Sixth Report
Article I. InstrumentS drawn to
the Special Attention of the House
The Committee has considered the
following instruments and has determined that the special attention
of the House should be drawn to them on the grounds specified.
Section 1.01 A. Draft Contracts for
Difference (Allocation) Regulations 2014
Date laid: 30 June 2014
Parliamentary Procedure: affirmative
procedure
Section 1.02 Draft Contracts for Difference
(Definition of Eligible Generator) Regulations 2014
Draft Contracts for Difference (Standard Terms) Regulations 2014
Draft Contracts for Difference (Electricity Supplier Obligations)
Regulations 2014
Draft Electricity Market Reform (General) Regulations 2014
Draft Electricity Capacity Regulations 2014
Date laid: 23 June 2014
Parliamentary Procedure: affirmative
procedure
Section 1.03 Draft Capacity Market Rules
2014
Draft Modifications to the Special Conditions of National Grid
Electricity Transmission plc's Transmission Licence (EMR No. 1
of 2014)
Date laid: 19 June 2014
Parliamentary Procedure: draft
negative procedure
Section 1.04 Draft Modifications to Transmission
Licences and Documents maintained under Licences (EMR No. 2 of
2014)
Date laid: 16 June 2014
Parliamentary Procedure: draft
negative procedure
Summary: This complex suite of secondary
legislation and related documents has been laid by the Department
for Energy and Climate Change to implement its programme of Electricity
Market Reform (EMR) under the Energy Act 2013. We took evidence
from the Energy Minister on 8 July, who described EMR as the biggest
single reform of the electricity market since 1987-88.
We recognise that the Government
have made considerable efforts to ensure that interested parties
in the electricity market understand the EMR programme. However,
it is important that consumers should also have a good understanding,
and we see scope, and need, for the Government to take this forward,
working with consumer groups as appropriate.
We welcome the fact that the Minister
has now provided additional information to assist the House's
scrutiny of these instruments; in considering any further instruments
to take the programme forward, we urge the Government to bear
in mind the desirability of ensuring that such secondary legislation
as is required should be as clear and comprehensible as possible.
We draw these instruments to the
special attention of the House on the grounds that they are politically
or legally important or give rise to issues of public policy likely
to be of interest to the House.
1. The Department for Energy and
Climate Change (DECC) has laid these instruments, in each case
with an Explanatory Memorandum (EM), and also with a number of
impact assessments. They make up a suite of secondary legislation
and related documents, by means of which DECC plans to implement
its programme of Electricity Market Reform (EMR) under the Energy
Act 2013 ("the 2013 Act"). In view of the significance
of the secondary legislation, we took evidence on 8 July 2014
from the Rt. Hon. Michael Fallon, MP, then Minister of State for
Energy,[1] in order to
inform our scrutiny.
(A) ELECTRICITY MARKET REFORM (EMR)
2. In the EMs, DECC states that
the EMR programme is intended to incentivise investment in low-carbon
electricity generation, while improving affordability for consumers,
and maintaining energy security. The Department says that EMR
has been designed as a set of transitional arrangements intended
to work with the market and address market failures, in order
to ensure that low-carbon electricity generation is an attractive
investment opportunity.
3. DECC states that the key elements
of EMR will be delivered through two new mechanisms to incentivise
the required investment: Contracts for Difference (CFDs), which
will provide long-term revenue stabilisation to low-carbon plant,
allowing investment to come forward at a lower cost of capital
and therefore at a lower cost to consumers; and the Capacity Market,
which will provide a regular retainer payment to reliable forms
of capacity (both demand and supply side) in return for such capacity
being available when additional electricity supply is required
at times of peak demand. This will reduce the threat of blackouts
due to insufficient capacity on the system.
