Appendix 2: Additional information from the Department for Energy Security and Net Zero
Draft Contracts for Difference (Electricity Supplier Obligations) (Amendment) Regulations 2024
Q: The EM does not explain that the costs of the Dispatchable Power Agreement (DPA) will be passed on to consumers. The Impact Assessment (IA) refers to this at para 42, stating that the increase in energy bills for consumers is expected to be small. The IA then explains that the cost analysis has not been included as “any accurate approach to estimation would reveal the government’s expectation around the value of the DPA payments and they are still to be negotiated”. We understand the commercial sensitivity, but the lack of any information on this is unsatisfactory, given that Parliament has been asked to approve the Regulations and there are concerns about the impact of high energy prices on households. Would you be able to provide any figures that give an indication of the costs, for example an annual average costs per consumer that the Department would consider low? Even a broad range of costs would be helpful.
A: The proposed Regulations enable a Contracts for Difference (CfD) counterparty to raise funds from licensed electricity suppliers to provide a payment to enable it to pay future natural gas fuelled generating stations with CCUS technology (power CCUS). In common with the CfD scheme, of which the Dispatchable Power Agreement (DPA) is a type, it is proposed that the costs of the DPA will be borne by electricity suppliers. Suppliers would be able to pass the costs onto their consumers who use the electricity system, should the suppliers elect to do so.It is important to note that the Regulations do not in themselves commit to any awarding of future financial support to any party, rather, this amendment is enabling creation of the regulatory ability to raise related funds calculated in an alternative method to what is already provided. Any decision to offer support to a power CCUS project will be decided by Ministers, following completion of successful negotiations with any agreement subject to the government’s value for money and subsidy control assessment processes.
As such, the Impact Assessment for this legislation considered the cost effectiveness of implementing the policy through designating the Low Carbon Contracts Company (LCCC) as the DPA counterparty in order to collect the payments through the powers set out within the proposed Regulations rather than the final impact on consumers.
The first power CCUS project is being bilaterally negotiated by the Department with Net Zero Teesside Power Ltd. If negotiations are successful, the project will enter into a DPA and the LCCC will use the powers within the Regulations to raise funds from Electricity Suppliers to provide the DPA payments to the project. The negotiations are targeted to reach agreement this year and any payments due as a consequence of the agreement will commence in 2028 at the earliest, at which point electricity suppliers (and thus consumers) would see an impact.
The overall cost to electricity consumers of supporting gas CCUS will be determined by the cost of future gas CCUS subsidy agreements. We cannot reveal the cost of this DPA agreement until the negotiation has concluded, and it will not necessarily be indicative of the cost of future DPA agreements given expected changes in the cost of gas CCUS over time, as well as other project-specific factors likely to affect the cost of each negotiated deal. Indicatively, we would expect each DPA agreement to add in the region of £5 - £15/year to the average household electricity bill, noting this is an indicative estimate range. These costs are not additional; in the absence of Gas CCUS, our modelling shows alternative scenarios would have a higher system cost and could result in an increased cost to the consumer.
Low carbon flexible generation technologies like Power CCUS are vital for matching demand and supply within our electricity system, and are necessary to achieve the Mission 2030 clean electricity system ambition. Our 2021 modelling for the Net Zero Strategy suggested up to 10 GW of Power CCUS capacity would be required by 2035 to achieve the lowest cost pathways to decarbonisation.
Cost estimates have a degree of uncertainty attached given the potential for cost reductions as the sector develops with increased market competition and the associated maturity of supply chains, the variety in scale and type of Power CCUS plants (including new build plants and retrofitting of existing plants) and the reduction in capacity market costs. Costs are additionally related to the successful completion of negotiations and reliant on private providers committing to engaging, meaning there is inherent uncertainty within the process. Cost reductions have been seen in the development of offshore wind and solar generation technology for example.
21 August 2024