My Lords, this draft instrument seeks to amend regulations concerning the contracts for difference, or CfD, scheme and the capacity market. CfDs provide long-term price stabilisation to low-carbon generators, incentivising investment by lowering the costs of capital and thus reducing the costs to consumers. The capacity market is the Government’s main policy to ensure a healthy margin of electricity capacity. Regular payments are made to different forms of generation or demand-side response in return for such capacity being available when needed.
In both schemes, support to participants is assigned through competitive auctions, minimising costs to consumers. The 2017 CfD auction secured 3.3 gigawatts of renewable capacity, enough to power an estimated 3.6 million homes. It also saw the clearing price of offshore wind halve compared to the first auction back in 2015. The next competitive auction for less established renewable technologies is planned for spring 2019.
Following four successful four-year-ahead auctions, the capacity market is already securing the capacity we need through to 2021-22. The latest auction secured 50.4 gigawatts of capacity at a price of £8.40 per kilowatt per year. The main auctions have all cleared at between £8.40 and £22.50 per kilowatt per year, below most industry estimates and indicating that the process is highly competitive and delivers value for money for consumers.
The Low Carbon Contracts Company and the Electricity Settlements Company, two operationally independent government-owned companies, work with government to operate the capacity market and CfDs, playing a crucial role in their successful delivery. The Low Carbon Contracts Company was set up to be the counterparty to the contracts for difference. It manages the contracts for their duration, as well as collecting and making CfD payments. The Electricity Settlements Company was established as the capacity market settlement body to oversee all financial transactions relating to the capacity market. Both companies recover their operational costs through levies on electricity suppliers. This is the subject of the regulations that we are considering today.
The regulations will set revised operational cost levies for each of the companies for financial years 2018, 2019 and 2020. Previously, the levies have been set annually. These regulations, however, will set levies for each of the next three financial years, allowing the companies to recover their expected operational costs over this period. Additionally, the regulations make a minor grammatical amendment to the Electricity Capacity (Supplier Payment etc.) Regulations 2014, removing the words “is responsible”, which are not required.
Both companies are essential to the Government’s decarbonisation and security-of-supply objectives and must be sufficiently funded to perform effectively while keeping costs to consumers minimised. The budget-setting process aims to strike the right balance. The budgets are scrutinised by government to ensure they reflect operational requirements and deliver value for money. The budgets have also been exposed to external scrutiny through consultation. The three consultation responses were broadly supportive of the proposed budgets. We also asked stakeholders for their views on setting levies for the next three years instead of one year ahead. They agreed that this was a sensible approach, as it provides them with greater visibility of the estimated costs. Furthermore, parliamentary time is saved over what is likely to be a very busy period.
The operational cost budgets over the three-year period have been set to cover the expected activity required to manage the CfD scheme and the capacity market. The Low Carbon Contracts Company’s budget will be £16.5 million in 2018-19, increasing by about £0.5 million for each of the next two years. The Electricity Settlements Company’s budget will be £7.6 million in 2018-19 and decrease slightly to £7.5 million in 2020-21. The Low Carbon Contracts Company’s net core operating cost for 2018-19 is slightly down on last year. The increase in total cost reflects the inclusion of a contingency provision for managing potential contract disputes. The increase in the final two years takes account of potential additional contracts awarded through future allocation rounds. Importantly, however, management costs per contract are projected to fall by 30% over the budget period.
The Electricity Settlements Company is managing a significant increase in the amount of capacity and the number and type of capacity providers. Moreover, there will be an ongoing need to refine the operation of the capacity market. To manage this activity effectively and ensure that it continues to successfully deliver all the financial transactions for the capacity market, the Electricity Settlements Company requires investment. The budget increase reflects the investment needed.
The regulations revise the levies currently in place to reflect the expected operational cost requirements in financial years 2018, 2019 and 2020. Subject to the will of Parliament, the levy to fund the Electricity Settlements Company’s operational costs is due to come into force on the day after the regulations are made; the operational costs levy for the Low Carbon Contracts Company on 1 April. I commend these regulations to the House.
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