The Minister for Business, Energy and Clean Growth (Anne-Marie Trevelyan)
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.
Jacob Young (Redcar) (Con)
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?
Anne-Marie Trevelyan
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.
Anne-Marie Trevelyan
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.
Dr Whitehead
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?
Anne-Marie Trevelyan
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.
Mr Deputy Speaker (Mr Nigel Evans)
I will suspend the House for a short period to allow the sanitisation of the Dispatch Boxes.