HANSARD
Contracts for Difference (Electricity Supplier Obligations) (Amendment) (Coronavirus) Regulations 2020
- Motion to Approve
- 1:46 pm
- Moved by
- That the draft Regulations laid before the House on 4 June be approved.Relevant document: 18th Report from the Secondary Legislation Scrutiny Committee
- My Lords, the aim of this draft instrument is to limit the negative short-term impact on electricity suppliers of an unexpected increase in the costs of the contracts for difference—CfD—scheme as a result of measures introduced to reduce the spread of the novel coronavirus. Before outlining the provisions, I will briefly provide some context for the benefit of your Lordships.The CfD scheme is the Government’s main mechanism for supporting new renewable electricity generation projects in Great Britain. The CfD is a 15-year contract between a renewable generator and the Low Carbon Contracts Company—LCCC—a government-owned company that manages CfDs and is at arm’s length from the Government.Contracts are awarded in a series of competitive auctions that determine the strike price in pounds per megawatt hour that the generator will be paid for the electricity produced. Generators receive revenue from selling their electricity into the market as usual. However, when the market reference price of electricity is below the strike price, generators receive a top-up payment for the additional amount. Similarly, at times when the reference price is above the strike price, the generator pays the LCCC.The LCCC is the designated CfD counterparty under Section 7 of the Energy Act 2013, and as such it has a power to collect payments from licensed electricity suppliers through the CfD supplier obligation to enable it to make CfD top-up payments to generators. This obligation comprises a daily interim rate levy paid on each megawatt hour of electricity supplied, plus a total reserve amount paid in the form of a lump sum at the start of each quarter to cover uncertainty.Both rates are set by the LCCC three months ahead of each quarter, based on the LCCC’s forecasts of CfD payments and electricity demand. At the end of each quarter, the LCCC carries out a reconciliation of the amount owed by suppliers, based on the actual payments made to generators and amounts received from suppliers. The LCCC advised BEIS that, because of measures introduced to reduce the spread of coronavirus, it was anticipating a shortfall in funds required to pay CfD generators in the second quarter of this year, from April to June.The LCCC had observed a sharp fall in electricity demand across the quarter, of around 13%, as a result of the lockdown. This would have meant a significant reduction in the amount collected from suppliers under the interim rate levy. There was also a significant fall in the wholesale price of electricity, which would lead to increased payments to CfD generators of £18.6 million higher than forecast. The combined effect of these unanticipated changes is a forecast shortfall of £121 million between the amount owed to CfD generators and the amount collected from suppliers under the interim rate levy.To address the shortfall, the LCCC was considering an increase of between 22% and 35% in the interim levy rate part-way through the second quarter of this year. This would have been the first time such action was needed. Electricity suppliers would have faced an unexpected increase in their obligations at short notice and at a time when they were facing significant other pressures. Therefore, in line with efforts to support the economy in the light of the Covid-19 national emergency, the Government agreed to provide a loan of up to £100 million to the LCCC so that it could continue to pay CfD generators during the current quarter without increasing the financial burden on suppliers. The loan is governed by a separate agreement between BEIS and the LCCC and is not covered in this instrument.
- 1:53 pm
- My Lords, I thank the Minister most sincerely for his very helpful and comprehensive introduction, which enables me to be briefer than I had intended. I thank him also for his courtesy in asking us all in advance whether we had any questions.I should say first, as a Scottish Peer, that I am very proud of the progress that we in Scotland have made with renewable energy electricity generation. Indeed, it is now reported that an equivalent of 90% of Scotland’s electricity consumption comes from renewable sources, representing an increase of 14% year on year. Despite some policy uncertainty over recent years, which has limited deployment, our 100% target for renewable power generation in 2020 looks as if it remains on track. I am sure that the Minister will agree that success with renewables, including solar, onshore and offshore wind, and tidal and thermal energy, will all be critical in demonstrating that we in the United Kingdom have shown leadership when we come to COP 26, which we look forward to hosting in Glasgow next year.I have a couple of questions for the Minister. The explanatory statement to the instrument notes that there is opportunity for these regulations to be used in “similar exceptional circumstances” without the need for further secondary legislation or debate. Can the Minister inform the House what “similar exceptional circumstances” would look like in the future? In this event, would the Government commit to providing further loans to support the Low Carbon Contract Company?Finally, since these regulations are temporary, my main question is how the Government will reassess these payments in a year’s time. With the current uncertainty in the market, the composition of the players involved may have altered in a year’s time, so I would find it really helpful if the Minister would tell us and help us to understand how they will secure future payments and whether this will mean redistributing them among new market formations. I look forward to hearing the Minister’s answer to these two questions in his reply to this debate.
