The phrase “another NHS reorganisation” is designed to send a chill through the sturdiest of hearts of all of us who have worked in the NHS for many years, so why do I actually think that the Bill is the right thing at this time? First, there is a pragmatic reason: it has very wide support from within the NHS; it goes with the grain of NHS culture; it is a Bill to be delivered bottom-up. Secondly, there is another pragmatic reason: it is already happening on the ground. NHS England and NHS Improvement already operate as one organisation, and locally integrated care systems have been and are being created. Thirdly, this is not some new-fangled ideological concept dreamt up by an ambitious Secretary of State. The process towards integration was launched some seven years ago by my former colleague and noble friend Lord Stevens. Then, it was called the five-year forward view. The underlying philosophy of the Bill has been road-tested in numerous places across England for seven years.
Fourthly, the fundamental basis of the Bill is, I think, unanswerable. I quote something verbatim from the NHS Five Year Forward View written seven years ago which is still true today:
“The traditional divide between primary care, community services, and hospitals—largely unaltered since the birth of the NHS—is increasingly a barrier to the personalised and coordinated health services patients need. And just as GPs and hospitals tend to be rigidly demarcated, so too are social care and mental health services even though people increasingly need all three.”
Finally and fifthly, the ICS structure will enable the NHS more effectively to deliver population health and, in particular, to address the growing and unacceptable levels of health inequality that disfigure our society.
For all those reasons, I support the Bill. I hope, however, that the Government will recognise that the improved accountability and transparency that resulted from the purchaser-provider split, the productivity gains that came from the incentives built into payment by results, and the innovation value driven by competition should still be kept as drivers of improvement and change within the ICS structure. I also hope—this will not be popular on all sides of the House, although it used to be popular on the other side—that this Government will publicly recognise the very important contribution that the private sector can make to delivering high-value care. I hope these issues will be debated fully in Committee.
The Bill, in whatever shape it finally takes, will not on its own mend a healthcare system that is extremely fragile, as many healthcare systems are in the developed world. Most health systems in the developed world are not, in reality, health systems; they are late-stage sickness and emergency care systems. By using digital technologies and predictive AI, by incorporating genomics, by focusing on population health, out-of-hospital care and self-care, and by investing in precision, personalised public health, we have a chance of changing what has now become an outdated model.
There are four particular issues I will leave with the Minister. The first is the workforce. I commend the amendment put forward by Jeremy Hunt in the other House. Long-term workforce planning is essential to the future of the NHS. The second is mental health. We have made huge progress but we are not there yet; there is no real parity of esteem in the provision of services and funding for mental health. Thirdly, I would like to see the ICBs committed to achieving net-zero carbon emissions, which the NHS as a whole is now committed to. Finally, on social care, I thought the contribution by the noble Lord, Lord Kerr, was pertinent. He is absolutely right: we are at the beginning of reforming social care, not the end.
]]>I make the obvious point: after 70 years, the NHS is still a remarkable institution. I do not think anyone in this House today is going to say that the NHS should be disbanded or that it is no longer fit for purpose. That is pretty remarkable after 70 years; there are very few organisations that have weathered so well. If you look around the world at other social insurance-funded systems or private insurance-funded systems, there is no doubt that the NHS—which pools the risks, whether genetic or social, of a whole nation—can deliver both fair and efficient healthcare. When Theresa May became Prime Minister she talked about social justice, and no institution better embodies those words than the National Health Service.
I will make four points, the first of which is on money. If we look back over the life of the NHS, there is a correlation between the amount of money that goes in and the productivity that comes out. It goes in fits and starts. One Government come in and put too much money in, and productivity goes down. The last Labour Government, who the noble Lord, Lord Hunt, referred to, got the NHS to make huge progress, but during much of that time in the early 2000s a lot of waste and inefficiency went along with that extra money going into the system. We need a long-term settlement so that people in the NHS can plan for the future. It is not hard to create a long-term settlement, because the spending on the NHS is so determined by demography and technology that it is quite easy to predict. As some noble Lords will know, the IPPR has made a prediction of £50 billion extra by 2030. Whether it is £50 billion or £40 billion, surely that figure can be agreed on. If we are to have a cross-party view on this, exactly where we could have one is on what those requirements are for the NHS. However that is financed—whether through some form of hypothecation from general taxation, charging or productivity increases—that seems a perfectly legitimate area for proper political debate.