(B) EMR SECONDARY LEGISLATION AND RELATED DOCUMENTS
4. The first five of the instruments
subject to affirmative resolution relate to Contracts for Difference
(CFDs). The draft Contracts for Difference (Allocation) Regulations
2014 set out details of the procedure for applications for
CFDs, including the assessment of applications, the contents of
an allocation framework and how that is applied to an allocation
round, and the budget for such rounds. The draft Contracts
for Difference (Definition of Eligible Generator) Regulations
2014 specify the relevant definition. The draft Contracts
for Difference (Standard Terms) Regulations 2014 control three
aspects of the way in which a "generic" CFD (that is,
one that follows a notification from the national system operator)
may be drawn up, offered and publicised: provision to be included
in standard terms issued or revised by the Secretary of State;
the process for an applicant to request a change to the generic
CFD terms; and controls on the process through which a CFD is
completed and offered. The Draft Contracts for Difference
(Electricity Supplier Obligations) Regulations 2014 establish
a mechanism to allow the CFD Counterparty to raise funds from
all licensed electricity suppliers in Great Britain to pay for
the liabilities that it has to make for payments to electricity
generators under the Contracts for Difference scheme, and to return
money to suppliers where appropriate.
5. The fifth of these instruments,
the draft Electricity Market Reform (General) Regulations 2014,
set out a number of general provisions relating to the CFD policy.
These include a requirement on the EMR Delivery Body (namely,
National Grid Electricity Transmission plc (NGET)) to provide
information in relation to the strike price[2]
applicable to any form of low-carbon electricity generation under
CFDs; provisions determining how and when a supply chain statement
application[3] should be
made and what it should cover, and setting out the circumstances
in which the Secretary of State must not disclose information
contained in a supply chain statement application; and provision
to shield NGET (as the national system operator and EMR Delivery
Body) against liability in damages to third parties arising out
of its exercise of EMR delivery functions relating to the CFD.
6. The draft Electricity Capacity
Regulations 2014 and the draft Capacity Market Rules 2014
establish a Capacity Market which is designed to ensure that sufficient
electricity generating capacity is available to ensure security
of electricity supply. Among other things, the draft Regulations
deal with the Secretary of State's role, including matters such
as how and when the Secretary of State will determine whether
to run a capacity auction, and providing for the Capacity Market
to be implemented and administered by a combination of the Secretary
of State, the Gas and Electricity Markets Authority (Ofgem), the
EMR Delivery Body (NGET) and a Settlement Body. The Rules detail
the operating framework set out in the Regulations, focusing on
the technical and administrative rules and procedures for how
the Capacity Market will operate.
7. Finally, the draft Modifications
to the Special Conditions of National Grid Electricity Transmission
plc's Transmission Licence (EMR No. 1 of 2014) insert a new Special
Condition into NGET's transmission licence, with provisions which
require NGET to implement certain business separation measures
intended to manage conflicts of interest arising with other parts
of its business while undertaking functions conferred on it as
the EMR Delivery Body. The draft Modifications to Transmission
Licences and Documents maintained under Licences (EMR No. 2 of
2014) contain amendments consequential on the EMR secondary legislation
described above.
(C) EVIDENCE SESSION WITH ENERGY MINISTER
8. On 8 July, we took evidence from
the Rt. Hon. Michael Fallon, MP, then Energy Minister. As well
as hearing more about the objectives of the secondary legislation,
we raised with him a number of concerns prompted by our scrutiny
of the instruments.
