PARLIAMENTARY DEBATES HOUSE OF COMMONS OFFICIAL REPORT

First Delegated Legislation Committee

DRAFT CONTRACTS FOR DIFFERENCE (ELECTRICITY SUPPLIER OBLIGATIONS) (AMENDMENT) (CORONAVIRUS) REGULATIONS 2020

Monday 29 June 2020 No proofs can be supplied. Corrections that Members suggest for the final version of the report should be clearly marked in a copy of the report—not telephoned—and must be received in the Editor’s Room, House of Commons,

not later than

Friday 3 July 2020

© Parliamentary Copyright House of Commons 2020 This publication may be reproduced under the terms of the Open Parliament licence, which is published at www.parliament.uk/site-information/copyright/. 1 First Delegated 29 JUNE 2020 Legislation Committee 2

The Committee consisted of the following Members:

Chair:

† Afriyie, Adam (Windsor) (Con) Grady, Patrick (Glasgow North) (SNP) Ali, Tahir (Birmingham, Hall Green) (Lab) Jarvis, Dan (Barnsley Central) (Lab) † Baynes, Simon (Clwyd South) (Con) † Kwarteng, Kwasi (Minister for Business, Energy and † Begum, Apsana (Poplar and Limehouse) (Lab) Clean Growth) † Bradley, Ben (Mansfield) (Con) † Tomlinson, Michael (Lord Commissioner of Her Majesty’s Treasury) † Carter, Andy (Warrington South) (Con) † Twist, Liz (Blaydon) (Lab) † Clarke, Theo (Stafford) (Con) † Whitehead, Dr Alan (Southampton, Test) (Lab) † Daly, James (Bury North) (Con) † Eagle, Maria (Garston and Halewood) (Lab) Hannah Bryce, Committee Clerk † Fell, Simon (Barrow and Furness) (Con) † Gideon, Jo (Stoke-on-Trent Central) (Con) † attended the Committee 3 First Delegated HOUSE OF COMMONS Legislation Committee 4

Adam Afriyie (Windsor) (Con): I very much welcome First Delegated Legislation this measure, which is a reasonable step given the current Committee circumstances. I want to ask the Minister this question now, to give him time to reflect. If, during this period in which electricity suppliers have extended terms, one of Monday 29 June 2020 them was to go out of business, what clawback mechanisms might there? [CAROLINE NOKES in the Chair] : That is slightly outside the scope, Draft Contracts for Difference (Electricity but I understand where my hon. Friend is coming from. Supplier Obligations) (Amendment) There are a number of measures that we would go into: (Coronavirus) Regulations 2020 there is the SLR—the supplier of last resort—and there are measures for mutualisation of cost. I also remind 5 pm him that this happens every summer, regardless of covid. The Minister for Business, Energy and Clean Growth It is a highly competitive space, and a number of energy (Kwasi Kwarteng): I beg to move, suppliers come in and out of the market at will, so this is very much in the run of ordinary business. This That the Committee has considered the draft Contracts for measure is related to the specific challenge of covid and Difference (Electricity Supplier Obligations) (Amendment) (Coronavirus) Regulations 2020. to deferring payments in the way that he described. It is a delight to open the debate under your Finally, the regulations enable the LCCC to repay chairmanship, Ms Nokes. I will try to explain clearly any financial assistance provided by the Government, the rationale behind this draft instrument. The regulations using moneys collected from electricity suppliers after aim to limit the negative short-term impact on electricity the reconciliation process following the relevant quarterly suppliers of an unexpected increase in the costs of the obligation period. In effect, all we are doing is delaying contracts for difference scheme, which members of the the payable period so that it does not force energy Committee will know is integral to offshore wind and suppliers to go out of business in the way my hon. electricity power generation. Friend suggested. The Low Carbon Contracts Company is a Government- I must stress that this deferral will give suppliers more owned, arm’s length company that manages CfDs. In time to prepare for the increase in payments and provide simple terms, it gets money in from energy suppliers greater confidence about the level of additional costs that is used to pay to manage contracts for difference they will face in the second quarter of 2021. I must also auctions. It is, in effect, a levy on suppliers. The regulations stress that the Government are committed to upholding aim to alleviate the burden on energy suppliers, who the self-financing nature of levies in the energy system. would be forced by the rules to pay the LCCC when There was no question of our providing some sort of there are fears about working capital. Because there has grant or subsidy to the LCCC. We fully expect that been a huge drop in energy demand, the LCCC would whatever moneys are deferred will be paid eventually to have needed to raise the levy to get enough funds from the LCCC and that it will be able to sustain its function energy suppliers to pay the generators. regardless of Government intervention. I took the view with officials that this is not the time These legislative changes are technical in nature. They to impose additional burdens on the working capital of needed to be made ahead of the LCCC’s quarterly energy suppliers. As a consequence, the Government reconciliation process, which determines suppliers’ have agreed to provide a loan of up to £100 million to obligations for the current quarter. That is expected on the LCCC to allow it to continue to pay CfD generators 9 July, at the end of next week. Subject to the will of this quarter without increasing the financial burdens on Parliament, this instrument will enter into force the day energy suppliers, who, as we know, are in a vulnerable after it is made. I commend the regulations to the state. The loan is governed by a separate agreement House. between the Department for Business,Energy and Industrial Strategy and the LCCC and is not covered by the 5.7 pm regulations. Dr Alan Whitehead (Southampton, Test) (Lab): The The regulations make four technical changes to the SI before us is, in one way, quite uncontroversial; it is existing Contracts for Difference (Electricity Supplier eminently justified and reasonably undertaken, given Obligations) Regulations 2014 to, in effect, defer payment. the present pandemic and the problems it is creating for There is no question but that these costs will have to be energy companies in relation to the payments into and paid; we are simply deferring the obligation for this out of the LCCC. The Opposition do not object to it; quarter. on the contrary, we support it and think it will help In brief, the regulations first reduce each electricity considerably with the difficulties energy companies have supplier’s obligation, in a quarterly obligation period, in both ways as they react to the LCCC’s concerns by the amount of financial assistance provided by the regarding this pandemic. Government to the LCCC—the £100 million loan I To add to the Minister’s admirable explanation of referred to.Secondly,they increase each supplier’sobligation the regulations, my understanding is that they reduce four quarters later. The obligation is therefore reduced the obligations on energy suppliers to pay a levy to the in this coming quarter, but it will go up correspondingly LCCC in one quarter and increase those obligations by in four quarters’ time. Thirdly, the regulations enable the amount that they were decreased in that particular the LCCC to take into account anticipated receipt or quarter four quarters later, so that there is no long-term repayment of financial assistance provided by the difference to the overall arrangements as far as obligations Government when setting the obligation for one quarter. are concerned, but the effect is delayed by a year. 5 First Delegated 29 JUNE 2020 Legislation Committee 6

