My Lords, I thank my noble friend Lord Jenkin for his amendment. Amendment 53ZA proposes that providing capacity should take account of projected growth over a 10-year period. I understand that he has proposed it because of concerns about the
long-term capacity of electricity networks and the ability of distributive network operators to make strategic, long-term investment decisions. I should make it clear from the outset that the capacity market is not intended to drive investment in network capacity. Rather, it is designed to ensure that there is sufficient longer-term investment in electricity capacity, including generation and other forms of capacity, such as demand-side response.
In March, Ofgem published its strategy decision for electricity distribution network price control. That explained that price control had been designed to encourage distribution network operators to provide a high level of service for connections while maintaining a reliable network and delivering value for money for existing and future customers. The decision also explained that flexibility has been provided for DNOs to submit a case for strategic investment in their business plans on a project-by-project basis. Similarly, the Electricity Act 1989 already provides some flexibility for early investment—for example, the distribution network operator and its customer can make an agreement that allows an upfront user commitment agreement between the DNO and a customer who wants strategic investment. I understand that, in the case of UK Power Networks and its customers in the City of London, this is already happening.
It is vital that investment in our networks continues at a pace that supports our future energy needs. None the less, we must be mindful that there will be a balance to be struck to ensure that consumers do not pick up the costs of unused or underused assets. For this reason, it is right that Ofgem and the network companies continue to consider carefully where investment ahead of need is proposed.
My noble friend also makes an important point about ensuring that decisions on capacity of electricity supply are made with due regard to the long-term outlook. As such, for the capacity market, the Government have committed to publishing a delivery plan every five years and producing annual updates to that plan. These plans will include long-term forecasts of electricity demand and supply, and will inform the amount of capacity contracted through the capacity market.
I hope that my noble friend finds my explanation reassuring. Before I ask him to withdraw his amendment, I shall respond to the noble Baroness, Lady Worthington, on her questions about how the capacity market works and how it is envisaged. A forecast of future peak demand will be made for four and a half years ahead of the delivery year in which it must be available. The amount of capacity needed to ensure security of electricity supply will be acquired through a competitive central auction four years ahead of the delivery year. Generation and non-generation approaches such as demand-side response will be able to participate in the capacity auction. All generation plant, including existing plant, will be eligible to participate in this auction with some exceptions such as low-carbon plant receiving CFDs.
Providers of capacity successful in the auction will enter into capacity agreements committing to providing electricity when given notice in the delivery year in return for steady capacity payments or will face financial penalties. The costs of the capacity payments will be
shared between electricity suppliers in the delivery year. That is a brief outlook of how it will work but I hope that the noble Baroness is reassured that there is plenty of detail. She also referred to the Delegated Powers Committee. As she is aware, we have submitted extra information to the committee and it is now looking at that. We will then look at its recommendations but until that point it would not be right for me to comment on them. With that, I hope that my noble friend will withdraw his amendment.