Contribution
My Lords, this instrument was laid before the House on 18 November 2024. It seeks to revoke and alter several provisions in assimilated Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity, relating to the capacity market. For ease, I will refer to this as the assimilated electricity regulation. The instrument makes targeted, technical amendments which are intended to support the continued operation of the capacity market, Great Britain’s main mechanism for ensuring security of electricity supply. It does not introduce any practical changes to the operation of the capacity market.
Before outlining the specific provisions of this draft instrument, I will briefly provide some context. Great Britain’s electricity capacity market was introduced in 2014 and is designed to ensure that sufficient electrical capacity is operational and on the system to meet future predicted demand, thereby maintaining security of supply. The capacity market scheme provides all forms of existing and new-build capacity with the right incentives to be on the system to deliver when needed. It covers different types of electrical capacity, including generation, storage, consumer-led flexibility and interconnection capacity.
Through capacity market auctions held annually one year and four years ahead of delivery, the aim is to secure the capacity needed to meet future peak demand under a range of scenarios. This is based on advice from the capacity market delivery body—the National Energy System Operator. Capacity providers which are successful in the auctions are awarded capacity agreements, which range in duration from one to 15 years.
The capacity market was introduced in 2014. Since then, it has contributed to investment in just under 19 gigawatts of new, flexible capacity needed to replace older, less efficient plant as we transition to a net-zero economy. The capacity market was originally approved under European Union state aid rules for a period of 10 years. Following the United Kingdom’s withdrawal from the European Union, a requirement in EU law for approval of up to 10 years was brought into domestic law as part of the assimilated electricity regulation. To date, the capacity market has been successful in ensuring that Great Britain has sufficient electrical capacity to meet demand and continues to be required to maintain security of supply and provide confidence to investors.
On the detail of the instrument, it revokes and alters a number of provisions relating to capacity mechanisms in the assimilated electricity regulation, including Article 21.8, which requires that
“Capacity mechanisms shall be temporary”
and
“shall be approved … for no longer than 10 years”,
and other references to such mechanisms being temporary. The instrument also revokes provisions that either are no longer considered to be necessary or require minor correction following the UK’s withdrawal from the European Union. We are seeking to make these changes so that our post-EU exit legal framework reflects the continuation of current arrangements for maintaining a secure electricity supply, since there remains an ongoing need for the capacity market to ensure sufficient investment in reliable electricity capacity.
Furthermore, following the UK’s withdrawal from the European Union, the domestic subsidy control regime was introduced. The subsidy control regime does not require subsidy schemes to be granted an approval or limited for a specified period. Therefore, the approval requirement in the assimilated electricity regulation does not reflect our post-EU exit arrangements. Of course, it is important that we keep the capacity market under review and there are multiple controls set out in domestic legislation, all of which will be retained. This includes a statutory requirement for my department to review the capacity market regulations every five years, which provides an opportunity to review the need for the scheme. Ofgem also undertakes an independent five-yearly review of the capacity market rules. Furthermore, the Secretary of State can decide not to hold a capacity market auction. These embedded controls all remain as part of the wider domestic capacity market legislative framework.
In conclusion, this draft instrument revokes and alters certain provisions related to the capacity mechanism in the assimilated electricity regulation. This includes a requirement for an approval lasting no more than 10 years, as well as references to capacity mechanisms being of a temporary nature. These changes are being made to ensure that our domestic legislative arrangements reflect the continuation of the capacity market, which is Great Britain’s main mechanism for ensuring electricity security of supply. I beg to move.