Electricity Capacity (Amendment) (No. 2) Regulations 2025

Considered in Grand Committee

16:15:00

Moved by

That the Grand Committee do consider the Electricity Capacity (Amendment) (No. 2) Regulations 2025.

My Lords, these regulations were laid before the House on 3 June 2025. I am most grateful for the opportunity to join this Committee’s proceedings today. This instrument seeks to make technical improvements and changes to the capacity market scheme, the Government’s main tool for ensuring security of electricity supply in Great Britain. The Committee may recall that in December 2024, the Government published the clean power action plan, setting out that the capacity market must be reformed to provide clear and viable routes to decarbonisation for unabated gas, enable low-carbon flexible capacity, and incentivise investment in existing capacity. As set out in the clean power action plan, by 2030, unabated gas will account for less than 5% of total generation. However, we will need sufficient flexible capacity to meet system need, such as when renewables are not generating. While we continue to rely on unabated gas as the main mature, reliable technology capable of providing the flexibility needed to balance the system, we are committed to driving deployment of low-carbon alternatives and providing routes for unabated gas capacity to decarbonise in future. Before I turn to the provisions in greater detail, I will first outline some background to the capacity market. Great Britain’s capacity market was introduced in 2014 and is designed to ensure that sufficient electrical capacity is available to meet future predicated demand, to maintain security of electricity supply. The capacity market is a well-established, technology-neutral scheme in which existing and new-build electricity capacity receive revenue based on capacity. Participants secure agreements through auctions which require them to make capacity available at times of system stress. It is our main tool for ensuring security of electricity supply. It provides all forms of capacity with the right incentives to be on the system to deliver when needed. It covers generation, storage, consumer-led flexibility and interconnection capacity. Through capacity market auctions, held annually, one year and four years ahead of delivery, the capacity needed to meet future peak demand under a range of scenarios is secured, based on advice from the capacity market delivery body—the National Energy System Operator. Since its introduction in 2014, the capacity market has contributed to investment in just under 20 gigawatts of new, flexible capacity needed to replace older, less efficient plants as we transition to a net-zero economy. To date, the capacity market has been successful in ensuring that Great Britain has adequate electricity capacity to meet demand and continues to be required to maintain security of supply and provide investor confidence. To ensure that the capacity market continues to function effectively, regular adjustments are made to the implementing legislation, based on the day-to-day experiences of operating the scheme and wider developments in the energy sector. This draft instrument makes changes to nine regulations to deliver technical improvements and changes that support the functioning of the capacity market which have been identified and explored through consultation. This will ensure that the regulations remain clear for market participants and that the legislation remains up to date to enable us to better deliver this security of supply mechanism. The draft instrument does this by making several revocations to expired provisions relating to the scheme, which include revoking references to transitional auctions which are no longer applicable, the temporary standstill period which occurred in 2019, and time-limited relief given to scheme participants in relation to coronavirus. The draft instrument will also introduce a new process to establish a decarbonisation pathway for unabated gas plants currently in long-term capacity market agreements. It will allow gas plants to exit their agreements without penalty and transfer to a dispatchable power agreement, facilitating conversion to gas-fired power with carbon capture and storage once the technology is available. This will better align the capacity market with the Government’s clean power objectives and provide gas plant operators with a future decarbonisation route for their assets. The Government conducted two robust public consultations on the measures in this instrument. The first considered reforms to the capacity market to strengthen security of supply and enable flexible capacity to decarbonise. The second considered reforms to modernise the capacity market and improve the participation and delivery assurance of consumer-led flexibility. Both these government consultations were published towards the end of 2024. Respondents were broadly supportive of the proposals included in the instrument. A number of technical amendments to the capacity market rules were consulted on at the same time as the regulations and have also been made. These support the implementation of the regulations for the capacity market and were laid before the House on 3 June 2025. To conclude, this draft instrument introduces a number of technical changes that will enable the continued efficient operation of the capacity market, so that it can continue to deliver on its objectives. These reforms will be critical if we are to achieve clean power by 2030. They will improve security of supply by ensuring the modernisation of the capacity market and making the legislation as clear as possible for all scheme participants. They will also support decarbonisation of unabated gas and enable the rapid acceleration of low-carbon flexible capacity. I beg to move.