(D) COMPLEXITY
9. The number of statutory instruments
laid, and the highly detailed nature of their provisions, are
not conducive to a rapid understanding of their effect. We pressed
the Minister on whether implementation of the EMR programme needed
to be secured through such complex legislation. Mr Fallon said
that this was the biggest single reform of the electricity market
since 1987-88, "so inevitably there is some complexity in
the regulations".[4]
While accepting in principle that regulations could always be
made clearer, he was "not sure how [the secondary legislation]
could have been made necessarily more succinct".[5]
He acknowledged that the Government would be laying additional
secondary legislation.[6]
(E) CONSULTATION AND ENGAGEMENT
10. We asked the Minister about
the extent of consultation in relation to the statutory instruments,
and about whether the Government had made changes to their proposals
for implementation in the light of consultation responses. Mr
Fallon mentioned three changes which had been made: quarterly,
rather than annual, consolidation of the reserve fund; simplification
of the pre-qualification paperwork; and restructuring the penalty
regime in the capacity market.[7]
He also described the Government's wider engagement with interested
parties both before and since the formal consultation process,
and said that this would continue, particularly in the case of
the capacity market: "we will certainly want to build in
lessons from the first auction [in December 2014] when we come
to run the second".[8]
(F) UNDERSTANDING IN INDUSTRY AND AMONG CONSUMERS
11. We pressed the Minister on whether
he saw any risk that a lack of understanding among market participants
could affect the progress of the EMR proposals. He told us of
his confidence that the industry understood, and was interested
in, both the CFDs and the Capacity Market: "I am satisfied
that the industry, the potential generators, are ready to participate",
though he acknowledged that the test would come only when the
Capacity Market had run its course.[9]
12. Mr Fallon said that, once the
secondary legislation had been approved by Parliament, the Government
would consider with Ofgem and others how to improve consumer understanding
of the EMR arrangements.[10]
He acknowledged that until recently the Government had not made
it sufficiently clear to consumers that their electricity bills
needed to cover not only energy consumed, but also the cost of
replacing generating capacity, and the cost of international commitments
to use low-carbon technology: "these are the two things that
perhaps the Government could work harder at getting over to consumers".[11]
We put to the Minister the case for involving consumer organisations,
such as Which? and Citizens Advice, in the process of improving
consumer understanding, and received some assurance that this
was in the Government's sights.[12]
(G) COSTS TO CONSUMERS
13. We asked the Minister about
the cost implications for consumers' bills of implementation of
the EMR programme. Mr Fallon acknowledged that bills would carry
additional costs: roughly £2 a year for the Capacity Market,
and £25 or £26 a year for the Contracts for Difference:
"we have to make sure that we get good value for money for
what the taxpayer is putting in."[13]
We raised the concern that had been voiced by Which? among others,
that implementation of EMR might favour more expensive technology
over cheaper projects, to the financial detriment of consumers.
Mr Fallon said that the Government wanted to see competition
between technologies and among the technologies: "we see
that as one of the main pressures on price and making sure that
what our constituents pay is affordable."[14]
(H) PARLIAMENTARY OVERSIGHT
14. We raised the issue of Government
accountability to Parliament on implementation of the EMR programme.
Mr Fallon said that the Secretary of State was under a duty to
lay an annual report before Parliament to explain how the reforms
would work out.[15]
He said that there were other statutory requirements on the Government
to report to Parliament on other aspects of energy policy, including
energy security.[16]
15. We put to the Minister that,
in order the assist the House further in its consideration of
the secondary legislation, he might provide some additional, succinct
explanation of the legislation, to help members navigate through
the statutory instruments and related documents. Mr Fallon has
now done so, and we are publishing that further explanation as
Appendix 1.
(I) CONCLUSION
16. This suite of secondary legislation
and related documents serves to implement what the Minister
described to us as the biggest single reform of the electricity
market since 1987-88. We recognise that this is a large-scale
and long-term programme, but we have some concern, as explained
below, that its implementation has taken as complex a form as
is embodied in the statutory instruments now before the House,
to which the Government intend to add other statutory instruments
later in the year.
17. Our concern about complexity
arises out of our view that legislation can be expected to work
best if it is readily understood by those affected by it. We
recognise that the Government have made considerable efforts to
ensure that interested parties in the electricity market understand
the EMR programme. However, it is important that consumers should
also have a good understanding, and we see scope, and need, for
the Government to take this forward, working with consumer groups
as appropriate.
18. We have no doubt that the House
is closely interested in electricity market reform and, hence,
in this secondary legislation. We welcome the fact that the Minister
has now provided additional information to assist the House's
scrutiny of these instruments; in considering any further instruments
to take the programme forward, we urge the Government to bear
in mind the desirability of ensuring that such secondary legislation
as is required should be as clear and comprehensible as possible.
Section 1.05 B. Draft Police and Crime
Commissioner Elections (Amendment) (No. 2) Order 2014
Summary: According to the BBC the
average turn out for the Police and Crime Commissioner (PCC) elections
in 2012 was less than 15%. Those elections were run on a "digital
by default" basis with information on the candidates only
appearing on a dedicated webpage. The Order allows the Home Office
to run a pilot exercise at the first PCC by-election that occurs
to see whether the delivery of election booklets to residential
premises significantly raises voter awareness about the candidates.