Secondly, on reform, by fragmenting the commissioning system into 212 clinical commissioning groups the Health and Social Care Act—my noble friend Lord Lansley, who was here a minute ago, was the architect of that—has made the process of integration more difficult. It also did not address the foundation trust issue, which was of course set up by the Labour Party when it was in government, and which has made integration much more difficult. If you are a foundation trust, you are solely interested in your own financial results and performance, and not in the performance of the system for the population as a whole which you service. We therefore have to address not only the consolidation of CCGs but have to look again at the regulation of foundation trusts. There is now evidence that where acute care and primary care work together in integrated systems, we reduce the number of emergency admissions into hospitals so that people are treated outside acute hospitals, which is all to the good.
The second area where the Health and Social Care Act was not helpful was in the split roles between NHS Improvement and NHS England, which has led to a fairly high degree of frustration and split responsibilities. To bring those two organisations together could well be part of the future. However, there is one caveat. Here I pay tribute to the noble Lord, Lord Carter of Coles, his team at NHS Improvement and their work on the Model Hospital and on the Getting It Right First Time initiative, led by Professor Briggs and Professor Evans. That “improvement” part of NHS Improvement should not be part of the regulator. You cannot be both a regulator with a big stick and a genuine improvement agency. However, the work the noble Lord has done in NHS Improvement should not be lost; it should be taken out of a combined NHS Improvement and NHS England organisation and treated separately.
The last part of any reform programme must be to emphasise prevention, as the noble Lord, Lord Patel, has already mentioned. We cannot regard the NHS purely as an organisation which cures the sick; it has to prevent people being sick in the first place. That has not received enough emphasis over the last six years.
I would like the Minister to address two other points in winding up. The first is that there should be a greater obligation on the NHS to support the life sciences industry in the UK. At the moment, it seeks to meet its own budgets and deliver care at the lowest possible cost but, for the economy and the country as a whole, the life sciences industry is absolutely essential. When it comes to developing cell and gene therapies and encouraging the convergence of data science and medical science in this country, for example, the NHS ought to have a greater obligation to support those initiatives and to become a test bed for British technology and science. However, the work that the NIHR has done under the leadership of Sally Davies and Chris Whitty in driving translational research in this country over the last five years has been terrific.
I should like to end on a point about Brexit. The Minister will know that my views and his on Brexit are very different but, whatever the outcome of the negotiations, there are three aspects of it which he may be able to give me some assurance on today: first, that we will remain part of any EU research programme such as Horizon 2020; secondly, that we will have a visa programme, not just for doctors and nurses but for the brightest and the best researchers, that is flexible and allows us to attract the best in the world to this country; and, finally, that we will remain part of the regulatory system in the European Union for medicines. If we do not, the chances of this country manufacturing these new advanced cell and gene therapies will disappear. We lost monoclonal antibodies from this country 10 or 15 years ago; we must be able to manufacture cell and gene therapies in this country. If we have to go through enormous compliance issues with customs at the borders, we will not be able to do so. I hope that we can have an assurance on that point.
]]>In my view, the White Paper is more of an hors d’oeuvre than a main course: it acknowledges specifically that it is a work in progress and not the final result of our labours. We have not yet won the argument that an industrial strategy should be central to all government policy-making and that, if not addressed, low productivity and low earnings pose existential questions for our way of life.