- 1:57 pm
- My Lords, the government loan and delayed payback mechanism in this statutory instrument gives the electricity suppliers time to work unexpected higher charges through to customers. By delaying four quarters rather than three, the extra cost can be fed into the retail price cap to ensure that higher prices do not hit in the winter months. It is all very logical but, in the retail price cap, will any account be taken of the fact that it is not domestic energy consumption that dropped due to lockdown? Working from home, having children at home, extra cooking, baking, computer use and other household activity has led to increased consumption, and putting these levy-related costs on to domestic supply later on is retail picking up the tab for disruption in industrial consumption.For those on low income, where fuel poverty is a serious matter, any rises are dreaded. What planning is being done for how the levy cost blip will be reflected in the price cap? Will the retail share of the levy blip be limited to cover, say, 30%, or whatever the 2019 domestic percentage of household electricity consumption is, and not the higher percentage that will probably happen in 2020 due to lockdown? Will it be reversed out of the baseline in later cap updates?My back-of-envelope calculation for the spring quarter, based on the £100 million cap, has a possible maximum levy of around £125 million, over 28 million households and using 30% of total electricity. That share would come out at only about £1.50 per household for the quarter. Will that be the kind of maximum increase allowed? To some, even that is significant. Further loans are presently ruled out, but is it not the case that an elevated levy is likely in later quarters, as overall consumption and market prices remain depressed?The Government said in their consultation that suppliers should absorb some of the costs, that being the reason for not giving 100% cover, and the payback will then be mutualised among suppliers extant in a year’s time—not least in case some go bust. Once the price rise comes in, all levy costs will surely be clawed back, but what will be the effect on consumers if some suppliers go under, including where there are advanced payments? Are those lost as unsecured creditors? Finally, have the consultation responses been published? I looked for them on the BEIS website but did not find them, and it is not really a public consultation without seeing the responses.
- 2:00 pm
- My Lords, I welcome this SI and say well done to the Government for anticipating this need. If they had not done that, there could have been problems with the continuity and reliability of supply, and it is absolutely crucial at this difficult time that we do not go through any of the old problems we had in the past. As an aside, I recently had no telephone, no wi-fi and indeed no water supply, but thankfully they are all back on again now.I have a few questions. First, what consultation was there with the key renewable companies over this arrangement and were any problems raised by them? Secondly, following the speech by the noble Baroness, Lady Bowles, does Ofgem fit into this anywhere? She is right in the sense that we know that, domestically, demand has gone up because everyone has been locked down and stuck at home, and we have all been using our computers far more than we would normally do. Thirdly, some might say that this action is undermining efficiency and making it a little too easy for companies that ought to be able to handle the toing and froing of challenges. However, maybe looking at the detail of the SI, the Minister will tell me that paragraph 7.5 of the Explanatory Memorandum answers that question.What exactly is the estimated cost to the Government through this transitional loan? Presumably it is a cost of lost interest, and is that somehow rolled up at the end of the process? Finally, as someone who was a very junior Minister in Northern Ireland, I am not sure why Northern Ireland is not involved. Is it because Stormont was not sitting and this came under Stormont, or is the infrastructure in Northern Ireland different from the rest of the United Kingdom?
- 2:02 pm
- My Lords, the only good thing to come out of the coronavirus lockdowns worldwide has been the biggest fall in energy demand in 70 years. That has had the fortunate effect that global energy-related carbon dioxide emissions in 2020 are set to fall nearly 8% to their lowest level in a decade. However, that reduced demand for energy means that the LCCC has a cash-flow problem. However, here is a remarkable statistic: renewables generated 47% of the UK’s energy in the first three months of this year.While I do not oppose the Government’s plan to step in temporarily to ease the situation for energy suppliers, I wonder what discussions are taking place about other ways to smooth out the demand-and-supply mismatch that can sometimes occur with renewable sources of energy, given that we cannot control when the wind will blow. For example, the climate change committee’s progress report, published last week, stated that battery storage facilities need greater investment and development. If we had the ability to store power when it was produced in excess, the LCCC would be much less likely to be in a situation where the price of electricity went negative. Is investing in battery technology—a technology that is moving apace—under consideration?Another way to smooth out supply and demand is to move energy around more efficiently—for example, through interconnectors. Can the Minister update the House as to when the Denmark-Britain cable will become operational?Given the Prime Minister’s intention to lift restrictions on people’s movements to get the economy moving again, which will have the effect of gradually increasing demand for energy, was a more phased approach to clawing back the deferred payment considered?Lastly, this is a Treasury intervention that will support energy suppliers, with the effect that consumers should be protected from energy price rises. Can the Minister confirm that that is indeed the case and that no supplier benefiting from deferred payments will increase energy prices for consumers?