When originally laid the instrument was only put forward on a
contingency basis but the unexpected death of the West Midlands
PCC, announced on 1 July, means a by-election will now take place
on 21 August. Although the Electoral Commission is supportive
of the arrangements for the pilot, the Committee remains uncertain
whether the pilot, as currently structured, will yield robust
results. We recommend that the evaluation exercise to be
conducted after the pilot should also consider the level, if any,
of charge to be made and how the booklet influences voters' perception
of candidates, in particular, if someone declines to contribute
to it, whether not being included in it made a difference to how
the candidate was viewed.
The Order is drawn to the special
attention of the House on the grounds that it gives rise to issues
of public policy likely to be of interest to the House and may
imperfectly achieve its policy objective.
19. The Order was laid by the Home
Office under the Police Reform and Social Responsibility Act 2011
and a revised version, to allow the pilot exercise to be run at
the forthcoming West Midlands Police and Crime Commissioner (PCC)
by-election, was laid on 9 July. It is accompanied by an Explanatory
Memorandum (EM) and although there is no Impact Assessment the
cost to the Home Office of providing candidate information booklets
in an average-sized police force area is estimated to be £0.3
million. As the West Midlands is a larger area, specific costs
for this election are estimated at about £1 million for distribution
of the booklets and a further £3 million for the running
of the by-election itself.
20. According to the BBC, the average
turn out for the PCC elections in 2012 was less than 15%. Those
elections were run on a "digital by default"
basis with information on the candidates only appearing on a dedicated
webpage. The Order allows the Home Office to run a pilot exercise
at the first PCC by-election that occurs to see whether the delivery
of election booklets to residential premises significantly raises
voter awareness about the candidates standing in a PCC election.
When originally laid the instrument was only put forward on a
contingency basis but the unexpected death of the West Midlands
PCC, announced on 1 July, means a by-election will now take place
on 21 August and the original draft instrument was re-laid with
minor drafting amendments to facilitate this.
21. Although in principle this pilot
seems like a sensible idea, the Committee has raised some questions
with the Home Office about the methodology proposed.
(A) SAMPLE SIZE
22. The Order would only permit
the distribution of booklets for the first by-election that occurs
and the Home Office will then assess the results and consider
next steps. This seemed a rather small sample where other factors
including the popularity of the candidate (or otherwise) might
influence the turn out. To be able to draw more robust conclusions
on whether and how booklets influenced the result it would seem
preferable to base them on a larger sample.
(B) FAIRNESS OF BOOKLETS IF INCOMPLETE
23. The booklets will only contain
the election addresses of those candidates willing to pay a contribution
to the price of production. The Home Office has stated that it
"will pay for the majority of the costs"; and
"The Order provides that the
Police Area Returning Officers may seek a 'reasonable sum' from
candidates as a contribution towards printing the booklets. This
is in order to discourage any potential for individuals seeking
to use the booklets inappropriately because they would otherwise
be free. There is precedent for this. For example, each candidate
contributed £750 to feature in election booklets during the
2011 local mayoral elections in Middlesbrough. It will be up to
candidates as to whether they wish to participate in the booklets
distributed to households."
24. It should also be noted that
this arrangement replaces the "freepost" option, so,
if they choose not to participate in the booklets, candidates
will have to pay for the printing and distribution of alternative
leaflets themselves. The sum that candidates will be required
to contribute has not yet been announced for the West Midlands
by-election, but a substantial sum could prove a barrier to
some candidates, particularly independents. Given the by-election
itself is going to cost £4 million these contributions seem
nugatory and we trust the evaluation will consider this point
carefully.
25. In the Middlesbrough case, cited
as the precedent, all four candidates chose to be included. Neither
the response from the Electoral Commission nor that from the Home
Office addresses the question of fairness if someone chooses not
to be included. The Committee questions how a booklet that
did not include information from all candidates would influence
the electorate, and whether it could give an impression that the
Home Office was endorsing those who appeared in the "official"
booklet, if some did not.
(C) OTHER VARIABLES SUCH AS MARKETING
26. Paragraph 12.2 of the EM says
that the Home Office "will track the performance of any marketing
campaign that is run to raise awareness of the by-election".
