Our Response to the Energy Minister’s House of Commons Statement
Overview and Summary
Ben Lake MP, one of the cross-party co-sponsors of the Local Electricity Bill, secured this Adjournment Debate and used it to propose the idea that is central to the Bill: the establishment of a statutory Right to Local Supply which would require the energy regulator, Ofgem, to create a local supply licence and ensure that companies that acquired such a licence face costs that are proportionate to the size of their business.
Over a dozen Members, from all sides of the House, made interventions in favour of Mr Lake’s proposal, leading the Deputy Speaker, Mr Nigel Evans, to comment before calling on the Minister to respond, “The number of interventions might be a record. Congratulations.”[1]
In his response to the debate the Energy Minister, the Rt. Hon. Kwasi Kwarteng MP, made several positive points and we thank him for these. He also pointed out some hurdles to be overcome and we respond to those below – showing how they can be.
We welcome any existing mechanisms that can help community renewable energy generation, but none of them solve the fundamental problem: renewable energy generators wanting to sell their electricity directly to customers in their local communities are unable to do so because of insurmountable costs.
We accept that getting the detail of the Bill right, to ensure that there are no unintended negative consequences, is essential work. But that is not a reason to not do that work and to not support the Bill. We therefore look forward to working together with the Minister and his officials in, to use his own words, a co-operative spirit, to improve the Bill into a form that we can all support together.
Our Responses to the Minster
The Minister said, “…changing the licensing framework to suit [local energy supply] business models … appears attractive, but the danger … is that it would create wider distortions elsewhere in the energy system.”[1] and later elaborated, saying, “I do not believe … that artificially reducing network costs for local electricity suppliers is going to be highly efficient, because it could distort the market.”[2]
Our Response: At present the energy market is already highly distorted – in favour of large scale energy companies. This distortion means that only companies operating at national scale are able to run viable energy supply businesses. This is because of the very high setup and running costs involved in being a licensed energy supplier. We are not calling for market distortion: just the opposite. We are calling for a level playing field, i.e. changes to the rules governing the market so that an energy supplier faces costs proportionate to the size of their business.
This will be highly efficient as it will prevent losses through transmission. This is because the more electricity that is used nearer to where it is generated the more efficient the energy system is. Currently our energy system is very inefficient due to the fact that a significant portion of electricity that is generated by the large power stations is lost through resistance as it travels along the wires. The more distributed and smaller-scale generation that happens across the grid, the more that electricity wastage is reduced. The current rules that govern the market do not recognise this and the Local Electricity Bill, by establishing proportionate costs, would.
The Bill therefore gives the energy regulator, Ofgem, the duty to establish this via a new Right to Local Supply. We would like to work with the Minister, his officials and Ofgem on amendments to the Bill that ensure that any undesirable market distortions do not occur.
It is important to remember that the market is a construct that has been engineered by the rules set by the energy regulator, Ofgem. These rules are no longer fit-for-purpose as they are largely from the early 1990s, when the energy system was privatised and completely dominated by large power stations. We welcome the Minister’s acceptance of this at the debate, when he said, “[The hon. Member for Ceredigion] was quite right to say at the beginning of his remarks that a lot of the structures that we have today reflect the conditions and circumstances before we legislated for net zero, and in many cases reflect conditions that operated 30 or 40 years ago. There is an ongoing discussion to be had about how best to adapt our institutions to modern circumstances.”[3]
The energy system is dramatically different now because of the growth and huge potential for smaller-scale, distributed renewable energy generation. But the market rules do not accommodate for this. That is why the Bill requires Ofgem to change these rules.
Making network (and indeed other) costs proportionate to the size of an energy supplier’s business is essential if we are to solve the problem that smaller-scale renewable energy generators that want to sell electricity directly to local customers face insurmountable costs. The costs involved are in excess of £1 million[4] making it impossible to sell electricity to customers unless operating on a national scale.
The Minister said, “One is essentially incentivising a behaviour that may not be economical in the first instance, and that would mean higher costs falling on other consumers, which would increase as more local suppliers were subsidised.”[2]
Our Response: Let us be clear: we are not calling for any government subsidies and the Bill does not establish any. Rather, it aims to create a market solution that would make costs proportionate.
Regarding costs falling on other consumers, Ofgem already has price cap rules to ensure that no energy customer is paying what is deemed too much for their electricity.[5] The Bill does not change these rules.
In fact the Bill is ‘incentivising a behaviour’ that will reduce waste and so cut costs. As described above, this is because the more electricity that is used nearer to where it is generated the more efficient the energy system is. By creating a level playing field through the establishment of proportionate costs, the Bill would lead to more distributed and smaller-scale generation and thus reductions in wastage.
