs. The green excluded electricity amendment also delivers part of the Government’s priority to address the UK legislative legacy of being a member of the EU. The exemption will continue to apply in respect of electricity supplied up to 31 March 2023. I commend the regulations to the Committee.

My Lords, I assume that we will take both SIs together. I thank my noble friend for bringing forward these two regulations, with which I broadly agree. I will limit my remarks to the Electricity Supplier Obligations (Excluded Electricity) (Amendment) Regulations.

I listened carefully to what my noble friend said. He said that the costs arising from the scheme will be distributed to all other users. Does that mean all other users, both domestic—that is, households—as well as industrial? If that is the case, is this part of the charge on standing charges? I will put down a marker—and I hope my noble friend will agree with me—that it seems very unfair that at this time of household stress and cost of living constraints, standing charges are the one element of a bill that we are not able to control. As individual householders we can control the unit charge, but we cannot control the standing charge. Therefore, if this is being spread across all users, both domestic and industrial, as my noble friend indicated, it seems a little unfair that this will be or is already an additional cost on the standing charge. Would it be possible at some stage to have a general debate on what constitutes the standing charges? I realise that that is not the purpose of today’s debate, but that would be very helpful indeed. My question is, what is the impact of this measure, with which I am in broad agreement, on household bills?

I absolutely accept that the EII plays a useful role, covering high electricity-using businesses such as, we are told, in the very helpful paragraph from the Secondary Legislation Scrutiny Committee report on this, energy-intensive users in sectors such as

“steel, paper, plastics, chemicals, cement and glass.”

Cement and ceramics are often overlooked, despite being high-energy users. That paragraph also says that the charge covers potential market failures:

“the Energy Intensive Industries … Exemption Scheme”—

to which my noble friend refers—

“offers an exemption for eligible companies to receive a discount from their electricity costs to address high energy costs and potential market failures.”

Another question that arises from this is: in the event of a market failure relating to an industrial user in this category—I am sure that a number may be teetering on the edge—is it left to the others in this category to pick up the costs of that failure, or is it once again a charge to all users, domestic and industrial?

My two final points are, first, that no impact assessment was done, which possibly might have been useful. Secondly, paragraph 10.8 of the Explanatory Memorandum states:

“This consultation ran for 5 weeks and closed on the 16 September 2022.”

That seems a short period to run a consultation which covers the holiday period. Was there any particular reason for that, or had the department taken other soundings before it launched the formal consultation? However, with those few queries, I support the two regulations before us this afternoon.

My Lords, I thank the Minister for his introduction of the SIs. I will take the Electricity Supplier Obligations (Excluded Electricity) (Amendment) Regulations 2023 first and then the other one second. I can broadly support this SI, but I have a few points that I want to raise.

The Explanatory Memorandum explains that the proposals were made in the review of the scheme to provide relief to energy-intensive industries for a proportion of

“the indirect costs of funding renewable electricity policies”.

However, it makes no mention of the responses to the consultation. I am afraid that I have been unable to find a government response on these proposals. My first question to the Minister is: is that response in the public domain and, if so, where can I find it? Also, how many consultees responded on questions 3 and 4, which cover the proposals in this regulation? What was the distribution of views and what alternative proposals were made? Did any consultees highlight risks or unintended consequences? It would have been useful to have seen responses on that.

As trading data will be unaudited, what independent checks will be carried out on that data to ensure that gross value added is not being under-reported or energy costs overstated to meet the eligibility criteria of at least 20% of the GVA being from electricity costs? When will the Government respond to the other proposals in the review?

I will close with a thought on a more strategic outlook that the Government could take. Rather than piecemeal subsidies, a possible longer term and more comprehensive solution to carbon leakage would be the carbon border adjustment mechanism, whereby high-emissions industries migrate to the parts of the world with the lowest effective price on carbon. A CBAM would allow tariffs to be charged on imported goods in proportion to the difference between their emissions and those for the corresponding goods made at home. Ministers reported in May 2022 that they would consult on such a mechanism by the end of last year. That time has come and gone, so I wonder whether the Minister could provide an update to the Committee on when we might have that consultation. There are rumours that it might be due to start in the next month or two. Can the Minister confirm that or say no to it?

I turn to the Electricity Supplier Obligations (Green Excluded Electricity) (Amendment) Regulations 2023. The Minister mentioned briefly, and it was laid out clearly in the Explanatory Memorandum, why the UK’s departure from the EU means that the UK Government are no longer required to make provision to exempt certified green imported electricity from EU member states from the electricity supplier obligations—that is, as the Minister explained, from payments which are used to support feed-in tariffs and contracts for difference. This instrument will remove the green excluded electricity exemption from the contracts for difference scheme so that the electricity from renewable sources that is imported to Great Britain from an EU member state, and is currently exempt from the contracts for difference reconciliation scheme, will no longer be exempt.