- 2:05 pm
- My Lords, these regulations seem to suggest a fundamental flaw in the way the Government are thinking about funding new energy generation. It looks as though the Government intend to tie us into tens of billions of pounds of these contracts over the coming years, for everything from new nuclear power stations to solar and wind energy. Contained in these contracts is a guarantee that energy payers will pay high energy prices whether or not the wholesale price is much, much lower, and whether or not we use much less energy. Surely the Government can see that that is a bad business practice. Why would a Conservative Government do something like this?We have used less energy while in lockdown, and that has essentially bankrupted the Government’s whole energy-generation scheme; I understand that. As we embark on the rapid reduction in energy consumption that is necessary if we are to meet a net-zero carbon future, we will see the same thing happen again and again. However, for me this is a stealth tax. It will be deeply regressive, pushing the burden of costs on to the fuel-poor and disadvantaged while the wealthy will barely notice the difference.For these very reasons, the Government should abandon this bankrupt contract system and instead bring their energy-generation and energy-efficiency schemes into normal government capital investment, to be funded by progressive taxation. Will the Minister comment on those ideas?
- 2:07 pm
- My Lords, I congratulate my noble friend the Minister on bringing forward these regulations for our consideration this afternoon. My first question is not dissimilar to that asked by the noble Baroness, Lady Bowles, and I am grateful to her for the research she has clearly put into that. Paragraph 7.1 of the Explanatory Memorandum states this fairly complicated payments procedure and says at the end:“We expect that suppliers pass on the costs of these payments to their customers.”As we know, while retail shops and business customers generally closed down, as they were told to do because of the Covid-19 virus—and it was absolutely right that they did so—that meant that everybody was working from home and the consumption of electricity and water went up incrementally. I am therefore concerned that this will be passed on to the domestic customer in what is a very grey area as regards transparency of payments.Successive Governments have introduced renewable energy, and we as domestic customers pay handsomely for the privilege. However, the transparency of how we pay is indeed very opaque. Can my noble friend put my mind at rest as to how this increase will appear, and what role Ofcom will have in agreeing to this? Presumably Ofcom was consulted, and as the regulator it will have a view when it comes to sorting this out at the end of the next quarter or at the end of the financial year.Finally, I do not quite understand the thinking behind why the agreement that the Government have entered into—between BEIS and the LCCC—is not part of our proceedings this afternoon. That would have been very helpful. I hope that my noble friend will agree to publish all the responses on the website, in the normal way.
- 2:10 pm
- My Lords, I congratulate my noble friend the Minister on the clarity and thoroughness of his introduction to these regulations. I also sincerely thank all those key workers in energy and power production, not least everyone at National Grid, who have kept the lights and the heat on through this Covid crisis, often putting themselves in harm’s way to ensure that everybody across the country has power.I welcome the regs in the sense that they are necessary, given the current construction of the sector, but as other noble Lords have commented, there is an extraordinarily high level of complexity and opacity in the whole energy sector. Does my noble friend the Minister agree that it would be helpful to produce a clear chart showing the real price per kilowatt hour of energy, including everything, from whatever source that energy came?I appreciate that this is somewhat off-piste, but perhaps my noble friend will indulge me: in this new future that we are embarking upon, does Hinkley C in any sense seem like something we should be doing? A technology unproven and unbuilt, a deal done at a strike price three times the strike price at the time—it was a bad deal then and it looks disastrous now. If he were offered that today, would he say “deal” or “no deal”?Finally, what are the Government doing to address one of the most pernicious energy issues? Those on meters or pre-paid cards—those in our society who have the least—often find themselves paying the most. Does he agree with me that we still need to do so much to address this inequity?
- 2:13 pm