My Lords, my noble friend the Minister has made a very brave and thorough attempt to explain all these complicated regulations to the Committee and I do not envy her her task. This is an immensely complicated business, and I approach this as one who has spent many months over the last two or three years dealing with these matters—first on the Energy Bill, now the Energy Act 2013, and in the months since then. I see that I am surrounded by a very select band of aficionados who have been doing the same, and I think that between us we have the capacity to put some questions to my noble friend.
I entirely endorse the description of the scrutiny committee, which reported a few days ago. In paragraph 9 of its report, it said:
“The number of statutory instruments laid, and the highly detailed nature of their provisions, are not conducive to a rapid understanding of their effect”—
to which I can only say, “Hear, hear!”. Of course, the committee expresses some anxieties about how far consumers can be helped to understand these measures. In response to that, the then Minister for Energy undertook to provide what he described as an,
“additional, succinct explanation of the legislation”.
I invite noble Lords to look at Appendix 1 to the Select Committee report. I m not sure that the six pages of detailed description can match what Mr Fallon said on that occasion. This is a serious problem. The scrutiny committee was clear that much more needed to be done to explain this complicated system to consumers.
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However, my noble friend has indicated that, even in the midst of the preparation for today’s debate, we were confronted with four hugely important pieces of information yesterday and this morning which, in my case, caused a substantial revision of the text of what I was hoping to say to the Committee this afternoon. My noble friend has referred to them. We had yesterday’s welcome news that no less than two reports of the European Commission have now given the green light under the state aid rules to the capacity mechanism and to the contracts for difference. I received yesterday—I am sure other noble Lords have copies—a detailed letter from my noble friend in response to a question I had put to her by e-mail several weeks earlier. I shall talk about that later. Finally, as she said, this morning we had the announcement of the budget for the first year of the contracts for difference auctions. A figure of £200 million will be available for the first year and further funds up until 2021.
When I came to grips with this news yesterday and this morning I thought it might reduce the number of questions that I would have to put to the Minister—indeed, I have rubbed some of them out and taken out several pages—but I hope the Committee will bear with me because it has prompted new questions. I will return to the four announcements later.
My noble friend will be relieved that I do not intend to comment on all the regulations that she has described to the House. However, there are several issues I wish to raise. Perhaps I may take them in the reverse order of the subjects that she described. I turn first, therefore, to the capacity market. Noble Lords may recollect that during the passage of the Energy Bill, I and a number of my noble colleagues and friends expressed considerable concern that the current proposals would fail to enable new gas generators to invest, particularly under the capacity mechanism. As my noble friend explained, the purpose of the capacity market is to incentivise sufficient investment to ensure that the lights do not go out. That is a very good phrase but one might add, “and to save the planet”. It concerns both sides: one has got to consider the environment as well as security.
To protect customers from higher electricity bills, I and three other noble Lords—the noble Lords, Lord Roper, Lord Cameron of Dillington and Lord Berkeley, who I am pleased to see in his place today—moved an amendment to the Bill to make competition a specific objective under the capacity mechanism. For that to be effective, new generators had to be able to bid in the capacity auctions. To our disappointment, my noble friend rejected the amendment. However, there is an interesting postscript. My noble friend’s right honourable colleague Mr Fallon was standing at the Bar listening to that debate and was overhead to say, “If this amendment is carried, we cannot reverse it at the other end”. Therefore one began to see a glimmer of hope.
The fact of the matter is that we have won the argument on competition and this has ensured—my noble friend referred to this and I may come back to it—that, for the most part, the big six are not to be allowed to dominate the market. Competition will drive down prices. Indeed, that was said very clearly by Mr Fallon, who told the Secondary Legislation Scrutiny Committee at paragraph 13,
“that the Government wanted to see competition between technologies and among the technologies: ‘we see that as one of the main pressures on price and making sure that what our constituents pay is affordable’”.
Therefore that is a clear statement of the Government’s intention which I, and I am sure many other noble Lords, will welcome.
However, to achieve that, DECC had to be persuaded that the original form of the draft regulations simply had to be amended. It would have been impossible on the basis of that first draft for independent companies to raise the finance necessary for them to enter the auctions for the capacity market. By dint of skilful and intensive negotiations, the industry was able to persuade Ministers to make important and significant changes. Those were set out for me in a letter I received from Mr Fallon on 30 April. He said that,
“we absolutely recognise the need for investment in new plant. That is why we are seeking to make the scheme as pro-competitive and investable as possible, and our current proposals aim to create the right market signals”.
I do not need to read the rest of the letter, because I am sure that many other noble Lords will have seen it. He described changes which met in substance most of the representations that the industry had made. That was very much welcomed, and certainly by myself.
Of course, some uncertainties remain. One of them, as my noble friend mentioned, was removed yesterday. The EU Commission decided that this did not offend the state aid rules, which is extremely valuable, and stated that,
“the proposed UK Capacity Market is in line with EU state aid rules … The Commission found in particular that the scheme will contribute to ensuring the security of energy supply in the United Kingdom … in line with EU objectives, without distorting competition in the Single Market”.
When I read that yesterday, I thought to myself, “Well—they’re not so bad after all”. We still await the Hinkley Point decision, which is still to come, but those two decisions yesterday give one some prospect of hope.
