Electricity Supplier Payments (Amendment) Regulations 2026
(1 day, 9 hours ago)
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Lord Whitehead
That the Grand Committee do consider the Electricity Supplier Payments (Amendment) Regulations 2026.
The Minister of State, Department for Energy Security and Net Zero (Lord Whitehead) (Lab)
My Lords, you have got me again. These draft regulations were laid before the House on 2 February 2026. I trust that since they are very technical in their nature and very modest in their effect, they will be agreed, because they are an essential element of making sure that our supplier payments and supplier collection work well for the future; they are an integral part of how the system works, so I hope that they will meet with general agreement.
This statutory instrument amends regulations concerning the levies used to fund the operational cost budgets for the Low Carbon Contracts Company and the Electricity Settlements Company. Before I proceed, I apologise to the Committee for the enormous number of acronyms that will no doubt emerge during this debate and in my speech. Let me start with the LCCC and the ESC, which I have already explained.
The LCCC administers the contracts for difference scheme on behalf of the Government under the Energy Act 2013. Under that Act, the LCCC also administers schemes modelled on the contracts for difference, including the dispatchable power agreement, the DPA, and the low-carbon dispatchable contracts for difference, or LCD contracts for difference. The LCCC also acts as the revenue collection counterparty for the regulated asset base for new nuclear under the Nuclear Energy (Financing) Act 2022.
It is anticipated, subject to future policy decisions and the will of Parliament, that the LCCC will conduct additional work to support government energy objectives under the Energy Act 2013. This includes work on a new scheme supporting the deployment of large-scale power bioenergy with carbon capture and storage electricity generators, work relating to DESNZ’s proposals to support nuclear generation, and work relating to DESNZ’s proposals to potentially support landfill gas generation.
The ESC administers the capacity market scheme. Those schemes will incentivise the significant investment required in our energy infrastructure to keep costs affordable for consumers and help to deliver our clean power mission, while keeping our energy supply secure.
Contracts for difference—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 for consumers. AR7, the most recent CfD auction and the seventh to date, secured a record 14.7 gigawatts of new clean energy capacity across Great Britain, making it the largest round ever delivered. It brought forward a diverse range of renewable technologies while delivering a good deal for bill payers. The LCCC is currently signing 197 CfDs with projects that were successful in this auction.
Dispatchable power agreements—DPAs—under the Energy Act 2013 are agreements modelled on CfDs. They have been designed to instil confidence among investors in power carbon capture and storage projects and incentivise the availability of low-carbon, non-weather dependent dispatchable generation capacity. The LCCC signed its first DPA on 19 November 2024 for the Net Zero Teesside Power project. This pioneering project in the north-east aims to build the world’s first commercial-scale gas-fired power station with carbon capture and storage.
Over the next three years, the LCCC is expected to sign additional DPAs, which will drive the private sector investment required to bring forward further power carbon capture and storage projects by the mid-2030s. The LCCC will be the counterparty for these DPAs, as it was originally for CfDs, and funds have been included within the budgets to support this role.
The LCCC also signed its first low-carbon dispatchable CfD—LCD CfD—with Drax Power Ltd on 4 November 2025. This agreement will ensure that Drax generates electricity when needed between 2027 and 2031, thus bolstering our energy security. It is also a good agreement for consumers, saving them around £6 per year on their household bills compared to previous arrangements.
The Government also agreed heads of terms with EP Lynemouth Ltd on 6 February 2026 for an additional LCD CfD. If a full contract is concluded in the following month, this will further bolster our energy security by ensuring that Lynemouth continues to generate when needed between 2027 and 2031. Funds have been included in the budgets to support the LCCC’s role as the intended counterparty for this LCD CfD, as well as its role as counterparty for the existing contract with Drax Power Ltd.
The revenue collection contract with Sizewell C Ltd, the first project to use the regulated asset base—RAB—model for new nuclear, became effective on 4 November 2025, and funds have been included in the budget to cover the LCCC’s operational costs as a revenue collection counterparty for the RAB. As noble Lords can see, this all amounts to a large amount of additional work and activity for the LCCC, which is important in terms of this particular SI.