The recent effects are twofold. First, energy prices are ahead, because levy payments are routinely passed on very low, which means that organisations and companies to customers by energy companies when those payments that take money from the LCCC for their generation are made. The same thing will therefore happen four receive a greater amount. The difference between the quarters from now, when we may or may not have a strike price—for example, for an offshore wind farm—and price cap on energy prices. As the Minister will know, the reference price is greater when energy prices are low, Ofgem is required to report each year—as the price cap so generators will be paid more out of the funds that the develops—on market conditions either being present or LCCC holds at that time. There is an effect on the not being present, in order to advise the Government on money going out of the LCCC to generators as a result whether the price cap should be continued or discontinued of low energy prices. for the next year. Secondly, there is very low demand. As prices are Kicking the can down the road for a year means that determined on a megawatt-hour basis, the amount of the market arrangements for the price cap will need to revenue coming into the LCCC to pay for the money be determined next year rather than this year, in the going out is also decreased. It is a perfect storm of lack light of those changes. I am not sure that Ofgem has the of resource for the body that is supposed to keep the remit, in terms of its requirement to report on the price money coming in and going out and to settle what is cap and market conditions, to take the circumstances happening in between. It is likely that the LCCC will that will cause this change in the requirement for the levy— not have sufficient resources in its reserves or its immediate and, hence, potential price rises—into its consideration revenue to easily deal with that without putting a large of the price cap. I would be grateful if the Minister can new imposition on energy companies to balance the give me his thoughts on that and explain whether that books in the meantime. That is my understanding of has been taken into account with this SI. the situation behind the regulations. My final point is that the LCCC was, as I am sure the I do not mean this in an unkind way, but the regulations Minister will recall, introduced in the Energy Act 2013 kick the can down the road for a year to deal with the only because the Government wanted to introduce a immediate problem and crisis that we are in. The answer levy payment to the disbursement system that did not to the intervention rightly made by the hon. Member for impact on the Treasury and that effectively guaranteed Windsor is that when the levy is reassessed in a year’s payments by Government backing. It was a method of time, it will be based on the then market share of those keeping the whole thing outside the Treasury and, hence, companies, not their market share today. So if there are independent of the whole process. Indeed, there was changes in market share, or indeed, if certain companies discussion at the time about whether that would work have no market share by that point, that would be efficiently. It did work efficiently, so there has been no reabsorbed among other companies that will thereby further issue with that. Through this process, however, have a greater amount of market share, so it will come the Government are effectively bringing the Treasury to the same amount of levy as would have been the case back into the dealings of the LCCC. today. Although I appreciate that this is a temporary measure, The issues surrounding the levy and the measure being or a measure for exceptional circumstances, which require proposed give rise to a couple of questions, although not exceptional actions to be taken, does the Minister consider to opposition to the measure, and I would be grateful if that this breaches,in some long-term way,the understanding the Minister could address these questions. They are that was undertaken at the time of the passing of the not intended to be hostile or to trip the process up, but 2013 Act? Does he perhaps also consider that it might to reflect on some of the consequences of what is being be prudent in the light of this piece of secondary proposed and how that reflects across other areas. legislation to consider whether, for future purposes, the First, the statutory instrument sets out measures LCCC ought to be effectively brought within Treasury whereby it is possible for this measure to be used again guidelines, so that, rather than having a body that is without recourse to a further piece of secondary legislation theoretically independent but actually has occasional if there are “similar exceptional circumstances”, as the support, we have a body that is clearly backed, supported explanatory memorandum states. It is important for the and resourced, if necessary, by the Government, so that Minister to set out today what he thinks those similar these sorts of issues do not materialise in the future? exceptional circumstances might be in future. It would clearly be inappropriate for the measure to 5.19 pm be used if there was just a temporary dip in energy Kwasi Kwarteng: I will deal with the three points prices,or there was lower seasonal demand than anticipated, made by the hon. Gentleman in reverse order. He will and for no other reason than that was slightly in excess have noticed that the Treasury has made all sorts of of predictions. This is a wholly exceptional circumstance, interventions across the whole economy. That does not inasmuch as there is a combination of low prices, low mean that the Treasury should sustain its intervention demand and the likelihood of that continuing for quite in every business that has been furloughed. Similarly, a while under the circumstances of the present pandemic. with the LCCC, I made the decision that these were I hope the Minister can say that it would not be the exceptional circumstances that warranted an exceptional intention of the Government to use the changes that response. It is in that sense that the Treasury has intervened; have taken place with this SI for anything other than there is no notion that this will be ongoing. I want to similar exceptional circumstances such as the present put his mind to rest about that. Secondly, that is a pandemic. loan—essentially,a working capital facility of £100 million My second point is that a hike in the requirement for that we expect to be repaid the LCCC in the next quarter—as the Minister says, On the hon. Gentleman’s second point about Ofgem that would have to be settled by 9 July—would undoubtedly and the price cap, that is something to which I am not have had implications for customer prices had it gone privy. Ofgem will have a discussion about the price cap; 7 First Delegated HOUSE OF COMMONS Legislation Committee 8

