My Lords, today we are considering the six instruments which form the implementing secondary legislation for the electricity market reform programme—namely, the draft Contracts for Difference (Definition of Eligible Generator) Regulations 2014, the draft Contracts for Difference (Allocation) Regulations, the draft Contracts for Difference (Standard Terms) Regulations 2014, the draft Contracts for Difference (Electricity Supplier Obligations) Regulations 2014, the Electricity Market Reform (General) Regulations 2014 and the draft Electricity Capacity Regulations 2014. I apologise from the outset: given that we are taking a large number of regulations together, I have some detailed speaking notes.
The electricity market reform programme is designed to encourage investment in secure, low-carbon electricity generation. The reforms that we will debate today will transform the electricity sector, supporting jobs, strengthening supply chains and boosting economic growth. The reforms have been strongly welcomed by industry, and that is best demonstrated by the fact that
it is already generating private sector investment in low-carbon electricity. Based on the information provided by projects, the eight renewables projects which have signed investment contracts—an early form of CFDs—will bring forward up to £12 billion of private investment. We hope that by delivering EMR this year, we can secure much more of this vital investment.
This investment, of course, is needed to ensure that we have a generation mix which responds to the challenge of climate change and meets our legally binding carbon and renewables targets. The investment is also necessary if we are to ensure that the lights do not go out. The UK faces very rapid closure of existing capacity as older, more polluting plant goes offline, and this needs to be replaced with a cleaner, more sustainable generation mix. To achieve this, we estimate that £100 billion of investment is required up to 2020.
The enabling powers to make this implementing secondary legislation are found in the Energy Act 2013, which completed its passage through Parliament last December. Since then, my department has finalised the policy detail for the two mechanisms for reform—contracts for difference and the capacity market. These two mechanisms are implemented through the draft regulations before your Lordships today. They have now been approved by the other place and, if approved by noble Lords this afternoon, are planned to come into force on 1 August.
Noble Lords may be aware that yesterday the EMR programme reached a significant milestone as we received state aid approval for the CFD for renewables, the capacity market and the five offshore wind projects which have secured investment contracts under the final investment decision-enabling for renewables process. This is a large step forward for the programme and, subject to today’s debate, will keep the Government on track to launch the first CFD allocation round and the first capacity market auction before the end of this year.
Passing these regulations will be another important milestone which will provide developers and financiers the certainty they need to continue making the investment our energy infrastructure requires. Timely delivery of the reforms will help to ensure that we are on track to meet our carbon and renewables targets and that we have cost-effective measures to keep the lights on.
One of the key objectives of EMR is to minimise costs to consumers, and delivery this year will also help ensure that the benefits to consumers are realised as soon as possible. A delay to implementation is likely to mean that more developers will seek support under existing mechanisms such as the renewables obligation, the closure of which the Committee will debate later. While these mechanisms have served us well, they do not deliver the same value for money to consumers and industry that CFDs provide.
Timely delivery of the reforms will also reinforce the UK’s reputation as one of the most attractive places to invest in energy globally. Industry and investors have demonstrated that they have confidence in the new arrangements and have already expended substantial resources in preparing for the introduction of EMR. It is vital that we maintain this confidence and along with it the vast economic benefits—not only in terms
of our energy infrastructure but in terms of job creation in energy industries and supply chains. The EMR will deliver that.
I know that securing approval for the implementing secondary legislation will be strongly welcomed by stakeholders, who are keen to engage and invest in the new arrangements, and I hope I will effectively explain why the timely delivery of these reforms is so important.
Before we commence the debate I will briefly describe the six statutory instruments under consideration. The first five instruments implement the contracts for difference regime. The Contracts for Difference (Definition of Eligible Generator) Regulations and the Contracts for Difference (Allocation) Regulations provide the starting point by setting out, respectively, which persons are eligible generators for the purposes of applying for a CFD and the eligibility criteria which must be met. The Contracts for Difference (Definition of Eligible Generator) Regulations define an eligible generator by reference to a person’s relationship to the generating station; and define those generating stations which are eligible generating stations by reference to the technology used by the generating station. The regulations include a list of 15 low-carbon technologies which are eligible for a CFD.
The allocation regulations stipulate qualification requirements that an eligible generator must satisfy in order that the application for a CFD by that generator may take part in the CFD allocation process, and provide for a three-tier appeals process in relation to the eligibility assessment. The qualification requirements include, for example, that an applicant’s project has secured relevant planning consents and that a grid connection agreement is in place. Applicants wishing to construct or alter offshore wind generating stations will be required to provide evidence of a Crown Estate agreement for a lease; and all projects generating 300 megawatts or more will be required to show that an approved supply chain plan is in place.
