My Lords, these regulations amend the Electricity Supplier Obligations (Amendment & Excluded Electricity) Regulations 2015. They make provision for indirectly exempting eligible energy-intensive industries from part of the cost of funding the contracts for difference scheme. They aim to avoid putting these industries at a significant competitive disadvantage.
The transition to low-carbon—and the securing of our energy supplies—must be done in a way which minimises the cost to business and domestic consumers. Our industrial gas prices are internationally competitive but our industrial electricity prices have moved out of line with other European countries. The UK’s industrial electricity prices for large consumers in the EU 15 were the highest after Italy’s in 2016, as set out in The Clean Growth Strategy. This places UK electricity-intensive manufacturing industries at a competitive disadvantage and increases the risk of some deciding to relocate.
In order to meet our legally binding climate change and renewable energy targets, we have implemented a number of policies designed to incentivise generation
of electricity from renewable resources. The costs of these policies are recovered through obligations and levies on suppliers, which pass these additional costs on to their customers. This results in electricity bills being higher than they otherwise would have been.
The CfD scheme is such a policy. It gives greater certainty and stability of revenues to electricity generators by reducing their exposure to volatile wholesale prices. The scheme is financed through a compulsory levy on electricity suppliers, which pass the costs on to domestic and business users through their electricity bills. The levy currently stands at almost £2.52 per megawatt hour. The funding costs of the CfD can reduce the attractiveness of the UK as an investment location and increase the risk that companies will invest or even move elsewhere. This is a scenario we wish to avoid, particularly as we exit the EU.
We intend to safeguard the competitiveness of those energy-intensive industries that are exposed to the additional costs arising from the CfD by exempting them from a proportion of these costs. An exemption scheme allows for real-time changes in energy use to be taken into account and provides certainty to business. The European Commission approved our state aid proposal to exempt certain EIIs from the cost of the CfD in December 2015.
The statutory instrument before us updates and improves the 2015 regulations. It brings them into line with the terms of our state aid approval, allowing us to commence the scheme. We recognise that the exemption will redistribute the cost of financing the CfD among other electricity consumers. We estimate that this will increase annual household electricity bills by around £1 between 2018-19 and 2023-24. None the less, we have taken steps to reduce consumer bills, which are now lower than they might otherwise be. Indeed, our energy efficiency policies reduced the average household energy bill by £161 in 2016. After taking account of the cost of policies for delivering cleaner energy, supporting vulnerable households and investing in upgrading our buildings, there was a net saving of £14 on the average household energy bill in 2016. Energy efficiency is the best long-term solution for tackling fuel poverty.
Since April, 70% of the £640 million per year energy company obligation has been focused on low-income households through the affordable warmth part of the scheme. This will upgrade the energy efficiency of more than 300,000 homes per year, tackling the root cause of fuel poverty. Certain households can also get £140 off their electricity bill for winter 2017-18 under the warm home discount scheme.
These regulations amend the original 2015 regulations. These amendments are necessary to bring those regulations into line with the Commission’s state aid approval. We are also making certain technical changes to the regulations to improve the administration of the scheme. The effects of the amendments include, among others: changes to eligibility; allowing new or restructured businesses to claim the benefit of the exemption; a requirement on beneficiaries to notify us, to help us ensure that they receive the exemption to the correct level and only if they are eligible; and allowing a
company to apply for the exemption if it does not obtain electricity directly from a licensed electricity supplier.
The House of Lords Secondary Legislation Scrutiny Committee raised a number of points relating to consultation and timing, provision for direct competitors and the impact on consumer bills. I will summarise the main points. The policy to exempt eligible energy-intensive industries from a proportion of the costs of CfD had been subject to three previous consultations. The third consultation covered technical amendments to the regulations rather than policy changes, as the policy had already been consulted and agreed on previously. Our original intention was for these regulations to come into force at the end of February. However, some of the technical issues needed further consideration to ensure that the amended regulations achieve their aim. We involved stakeholders throughout the whole of this process.
Our original intention had been to provide relief to direct competitors—businesses which do not meet the eligibility criterion on electricity intensity but which manufacture the same product as eligible companies in the same sector. This was to create a level playing field and prevent market distortions within sectors. We submitted a state aid notification to the European Commission to address this issue. However, the Commission does not think our proposal is compatible with the relevant state aid guidelines. We are currently considering alternative options which may be open to us within the scope of these guidelines.
These draft regulations will make the necessary changes to the 2015 regulations to allow us to exempt eligible energy-intensive industries from up to 85% of the indirect costs of funding the CfD scheme. As well as providing these businesses with greater long-term certainty, the measures set out in these regulations will reduce the price differential between eligible energy-intensive industries and their international competitors, mitigating against the risk that these companies are put at a significant competitive disadvantage and might choose to move their production abroad. I commend these regulations to the House.