Other countries have grasped this to a greater extent than we have. Look at China’s One Belt, One Road strategy, Germany’s Industrie 4.0 and Japan’s Society 5.0—they are at the core of those countries’ economic, social and industrial policies. They are central, transformational and driven from the top of government. You can hardly pick up a Japanese newspaper without seeing the Japanese Prime Minister expounding on artificial intelligence, drones or new industrial techniques. Contrary to public belief and much political rhetoric, the US too has a long history of industrial strategy, beginning back in 1945 with the seminal work Science: The Endless Frontier, produced for President Roosevelt by Vannevar Bush. It marked the beginning of a massive investment by the federal Government in research, and saw the creation of DARPA, the NIH and other government research bodies. You need look no further than the Manhattan Project or the Apollo programme, or the more recent orphan drugs programme, to see the power of government in the US.
Yet part of British politics is still fighting the sterile, hopeless, outdated battle between those on the left who believe that public ownership is the answer to all evils and those on the right who deride and caricature all government involvement in industrial strategy as picking winners—by which, of course, they mean picking losers. This White Paper makes it absolutely clear that the Government have a critical role working with the private sector, universities and local government in driving the industrial strategy. This role goes beyond creating the right market or competitive environment, and beyond correcting market failure. It encompasses a much deeper, long-term partnership between government, universities, business and local civic institutions.
The noble Lord, Lord Hennessy, suggested I read for inspiration the Beveridge report, arguably one of the most influential reports written in 20th-century Britain. Beveridge declared war on the five giant evils of want, squalor, ignorance, disease and idleness. He wrote, which I thought was interesting, that:
“A revolutionary moment in the world’s history is a time for revolutions, not for patching”.
We are at a similar time in our country today. There are two giant evils: low productivity and inequality. They not only have a direct impact on the five great evils identified by Beveridge but, if not addressed, pose an existential threat to our liberal democracy. Already their influence can be seen with the rise of extreme politics and simplistic populism in the US and western Europe.
Productivity has slowed and, consequently, earnings have stagnated. Paul Krugman, the Nobel laureate for economics, said that productivity is not everything but in the long run it is almost everything. Globalisation has enriched billions of people in Asia and beyond but it has been partly at the expense of the middle classes in the west, especially in traditional manufacturing areas. Demographic change has exacerbated the problem. In the US, real median earnings have hardly moved since 1990. In the UK, earnings have stagnated since 2007. Paul Johnson, the director of the IFS stated at the end of last year:
“After taking into account inflation, average earnings remain below where they were in 2008. That’s unique in at least 150 years”.
The outlook for the next 10 years is not much better. It is likely for the first time since the Industrial Revolution started at the end of the 18th century that the next generation will be less well off than the preceding one. Millions of people have been left behind. The American dream has for many become a nightmare.
This is a far cry from the perceived wisdom back in the 1990s when Francis Fukuyama wrote “The End of History?”, concluding that,
“we may have reached the end point of mankind’s ideological evolution and the universalisation of Western liberal democracy as the final form of human government”.
If liberal democracy cannot deliver improving living standards, one is tempted to ask: what is the point of it or, at the very least, how long can it last?
However, low productivity and stagnant earnings are only half the problem. The other half is rising inequality. Between 1980 and 2016 the richest 1% of the population of the US took as much as the bottom 88% of the increase in real income. In the UK the top 1% took as much as the bottom 51%. Overall, the poorest 50% of the population of western Europe, the US and Canada over this period—some 30 years—took only 9% of the increase in real income. This level of inequality is not justifiable morally, politically or economically. It is not fair. It is simply not sustainable over a long period of time in a democracy.