To avoid projects benefiting from a double subsidy and to ensure value for money, generating stations already in receipt of funding from another government support scheme, such as the RO, are excluded from the subject of a CFD application under the regulations.
Noble Lords should note that my department also intends to introduce, through future amendment to the regulations, a non-delivery incentive to discourage speculative or strategic applications where there is little or no prospect that they will deliver on CFD commitments. We are also exploring measures that prevent an applicant who has engaged in such behaviour from applying for a CFD in respect of a generating station on the same site as that included in such a speculative application, for a period of time that will cover at least the allocation round subsequent to that in which the CFD was offered or entered into.
The allocation regulations set out the parameters for the allocation process. Included as part of this is how applications are to be assessed by the delivery body; how the budget for each round is notified to those wishing to apply for a CFD; and how an allocation framework applies to an allocation round. The allocation framework is a separate document that sets out the
CFD auction process in detail, including the individual rules that apply to each auction, and may, where the allocation regulations permit it to do so, set out supplementary qualification requirements. Having a non-statutory document in the form of an allocation framework helps the Government effectively to balance the need for regulatory certainty for investors with the flexibility needed to adapt the auction rules to changing circumstances or to close loopholes that undermine the integrity of the auction process. It would not be practicable to subject any changes in the auction rules to any parliamentary procedure as doing so might constrain the Government’s ability to deal quickly with a problem that has been identified with the technical auction rules.
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The allocation regulations stipulate that an allocation framework must be published in advance of each allocation round opening for application. Noble Lords may wish to note—indeed some may have already noticed—that the latest version of the near-final allocation framework, which is intended to apply to the first allocation round due to take place this autumn, has been placed in the House Library. Noble Lords may also have noticed that today my department has published indicative budget figures for the first CFD allocation round. These have been released around three months ahead of the round opening to provide visibility and certainty for investors, enabling them to prepare their applications. Final budget figures will be confirmed in a budget notice at least 10 days ahead of the allocation round opening.
I turn to the third set of regulations which implement the CFD regime: the Contract for Difference (Standard Terms) Regulations. These regulations set out how a generic CFD—one issued on standard terms following a notification by the delivery body—may be drawn up, offered and publicised. It includes a list of the standard terms which must be included in a CFD contract, helping to ensure parity between contract holders and consistency for the duration of the CFD regime. Again, I draw the Committee’s attention to the need to provide consistency and certainty with flexibility. While the essential elements of the CFD contract will be consistent for all CFD holders, we also want to ensure that a wide range of developers are able to access the benefits of the regime. As such, we have included provision for generators to request necessary modifications to the standard terms that are of minor effect. This flexibility has been tightly defined in the regulations so that it is available only to generators precluded from applying for reasons they cannot change, and the changes must not alter the risk/reward balance of the CFD or allow the generator to gain any kind of commercial advantage. The standard terms regulations also specify how the CFD counterparty—designated earlier this month as the Low Carbon Contracts Company, which is set to become operational and have full powers on 1 August—must prepare, offer and register CFDs.
I turn to the fourth set of regulations, the Contracts for Difference (Electricity Supplier Obligations) Regulations, which establish the supplier obligation mechanism, a levy on all licensed electricity suppliers to meet the costs of the support provided to low-carbon
generation under the CFD regime. The levy will apply proportionately to all suppliers in Great Britain from 1 April 2015, with contributions based on market share. The Government carefully considered the impacts of the supplier obligation on suppliers and competition in the market when designing the mechanics of the obligation. We have engaged extensively with stakeholders throughout policy design, and following consultation feedback we have modified the design of the supplier obligation. The model we have adopted is a fixed levy with a quarterly reserve fund and reconciliation, rather than the previously proposed fixed levy with an annual reserve fund and reconciliation.
Our analysis suggests that the quarterly levy design will reduce the average size of the reserve fund collected per year from suppliers over the period 2015 to 2020 by around 70%. As a result, the average cost to suppliers of financing the reserve fund is expected to be more than halved over the same period, which will be of particular benefit to smaller suppliers. The (Electricity Supplier Obligations) Regulations also set out the arrangements for the collection of a small additional levy from all licensed electricity suppliers to pay for the CFD counterparty’s operating costs.
The fifth and final instrument which implements the CFD regime is the Electricity Market Reform (General) Regulations. There are three aspects of the regulations which I would like to draw to the attention of noble Lords, which I will briefly describe. These are: a requirement on the EMR delivery body to provide information and analysis in relation to strike prices; provisions relating to the submission of an approved supply chain plan; and the creation of a liability shield for National Grid Electricity Transmission plc as the EMR delivery body.