My Lords, I have only one brief question in thanking the Minister for moving this statutory instrument so eloquently. In his opening remarks, he referred to the responses to the consultations, particularly the first. I quote paragraph 7.2 of the Explanatory Memorandum: “42 responses were received from a variety of stakeholders… Respondents were broadly supportive of the proposals”. In times gone by, responses to consultations were published on the internet; I do not know whether that is still the case. That the respondents were “broadly supportive” indicates that some of them were not supportive. Can the Minister clarify? I just wonder what criticism there was and for what reason, if any, the Government did not revise the statutory instrument in any way. Otherwise, they are very sensible regulations, and I support them.

My Lords, I have a couple of quick questions for the Minister. I completely understand why trying to move off gas is a clear policy of the Government, as reaffirmed in its recent 2030 plan. However, gas is, without doubt, the cheapest way of heating a home. I want to get an understanding of what financial impact this is likely to have on household bills. I could not see anything in the accompanying notes. My sense is that it is good news for trying to get away from gas as a source, but bad news for households in the costs of heating their home and food.

My Lords, these Benches welcome these amendments. This is an important step in our journey towards a full, clean and secure energy future. We are generally supportive of the intent behind the amendments, particularly their aim to accelerate the decarbonisation of our electricity supply. At the heart of the regulations is a new mechanism designed to allow unabated gas plants to exit their existing capacity market arrangements without penalty. This is a significant change. Previously, capacity providers with a long-term agreement faced termination fees if they left early. This was a disincentive for them to decarbonise from their scheduled expiry, which was often as late as the 2040s. This instrument now enables these plants to transition to a bespoke support mechanism under a dispatchable power agreement, or DPA, which is categorised as a CCS CfD—a contract for defence related to carbon capture and storage. This managed termination mechanism, set out in new Regulation 34A, aims to allow these plants to retrofit carbon capture equipment, thereby aligning with the Government’s objectives for clean power 2030. This addresses what the Government say is a clear need, identified through stakeholder feedback, for clarity on decarbonisation pathways and penalty-free exits. We welcome this as a way forward. Furthermore, we welcome the cleaning up Part 3 looking at the removal of redundant provisions from the Electricity Capacity Regulations 2014, the Electricity Capacity (No. 1) Regulations 2019 and the Electricity Capacity (Amendment etc.) (Coronavirus) Regulations 2020; those are all sensible changes, so we welcome the clarification on that. I will ask the Minister a couple of questions. First, I want understand a little more about the demand side for these measures. Although the consultation response talks about it being broadly supportive, particularly regarding the timing and the appeal route for refusal notices, can the Minister say a bit more about what the true extent of the demand is? It talks about capacity for the exit pathway being 4.4 gigawatts. By my calculations, that is almost two-thirds the electricity consumed by London, so that is a big amount of electricity. If the Minister can just say a little more about the demand side for these changes, that would be helpful. Can the Minister also say a bit more about at what stage the Government might be in terms of any negotiations with any capacity providers to transition under these regulations? Are the Government in any talks at the moment, and are there any moves once these regulations come into force? How do they intend to review and monitor these regulations? What would success look like for the Government, and how will they be reported back to Parliament, if they are? I note that the regulations do not include a statutory review clause for these specific amendments and that the broader CM regulations are subject to five-yearly reviews. Obviously, this is a fast-moving space; carbon capture technology is new technology, and other new technologies are coming online. How will the Government review the impact of these regulations in this fast-moving market between now and the five-yearly review period? That is not a criticism of what the Government are doing—I generally support this direction—but this is a fast-moving space with new technologies. If the Minister could clarify those couple of points, it would be greatly appreciated.

My Lords, I thank the Minister for introducing the draft Electricity Capacity (Amendment) (No. 2) Regulations 2025 today. We have a responsibility to protect future generations, and there is a shared determination across these Benches to confront climate change. That is why today’s regulations will contribute to decarbonising our energy system to reach our net-zero aspirations. However, while net zero remains a laudable ambition, it must surely be achieved in a manner that protects our energy system and ensures that energy remains affordable for households and businesses. Surely it is time to stop kidding ourselves that this is a just transition when it is clearly not. Can we please instead begin to focus on an affordable transition? His Majesty’s loyal Opposition firmly believe there is nothing just about a clean power target of 2030 if it results in overreliance on intermittent renewables that are manufactured abroad, which means losing jobs overseas and hiking costs for UK customers. It is right that we have an ambition to produce the cleanest possible energy system in the UK. To do so, we must avoid ideological extremes at either end of this debate and find a middle way that is agnostic about where energy is sourced, so long as it is affordable, reliable and, yes, as clean as possible. In particular, with reference to these regulations, we must retain an element of natural gas, which is so crucial to our domestic heating system.