The Minister said, “Creating a special category of local supplier brings its own complexities, and there may well be unintended consequences as a result.”[3]
Our Response: The Minister did not spell out what these unintended consequences may be and so it is impossible to respond directly. What is clear is that the huge benefits, listed below, to increasing the local use of community renewable energy mean that we must work to solve any potential problems.
As a way forward, we suggest that we meet with the relevant officials and work together, in the co-operative spirit that the Minister called for, to sort out these points: we have written to the Minister requesting this, so that the benefits can be achieved.
The benefits of community renewable energy generation:
As the Minister himself said, local renewable energy generation and consumption would be “helping to avoid further investment in the high-voltage transmission network.”[2]
It will help achieve the UK’s 2050 Net Zero greenhouse gas emissions target – a 2014 government report[6] said that by 2020 we could have had 3,000 megawatts of community renewable energy generation, which would represent 5% of total UK electricity generating capacity, yet we currently only have less than a tenth of this. We estimate that community renewable energy could easily grow to at least 10% of our total electricity generating capacity.
It will help rebuild sustainable local economies in the aftermath of the Covid-19 pandemic – more of the money that people use to pay electricity bills with would circulate in the local economy, supporting skilled jobs and new community renewable energy generation schemes. This point was also made by the Secretary of State for Business, Energy and Industrial Strategy, the Rt. Hon. Alok Sharma MP, at the London Stock Exchange’s webinar on 17th June 2020, when he said, “Today, nearly half a million people across our country are employed in the low carbon economy and its supply chains. And recovering from this pandemic makes these projects more necessary and more important than ever.”[7]
The system will be made more efficient, reducing costs, because of energy generation infrastructure being more distributed, as explained to above.
The public appetite and welcoming of renewable energy will greatly increase as they see local energy schemes directly benefiting their local communities.
These huge benefits are the reason why we need to overcome the complexities and figure out a way to avoid any potential unintended consequences.
The Minister said, “Ofgem has powers to award supply licences for specified areas and specified types of premises, and that can allow licensees, once they have the licence, to specialise and offer more targeted and potentially innovative products and services. The holder of such a licence could supply customers only in the specified geographical area and specified types of premises, with the full terms and conditions of the licence applying otherwise. That means that there is already provision through this licence to have local provision. Electricity suppliers can apply to Ofgem for a derogation from a particular provision of the supply licence, and if it is granted, provisions of the supply licence will not apply to them. There is already some degree of flexibility.”[2] and later said, “On existing mechanisms, the Electricity Act 1989 already allows the Secretary of State to exempt, by scale, electricity suppliers from having an electricity supply licence if they meet certain conditions. There have been examples, certainly in my tenure as Energy Minister, of people successfully applying for exemptions.”[2]
Our Response: We welcome these flexibilities and mechanisms, but they do not fix the fundamental problem that the costs that community renewable energy generators face in selling their electricity to households and businesses in their local communities are so large that they make doing so impossible.
None of the existing community energy groups in the UK are licenced to sell their electricity directly to local customers. Furthermore, community energy generation has only grown from 527 megawatts in 2017 to 622 megawatts in 2020.[8] This clearly shows that the flexibilities and allowances for local supply that the Minister alludes to have been unable to create the 3,000 megawatts of community energy generation that the government’s 2014 report said we could have had by 2020.
Making the costs of selling locally generated renewable energy to local customers proportionate will solve the problem, making it possible for local energy suppliers to exist and for the huge potential for more community renewable energy generation, as described above, to be realised. The Bill would fix the problem by giving Ofgem the duty to make costs proportionate.
The Minister said, “…the Licence Lite provision … allows aspiring suppliers or local generators to apply for a supply licence and receive relief from compliance with industry codes.”[2]
Our Response: Licence Lite was set up by Ofgem in 2009, yet only three such licences have been granted since it was established.[9] It has therefore clearly been unable to achieve the potential for 3,000 megawatts of community energy generation, identified in the 2014 government report referred to above. Whilst the intention behind Licence Lite was commendable, it clearly has not delivered what it intended. The key flaw in Licence Lite is the need for local renewable generators to partner with a willing nationally licensed energy utility.
The Minister said, “Being an electricity supplier … bestows certain obligations, and that is very important to remember. Those obligations include payment of a proportion of network costs. Clearly, if one is operating in a situation where one is not a licensee, then one can avoid paying the costs on which the whole system depends. That is a critical issue. In some instances, the Licence Lite regime can remove this burden, but clearly we would not want to go down a route where large numbers of suppliers are simply exempting themselves from those obligations.”[2]
Our Response: Nor do we want to go down that route. Indeed, the Bill does exactly the opposite. What the Local Electricity Bill would do is not exempt local energy suppliers from costs but, rather, ensure that those suppliers were paying costs proportionate to the size of their supply business.