Turning to the ESC, 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 provides all forms of capacity and the right incentives to be on the system, delivering capacity when needed by increasing generation or by turning down electricity demand in return for guaranteed payments. The capacity auctions held to date have secured the capacity we need to meet the forecast peak demand out to 2028-29. A T-1 auction is currently ongoing and a T-4 auction will take place next week, securing most of the capacity we need out to 2029-30. In both the CfD and capacity market schemes, participants bid for support via a competitive auction that ensures that costs for consumers are minimised.
In the DPA, agreements are allocated through a process involving competitive assessment, followed by shortlisting then a final stage of bilateral negotiations between project developers and DESNZ. In the LCD CfD, contracts are agreed following a structured negotiation process between DESNZ and the generator. This process ensures that only those contracts are signed that offer value for money for consumers and include strict sustainability criteria.
Revenue collection contracts under the RAB model are agreed through a structured process involving DESNZ, Ofgem and the LCCC. These contracts provide a stable, regulated revenue stream to projects during construction and operation. In turn, we expect the RAB to lower the cost of financing for nuclear, one of the biggest drivers of new project costs, resulting in better value for money to consumers.
The LCCC and ESC’s effective administration of the CfD, the capacity market and other schemes to date has demonstrated their ability to deliver such schemes at least cost to consumers. It is in part for this reason that the LCCC has been working with DESNZ and other departments to develop new schemes for incentivising deployment of more low-carbon technologies. For example, the LCCC has supported DESNZ in the development of incentives for bioenergy with carbon capture and storage. Although this has not been confirmed, contracts for such projects could potentially be entered into following a process established under the Energy Act 2013. Were DESNZ to move forward with this option, the LCCC would need to undertake activity to prepare for acting as the counterparty in the next three years. Consequently, funds have been included within the budget for this purpose.
The LCCC and ESC are mindful of the need to deliver value for money, as their guiding principle is to maintain investor confidence in the schemes they deliver 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. It is because of actions like that that CfD operational costs per contract are expected to fall by 27.3% per CfD across the budget period, despite the growing size of the CfD portfolio. It is a similar narrative for the ESC, which expects the number of capacity market electricity meters to exceed 1.2 million over the budget period, a 450% increase on current meter numbers. It estimates that costs per meter will fall by 23% over 2025-26 to 2028-29. 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, ensure that they represent value for money. Subsequently, the budgets remain unchanged.
In conclusion, to summarise this rather detailed and technical narrative, the LCCC has done a great job in managing as the counterparty for taking money in for contracts, giving money out and balancing between the two—and, indeed, when it runs a surplus it gives it back to the companies that are paying the money back in. Its activities have changed very substantially over the years, and the levy that goes into those companies has not changed since 2022. Therefore, it is right that the levy coming into the LCCC and the ESC for the expanded work that they do is reviewed, which is what the Government have done, to make sure that the LCCC can cover its costs for the relevant financial years up to 2029-30.
I assure the Committee that the Government are also mindful of the uncertainties involved in setting a budget for the next three years, such as world events impacting energy demand and policy decisions on new schemes that have not yet been taken. Consequently, DESNZ will keep the companies’ budgets under careful review throughout the budget period to ensure that costs to consumers are minimised. I commend these draft regulations to the Committee.
Lord Fuller (Con)
My Lords, there is a reason why UK energy prices are some of the most expensive in the world. We are starting from a high base and we are increasingly vulnerable. At the moment, our gas prices are six times higher than you might find on an ex-NOLA basis: that is, exported from New Orleans. We are more expensive than the rest of Europe, apart from Germany, which has its own particular industrial problems, and we are increasingly vulnerable because we are trying to run our 24-hour-a-day, 365-day-a-year economy on energy sources that do not work at night or when the wind does not blow. I understand that, and I am not against using renewable energy—we need to have an energy mix—but the way we are going at the moment is to put too many eggs in the renewables basket.
With this statutory instrument, the name is on the tin: it is all about nuclear energy, but the speech that the Minister gave was not really about nuclear at all, but about the mission creep that has led to us having the world’s most expensive industry, whereby we are deindustrialising. Only today, what a shame that the Huntsman Group has announced that the Wilton facility, that last vestige of ICI at Billingham, could be closed. How ironic it is that the obituary of Sir Ronald Hampel, the architect of ICI, was in the Times this week: he must be turning in his grave.