These are the twin evils—low earnings and growing inequality—that any industrial strategy has to address. This industrial strategy takes a long-term view over more than 10 years. It is cross-party in its approach, building on the works of the noble Lords, Lord Heseltine and Lord Mandelson, Vince Cable, my noble friend Lord Willetts and the noble Lord, Lord Sainsbury. It is about the future not the past; it is about new disruptive technologies not incumbents; it is mission-oriented with the four grand challenges; it is built on the remarkable competitive advantage of our universities and research institutes; it builds in a cross-government delivery and measurement mechanism through the Cabinet committee, chaired by the Prime Minister, and the creation of the industrial strategy council; and it explicitly recognises the crucial partnership between government and the private sector as a driver of strategy—if I can put it this way, more Mariana Mazzucato than Milton Friedman, more UCL than Chicago. Perhaps most important, it recognises that the productivity and inequality evils cannot be addressed solely in London, important though London is. The revival of the northern powerhouse, the Midlands engine and our great industrial cities outside the golden triangle of London, Cambridge and Oxford is fundamental to the success of industrial strategy.
One of the most influential things that happened to me in the past year was going to Pittsburgh. I used to spend a lot of time in Pittsburgh in the 1980s, when it was a declining steel town, the rivers were polluted and crime was high. If you go back to Pittsburgh today you will see that, through the revival of the Carnegie Mellon University, the development of robotics and the cleaning up of the environment, it has completely changed. This is because the revival of strong local civic institutions has driven an extraordinary change in Pittsburgh. You can see this in Chicago, Cleveland and other great old American cities where they have strong elected mayors. I agree 100% with the words of the noble Lord, Lord Heseltine, that we can have a strong industrial strategy only if it devolves more power to accountable local leaders.
We have a saying in Norfolk that fine words butter no parsnips. The White Paper has fine words and we now have to deliver.
]]>On 2 October my Rt Hon Friend the Secretary of State announced the appointment of Paul Uppal as the UK’s first Small Business Commissioner (SBC). Mr Uppal and his team will provide general advice and information to small businesses on matters such as resolving payment disputes, including signposting small businesses through the SBC’s website to existing support and dispute resolution services.
The SBC complaints scheme is dependent on secondary legislation, which is currently being considered by Parliament. Small businesses will be able to submit complaints once the service fully launches, including complaints relating to issues from 1 6 April 2017. The office of the SBC will be operational by the end of 2017, subject to the will of Parliament.
On 2 October my Rt Hon Friend the Secretary of State announced the appointment of Paul Uppal as the UK’s first Small Business Commissioner (SBC). Mr Uppal and his team will provide general advice and information to small businesses on matters such as resolving payment disputes, including signposting small businesses through the SBC’s website to existing support and dispute resolution services.
The SBC complaints scheme is dependent on secondary legislation, which is currently being considered by Parliament. Small businesses will be able to submit complaints once the service fully launches, including complaints relating to issues from 1 6 April 2017. The office of the SBC will be operational by the end of 2017, subject to the will of Parliament.
Data on payments from the Renewable Heat Incentive (RHI) schemes are given in the table below.
Year | Domestic RHI | Non-domestic RHI | Total |
13/14 | 0 | £54m | £54m |
14/15 | £23m | £148m | £171m |
15/16 | £77m | £296m | £373m |
16/17 | £92m | £454m | £546m |
Based on data to end Aug 2017 |
In November 2015, the Government confirming a continued budget for the RHI to 2020/21, as set out in the table below. A budget cap allowing the scheme to be closed to new applications was introduced to reinforce existing cost control mechanisms within the RHI, to ensure that scheme expenditure does not exceed the allocated annual budgets.
| 16/17 | 17/18 | 18/19 | 19/20 | 20/21 |
Budget | £640m | £780m | £900m | £1010m | £1150m |
As the Clean Growth Strategy sets out, the Government is considering the UK’s future participation in the EU ETS after our exit from the EU, and we remain firmly committed to carbon pricing as an emissions reduction tool whilst ensuring energy and trade intensive businesses are appropriately protected from any detrimental impacts on competitiveness.
Whatever our future relationship with the EU, we will seek to ensure that our future approach is at least as ambitious as the existing scheme and provide a smooth transition for the relevant sectors. The UK’s commitment and leadership role in tackling climate change remains undimmed and working closely with the EU on this global challenge will remain important.