The first relates to the information gathered and supplied by the delivery body—National Grid—which the Government use to inform decisions taken on EMR, such as the CFD strike prices. Such decisions are taken, based on key assumptions using electricity market and electricity generation technologies data, and therefore it is essential that the information used is robust. The general regulations, therefore, place an obligation on the delivery body to supply such information relating to the development of CFD strike prices, and also confer a power on the delivery body to request certain information from CFD-holding generators, if needed, to perform effectively its information and analysis function.
We consider that this mechanism is necessary to ensure that the Government have the best information available when making decisions relating to CFDs. However, we have sought to minimise any adverse effects on generators. To avoid any unnecessary administrative burden, the power for the delivery body to request information from generators applies only when it has been unable to obtain the information it reasonably believes is necessary from the CFD counterparty in the first instance. The CFD counterparty will already hold a wide range of information, and, therefore, we expect that on many occasions there will not be a need to request information. To allay potential generator concerns about sharing information, particularly where this could be commercially sensitive, we have
taken forward a series of measures to manage potential conflicts of interest between National Grid’s EMR delivery body and commercial roles to ensure that information is properly safeguarded. We are doing so via modifications to National Grid’s transmission licence.
I turn now to the second aspect of the regulations, which is how and when an eligible generator may make a supply chain application. As I mentioned earlier, the allocation regulations stipulate that applicants with projects generating 300 megawatts or more will be required to show that an approved supply chain plan is in place. These general regulations detail what a supply chain plan should cover. The purpose of this requirement is to help ensure that the reforms support the development of a diverse, robust supply chain and support innovation and the development of skills. Draft guidance on developing supply chain plans has been published, and the final version of the guidance is expected be available on 1 August when applicants can start to submit their plans—subject, of course, to approval of these regulations.
The final aspect of the general regulations, which I shall describe very briefly is how these regulations create a liability shield for National Grid Electricity Transmission plc, protecting it from liability and from damages arising as a result of exercising EMR delivery body functions. We consider that it is appropriate for National Grid to be protected against the unforeseen risks which may arise for the company as a result of its new, additional responsibilities as the delivery body. However, we recognise that it is critical that this protection does not undermine incentives for National Grid to perform effectively, nor should it prevent complaints or concerns from CFD generators or other stakeholders being properly addressed. To ensure that we achieve the correct balance between protection and responsibility, a number of exclusions to the liability shield have been applied following consultation.
While there are five instruments implementing the CFD regime before us today, we intend to bring forward a sixth instrument which will introduce the offtaker of last resort mechanism. This will help independent generators access the market by ensuring that eligible renewable generators have access to a back-stop PPA on specified terms with a creditworthy offtaker throughout the duration of the CFD. Subject to consultation, the regulations will be laid before Parliament in the autumn, and we intend them to be in force by the first allocation round—ensuring that CFD applicants will have a high degree of clarity about the arrangements in advance of the first auctions.
I turn to the final instrument, the Electricity Capacity Regulations, which, together with the capacity market rules, implement the second EMR mechanism—the capacity market. The capacity market will provide a regular retainer payment to reliable forms of capacity, on both the demand and the supply sides, in return for such capacity being available when the system is tight.
The regulations set the overarching strategic design framework for the capacity market and include the aspects of the design where it is appropriate that the Secretary of State retains responsibility, such as setting the amount of capacity to procure in a capacity auction. As well as provisions relating to the Secretary of
State’s role, the regulations include core features such as provisions concerning the auction parameters, eligibility for capacity auctions and dispute resolution and appeals.
The rules, in contrast, provide the technical and administrative detail for implementing the operating framework set out in the regulations. The rules were laid before Parliament on 19 June and the first set of rules is subject to an approval process equivalent to the negative procedure—although, after the first capacity auction, future changes will be consulted on and made by Ofgem. We consider that this approach will help to ensure that there is sufficient flexibility to allow for timely operational changes where necessary without impinging on the robust framework set by the regulations.
The Committee should also note that the Electricity Capacity Regulations include provision for a levy on suppliers to fund the capacity market settlement body’s costs to 31 March 2015. However, to align the capacity market and contracts for difference regulations, it was decided that a dedicated separate set of regulations, the Electricity Capacity (Supplier Payment) Regulations, will be provided. This instrument will make provision for payment post-31 March 2015 and will be laid in Parliament shortly. These are technical provisions that we are keen to ensure we get right, and they do not need to be in force prior to the initiation of the first capacity auction.
I express my thanks to noble Lords for enduring a very long introduction—but it was necessary given that there are six instruments and it is a quite a complex area. I beg to move.