I am happy to give the hon. Gentleman further written assurances on that. He might be on rather weak ground in discussing the regulatory framework put in place for the banks, given that we have had to take immediate and fairly radical steps to improve it, but if I can give him any further reassurances on his main point, I certainly will.
The third main issue covered by this group of amendments is the funding and governance of the capacity market. I shall deal with the remaining Government amendments and new clauses, which relate to that market
and are, I hope, relatively uncontroversial, before coming to the more important amendments tabled by the hon. Member for Southampton, Test. New clauses 8 to 10 and amendments 105 to 107 will enable us to set out detail of the capacity market in a combination of two places: in regulations, changes to which would be made and overseen by the Secretary of State; and in rules, which once made by the Secretary of State could be overseen by Ofgem.
The intention is to give Ofgem the responsibility for consulting on and implementing future changes to those elements in capacity market rules, in line with evolutions in the existing market structure. These changes enable that. However, Ministers would retain accountability for key aspects of the scheme, such as capacity volumes and cost control. Amendments 101 to 104 make clear our intentions for the capacity market settlement body, which has overall responsibility for managing payment flows—in short, that capacity payments will have to flow through the settlement body; that it can discharge certain technical obligations and functions through an agent; and that it can recover costs only in connection with the obligations placed on it as the settlement body.
Amendments 45 to 50, tabled by the hon. Member for Southampton, Test, would allow a second, alternative capacity mechanism, known as a strategic reserve, to be included in the Bill. As I understand it, a strategic reserve would hold a small amount of capacity outside the market, to be deployed only in limited circumstances. The Government have always acknowledged the potential benefits of a reserve as a short-term measure. If it is necessary to respond to a short-term security of supply challenge, Ofgem already has powers it could use. For instance, it could strengthen the options that the national grid has, to ensure sufficient capacity is in place before the capacity market is implemented. However, I would suggest to the hon. Gentleman that a capacity market is a better medium-term solution to address the current investment challenge and ensure continued security of supply, for two reasons.
First, if used as a longer-term intervention, a strategic reserve could undermine the market signals for capacity providers by reducing revenue certainty. That is because of the uncertainty about when the reserve might be deployed and the negative impact on the revenue of other capacity providers. There is a danger that investors may decide that future Governments will be tempted to use the reserve too frequently—a reasonable concern in a world of rising prices—which would increase the risk of not getting a sufficient return on their investment. The resultant increase in financing costs would flow through to the consumer, with the long-term risk that less capacity is built and the Government are forced to create a larger and larger reserve, at which point the competitive market disappears. By contrast, a capacity market is open to all providers of reliable capacity, with the only exceptions intended to be plant receiving support under CFDs. This provides the right, market-based signals for both existing and new capacity. Secondly, offering both capacity mechanisms in the Bill—the capacity market and the strategic reserve—would create regulatory uncertainty about the Government’s preferred approach and, again, act as a disincentive to investment.
Let me turn, fourthly, to nuclear power. The Government have made it clear that nuclear generation has an important part to play in decarbonising electricity generation. It is
a source of reliable generation capacity and it is a vital part of our energy mix. CFDs are intended to provide support to all forms of low carbon generation; hence I could not support amendment 23, as it would exclude nuclear generation. I also have concerns about amendment 24, which seeks to limit the amount paid under a CFD to nuclear generation to no more than what can be paid to renewables generation. It would not make sense artificially to link the amount of support for one technology with support for another. Support should be set based on robust evidence and advice that demonstrates, for instance, that the level of support makes a project economically viable—and thus will attract investment—and that it delivers our policy objectives while minimising costs for consumers. More widely, renewables support rates will vary over time, as has happened with the renewables obligation, and a mechanism to link support levels in this way, as proposed in amendment 24, could be cumbersome and could restrict our discretion to set support levels that might otherwise provide value for money.
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