Electricity Capacity (No. 1) Regulations 2019 — House of Lords, 2019-04-03
Topic: Energy
Oliver Michael Robert Eden (Conservative, Centre-right): My Lords, the capacity market is a key element of the Government’s strategy for maintaining the security of electricity supplies in Great Britain. Britain’s current security of electricity supply is robust. The forecast electricity margin for winter 2018-19 is over 11%, the highest for five years, showing that the capacity market works This draft instrument will help maintain a strong security of supply position into the future. It contains modifications needed for the operation of the capacity market, pending fresh state aid approval by the European Commission, and makes arrangements for a positive or negative state aid decision Before I go into detail on the draft instrument, it may be helpful to provide some context and background on the capacity market. The capacity market ensures that there will be sufficient electricity capacity in Great Britain during periods of peak electricity demand. It secures the capacity required through awarding capacity agreements in competitive, technology-neutral auctions held four years and one year ahead of delivery. Those who win agreements—known as capacity providers—commit to providing capacity during periods of system stress in exchange for receiving capacity payments. The revenue from capacity payments incentivises the necessary investment to maintain and refurbish existing capacity and to finance new capacity. It also ensures that those able to shift demand for electricity away from periods of greatest scarcity are encouraged to do so. In November 2018, the General Court of the Court of Justice of the European Union annulled the European Commission’s state aid approval for GB’s capacity market and introduced a standstill period until the scheme can be reapproved. The judgment was based on the procedure the Commission followed when it approved the capacity market, not the substance of the capacity market itself. The judgment prevents the UK Government making capacity payments unless and until the scheme has state aid approval. It changes neither the Government’s commitment to delivering secure electricity supplies at least cost to consumers, nor our belief that capacity market auctions remain the most appropriate way to do this The Commission is investigating the scheme’s compatibility with state aid rules and recently confirmed it is moving on to the next phase. We are working with it to ensure that it has everything necessary to reapprove the scheme as quickly as possible. We are confident that the scheme will be approved and payments to agreement holders that have met their obligations during the standstill period will be allowed The Department for Business, Energy and Industrial Strategy published a consultation proposing modifications to allow the capacity market to operate as far as possible during the standstill period, following the General Court’s decision in December last year. Sixty-one responses were received, from a wide range of stakeholders, and there was significant support for the majority of the proposals raised The House of Lords Secondary Legislation Scrutiny Committee highlighted uncertainties associated with the state aid process. We are confident that the draft instrument helps address those uncertainties I will briefly expand on the provisions of the draft instrument itself. First, to maintain industry confidence, the instrument includes modifications that ensure that capacity payments currently prevented by the court’s judgment can be paid to capacity providers after state aid approval is obtained. These payments will remain linked to capacity providers’ performance of their obligations under their capacity agreements. Secondly, in recognition of the disruption caused to capacity providers, this instrument adds flexibility to termination, penalty and credit cover requirements during the standstill period. Thirdly, the instrument sets the conditions for rearranging the one-year-ahead auction that was originally planned for earlier this year, securing the capacity required for winter 2019-20. Agreements awarded by this auction will be conditional on state aid approval, allowing the auction to be run before there is state aid approval Moving on, this instrument allows the settlement body to hold payments made by suppliers to fund the scheme where suppliers choose to pay during the standstill period. It also enables the collection of all outstanding supplier charges for the standstill period upon receipt of state aid approval. This provides certainty that, upon state aid approval, capacity payments will be paid promptly Finally, in the unlikely event of a negative state aid decision or no decision by October 2020, the instrument will terminate capacity agreements without any entitlement to receive capacity payments, and will require supplier payments held by the settlement body to be returned. We have also laid complementary amendments to the capacity market rules, which govern the technical and administrative procedures relating to capacity market operation These regulations are necessary to provide legal certainty and confidence to industry about how the capacity market will operate until state aid approval is received, and I commend them to the House.