The Explanatory Memorandum tells us that the current

“exemption benefits licensed electricity suppliers in Great Britain who import renewable electricity from EU member States”.

That is clear so there is an incentive to import green electricity, as things stand, which is a good thing. Can the Minister confirm that the proposed abolition of the exemption means that the energy supplier obligation reconciliation payments will have to go up, as a result of losing this benefit? That is the logical conclusion of the statement in the EM. Removing the exemption will put in place an incentive instead for energy suppliers to move away from green energy imports from the EU, and I wonder whether that is the Government’s intention.

I see the Minister shaking his head, but the EM states that the current exemption “benefits licensed electricity suppliers”, so I do not see how getting rid of it will also be to their benefit. Further clarification on that would be greatly appreciated, because the outcome, whether intended or not, has the potential consequence to be the reduction of green energy supply to GB consumers.

The consultation response from the Government says at pages 7 to 8 that the removal

“provides financial incentives to those suppliers who import renewable electricity from EU trading partners.”

However, it is not clear that the abolition of the exemption provides any incentive for suppliers to import renewable electricity over any other kind. In fact, it does quite the reverse. Perhaps the Minister could explain that statement in the Government’s response and offer an example to make it clearer to me, to whom it is just not clear, how this might be the case. It would be great to have that on the record. Lastly on this, what assurances have Ministers obtained from Ofgem or elsewhere of the harm to green specialist suppliers, which provide an important element of consumer choice and have often led the way, and which bigger suppliers have subsequently followed? The last thing we want is to dampen their enthusiasm.

Again, the Explanatory Memorandum states that the removal of the green excluded electricity exemption “addresses a distortion”—the Minister also himself used the word “distortion”—

“where the costs of the”

contracts for difference

“scheme, borne by UK suppliers, are not evenly distributed in relation to an energy supplier’s market share.”

I am not sure about that. To me, it does not make sense that that will be the case, because the whole raison d’être of the contracts for difference scheme is to allow incentives for the generation of green electricity. It is there to distort the market. It should not matter to our Government where that renewable energy has been generated. Climate change is a global issue. We benefit from the manufacture of goods all over the globe. Surely we want those goods to be less carbon intensive, wherever they may be produced, so we should be encouraging the global rollout of renewable energy, and the proposed abolition of the GEE will have the opposite effect. We may have to disagree on that, but if the Minister has an example, I should really appreciate it.

The Explanatory Memorandum says that

“The withdrawal of the UK from the EU means that the UK is no longer legally required to maintain the GEE exemption.”

I agree that that is indeed the legal case. However, there is also a moral imperative and a common sense one. Is it not the case that this abolition of the GEE from energy supplier obligation calculations will make it harder for us to realise our statutory net-zero targets—which are more important than ever in light of the IPCC report today?

My Lords, I thank the Minister for his thorough explanation of the regulations and the noble Baronesses, Lady McIntosh and Lady Hamwee, for their contributions and questions, which the Minister will no doubt deal with when he comes back.

I will take the reverse order from the Minister: I will deal first with the green amendment and then with the energy intensive amendment. Contracts for difference are the main way in which the Government support low-carbon electricity generation projects. While we were in the EU, a supplier could seek a reduction in their liability proportion in the levy by offsetting low-carbon electricity generated in the EU area. The UK is no longer under an obligation to offset any low-carbon electricity generated in the EU area. Following industry consultation—I do not know how thorough it was, or how much there was—removing the green excluded electricity was determined to be the fairest way of proceeding following our exit from the EU. As I understand it, the supplier obligation applies to all licensed suppliers of electricity to pay for the contracts for difference.

The statutory instrument is relatively straightforward: it removes something that was implemented when contracts for difference first became the major instrument of the development of renewals in the UK. It looks to close a potential loophole in state aid regulations. Suppliers importing electricity from Europe should not have that supplier obligation applied to them and the electricity they are bringing in from European sources. As we no longer have responsibilities over state aid, it is no longer appropriate to continue with the arrangement that was dependent on the state aid loophole. In the past, suppliers had to provide proof of power coming in to claim that there was no money to pay, as it were, for that energy coming in. Now the opposite is the case: suppliers will have to provide evidence of what is coming in as a renewable source, via the interconnector, from Europe to ensure that they pay. Can the Minister say why any company would now produce evidence of green energy imports through the interconnector in order to pay? Nothing in the regulations requires that evidence is given so that payment is made, and there is nothing about enforcement action or penalties against bodies which do not provide information to enable future payments to be made.