This debate has all been about carbon capture and storage. I did not realise it was going to be, I thought it was about nuclear, but there we are. Carbon capture and storage is expensive, technically challenging and hard to implement. It does not work, it is the most expensive way of doing it and it is unproven. If it were proven, it would be eligible to be discounted against CBAM, but it is not. One of the main things by which this Government want to take carbon reduction on board—they are parroting and trumpeting carbon capture and storage—is ineligible for the headline carbon reduction process. Can noble Lords not see the incompatibility here?
What we have heard so far in this debate, and I know it is early days, is that—
Earl Russell (LD)
This is not a debate. This is an SI about the mechanism for contracts for difference. It is not a debate on energy policy.
Lord Fuller (Con)
I thank the noble Earl, but he will forgive me for having made an introduction, and now I come immediately to the substance, because what we have heard, and it came from the Minister’s mouth, is that this is all about investor confidence. This is about subsidy farming; this is about underwriting the most emitting power station in Britain, Drax, which is responsible for the desecration of huge tracts of forestry on the other side of the world, the shipping costs associated with getting it and its transport to that power station, as if it is somehow renewable. That is a fantasy.
What these regulations underpin is a false economic market that says, “No matter how high the gas price is”, and, my goodness, gas prices are high now, “we’re going to bid up the costs of renewables in an unearned income”. This is financial engineering. We are kidding ourselves that we are doing this for low carbon. We are creating a false market in unproductive assets such as carbon capture and storage. When we invest in carbon capture and storage, and I use the word “invest” advisedly, we are not investing in productive assets that will generate an economic return; we are just burying money, money that we need.
I do not deny that, as a result of this regulation, the authorities—forgive me, there are so many acronyms, I cannot remember them all, the LCCC and so forth—have to be paid for. However, this debate has exposed that it is not just about paying for the authorities, it is about financing a mission creep into all sorts of areas that collectively and cumulatively are driving the cost of our energy. Householders are paying more and industry is paying more—and, candidly, industry is now voting with its feet to go to other parts of the world because it cannot afford all this.
At some stage, we need to draw a line. I am grateful that the Minister has used the word “crisis” to describe the circumstances currently being visited on the Middle East and, by extension, on our own economy. When the facts change, you need to alter your position, and when it comes to this panoply of extra burdens on industry—not least contracts for difference—we need to have a fresh look, because the definition of insanity is doing the same thing over and over again and expecting the outcome to change. This nation cannot afford it, and neither can our industry or our householders. Clearly, we are going to note this statutory instrument, but at some stage the music needs to stop.
Baroness Redfern (Con)
My Lords, it is a pleasure to follow my noble friend and to have the opportunity to speak to this statutory instrument. I support and welcome the update levies to fund operational costs of low carbon and nuclear energy schemes. However, it is the wider context that is my concern: the continued high prices of electricity, which are among the highest in the world for our heavy industry—such as steel, which is truly disadvantaged when having to compete worldwide. Our high-energy intensive industries—not only steel, chemicals and ceramics, which are the industrial base of the UK—are, therefore, left inadequately supported.
We all know that lower electricity costs directly help to retain manufacturing reinvestment and jobs, and support the supply chains, so it is disappointing to see manufacturing jobs moving abroad in the past 12 months. For high-energy intensive industries to compete on a level playing field, confidence must be targeted, building that elusive confidence and bringing the precious private investment into the heavy sector. The Government know they have to develop and go further with serious long-term plans, and possibly introduce a two-way contract for difference to provide a competitive wholesale electricity price to support and restore our British industrial competitiveness for the next decade.
Finally, the Government must support further—rather than undermine—the UK’s wider industrial strategy and growth emissions. I look forward to the Minister’s reply.
Earl Russell (LD)
My Lords, the draft Electricity Supplier Payments (Amendment) Regulations make technical but necessary changes to the levies that electricity suppliers pay to fund three of the UK’s key energy schemes: the contracts for difference—CfD—scheme, the capacity market and the nuclear regulated asset base, or RAB model.