This seems to introduce a second variable that might influence
the turn out of the election - if there was a 10% improvement
in the turn out how would the Home Office assess how much of the
increase would be attributable to the booklets and how much to
the marketing campaign? The website approach will remain as a
constant factor but the response from the Home Office is unclear
about the exact nature of the marketing activity planned:
"There will be additional marketing
activity in line with the PCC elections in 2012 to supplement
the booklets and the website. Candidates are not required to contribute
to the costs of those wider marketing activities, and all marketing
will be evaluated. In tracking the performance of any awareness
raising activity during the by-election, the evaluation would
isolate those who say they are aware of booklet only so we can
see the impact the booklet had in comparison with those who had
accessed candidate addresses via the 'Choose My PCC' website.
The Home Office has discussed its plans for evaluating the pilot
with the Electoral Commission, and the latter was content with
the proposed approach."
27. We note that in the EM to the
revised Order this was altered to the Electoral Commission "is
supportive". We contacted the Electoral Commission directly
to seek their view (published in full at Appendix 2). The Commission
drew our attention to the report, published after the PCC elections
in 2012, which found that a website-only approach was inadequate,
with 37% of people who did not vote saying it was due to lack
of awareness and only 22% stating that they felt they had enough
information to make an informed choice about those standing. The
Electoral Commission therefore states that it supports the intention
of the Order and a full evaluation of the pilot. They add that
the evaluation should also specifically address whether, if a
charge is to be made, the level of financial contribution requested
from candidates was at an appropriate level. The Electoral
Commission also cites the precedent of the mayoral election, and
makes no specific comment on how an incomplete booklet might be
perceived.
(D) COST OF TRANSLATIONS
28. In considering policy more generally,
the Committee asked whether PCC candidates in Wales would be asked
to contribute a higher sum towards booklets because of the higher
cost of providing a dual language booklet. The Home Office responded
that this was irrelevant to the current pilot. The Committee also
asked the more general question about whether there would be an
additional cost to candidates if they wished to publish their
election address in more than one language to appeal to the sectors
of the community whose first language is not English. The Home
Office responded that such decisions would be left to the Police
Area Returning Officer (PARO) in charge of the arrangements for
the election.
29. Both responses simply defer
the decision, neither makes a clear policy statement. Although
the issue of Welsh may not arise with this particular by-election,
according to the 2011 Census, 386,134 residents of the West Midlands
spoke a language other than English as their main language, which
represents 7.2% of the total resident population aged 3 and above.
Within this group, the most commonly spoken language was Panjabi
(17%), followed by Polish (13%) and Urdu (13%). Of these respondents
23% reported not being able to speak English well (1.6% of all
residents above the age of 3), while 5% reported they could not
speak English at all (0.4% of all residents above the age of 3).
We recommend that the Home Office publishes clear guidance for
the PARO on this issue in relation to the forthcoming West Midlands
PCC by-election.
(E) CONCLUSION
- The Committee remains uncertain
whether the pilot, as currently structured, will yield robust
results. We note that the Electoral Commission is supportive of
it as a fact finding exercise. The Committee is concerned that
different candidates within the same election may receive different
levels of publicity and queries how an "official" booklet
that does not include all candidates will be perceived. We
recommend that the evaluation exercise to be conducted after the
pilot should also consider the level of charges, if any, and
how the booklet influences voters' perception of candidates, in
particular, if someone declines to contribute to it, whether not
being included in it made a difference to how the candidate was
viewed.
1 See:
http://www.parliament.uk/documents/lords-committees/Secondary-Legislation-Scrutiny-Committee/SLSC-14-07-08-Ev1-TRANSCRIPT-Fallon-(revised).pdf
Back
2
CFDs will require generators to sell energy into the market as
usual but, to reduce exposure to fluctuating electricity prices,
CFDs provide a variable top-up from the market price to a pre-agreed
"strike price" which differs for different low-carbon
technology. If the market price is lower than the strike price,
a top-up payment is made to the generator. Conversely, if the
market price exceeds the strike price, the generator is required
to pay back the difference. Back
3
To be eligible to apply for a CFD and receive subsidy, generators
in respect of projects of 300MW or more are to be required to
demonstrate how they are likely to make a material contribution
to the development of supply chains in the relevant low-carbon
industry and/or technology. Back
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