Also, there is no inversion in place for the relationship between the strike price and the reference price. As I understand it, that means that, instead of normal procedure as far as the contracts for difference in this country are concerned, the supplier does not get a payment from the Government in respect of the strike price. As the reference price is currently above the strike price, the supplier has to pay back into the Low Carbon Contracts Company. The company then has a reasonable obligation to pay back that money to suppliers. So I ask the Minister: are companies now obligated under the SI to pay money into the LCCC for contracts for difference which were pre-exempted, and also to get money from the LCCC when the general strike price is inverted against the reference price?

The energy intensive industry exemption, as the Minister said, provides relief to around 320 electricity-intensive companies in the UK. It launched in 2017, and it needs to be reassessed this year under the scheme’s rules. Following consultation, the Government decided to implement two minor changes to the operation of the scheme. The amendments to the scheme are designed to improve accessibility to the EII scheme and to account for the Covid-19 pandemic period. First, it will allow companies applying under the exemption from the indirect costs of funding contracts for difference, the renewables obligation and the small-scale feed-in tariffs to be able to feed in three of the previous five years for assessment, as the Minister said, in order to account for possible lower trading and electricity usage during the 2020 and 2021 pandemic years. Secondly, it will allow new companies to apply with only one quarter of trading rather than two, as was the case previously.

Labour does not oppose those sensible changes which take account of what happened during the Covid period. Companies will be judged against their present performance rather than that of previous years. It is likely that companies previously exempted from the scheme can now be brought into it. Does the Minister agree with that? Could he comment on the observation made in the other place that the mining of hard coal is on the eligibility list? Given the environmental effects of that industry, it seems at least curious as to why it may be included under the EII scheme.

I thank all noble Lords for their valuable contributions to the debate. The electricity-intensive industries exemption provides relief for key foundation industries, including companies operating in the steel, paper, chemicals, cement and glass sectors. The scheme also supports emerging sectors ,such as battery manufacturers and companies making semiconductors. The companies this scheme supports are located all over the UK and provide high-paid, good-quality jobs both directly and in the supply chain.

These EII regulations are necessary to improve the operation of the current excluded electricity scheme. They will make it easier for start-ups and new businesses to apply. They will also allow businesses to account for the impact of Covid-19 when reapplying for relief. We will update and publish our guidance on the GOV.UK website to ensure that businesses are aware of these proposed changes, and proactively engage with stakeholders to ensure that they are too.

Following the consultation in spring 2023, we will come forward with our proposals on the recently announced British industry supercharger, which aims to roll out further support to important manufacturing businesses. This will be through exempting firms from certain costs arising from renewable energy obligations, as well as the GB capacity market costs, while also exploring reductions on network charges, which are the costs that industrial users pay for their supply of electricity.

The proposed removal of the green excluded electricity exemptions from the CfD scheme means that a supplier in Great Britain will pay a proportion of the contract for difference scheme cost that is closer to their market share. It will remove a condition placed on the British scheme by the European Commission and ensure that the supplier obligation is applied to GB suppliers in accordance with their market share.

We are proposing these legislative amendments following a public consultation. It generated 28 responses from a cross-section of the energy industry, representative bodies, brokers and other concerned parties, with the policy proposals receiving wide support.

I will move on to the specific questions raised. My noble friend Lady McIntosh asked about redistribution costs, the impact of standing charges, impact assessment and the consultation period. I say to her that, for the EII exemption scheme, any increase in the bills of non-eligible consumers arising from these changes is likely to be extremely minimal. For this reason, it was felt that a new impact assessment was not required. The redistributed cost applies only to the policy cost element of an electricity bill and does not impact or increase the current standing charge.

The noble Baroness, Lady Sheehan, asked a number of questions about consultation responses, the number of consultees and the distribution of comment, and about the carbon border adjustment mechanism. The Government’s response to the consultation will be published shortly and it will set out further detail on the distribution of comments received. I can tell the noble Baroness that, in total, there were 64 responses to the EII exemption consultation, including from electricity suppliers, currently eligible businesses and other organisations.

Regarding the distribution of comments, there was significant support for the amendments proposed under this SI, as they improve access to the schemes and ensure that firms are not disadvantaged by the impact of the Covid pandemic. The scheme continues to have a robust process both for initial applications by EIIs and for the required reassessment that an EII needs to go through to continue to receive the exemption. This includes an assessment of the company’s accounts, its electricity bills and any other supporting evidence. As officials are in regular dialogue with firms in the energy-intensive sectors it was felt that, given the relatively minor and technical nature of the changes, five weeks represented a sufficient consultation period. As stated, we will publish our formal response shortly.

