House of Commons - Draft Energy Bill: Pre-legislative Scrutiny

Draft Energy Bill: Pre-legislative Scrutiny - Energy and Climate Change Contents

1 Introduction

1. The Government's vision is to move to a secure, low-carbon energy system in a cost effective way. Achieving this goal will be no mean feat. Around a fifth of our existing generating capacity is scheduled to close in the next decade and there are also challenging climate change and renewable energy targets for 2020. DECC has estimated that up to £110 billion of investment for new electricity generation and transmission infrastructure is likely to be needed by 2020, which will require the current rate of investment to more than double.

2. At a time when both company and government balance sheets are stretched, and other faster growing economies are also seeking substantial investment in energy infrastructure, securing this level of investment represents an enormous challenge. What is more, rising gas prices and growing levels of fuel poverty have pushed questions of affordability to the fore. It will therefore be vital that, as we move towards a new energy system, every effort is made to maximise value for money and minimise costs to consumers.

3. Many witnesses argued that the framework in which the market currently operates will not deliver the necessary levels of investment (although some argued that the existing Renewables Obligation would be sufficient to deliver investment in renewable energy). There is clearly a problem in attracting investment at the moment. We have already fallen behind schedule, with only a third of the annual investment required in wind having been delivered and the prospects for new nuclear looking increasingly uncertain.[1]

4. As a result, DECC has been working to develop a new framework that it hopes will provide the necessary incentives to secure investment. One of the main goals of this work has been to reduce the risks associated with investments in low-carbon generation, thereby making them more attractive to prospective investors.

5. The Government's initial proposals were published for consultation in December 2010.[2] We conducted an inquiry on these proposals and reported in May 2011.[3] DECC subsequently published a White Paper in July 2011 and a technical update in December 2011.[4] We heard evidence on the technical update in January 2012.[5]

The pre-legislative scrutiny process

6. We indicated our willingness to conduct pre-legislative scrutiny to the Department in January this year, but made clear at the time that this should not be at the expense of an early introduction of the Bill.[6] The draft Bill was not published until 22 May 2012. We support the Government's overall objectives for the electricity sector and see electricity market reform as vital to achieving these aims. We were therefore willing to take part in this process and have done so in the spirit of making a constructive contribution towards the Bill. We hope that the result will be better, more workable and more effective legislation.

7. However, our efforts to provide robust and effective scrutiny have been hampered by a number of factors. First, the timescale in which we have been asked to conduct and conclude our inquiry—just five sitting weeks—has made examination of what is a very complex set of proposals extremely challenging. This timescale is well below the 12 sitting weeks that a Joint Committee conducting a similar task would, by convention, be granted.[7]

8. Second, we have been dismayed by the lack of detail provided on key aspects of the proposals, most notably on the crucial question of who will be the counterparty for the new Contracts for Difference. In addition, DECC was still collecting evidence as we carried out our inquiry in many vital areas (for example, demand reduction, the Power Purchase Agreement market and detailed design of the capacity market, to name but three). It is very difficult for us to comment constructively on these aspects without having had access to this evidence base.

Role of the Treasury

9. Finally, the refusal of the Treasury to provide a witness or to answer our questions in writing has seriously undermined the pre-legislative scrutiny process.[8] Treasury Ministers have given evidence to this Committee on several previous occasions and we are aware of at least one example of a Treasury Minister giving evidence to a Public Bill Committee on a Bill where it was not the departmental lead.[9] We are therefore frankly astonished by the suggestion that providing evidence to the Committee would "establish a precedent" that would "undermine" its "role in Government as spending arbiter" (in the past the Treasury's approach has been more pragmatic, demonstrating an acceptance that, even within the parameters of joined-up government, there is scope for discussion and scrutiny of interaction between Treasury policy and that of other government departments).[10]

10. Numerous witnesses told us that Treasury policy (and in particular the levy control framework) was having a direct impact on energy investment decisions. What is more, the levy cap may, paradoxically, result in increased costs to consumers and may damage prospects for growth in low-carbon industries - exactly the outcomes the Treasury is seeking to avoid. These are important questions that must be addressed, but the Treasury's apparent refusal to engage with the possibility that its policies may have unintended consequences risks derailing DECC's proposals and producing a worse deal for consumers. All Government departments must explicitly support a policy framework that is evidence-based.

11. The draft Bill is a framework Bill, with much of the detail to be contained in secondary legislation. One witness argued that the Committee should undertake further scrutiny of these proposals, when the final models are available.[11] Since much of this detail is essential to understanding whether the reforms are likely to be effective, we have not limited our inquiry to the draft Bill itself, but have also explored some of the broader policy questions relating to the proposed reforms.