[Kwasi Kwarteng] The first issue that the hon. Gentleman really goes to the heart of the matter. This is an exceptional time. it knows the circumstances of the energy suppliers and A friend of mine—a banker—said to me, “If there ever about the legislation. I have had weekly rounds with the was a case of force majeure, the covid crisis is it.” The sectors and the energy suppliers, and twice-weekly Government have made exceptional interventions, of conversations with Ofgem, in which we have talked which this is one. There is no sense in which we would about a lot of those issues. They fully understand the use the powers in the draft instrument to intervene on a context in which the draft instrument has been laid, so I regular basis in the market for the LCCC. I fully assure do not think that there will be any kind of read-across the hon. Gentleman that we will only do so in exceptional in what Ofgem will do, and I strongly suspect that the circumstances. He will understand that the very nature price cap will be in force for a number of years to come. of exceptional circumstances means that we cannot predict here or now the specifics of what they might be, Dr Whitehead: Does the Minister recognise that the just as a year ago, we could not say that covid-19 was draft instrument could mean inflated customer levies in going to come upon us in February and March of this a year’s time when that effect comes through? year—nobody foresaw that, or certainly not the timing. The very nature of exceptional circumstances should Kwasi Kwarteng: I do not think that the hon. Gentleman give him some assurance that we will only use the or I have any idea what the circumstances will be next legislation in exceptional circumstances. I cannot here year. Lots of things operating in the market may or may and now give him chapter and verse about what those not reduce wholesale gas and electricity prices. It would exceptional circumstances would look like. be very foolish for him or me to speculate about the The Government are committed to the regulations, state of the wholesale market in 12 months’ time. Ofgem and I commend them to the Committee. will take into account a whole range of factors; some Question put and agreed to. may relate to deferred payments, which we had to bring in to alleviate the pressure on the suppliers, and the hon. Gentleman recognised that as a good thing. There is no way that he or I can say exactly what the effect will or will not be on the price cap or on bills in 12 months’ 5.23 pm time. Committee rose.