]]>The Government is considering carefully the potential impacts of a wide range of EU Exit scenarios relating to the EU ETS, both on the system itself and on UK operators covered by the system. This includes consideration of the risks that a mid-Phase exit of the EU ETS could present for UK operators.
To ensure a smooth transition and avoid a cliff edge on withdrawal, the UK has proposed to the EU an implementation period of about two years where we would continue to have access to each other’s markets on current terms. We are calling for this to be agreed as early as possible to provide clarity.
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Transmission, distribution and balancing charges are set by network companies in line with the charging methodologies approved by Ofgem, as the independent regulator.
Network companies also produce some future estimates of these charges. These include National Grid’s forecasts of Transmission Network Use of System charges for 2018/19 to 2021/22 (available at: http://www2.nationalgrid.com/UK/Industry-information/System-charges/Electricity-transmission/Approval-conditions/Condition-5/) and Balancing Services Use of System charges to 2018/19 (available at: http://www2.nationalgrid.com/UK/Industry-information/Electricity-transmission-operational-data/Report-explorer/Services-Reports/). These forecasts are not broken down to show renewable energy sources.
]]>In energy the Confidence Code is a Code of Practice to govern independent energy price comparison websites. Ofgem accredits sites to the Code and these must follow key principles in order to operate their service. When customers are presented with options and prices, they have been calculated and are displayed in a fair and unbiased way.
Accredited price comparison websites must operate an effective complaints process. If a customer has a complaint, they should first contact the comparison site to tell them so that they can try to resolve it. If a customer is not satisfied with the outcome, they can then contact Ofgem who will then investigate the issue.
The business retail water market opened in April. Third party intermediaries such as water brokers play an important role in supporting many customers in finding the best deal for their business. The marketing activities of such intermediaries operating in the water market, as with intermediaries generally, are subject to regulation. The Competition and Markets Authority and trading standard authorities have roles in ensuring that customers are not misled when switching to alternative suppliers. The ‘Business Protection from Misleading Marketing Regulations 2008’ apply to marketing activities in the water retail market.
Ofwat acts as the independent economic regulator of the new market. The Retail Exits Regulations required Ofwat to introduce a code to apply to customers who are transferred via an exit setting out the contract terms that will apply. Additionally all retailers must follow Ofwat’s customer protection code of practice that contains key customer protection obligations, including a requirement for retailers to obtain written confirmation from customers who choose to use the services of a third party intermediary.
]]>The Government recognises the important role of nuclear in our energy mix. Last September we signed a deal to build the first new nuclear plant in the UK for over 20 years. Hinkley Point C will provide 3.2 gigawatts low carbon electricity for 60 years, meeting around 7% of the UK’s electricity needs.
Further, on 12 October the Government published its Clean Growth Strategy, which committed continuing to work with nuclear developers on their new build proposals, including on financing plans, as well as investing £460 million in nuclear to support work in areas including future nuclear fuels, new nuclear manufacturing techniques, recycling and reprocessing, and advanced reactor design. The Department for Business, Energy and Industrial Strategy is also working with industry to develop a nuclear Sector Deal as part of the Industrial Strategy, looking at boosting competitiveness and skills across the sector.
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The use of tricolsan and triclocarbon is restricted by Regulation (EC) No 1223/2009 on Cosmetic Products. Manufacturers may only use these preservatives at specified levels and triclosan is only permitted at those levels in a limited range of cosmetic products. Both ingredients have been examined by the European Commission’s Scientific Committee on Consumer Safety who considered them to be safe at these restricted levels and usages.
]]>The noble Lord, Lord Grantchester, raised the relative impact on competitors because the European Commission did not accept our argument. I think we have a serious argument here. It could be that there was a new process for making steel that was less energy-intensive and did not qualify for the exemption. That would put it at a competitive disadvantage in relation to the more energy-intensive process of making steel that did qualify, thereby achieving the reverse of what we intend to do, which is to move towards less energy-intensive methods of making steel, chemicals, glass, ceramics or, for that matter, anything else. So our argument to the Commission was a good one and we should carry on pursuing it.
