Draft Electricity Supplier Payments (Amendment) Regulations 2017

Simon Burns Excerpts

Monday 20th March 2017 General Committees

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Jesse Norman)]

I beg to move,

That the Committee has considered the draft Electricity Supplier Payments (Amendment) Regulations 2017.

It is a pleasure to serve under your chairmanship, Sir Alan. This statutory instrument amends regulations concerning the contracts for difference scheme and the capacity market. Those schemes are designed to incentivise the significant investment required in our electricity infrastructure, keep costs affordable for consumers and help to meet our decarbonisation targets, while ensuring security of energy supply.

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 provides regular payments to reliable forms of generation or demand-side response in return for such capacity being available when needed, the purpose being to ensure that enough capacity is always in place to maintain the security of supply. In both schemes, participants bid for support via a competitive auction, which ensures that costs to consumers are minimised.

The next CfD auction, with a budget of £290 million, opens in April and will be available to less-established renewable technologies. That should result in enough renewable electricity to power 1 million homes and reduce carbon emissions by about 2.5 million tonnes per year from 2021-22 onwards. It will thus allow developers of innovative renewable technologies to come forward, while delivering the best deal for bill payers.

There have been three main capacity market auctions, held each December from 2014 to 2016, to secure capacity for four years ahead—that is, from 2018-19 to 2020-21. The latest of those secured 52.4 GW of capacity at a price of £22.50 per kilowatt per year. In January 2017, an early capacity auction was also held to secure capacity for winter 2017-18. That auction secured 54.4 GW of capacity at a clearing price of £6.95 per kilowatt per year.

The regulations will implement a second tranche of minor and technical amendments to improve the efficiency of the CfD supplier obligation—that is, the levy on suppliers that pays for the cost of CfDs. They build on a first tranche of changes that were approved by Parliament last year and became law in April 2016. These further changes are being implemented now to allow time for necessary changes to be made to the settlement system, which determines the way in which CfD payments are calculated and paid. The changes under consideration and those implemented last year were both the subject of public consultation and received a largely favourable response. The regulations also amend the levies that fund the companies established to deliver the CfD and capacity market schemes.

The supplier obligation is a compulsory levy on all Great Britain energy suppliers to meet the costs of clean electricity generation under CfDs. The levy is collected by a private company called the Low Carbon Contracts Company, of which the Government are the sole shareholder. The funds levied are paid to CfD generators for the electricity they have produced. The rates are set on a quarterly basis and consist of two payments: the first paid daily, based on every unit of supply; and the second a quarterly reserve amount, designed to ensure that the LCCC faces as little risk as possible in covering payments to generators. Both rates are set based on forecasts of payments to the CfD generators and levied on suppliers based on their market share. At the end of each quarter, the supplier payments are reconciled with actual payments to generators.

The changes made by the regulations will further improve the efficiency of the supplier obligation mechanism. The most significant changes will speed up reconciliation payments, so that over-collected funds are returned more quickly after the end of the quarter and suppliers face less onerous cash-flow risk. Secondly, they will allow the LCCC to reduce the reserve amount without notice when it has been overestimated, to ensure that suppliers do not overpay for renewable generation and to reduce the call on their cash flow. Thirdly, they will enable the LCCC to recover funds from suppliers when a compensation payment to generators is due in respect of generation that happened more than 10 quarters ago. Finally, they will prevent double counting of the green import exemption and the energy intensive industry exemption to avoid suppliers demonstrating a negative market share, thereby avoiding the payment of levies altogether.

Taking the regulations together with the changes introduced last year, we have estimated that the cost of CfDs to consumers will be reduced by £38 million between 2016 and 2020, which is a small reduction of 40p to 60p on consumer bills. The current set of changes alone is estimated to reduce bills by £22 million over the same period.

The second objective to be delivered through the statutory instrument is to set a revised operational cost levy for the LCCC and a revised settlement costs levy for the Electricity Settlements Company, which is the company responsible for collecting and making payments to capacity providers under the capacity market. Those companies play a critical role in delivering the CfDs in capacity market schemes, and it is important that they are sufficiently funded to perform their roles effectively. The Government closely scrutinise their operational cost budgets to ensure that they reflect the operational requirements and objectives for the companies and deliver value for money.

Both companies have performed well and the cost of their core activities is slightly down from 2016-17. The increase in both budgets is due to the cost of software upgrades to the settlement system, which are necessary to reflect policy changes that simplify and improve the overall effectiveness of the capacity market and CfD schemes. For example, the changes to the supplier obligation will need to be reflected in the settlement system. The software upgrades are being treated as operational costs rather than as funded via capital, which means that they will be charged in full to the levy in 2017-18 rather than being recovered over the lifetime of the asset through a depreciation charge. Overall, there is no difference in costs to supplier.

The operational costs were also subject to consultation, which gave stakeholders the opportunity to comment, and they subsequently remain unchanged. The amendment revises the levies currently in place to reflect the operational cost requirements in 2017-18.

Subject to the will of Parliament, the settlement costs levy for the Electricity Settlements Company is due to come into force by 28 March 2017, the operational costs levy for the LCCC by 1 April 2017 and the changes to the CfD supplier obligation later this year.

[Sir Simon Burns (Chelmsford) (Con)]

I am interested to know on what day the regulations will be made.

[Jesse Norman]

The regulations will be enacted today by a vote in the Committee and the settlement costs will come into force at the times indicated: the Electricity Settlements Company by 28 March; the operational costs levy for the LCCC by 1 April; and the changes to the CfD supplier obligation later this year.

Finally, I would like to assure right hon. and hon. Members that the Government will continue to evaluate and monitor the reforms following implementation, ensuring that the measures put in place remain effective and continue to represent value for money for the consumer.