My Lords, we return to the demand-side provisions in the Bill. We spoke earlier today about how this element of the Bill has been quite a late afterthought from the Government. Indeed, it was all initiated by the Government’s response to the consultation this May regarding some of the demand-side initiatives. Amendments have been introduced only on Report in the other House. From this, it is easy to deduce that DECC is developing its thinking on these matters and has perhaps been too dogmatic in trying to insist that the department’s design of the capacity market should be maintained. As evidence of this, I
contend that new documents are arriving with ever increasing ferocity on our desks, as the noble Lord, Lord Jenkin, surmised. We on this Committee are endeavouring to keep up with the DECC officials who are trying to keep up with the thinking, and it is a fair challenge. We have put down these probing amendments just to try to understand whether DECC has more to contemplate during its enjoyment of the parliamentary recess.
In DECC’s own document in reply to the criticisms of your Lordships’ Delegated Powers Committee, it reveals on page 11 at paragraph 57, regarding the meaning of “reducing demand for electricity”, that it understands that,
“it includes both temporary actions by electricity consumers to reduce their demands at times of system stress (known as ‘demand side response’ or ‘DSR’) and projects by which electricity consumers permanently reduce their consumption (known as ‘electricity demand reduction’ or ‘EDR’)”.
While its intention is,
“to enable DSR providers to participate in capacity auctions from their inception”,
there is nevertheless some concern that the department has yet to appreciate the full impact of what could be achieved with judicious re-engineering.
It is very important that the Bill is future-proofed and made to be seen to be relevant to future developments and technologies. Many in the DSR market feel that the Government are yet to appreciate the specific needs of their technologies and the relative immaturity of the market. Many would like to see a separate auction of sufficient volume to grow the market until it can compete with supply-side options. Amendment 53A seeks to define demand-side actions to provide capacity services to the market and gives powers to the Secretary of State to ensure that a certain amount of demand-side resource is procured. What does the Minister’s department want to deliver in Clause 21? Providing a reduction in capacity through DSR must have a value put on it.
Amendment 53B would require the prioritising of demand reduction providers in any future capacity market. The principle is that demand reduction over additional supply is clearly in the interests of consumers. It is far more cost-effective and energy-efficient. There is some need for clarity from the Government that demand reduction is not simply an afterthought to a capacity market designed around the provision of supply by large-scale plant but is prioritised in any capacity auction. There is also the question of determining what capacity is required once demand has been reduced. Is there a risk of overprocurement and distortion, as well as overpayment made through the capacity market? Can the Minister clarify how she sees the current plan working in respect of demand reduction?
We have tabled these amendments because there is clear concern within the sector that the capacity market is being designed with no meaningful consideration of the role that the demand side can play as distinct from the role that demand-side reduction and storage could play. DSR is unlikely to participate in the four-year auction because trying to analyse this forward for four years would be beyond its capabilities.
The Minister’s department will take some capacity off the four-year auction and put up it for a one-year auction in which DSR could participate. How will this operate? How will the department avoid inefficiencies? Does her department recognise that the market must be made to work effectively, not merely allow actions to happen?
Currently, Clause 21 defines “providing capacity” as either,
“providing electricity or reducing demand”.
It makes no mention of the demand-side response, or storage. The Government should be looking at how the demand-side response can be deployed in times of system stress to respond to capacity demand. A hospital or business turning down air conditioning or running standby embedded generation in response to a signal from the system can be a highly effective and cost-efficient way of providing additional capacity, rather than investing in keeping more plants on the system than would be needed.
The Minister is indeed correct to identify the role and experience of the demand-side response in the United States. The US experience is important, as the inclusion of DSR in a capacity market for PJM, a major US utility company, is credited with saving consumers $11.8 billon in a single delivery year; that is, approximately $200 per customer. DSR has been proven to be more reliable than traditional generation, delivering a higher percentage of committed capacity over a given period of time.