The noble Lord then raised the issue of what we are going to do about the state aid provision programme post-Brexit. I can say only that that is part of the negotiations that are going on and it would not be for us to decide what to do about that post-Brexit although, depending on the trade agreements negotiated with Europe, there will be some understandings about that issue to avoid unfair competition between us and our European friends.
The noble Lord asked about the analysis behind why household bills changed from £1.80 to £1. The update from £1.80 to £1 was mainly because we reduced our estimate of the volume of electricity consumed by eligible energy-intensive industries. We have also updated our estimates of CfD policy costs and volumes of electricity sales to households and other consumers. I have to say I am just reading out my brief; I do not know whether or not it answers the question. I gather that it does. Excellent.
I believe the independent review by Dieter Helm is out tomorrow. I stress that it is an independent review, not a government one. I do not know what is in it but I think there will be lots that is of interest to the noble Lord when he reads it. If I have missed out any of the questions raised, I will write to noble Lords later. On that basis, I commend the draft regulations to the House.
Motion agreed.
House adjourned at 5.47 pm.
]]>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.
]]>Finally, he asked about the statutory review date in the primary legislation. Again, I will have to look and see when that date is and write to him.
I should also respond to the noble Baroness, Lady Maddock, who asked about how we responded to the consultation. I apologise if we did not follow the rules correctly. We will do better next time.
On the basis of that response and the letters I intend to write to the noble Lord, I commend these regulations to the House.
Motion agreed.
]]>The noble Lord, Lord Grantchester, raised a number of other more profound issues which I hope he will agree do not pertain directly to the matter in hand, but perhaps I may try to answer some of the questions that he raised. I think that his fundamental question was whether the capacity market is value for money. Using his analogy of the insurance market, the total gross premium that we have paid over the period to 2020-21 is £3.35 billion. That is the premium that we have paid to obviate the possibility of the lights going off over that period. Whether or not that is value for money, the noble Lord will have to draw his own conclusions. I think it is quite hard to assess that, except for the fact that if the lights did go off it would be a catastrophe. In the context of the British economy, that may be a premium worth paying. That is a subjective view, and he will have his own thoughts on that.
The noble Lord raised a number of other issues, to which I do not have a reply—at least, I cannot reply in the way that I would like to be able to. He asked four other questions. He answered one of them himself, fortunately, so that leaves me three other questions to address. One was: has this brought forward new investment in generation? The answer is that it has. I mentioned some in my speech. Whether it has brought forward enough is probably the question that he was asking, and he related that to the nuclear investment. I would like to think about that, if I may, and write to him afterwards. Related to that, he asked: has this brought forward new alternative capacity? I guess by that he meant wind, solar and the like. The answer has to be: yes, it has.
]]>Before I explain the changes in detail, it may be helpful as a reminder to noble Lords if I say a few words of background about the capacity market itself. Ensuring that families and businesses across the country have secure, affordable energy supplies that they can rely on is a top priority. We are facing challenges to electricity security of supply resulting from the closure of older plant and the move towards less polluting, but more intermittent and inflexible technologies, such as solar, wind and nuclear. That is why we have the capacity market; this scheme ensures that there will be sufficient electricity capacity in Great Britain for this winter and beyond. It gives generators confidence that they will receive the revenue they need to maintain, upgrade and refurbish their existing plant, and to finance and build new plant to come on stream as and when existing assets retire. It also ensures that those who are able to shift demand for electricity away from periods of greatest scarcity, without detriment to themselves and to the wider economy, are incentivised to do so.
It does this by offering capacity providers, who are successful in competitive auctions held four years and one year ahead of delivery, a steady, predictable revenue stream on which they can base their future investments. In return for these capacity payments, providers must meet their obligations to deliver electricity or reduce demand at times of system stress or face penalties.
