My Lords, today we are considering three instruments that amend legislation that came into force last summer to implement electricity market reform, with the powers to make this secondary legislation found in the Energy Act 2013. This reform, as noble Lords will be aware, is designed to encourage the necessary investment into secure low-carbon electricity generation through two mechanisms: contracts for difference, or CFDs, which provide long-term price stabilisation to low-carbon plant, allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers, and the capacity market, which provides a regular retainer payment to reliable forms of capacity in return for such capacity being available when the system is tight, and ensuring that enough is in place to maintain security of supply.
As noble Lords may be aware, the results of the first CFD allocation round were announced last week, with 27 contracts being offered to applicants, which could deliver more than 2 gigawatts of new renewable energy capacity. The allocation by competition has driven down costs to consumers, with this capacity costing up to £110 million a year less than it would have in the absence of competition. The first capacity market auction also completed in December, with 49.3 gigawatts procured for delivery in 2018-19. The below-expected clearing price of £19.40 per kilowatt in that auction is also great news for consumers, with costs driven down by competition between participants. I thank noble Lords for supporting the market reforms to allow us to reach this significant point.
In order to build on these successes, the Government are looking to make some small amendments to the mechanisms. This is in order to ensure compliance with state aid requirements, the successful remaining implementation of the scheme and that the legislation properly reflects the original intent. As well as the changes that I will describe, I inform noble Lords that the Government are committed to ensuring that the reforms remain effective and continue to represent value for money for the consumer. To this end, we are carefully evaluating and monitoring the measures implemented and will continue to do so.
Before we commence the debate, I will briefly describe each amending instrument in turn. First, the Electricity Market Reform (General) (Amendment) Regulations amend the original instrument that came into force last summer. This very minor amendment enables the Gas and Electricity Markets Authority to enter into arrangements with a CFD counterparty or the Secretary of State to carry out roles relating to the measurement and sampling of fuel. This ensures that generators are paid only for energy that is both renewable and sustainable, and applies to both those CFD contracts that have been signed by the Secretary of State and any future CFD contracts allocated under the enduring regime. The necessary expertise to carry out this work is held by the authority, and this amendment allows that provision of support.
The Electricity Supplier Obligations (Amendment and Excluded Electricity) Regulations, build on the supplier obligation mechanism that is already established. The supplier obligation will be levied on all licensed electricity suppliers in Great Britain from 1 April 2015, to meet the costs of the support provided to low-carbon generators under the CFD. This instrument does four things: it introduces an exemption from the supplier obligation levy for eligible imported renewable electricity; it introduces an exemption from the supplier obligation and operational costs levies for electricity supplied to eligible electricity-intensive industries; it sets the rate for the operational costs levy for the CFD counterparty for the financial year beginning 1 April 2015l; and it makes a number of minor and technical amendments to the original regulations. As a condition of state aid approval for the CFD, the European Commission required that the eligible renewable electricity imported from other EU member states and supplied to consumers in Great Britain be exempt from the cost of CFD payments.
These regulations set out the proposed implementation of this exemption. This includes the way in which suppliers should submit their evidence of eligible imports to the CFD counterparty, how the amount of exempt eligible electricity is determined and how electricity suppliers’ liabilities for CFD payments will then be adjusted.
The regulations also set out an exemption from the supplier obligation for a proportion of the electricity supplied to eligible electricity-intensive industries. They set out the application process for the exemption, the criteria that will be used to assess eligibility, the proportion of electricity that will receive the exemption and the way in which the exempt electricity will be identified.
Thirdly, these regulations also revise the operational costs levy that electricity suppliers must pay to the CFD counterparty to allow it to recover its operational costs. The new rate will apply from April 2015. It is expected that this amendment of the operational costs levy will take place annually, alongside the setting of the operational costs budget of the capacity market settlement body, as both bodies’ operational costs change.
Finally, I come to the Electricity Capacity (Amendment) Regulations 2015, which amend the instrument that established the capacity market last August. This instrument amends the Electricity Capacity Regulations 2014 to enable electricity interconnectors to participate in the capacity market from 2015 onwards. It makes a number of minor and technical amendments and amends the Electricity Capacity (Supplier Payment etc.) Regulations 2014 to set the settlement costs levy that funds the budget of the capacity market settlement body from 1 April 2015. The main purpose of this final amending instrument is to allow electricity interconnectors to participate in the capacity market and to be eligible to receive one-year capacity agreements, if successful in a capacity auction, from 2015.
These amendments include a definition of a new category of capacity market unit, a requirement on the delivery body to provide more information on the capacity to be provided by individual interconnectors, and provision for a financial penalty to be imposed in the case of a new-build interconnector where the failure to reach a completion milestone can be ascertained only where the capacity agreement has already expired.
A further change mitigates the National Grid’s potential conflict of interest by allowing the Secretary of State to provide the derating factor for interconnectors. On this point, we have recently published further details on the derating methodology for interconnector CMUs in the capacity market which will be included in the capacity market rules.
We have also made a number of minor and technical amendments to the principal regulations, after consultation with external stakeholders. These include provisions to require a capacity provider to repay capacity payments if a capacity agreement is terminated on certain grounds. This instrument also amends the supplier payment regulations to revise the total amount of the settlement costs levy in order to fund the operational costs budget of the settlement body. The opportunity has also been taken to correct a minor drafting error in those regulations, removing the unnecessary duplication of a provision.
As a final point before we start the debate, I draw noble Lords’ attention to the Government’s intention to introduce further small amendments. They introduce an additional performance incentive scheme, designed to encourage developers to sign and deliver on their commitments under a CFD, and were laid before Parliament on 23 February. The amendments aim to deter speculative bidding in the CFD auction.
On the capacity market, we recently published a consultation on further minor amendments to the regulations and the rules, with a response intended to be published later this month. I look forward to the debates on these future changes in due course. I beg to move.