However, there remain one or two questions. One question for my noble friend is: can she yet say—or will she be able to say—how much capacity will be auctioned? Am I right in saying that this morning’s contract for difference budget statement does not cover what will be necessary for the capacity market? If so, when will the budget for the capacity market auctions be announced? I hope that my noble friend will be able to give us some reassurance on those matters. Uncertainty is the enemy of investors’ confidence, so it is essential that we get these things absolutely clear before the first auction is held.
The contracts for difference may be a little more difficult. Here, again, we have a separate announcement that it is okay under the state aid rules. While that removes what has hitherto been a major uncertainty, it
underlines the huge subsidy still to be given to wind power, which of course goes straight on to consumers’ bills. I will not weary the Committee with all the details, because noble Lords have seen the figures themselves, but they indicate very large sums, which are covered by the contracts for difference and the wind power that will, I hope, result from them.
My right honourable friend the Secretary of State claimed that the EMR as a whole will save consumers around £41 per annum up to 2030 in lower energy prices. I am not sure about the per annum. I think that it may be in total—it is not entirely clear from the right honourable gentleman’s statement. Can my noble friend give an estimate of what the subsidy that will befall consumers’ bills will be? It would be helpful to be given some indication of that.
My noble friend has explained the purpose and impact of the contracts for difference arrangements, and she will recollect my telling her last month that I was having a meeting with the independent renewable energy generators group—IREGG. She asked me to let her know the problem. I did so in an e-mail on 26 June. Briefly, the Government were proposing to advance the date for the first contract for difference auction from 2018 to 2015 without, at the same time, advancing the availability of the arrangements for the offtaker of last resort. She referred to that point earlier, and I shall come to that. The group was worried that because of the gap between the auction starting in 2015 and the offtaker of last resort coming two or three years later, they would find it impossible to finance the investment because of the apparent risks.
Since sending that e-mail, I noticed that there had been a number of indications that there would be further regulations covering the offtaker of last resort. My noble friend today has confirmed that, and this leaves time for further consideration of this matter. However, my noble friend answered the letter yesterday, and I hope that copies have gone to other noble Lords who may be interested in the same subject. Because it is so recent, I will read the first four paragraphs of the letter, dated 23 July, if the Committee will bear with me. It states:
“Regarding IREGG’s concerns around the timing of the Offtaker of Last Resort, I would like to assure you that the benefits of the OLR can still be realised from the first allocation round.
DECO launched a consultation ‘Implementing the Offtaker of Last Resort’ on 27th June 2014. This consultation included a copy of the backstop PPA contract”—
power purchase agreement—
“draft supply licence modifications and draft OLR regulations to deliver the OLR and the input into this consultation will be used to develop the final OLR regulations.
We are on track to deliver the final policy and introduce enabling regulations before the first allocation round for CFDs opens. As such, CFD applicants will have a high degree of clarity about the arrangements for OLR in advance of the first auctions.
Generators will be able to discuss their likely financing requirements and costs with lenders, and constrain their cost assessment such that they can submit a bid for a CFD. This means that the OLR will meet its aim of broadening generators’ route-to-market options”.
So far, so good. That sounded rather encouraging.
However, there is a difficulty. I was able to consult a number of the organisations that have been briefing not only me, but I am sure other noble Lords, on this subject. I have to say that their immediate reaction is far from enthusiastic. For instance, IREGG replied late last night, making its assertion—and this is the point I really want to make to my noble friend—that,
“the OLR needs to start no later than April 2015—not October”.
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The generators then quote my noble friend’s letter about the assertion that the OLR advisory group,
“which is made up of stakeholders from a cross-section of the energy industry, including independent renewable generators, raised no objection to these arrangements. Members of the group were comfortable with the terms of the backstop PPA being made available ahead of the first allocation of CFDs—a key factor for generators”.
They do not recognise that. They had representatives on the advisory group. It has not actually met since May. The trouble is that the big six are also represented on that advisory group. I have no doubt they were very enthusiastic about the thought that the offtaker of last resort would not be available until October. I find that rather distressing. The Renewable Energy Association, writing to me this morning, made exactly that point when it stated that the big six were,
“consistently arguing against the need for any measures, so while these group members may have welcomed the final proposals, the independent members were less enthusiastic”.
There is a familiar ring to this. The big six have consistently and with great force of argument asserted that these measures, intended to fulfil the Government’s policy of bringing in as many independent and new generators as possible, were simply unnecessary and that they were opposed to them. My fear is that although Ministers—indeed, from the Prime Minister downwards—have reiterated the need for competition in these markets to protect consumers’ bills from rising prices, even now the big six seem to have an influence among officials at DECC. It is officials who attended the advisory committee meetings that have led the Government still to adhere to the later date for the introduction of the offtaker of last resort. I have no doubt that the big six feel that that will frighten off a number of their potential competitors so that they will continue to have the ability to dominate the market. I find this rather alarming.
However, as my noble friend made clear a few minutes ago, we are not at the end of the road. There is still time to put this right. The OLR regulations are still to be published though the consultation, as she says, actually ends tonight—this is the last day. My noble friend made very clear, and I took a careful note of what she said, that these will be “subject to consultation”. My final plea is that, for goodness sake, whatever advice she may be getting from her officials, I beg that Ministers listen to the representations still coming from the independent generators so that when the regulations are finally published, they do implement what they have always said is Ministers’ determination to ensure that there should be competition in these markets. It would be tragic if, at the very last minute, we found ourselves failing to ensure that OLR support for independent generators was introduced in time for
the first auction. To my mind, the Government simply must listen to that if their intentions are to be achieved, and I hope that my noble friend will take note of that.