The transitional arrangements the Government have brought forward are intended to allow the system operator and market participants to gain experience of how DSR will operate in a capacity market and allow for improvement in the market’s design when it is eventually rolled out. However, the CHPA and other DSR providers have said that the proposals put forward by DECC risk losing the UK’s decentralised generation capacity participation in the transitional arrangements of the capacity market. This is because it appears that enduring arrangements are being designed entirely around large-scale power stations and that DSR still risks being a secondary concern.
There is a substantial risk to the trading of small volumes of electricity capacity within the capacity market. Decentralised participants could be locked out. Large plants that trade hundreds of megawatts of power risk excluding those, such as hospitals or universities, which trade 2 megawatts or 3 megawatts. The whole system appears to be based on plants responding to electricity market price signals. However, demand does not operate in the wholesale market and therefore cannot respond to signals it does not see. No clear mechanism has been proposed for ensuring that the demand side can see the market signals.
One or two issues remain unresolved. One of these is proposing the “baselining” of on-site capacity. Current proposals do not consider on-site generation as providing capacity to the system when in operation. This proposal is different from the treatment of power stations, which will be considered as having provided a capacity
service if they operate during a period of system stress, irrespective of whether they were operating beforehand.
The hospital making 2 megawatts out of its total 3 megawatt usage is excluded from reward but can avoid penalties only in its baseline. As well as DSR, electricity storage features nowhere in the capacity market clauses. Amendment 53C requires the Secretary of State to provide for additional licence capacity authorising storage of electricity. As our system includes more variable renewable generation, it will become increasingly important to encourage electricity storage.
The Government are currently directing £50 million into grid scale research and demonstrations in electricity storage. However, without a route to market, that money would be wasted. Electricity storage has the potential to provide savings of more than £10 billion per year by 2050—that is £400 per household—but no savings at all if the capacity market takes no account of this contribution. It would be interesting to hear whether the Government support the Electricity Storage Network’s target for an additional 2 gigawatts of storage installed on the system by 2020.
The present licence categories treat electricity storage as generation, which it is not, and the standard licence conditions do not allow for an overlap between the licence categories for generation, transmission, distribution and supply. This inhibits the deployment of electricity storage on our current system, as licence conditions generally restrict activities in more than one segment. Distribution network operators can own electricity storage. However, presently, some operators may infringe their distribution licence conditions, which restrict generation and supply activities, as the DNO needs to buy and sell electricity in order to operate the electricity storage plant.
I will make a comment later in support of the amendment of my noble friend Lord Hanworth but I conclude with a few questions. First, as the Government have said that they consider DSR and storage to be a part of the future capacity market, can the Minister say what level of DSR and electricity storage within the capacity market the Government would deem a success? I remember asking the Minister, when we were welcoming the final provisions on the Green Deal, whether she could perhaps map out to us what success looks like. What I am trying to get at is: can she be more specific than saying that she wants it to happen or that she thinks it will be a success? Perhaps I can challenge her to try to be more specific in mapping out to the stakeholders, who will take note outside, how she views this part of the Government’s operation. A supplementary question to that is: do the Government recognise the need for a separate set of rules for DSR within the capacity market? In recognising that, it is imperative that they undertake a review of the current rules, as there is widespread industry concern that they do not facilitate DSR.
My second question concerns the design of the capacity market and these trial auctions, which do not provide any long-term income stream for new electricity storage to be planned, installed and operated. The Electricity Storage Network and the Liquid Air Energy Network say that their members will not be able to
finance projects on the basis of the proposals. How do the Government intend to address these barriers?
I am very grateful to the Committee for indulging me for a moment longer so that I may come to the amendment of my noble friend Lord Hanworth, which follows on from some of the challenges under the amendments in this group. Providing a reduction capacity through DSR must have a value put on it. Explicit recognition is required that DSR has extra value in adding value at certain times of the day, which my noble friend will no doubt address. I beg to move.
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