The capacity market is working. Fierce competition between providers in the auctions held to date meant that we obtained the required capacity at prices below the levels many had expected. That is good for consumers as it translates to lower costs on bills. The capacity market is driving investment in new, flexible capacity. The most recent four-year-ahead auction secured over 3.4 gigawatts of new-build generating capacity, including combined-cycle gas turbines, open-cycle gas turbines, small flexible engines and battery storage, as well as 1.4 gigawatts of demand-side response.
The clear message from industry and investors is that the mechanism retains their confidence and is the best available approach for ensuring our long-term security of supply. Industry and investors also stress that regulatory stability is crucial but that the scheme, operating in a rapidly changing environment, must be regularly reviewed to ensure it remains fit for purpose. The changes set out in the instrument are the latest in a series of amendments that ensure the scheme is kept relevant and workable. I will briefly expand on the amendments.
First, the instrument amends the method by which the costs of the capacity market are recouped from suppliers. It was felt the current supplier charge arrangements potentially gave an unfair advantage to embedded generators—smaller generators connected to the lower voltage distribution network—and could distort the outcome of the capacity auctions. That arises because, under current arrangements, suppliers are charged according to their share of total demand at peak times, measured by the demand they place on the transmission grid. That is their net demand. By contracting with embedded generators to run over winter peaks, some suppliers are able to reduce their net demand and therefore their share of capacity market costs, with others having to pay more. With some of the savings inevitably being passed on to the embedded generators, such arrangements unintentionally risk giving them a double payment for what is essentially only one contribution to security of supply. The instrument addresses the issue by amending the basis of the capacity market supplier charge and settlement costs levy from net to gross demand. That is a fairer way of sharing costs between suppliers: it ensures suppliers’ costs reflect their overall demand and helps ensure a level playing field between different generators in the auctions.
Secondly, the instrument seeks to prevent new and refurbishing plants being overcompensated in the capacity market where they are also in receipt of aid through risk finance schemes such as the enterprise investment scheme, seed enterprise investment schemes and venture capital trusts. Currently, there is a risk of double subsidy, which would likely distort the outcome of the capacity auctions. To ensure fair competition and value for money for consumers, the instrument asserts that where a capacity provider has accessed investment through one of these risk finance schemes to fund capital expenditure, their capacity payments must be reduced until such a time as this has been off-set. These off-setting arrangements ensure that the total amount of aid is capped at the amount awarded in the capacity market auction.
Thirdly, the instrument seeks to remove an inconsistency in the way demand-side response capacity is de-rated relative to other capacity types. De-rating is the process by which the volume of a provider’s capacity is adjusted to reflect the reliability of the technologies being used. Unlike other participants, demand-side response providers can nominate a lower amount of capacity to bid into an auction than the capacity they estimated at pre-qualification stage, but that nominated amount is not currently subject to de-rating. The instrument addresses that by ensuring that the nominated value is de-rated, thereby improving the overall reliability of the capacity that is procured. I hope noble Lords have got that.
Fourthly, the instrument clarifies the requirement that capacity market participants maintain credit cover until they have fully discharged all the requirements against which the credit cover has been lodged. In addition, the instrument puts beyond doubt that a party’s credit cover will not be drawn down where a termination fee is due unless the termination fee is unpaid.
Finally, the instrument amends the name, but not the substance, of the capacity market warning—a notification that must be issued in specific circumstances under the scheme. Revision to the capacity market notice better reflects the nature of the notification and will be clearer for participants.
My department published two consultations on these changes during September and October last year. In total, 38 responses were received across the two consultations. There was significant support for the majority of the proposals raised. I look forward to hearing what noble Lords have to say about the proposed changes.
]]>The noble Lord, Lord Mendelsohn, asked what our view would be if, between now and our leaving the EU, perhaps during the transition period, the EU decided it wanted to expand to cover, for example, Serbia, Albania and other countries. I think that our response is that we would not want to stand in the EU’s way in such circumstances. I am sure that if it wanted to go ahead, it would be curmudgeonly for us to stand in its way.
Bill read a second time and committed to a Committee of the Whole House.
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