The noble Baroness, Lady Sheehan, also asked about a carbon border adjustment mechanism. I agree that this could represent an easier solution to the problem of carbon leakage, but I am sure she will accept that it is more of a long-term change. The EU is also looking at it on a longer timescale. We will shortly publish a consultation on a potential CBAM, but I am sure the noble Baroness will realise that there are lots of potential implications of such a mechanism.

Further, with regard to the noble Baroness’s comments about the potential for incentivising EU imports, she made the point that the effect of removing the GEE will incentivise suppliers to no longer import from the EU. But it is not the case that the abolition of the GEE will make it harder for us to meet our net-zero obligations, because those suppliers who use the exemption will have to pay a scheme cost proportion that is much closer to their GB market share. Although this is an increase in costs to them it is, in the grand scheme of things, considered very minor. There are in fact more suppliers who will benefit from the change than not—again, though, the overall effect is relatively minor.

The overall costs to industry remain the same, as supplier obligation costs remain unaffected. There is unlikely to be any impact, positive or negative, on consumer bills as a result of the change, because the suppliers that use the green excluded energy exemption evidence their purchase using EU-derived guarantees of origin. These certificates can be, and often are, purchased separately from the electricity that they represent because, for government accounting purposes, all imported electricity counts as zero carbon, even if it was in fact not generated that way. It is obviously impossible to tell.

The effect of these regulations is that all electricity supplied by suppliers in the UK will be treated equally for the purposes of the supplier obligation, regardless of where it was generated. They remove the way that a supplier’s market share, and therefore the proportion of the scheme costs that it is liable for, is calculated. Once the amendments come into force, Great Britain suppliers will no longer be able to discount imported renewable electricity from their market share.

The noble Lord, Lord Lennie, asked about companies providing evidence on the electricity bought through an interconnector. The contracts for difference scheme offers extremely good value for money to consumers and continues to help deliver lower prices. The impact will depend on the outcome of the competitive auction process and, subsequently, on wholesale market prices. In fact in 2022, the CfD generators paid a net total of £357.5 million back to the Low Carbon Contracts Company, because of course the strike price was way below the actual market price of electricity. That demonstrates how good and effective the CfD scheme actually is. Many other countries across Europe and the world are seeking to emulate the scheme because it has been so successful.

The regulations further currently provide that eligible imported electricity will not be considered chargeable supply for the purpose of calculating each supplier’s underlying liability for CfD payments. Suppliers have to submit evidence of eligible imports to the Low Carbon Contracts Company within six months of the end of the quarter in which the electricity was supplied. The LCCC then determines the amount of electricity that qualifies as green excluded electricity, according to criteria set out in the regulations, and takes this into account when calculating a supplier’s reconciliation payments.

Once these amended regulations come into force, suppliers will no longer be required to provide evidence of imported electricity. Only data on electricity demand obtained by EMR Settlement Ltd from the GB balancing mechanism will be used to calculate suppliers’ liability for CfD payments, or alternatively, CfD refunds in the event of net generator payments back into the scheme. EMR Settlement is a wholly owned subsidiary of Elexon Ltd and provides settlement services—the collection and distribution of payments from and to suppliers and CfD generators, on behalf of the Low Carbon Contracts Company.

The noble Lord, Lord Lennie, also asked about previously excluded sectors. In fact, there will be no change to the current list of eligible business sectors or companies under this amendment, with only those companies which meet the current criteria being eligible to apply for and receive the exemption.

In response to the noble Lord’s question about the inclusion of the mining of hard coal as an eligible sector, that sector meets the criteria as being both highly electricity and trade intensive. This means that its electricity costs make up a significant percentage of its operating costs and it is, of course, subject to a significant degree of international competition—as a result the same arguments apply that I outlined earlier in relation to carbon leakage.

Our net-zero strategy makes it clear that unabated coal has no part to play in our future power generation, which is why we are planning to phase out coal completely from our electricity supply by 2024. Coal’s share of our electricity supply has already declined significantly in recent years, from almost 40% in 2012 to less than 2% in 2021. For similar reasons, coal mining in the UK has itself been in long-term decline, reflecting domestic demand, and in fact only a handful of operational mines remain in the UK.

I hope I have provided sufficient reassurance to noble Lords, and I commend these draft regulations to the Committee.

Motion agreed.