12. We received 79 submissions of written evidence and held five oral evidence sessions. We also held a roundtable discussion with investors and financial analysts. A note of the meeting, along with a full list of witnesses can be found at the end of this report.[12] We are very grateful to all those who contributed evidence to this inquiry. We would like to express particular thanks to Dr Robert Gross (Imperial College) and Professor Derek Bunn (London Business School) who were Specialist Advisers to the inquiry.[13]

Suggestions that the Bill be scrapped

13. The Government's original proposals for electricity market reform were based on four key measures: a Feed-in Tariff for low-carbon energy, a Carbon Price Floor, an Emissions Performance Standard and a Capacity Mechanism.[14] The Carbon Price Floor has already been legislated for through the Finance Act 2011, so the draft Energy Bill focuses on the remaining three measures.

14. As we noted in our previous report on this subject, "Electricity Market Reform" is really a misnomer, since the proposals will not actually change the current British Electricity Trading and Transmission Arrangements (BETTA) system under which electricity is traded in the electricity market. Instead, they will "bolt on" additional market mechanisms, taxes and regulatory measures.[15] As noted below, aspects of wholesale market reform appear critical to EMR (para 125). We were therefore not surprised by the lack of proposals to make changes to the wholesale market itself in the draft Bill.

15. Many witnesses believed that there was a need for reform of some kind (although it was widely known that the starting point would not be radical market reform). However, many also felt that the proposals as currently constructed would not deliver increased investment in low-carbon generation.[16] As the Low Carbon Finance Group put it, the proposals "at present, do not form a framework or structure that financiers believe they could present to, and secure approval from, credit or investment committees".[17]

16. Some witnesses argued that the proposals were fundamentally flawed and that the whole EMR process should be stopped.[18] However, others thought that it was still possible to revise the proposals and to create a workable framework.[19] While we are certain that significant changes are needed to the draft Bill, we also recognise that scrapping the plans at this stage would lead to even greater uncertainty, further delays in securing much needed new investment, and would undermine the credibility of UK energy policy. It would also seriously jeopardise the prospects for meeting our 2020 renewable energy and climate change targets and could even threaten energy security. It is therefore our intention in this report to engage constructively with the proposals that are on the table, rather than suggesting DECC rips up the Bill and starts again; the perfect should not become the enemy of the good. We aim to highlight the areas where DECC needs to carry out further work before introducing its Bill and, where possible, to make practical recommendations for how the draft Bill could be improved.

17. As well as Electricity Market Reform, the draft Bill also covers a number of other subjects (Energy Strategy and Policy Statement, the Office of Nuclear Regulation, Offshore Transmission and Government Pipeline and Storage System). Owing to the time constraints in which we have conducted this inquiry, we have not been able to include the detail of these other, less controversial areas in our scrutiny.

Structure of this report

18. Our report relates to the Chapters of the draft Bill as follows:

draft Bill Chapter 1, Contracts for Difference - Chapter 3 of this report
draft Bill Chapter 2, Investment Instruments - Chapter 4
draft Bill Chapter 3, Capacity Market - Chapter 5
draft Bill Chapter 4, Conflicts of interest - Chapter 6
draft Bill Chapters 5, Contingency Arrangements and 6, The Renewables Obligation: Transitional Arrangements - we have not examined these chapters in great detail.
draft Bill Chapter 7, Emissions Performance Standard - Chapter 7 of this report

19. As described above, we have focused our inquiry on Part 1 of the Bill and we have not looked at Parts 2 - 4 in great detail.

1 Committee on Climate Change, Meeting Carbon Budgets - 2012 Progress Report to Parliament, June 2012 Back

2 DECC, Electricity Market Reform Consultation Document, Cm 7983, December 2012 Back

3 Energy and Climate Change Committee, Fourth Report of Session 2010-12, Electricity Market Reform, HC 742 Back

4 DECC, Planning our electric future: a White Paper for secure, affordable and low-carbon electricity, CM 8099, July 2011; DECC, Planning our electric future: technical update, December 2011 Back

5 Oral evidence taken before the Energy and Climate Change Committee on 24 and 25 January 2012, HC (2010-12) 1781-i and 1781-ii Back

6 Ev 107 (letter dated 31 January 2012) Back

7 Ev 107 (letter dated 24 May 2012) Back

8 Ev 111, Ev 115 Back

9 Child Poverty Bill, Public Bill Committee, 20 October 2009 Back

10 Oral evidence taken before the Energy and Climate Change Committee on 4 May 2011, HC (2010-12) 1018-i; Oral evidence taken before the Energy and Climate Change Committee on 1 December 2011, HC (2010-12)1605 Ev 111 Back

11 Ev w54 Back