There is a sense of gravity on these Benches in that we fully recognise the role that CfDs have played, since they were introduced by the Liberal Democrats a long time ago, in helping to fund and secure funding for our energy transition. We recognise that these are necessary updates, and we welcome what the Minister has said to introduce these amendments. We welcome the measures that are being taken to ensure that efficiency savings are gained. Therefore, we fully support this SI.
Lord Moynihan (Con)
My Lords, I am very grateful to my noble friends Lady Redfern and Lord Fuller for their contributions. They bring a great deal of expertise to this Committee from a lifetime outside London in places where industries’ success has depended on low energy prices. For them to give up their time and dedicate it to the work of this Committee is commendable, and I associate myself with everything that both of them said.
That helps me in one way because it means that I can be short on this occasion. I will make just make four points. First, Drax has been raised. There are still major issues with Drax, as the Minister knows. Billions have been spent in public subsidies on it. As I recall, it was axed from the S&P green bond index because it clearly did not add to the net-zero objectives of either this Government or the previous one. Indeed, the burning of pellets releases CO2 immediately and does not achieve anything except for carbon debt. That undermines our net-zero goals, not least because the pellets come from the west of Canada; they are brought right the way across Canada and must then be transported to the United Kingdom by boat. The sooner we grasp the nettle and stop biomass burning, the better. In fact, it is unfair even to call it biomass: it is a CO2 pellet-driven wrong solution for Drax. Today, it has contributed a significant amount of electricity generated into the grid—not much less than comes from solar energy in the UK at the present time.
However, these are technical changes—this has been made very clear—and we on these Benches will not oppose them. I would just say three things. One is that the heart of this is, in fact, nuclear energy; look at the introduction and the rest of the statutory instrument. On the nuclear energy policy question, I welcome the fact that the Government have committed to implementing the recommendations of the Fingleton review in order to make nuclear power much cheaper. That is really important; we need to make it affordable, and it needs to be quicker and easier to build. We look forward to receiving the relevant legislation—even if I anticipate that, on that particular Bill, it will be colleagues from the left of the Labour Party and the Green Party who will give the Minister a lot of airtime because there is no doubt that the environmental impact is going to light the red touchpaper of the Labour left and the Green Party, which the Secretary of State has done so much to court.
Secondly, this Government cancelled the previous Government’s full-system cost analysis of the energy system. This statutory instrument highlights that such an analysis is important and would help all of us in this Committee—indeed, all of us in the House—to understand the cost of energy. I ask the Minister to consider reintroducing it, certainly before any further legislation comes before the House.
Finally—I was not going to make this point but I think it is important—I echo the comments made by my noble friends. The Government have not fulfilled their pledge to cut energy bills by £300. Pushing the costs on to tax bills is simply sleight of hand. The truth is that the Secretary of State’s made-up promise to cut bills by £300 has become, understandably, a national embarrassment for the Government, so they have turned to the already-struggling taxpayer for a bailout of £7 billion.
With all that said, I promised to be brief and make only a few comments on this instrument. These are technical changes, and we on this side will not oppose them, but it has been exceptionally helpful for the Committee to hear the comments made by my noble friends and the noble Earl, Lord Russell; I look forward to hearing the Minister respond to them.
Lord Whitehead (Lab)
I thank noble Lords for, as I have said on previous occasions, their valuable, extensive and wide-ranging contributions to the debate. I am similarly tempted to follow the wide-ranging comments that have been made—some of which I agree with and a lot of which I do not—but I do not think that this is the place to undertake that particular debate.
As noble Lords have reflected on, this SI is, in essence, about a practical and straightforward measure to ensure that the body that administers the working of the CfDs and an increasing amount of further contracts—acting as the counterparty and the proper regulatory body to make sure that there is value in all directions from the money that is collected—simply has the wherewithal to make sure that it can do that job. As I have said, the levels of that wherewithal were set in 2022 and have not been revised since then. They really need to be revised so that we are not in a position where the taxpayer has to come in and bail out the LCCC or similar bodies, come 2028-29, if they do not have sufficient funds to administer the contracts in the way they should.