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

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:

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 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.