16:30:00

Turning to the regulations today, they are pragmatic, and we will support them. Under these proposals, gas power providers will be granted greater flexibility to retrofit their facilities with carbon capture technology and move into dispatchable power agreements. This framework does not simply encourage innovation; it provides the necessary market signals and contractual mechanisms to incentivise investment in decarbonisation. It will, if done well, establish a clear and practical pathway for traditional gas-fired generation to evolve into low-carbon energy.

It was under the previous Conservative Government that these dispatchable power agreements were outlined as a business model to foster this competitive and scalable market for carbon capture and storage. I am, therefore, pleased that the regulations introduced today build directly upon that policy, allowing gas-powered plants that currently operate without carbon capture to exit existing capacity markets agreements. This is a necessary step, without which gas providers would delay their decarbonisation.

Today’s statutory instrument is essential in propelling the UK’s transition to a cleaner power system. The Department for Energy Security and Net Zero, as has been mentioned by noble Lords, has undertaken two consultations on the proposals with industry stakeholders, and the sector would appear to support the regulations. That highlights the sector’s readiness to make the transition. It also indicates support from the private sector in meeting these goals. To conclude, I welcome and support the regulations introduced today, which build largely on the legacy business competition model set up by the previous Government. Let us now call upon our vital gas providers to seize this opportunity and embrace these reforms as a catalyst for a real and lasting improvement to our energy system.

I thank noble Lords for their comments and their general support for these regulations, which, as I said in my opening remarks, are technical in scope. This Government are steadfastly committed to maintaining our electricity security and creating viable routes for unabated gas plants to decarbonise. As I have set out, the capacity market is our main tool for ensuring security of electricity supply and has already secured the majority of Great Britain’s capacity needs up to 2028-29. The Government continue to believe that the capacity market is an effective insurance mechanism providing secure and affordable electricity that families and businesses can rely on. The Government remain committed to ensuring that the right policy tools are in place for delivering a secure and affordable electricity system as we transition to net zero. This includes regularly assessing the performance of the capacity market and exploring improvements to the scheme. This instrument seeks to establish a first decarbonisation pathway for unabated gas plants in long-term capacity market agreements, allowing them to exit the agreements without penalty to transfer to a dispatchable power agreement and facilitating conversion to gas-fired power with carbon capture and storage once the technology is available. This will better align the capital market with our clean power objectives and provide gas plant operators with a future decarbonisation route for their assets. This instrument also seeks to improve the clarity of the legislation by revoking provisions in the secondary legislation that are now redundant. I want to respond to some of the questions. I welcome the support of the noble Baroness, Lady McIntosh of Pickering. All responses to the consultation were considered when finalising these proposals. On her question on the specifics of the consultation, a few respondents noted market volatility, speculative bidding behaviour and the impact of auction dynamics. One response noted that the proposal created an unfair commercial advantage. In response to the questions posed by the noble Baroness, Lady Coffey, these changes to the capacity market will allow us to maintain security of supply in a way that is cost effective for consumers. We are not expecting the changes to increase the cost of the capacity market, so there will be minimal impacts on consumers. I also welcome the support of the noble Earl, Lord Russell. In terms of demand to convert the power of CCUS, the managed exit pathway is subject to transport and storage capacity, value for money and affordability. Subject to this SI being made, plant will be able to utilise this pathway from the first transfer notice window after January 2026, with the first opportunity for unabated gas plants to leave the capacity market being in October 2027. Approximately 4.4 gigawatts of capacity is currently eligible to use this pathway, subject to successful bilateral negotiations. The next stage of the CCUS programme includes further building out of the first two track 1 clusters: HyNet and the East Coast Cluster. I welcome the support of the noble Lord, Lord Offord, for these measures. Energy security is a priority for the Government. The capacity market is an effective insurance mechanism and is worth paying for, providing security and affordable electricity that families and businesses can rely on. The alternative, not doing something, would cost us more than doing this. The capacity market is the UK Government’s main tool for ensuring continued security of electricity supply. The capacity market is technology neutral, providing incentives for all forms of capacity, including generation, storage, consumer-led flexibility and interconnection, to be on the system to deliver when needed. To date, the capacity market has contributed to investment of about 19 gigawatts of new flexible capacity needed to replace older and less efficient plant as we transition to a net-zero economy. Once again, I thank noble Lords for their points in this debate.

Motion agreed.