The Minister said, “Network charges … are levied on all users of the network, and they send signals that reflect the costs that users impose on the network. There are a range of signals to encourage generators to locate close to sources of demand, and placing a source of generation close to areas of high demand will mean that the generator gets paid credits for helping to avoid further investment in the high-voltage transmission network. Essentially, that means suppliers are incentivised to be in areas of high demand. There will be a commensurate problem in areas of low demand, because how would they attract the relevant suppliers? Ofgem is working to reform these signals through improvements to network charges, and it is also working to develop local markets for flexibility, which goes to the core of what I think the hon. Gentleman is talking about.”[2]
Our Response: We welcome the intentions of Ofgem to address these challenges of establishing local supply and the work that they are doing to reform signals and develop local markets. We hope that this work can inform and contribute towards improving the Bill. We would like to work with officers at Ofgem to reach agreement on the best mechanisms to enable community energy generation to flourish.
We accept that there are challenges regarding the varying levels of demand in different areas. However, given the substantial benefits that we list above, this would not seem a valid reason to avoid solving the problem that community renewable energy generators wanting to sell their electricity directly to local customers face insurmountable costs. Rather, we recommend accepting that such challenges may arise, working to ensure the right rules are put in place to deal with them and ensuring that Ofgem have the appropriate resources required to address them, if they arise, as part of implementing the Right to Local Supply established by the Bill.
Positive Points Made by the Minister
In his response, the Minister made several positive points, which we have copied below. We thank him for doing so and look forward to co-operating with him and the government on developing the Local Electricity Bill to ensure that it enables the huge potential for more community renewable energy generation.
“Thank you, Mr Deputy Speaker; I was going to make very much the same point. I congratulate the hon. Member for Ceredigion (Ben Lake) on securing today’s debate, and I will make the same point: I have never seen an Adjournment debate with so many interventions. They were all extremely gracefully and graciously accommodated in his speech, so many congratulations to him.”[1]
“The hon. Member has spoken eloquently about the need for local communities to be able to supply electricity, and I think there are strong arguments in its favour.”[1]
“I know that the hon. Member for Ceredigion supports a campaign for electricity generators to sell directly to local consumers, for all the benefits he suggested in terms of local employment. I think he or one of the many intervenors used the phrase ‘local buy-in’, and those arguments are fully appreciated.”[1]
“…local community participation has to be on the agenda. It is certainly something that I as the Energy Minister will be willing to engage with and have a discussion about.”[1]
“This is part of an ongoing conversation. [The hon. Member for Ceredigion] was quite right to say at the beginning of his remarks that a lot of the structures that we have today reflect the conditions and circumstances before we legislated for net zero, and in many cases reflect conditions that operated 30 or 40 years ago. There is an ongoing discussion to be had about how best to adapt our institutions to modern circumstances.”[3]
“… a very good start [at working on required legislative changes] is a debate such as this. It has been a real eye-opener for me. I am delighted to see so much interest. I would suggest that people engage with the Department and engage with me. I am very happy to discuss these issues, which are absolutely fundamental to the energy transition that the hon. Gentleman mentioned. As I said, this is part of an ongoing conversation.”[10]
“We have to focus on the flexibility of the whole system in terms of the current regulatory regime. If we get that right, then we can bring the innovation and perhaps some of the centralisation that the hon. Gentleman, and other hon. and right hon. Members, want to see. The prospects are considerable. We could see innovation and growth. We could see cost reductions and, most fundamentally, carbon reductions. I think that with a co-operative spirit, we can get very far.”[10]
[1] Hansard; Electricity Generation: Local Suppliers; Volume 682, Column 493; 14th October 2020
[2] Hansard; Electricity Generation: Local Suppliers; Volume 682; Column 494; 14th October 2020
[3] Hansard; Electricity Generation: Local Suppliers; Volume 682; Column 495; 14th October 2020
[4] Institute for Public Policy Research; Community and local energy: Challenges and opportunities, June 2016
[5] Ofgem; Energy Price Caps; accessed 23rd November 2020
[6] The Department for Energy and Climate Change; Community Renewable Electricity Generation, January 2014
[7] UK Government website; ‘The sustainable recovery, investor collaboration on COVID-19 recovery and the climate emergency’; Keynote address by Alok Sharma; June 2020; accessed 23rd November 2020
[8] For England, Wales and Northern Ireland: Community Energy England; Community Energy: State of the Sector 2017 Report, June 2017, and Community Energy England; Community Energy: State of the Sector 2020 Report, June 2020; for Scotland: Energy Saving Trust; Community and locally owned renewable energy in Scotland at June 2017, December 2017 and Energy Saving Trust; Community and locally owned renewable energy in Scotland at June 2019, January 2020
[9] Licence Lite section of Ofgem website, accessed 20th November 2020
[10] Hansard; Electricity Generation: Local Suppliers; Volume 682; Column 496; 14th October 2020