Electricity Supplier Payments (Amendment) Regulations 2021 — House of Lords, 2021-02-23
Topic: Energy
Martin Callanan (Conservative, Centre-right): First, I thank all noble Lords who contributed to the debate. I am delighted that the noble Lord, Lord Grantchester, is still following this brief from 2013. He showed that in the excellent contribution he made and in the knowledge he portrayed in his questions. I hope that my answers can do his memorable state justice. As I set out in my opening speech, the companies and the Government have taken steps to ensure the proposed operational cost budgets allow the companies to perform their crucial roles effectively while representing value for money for consumers. I believe that these twin aims will be achieved if this draft regulation is approved. However, the noble Lord, Lord Grantchester, did make an important point, and I will not pretend the 19% increase in the LCCC’s budget is not significant; it clearly is. I do believe, though, that this is a justifiable increase, and I will set out, for the benefit of the House, why that is The increase in the budget reflects a number of factors, in particular the company’s important role in helping to meet our legally binding net-zero target while minimising costs for consumers. The CfD scheme has proven that it can deliver large-scale, low-carbon generation while driving down costs. The cost of offshore wind, for example, as noble Lords have pointed out, fell by two-thirds between the first CfD auction, held in 2015, and the third auction, held in 2019. This proposed budget will allow the LCCC to play its part in delivering the next CfD auction, which will bring forward more low-carbon electricity while further pushing down technology costs and, in doing so, bring us closer to meeting our net-zero target I should also point out to the House that the LCCC is facing a number of costs beyond its control in 2021-22, such as the increased uncertainty in energy demand arising out of Covid-19. A number of noble Lords have referred to that. This has necessitated an increase in its existing contingency for lower-than-expected electricity demand—and other world events, such as Covid-19, have also pushed up insurance premiums for companies As the CfD portfolio expands, that increases the likelihood of a legal dispute arising between the LCCC and a generator. Consequently, the proposed budget increases the existing contingency for such disputes from £2.1 million to £3 million. The level of this increase has been informed by the costs of past and present legal disputes. It is important to consider that these two contingencies—one focused on electricity demand and the other on legal disputes—may not be needed. If that is the case, the funds raised from the levy to cover these costs will be returned to electricity suppliers. Excluding these contingencies, the overall increase in the budget equates to approximately 9% Noble Lords have also touched on what this budget increase means for electricity consumers. That is indeed important. I agree that we have to scrutinise every penny that goes on to consumer bills, but I also believe that in this case there has been sufficient scrutiny. Given the important role both companies play in our electricity system, a bill impact equating to less than 0.1% for the average consumer is proportionate and justifiable Virtually everybody who spoke—certainly the noble Baronesses, Lady Bowles and Lady Ritchie, my noble friend Lord Bourne, and the noble Lords, Lord Oates and Lord Grantchester—raised the important question of why we were setting the levy for the next financial year only, when we set the last set of levies, in 2018, for three financial years. We are amending the levy rates for 2021-22 only, instead of for the next three years, because of the impact of Covid-19 on electricity demand forecasting. Electricity demand has reduced significantly during the pandemic. Increased uncertainty with regard to a number of factors used to forecast electricity demand makes it extremely difficult to do so beyond the 2021-22 financial year. LCCC’s operational cost levy rate is calculated by dividing its annual budget by the total forecast electricity demand for the corresponding financial year. If demand is lower than forecast, LCCC will not be able to raise enough income from the levy to meet its budgeted costs. Therefore, a robust forecast of electricity demand is needed for each financial year to set the levy accurately My noble friend Lady McIntosh asked whether we needed an impact assessment. As she correctly said, an impact assessment has not been prepared for this instrument because of the relatively low levy impact on electricity consumers’ bills My noble friends Lord Bourne and Lady McIntosh, and the noble Baronesses, Lady Ritchie and Lady Bowles, asked about the impact of Covid on electricity demand and household bills. I will write to noble Lords on that, setting out what information we currently have on the deployment The noble Baroness, Lady Bowles, and my noble friend Lord Bourne asked about our ability to forecast electricity demand accurately and whether we would therefore set the levy for more than just one financial year. In the next round, we intend to return to the status of setting the levy for three financial years My noble friend Lady McIntosh asked about the consultation, on which I have responded. The noble Baroness, Lady Bowles, asked about the contingency for reduced electricity demand and why it has increased. The contingency in the proposed 2021-22 budget has increased by £0.75 million compared to the 2020-21 budget because of the impact of Covid-19. The pandemic has resulted in a reduction in electricity demand. LCCC’s forecasts predict that reduced demand will continue into 2021-22, but the landscape is extremely uncertain, as the Government may need to take further actions that impact on demand; for example, the emergence of new variants may require them to take extra measures in the short term to counter this threat, although we are confident that vaccines can be adapted to mitigate it in the medium term. To reflect this increased uncertainty and to mitigate the risk of LCCC having to rely on BEIS for cashflow, the electricity demand contingency has been increased by £0.75 million, bringing it to £1.5 million overall in 2021-22. As I said earlier, if the contingency is not used, it will be returned to the companies My noble friend Lady McIntosh and the noble Lords, Lord Oates and Lord Grantchester, asked when the five-year review of the energy market would be laid before Parliament. I am deeply conscious of the fact that this review is now overdue. We expect it to be laid in Parliament shortly The noble Lord, Lord Oates, asked about the operational budget being funded via a levy on electricity consumers rather than general taxation, a point raised many times in this House. The costs of decarbonisation should be shared fairly among consumers. Levying costs for supporting the deployment of clean electricity in this way enables electricity consumers to pay towards the costs associated with increasing the proportion of renewable electricity supply, from which they subsequently benefit. The contracts for difference scheme was designed to deliver value for money for consumers and it is doing so, with costs falling in every auction held to date. The CfD is entering a new phase in which renewable projects could even reduce consumer bills, as they are now much cheaper than alternative forms of generation. The LCCC must therefore be adequately funded if it is to perform its role in delivering the CfD effectively A number of other, more general questions were asked about energy policy and decarbonisation. If noble Lords will forgive me, I will not take up the time on these regulations by answering those, but I will write to them separately. I think that I have addressed all the points raised during the debate. I therefore take pleasure in commending the regulations to the House.