My Lords, I thank the noble Lord, Lord Grantchester, for his detailed explanation of his amendments. The Government have already made it clear that the demand-side response and electricity storage will be eligible to participate in the capacity market. We have announced that these technologies will be supported by transitional arrangements to help develop their capability and enable them to compete on a level playing field against generation. However, while we agree that these are two important aspects of providing capacity, the subsection already allows Secretary of State to make further provision for the meaning of “providing capacity”.
The definition in this subsection is not intended to be exhaustive, nor would it be if these amendments were accepted. There are other existing technologies, such as interconnectors, which may, at some point, play a part in the capacity market, along with other new technologies in the future. This clause seeks to maintain the flexibility to include this full range of technologies, including demand-side reduction and storage in the capacity market, while leaving it open to incorporate novel technologies, should they emerge in the future.
Amendment 53B is intended to ensure that demand-reduction providers are given priority over other providers in the awarding of capacity agreements through capacity auctions. There are a number of reasons why the Government do not see this approach as desirable. First, the capacity market seeks to encourage genuine competition by placing all forms of capacity provision on a level playing field. This is the best way to ensure value for money for consumers, and the reason why no capacity quantity will be ring-fenced for any particular technology type.
None the less, we recognise that certain technologies, such as demand-side response and storage, have different characteristics from generation. That is why we have announced the transitional arrangements. In addition, we have designed the enduring capacity market to ensure that demand reduction and storage can participate effectively by running capacity auctions both four years ahead and one year ahead of when capacity is expected to be required.
As we have already debated, the Government are also proposing an electricity demand-reduction pilot
to inform the future entry of EDR into the capacity market. Holding an auction four years out ensures that there is sufficient time to build and commission new generation plants as necessary. However, demand-reduction providers have told us that opting into capacity agreements so far in advance of the delivery year would not be possible for most of their projects. This is why we are giving demand-side response and storage the option of participating either in the auction held four years out or in a further auction held one year ahead of delivery.
It is currently risky for demand-side response providers to predict the amount of demand reduction they will be able to provide four years ahead of a delivery year. This risk is significantly reduced in a one-year auction and we would expect them to be awarded capacity agreements at this stage. This is because we envisage them being able to provide cheaper capacity than generating plants.
In summary, this amendment would not be compatible with a technology-neutral approach. Furthermore, it risks either forcing demand-side response providers into taking on unacceptably large risks to align with the timescales required for building new generating plants or negating the possibility of new plants participating in the capacity market, risking a significant shortfall in electricity supply and the very real possibility of regular blackouts.
Amendment 53C would require the Secretary of State to modify the Electricity Act 1989, adding an additional licence condition authorising a person to store electricity. Storage of electricity is not presently an activity that requires a separate licence, although some storage providers may be generation licence holders. I therefore reassure the noble Lord that electricity storage would be able to participate in the capacity market without this amendment. The Government have already confirmed its eligibility and this is irrespective of its licence status. This is because Clause 22 does not restrict participation in the capacity market only to licence holders. It also allows the Secretary of State to define further who may be a capacity provider in regulations.
The noble Lord, Lord Grantchester, also mentioned electricity storage. We agree that storage technologies are still developing and further innovation is needed to bring down costs and find ways of scaling up. We are supporting two innovation competitions, the first winners of which were announced in May. In the large-scale storage competition, 12 winning projects were given £17 million of funding for the first feasibility phase. Decisions on which projects will proceed to the demonstration phase are expected in September. The component research and feasibility study competition has four projects so far.
The noble Lord, Lord Grantchester, asked about a separate set of rules for DSR within the capacity market. We do not envisage a separate set of rules. We envisage that the rules and regulations will cover all technologies eligible to participate in the capacity market, although the transitional arrangements for DSR will be incorporated. He also asked about baselining for on-site capacity. This will be covered in the detailed capacity market regulations and will be the responsibility of the national system operator.
The noble Lord asked what I visualised as success, given his previous question on the Green Deal. I view success in the long term as a programme that will last many decades. In reference to the Green Deal, I am already witnessing success. We had more than 44,000 assessments up to the end of June and 115,720 installations under ECO. That is what I would call successful.
Turning to Amendment 53AA, tabled by the noble Viscount, Lord Hanworth, which proposes a definition of demand-side response to be added to Clause 21, the Government have already made it clear that demand-side response and electricity storage will be eligible to participate in the capacity market. As I made clear in response to the questions of the noble Lord, Lord Grantchester, we have announced that those technologies will be supported by transitional arrangements to help them to develop their capability and enable them to compete on a level playing field against generation.
I hope that the noble Lord, Lord Grantchester, and the noble Viscount, Lord Hanworth, have found my explanations reassuring, and I hope that the noble Lord will withdraw his amendment.
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