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

The Committee consisted of the following Members:

Chair: Martin Vickers

† Athwal, Jas (Ilford South) (Lab)

† Bowie, Andrew (West Aberdeenshire and Kincardine) (Con)

† Carling, Sam (North West Cambridgeshire) (Lab)

† Cooper, John (Dumfries and Galloway) (Con)

† De Cordova, Marsha (Battersea) (Lab)

† Dodds, Anneliese (Oxford East) (Lab/Co-op)

† Entwistle, Kirith (Bolton North East) (Lab)

Farron, Tim (Westmorland and Lonsdale) (LD)

† Fox, Sir Ashley (Bridgwater) (Con)

† Hall, Sarah (Warrington South) (Lab/Co-op)

† Heylings, Pippa (South Cambridgeshire) (LD)

† Hurley, Patrick (Southport) (Lab)

† McDonald, Chris (Stockton North) (Lab)

† Shanks, Michael (Parliamentary Under-Secretary of State for Energy Security and Net Zero)

† Slinger, John (Rugby) (Lab)

† Thomas, Bradley (Bromsgrove) (Con)

† Turley, Anna (Lord Commissioner of His Majesty’s Treasury)

Chris Watson, Committee Clerk

† attended the Committee

Third Delegated Legislation Committee

[Martin Vickers in the Chair]

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

14:30:00

I beg to move, That the Committee has considered the draft Electricity Capacity (Amendment) (No. 2) Regulations 2025. It is a pleasure to serve under your chairship, Mr Vickers. These regulations were laid before the House on 3 June 2025, and they make technical improvements and changes to the capacity market scheme—the Government’s main tool for ensuring security of supply in Great Britain. We know that to achieve clean power by 2030, reform of the electricity market is critical. To paraphrase the clean power action plan, we must: “Reform the capacity market to provide clear and viable routes to decarbonisation for unabated gas, enable low-carbon flexible capacity…and incentivise investment into existing capacity.” Before I outline the provisions in these regulations, I will briefly provide some context. The capacity market was introduced in 2014, and it is designed to ensure that sufficient electricity capacity is available to meet future predicted demand, to maintain the security of our electricity supply. The capacity market is a well-established and technology-neutral scheme in which existing and new build electricity capacity receives revenue based on the capacity provided. Participants secure agreements through auctions, which require them to make capacity available at times of system stress. It is our main tool to ensure security of supply, and it provides the right incentives for all forms of capacity to be available when needed most. It covers generation, storage, consumer-led flexibility and interconnection capacity. Through capacity market auctions, which are held annually—one year and four years ahead of delivery—we secure the capacity needed to meet future peak demand under a range of scenarios, based on advice from the National Energy System Operator. Since its introduction in 2014, the capacity market has contributed to just under 20 GW of new flexible capacity needed to replace older, less efficient plants as we transition to net zero. To date, the capacity market has been successful in ensuring that Great Britain has adequate electricity capacity to meet demand, and it continues to be required to maintain our security of supply and to provide investor confidence. To ensure that the capacity market continues to function effectively, we regularly make adjustments to the implementing legislation based on our day-to-day experiences. The draft instrument makes technical improvements and changes to nine regulations to support the functioning of the capacity market, and they have been identified and explored through consultation. The changes will ensure that the capacity market regulations remain clear for market participants and that the legislation remains up to date, to enable us to better deliver the security of supply mechanism. The draft instrument does that by revoking several expired provisions of secondary legislation relating to the scheme, including references to: transitional auctions, which are no longer applicable; the temporary standstill period, which occurred in 2019; and the time-limited relief given to scheme participants in relation to coronavirus. It will also introduce a new process to establish a decarbonisation pathway for unabated gas plants currently in long-term capacity market agreements. That will allow gas plants to exit their agreements without penalty in order to transfer to a dispatchable power agreement, facilitating conversion to gas-fired power with carbon capture and storage once the technology is available. That will better align the capacity market with our clean power objectives, and it will provide gas plant operators with a future route to decarbonise their assets. The Government carried out two public consultations on 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 consultations were published towards the end of 2024. Respondents were broadly supportive of the instrument’s proposals. We have also made a number of technical amendments to the capacity market rules that support the regulations, which were laid before the House on 3 June. This draft instrument introduces a number of technical provisions and changes to 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 legislation as clear as possible for all scheme participants. We need clear routes for the decarbonisation of unabated gas and for the rapid acceleration of low-carbon, flexible capacity. And today, with these regulations, we take another step towards that. I commend the regulations to the Committee.

14:35:00

It is a pleasure to serve under your chairmanship, Mr Vickers, and to be in the august company of the double award-winning Minister—the Scottish MP of the year, as of yesterday evening. The competition was very stiff. The capacity market scheme was introduced in 2014 as part of the electricity market reforms to ensure security of electricity supply by providing payments for reliable sources of dispatchable generation or, in some cases, demand reduction. As we saw in January, a renewables-dominated system increases the need for capacity market generation. The system, which is designed to insure the market during periods of electricity system shortage and stress, is increasingly significant and increasingly costly as intermittency increases. These regulations will allow unabated gas generators to exit their capacity market obligations without penalty for the purpose of retrofitting carbon capture, usage and storage and transferring to a dispatchable power agreement outside of the capacity market. The rationale for this is to allow generators to convert unabated gas to power with CCUS in order to decarbonise the UK’s electricity generation. So far, so good. We support that ambition in principle, as we believe in a cleaner energy system. However, we also believe in delivering an energy system that is secure and affordable, on which we have some concerns. Namely, how will this impact energy bills? The regulations intend to allow unabated gas generators to transfer from existing capacity market agreements to a contract for difference mechanism to power CCUS, thereby entering a dispatchable power agreement. If dispatchable power agreement contracts are more expensive than the average cost of electricity, higher prices will be locked in, and the cost of this mechanism will necessarily filter through to billpayers. Energy bills are composed of wholesale costs, network charges, contracts for difference subsidies, balancing costs such as curtailment payments, and capacity market payments. Under the Government’s clean power 2030 plan, those costs are all set to rise. Bills will go up. This week, Ofgem announced a £24 billion investment in the electricity and gas grid, including a 2,700-mile pylon expansion, necessitated by, in Ofgem’s words, the need to “handle the flow of electricity from new renewable sources.” Onshore wind and solar panels need an expensive expansion of our infrastructure due to their dispersed locations, costing billpayers money. This is not cheap, and it will not bring bills down. Contracts for difference payments are set to rise, while developers still await news of the administrative strike price for the next allocation round. We know that a high reserve price will drive up consumer bills. With increasing onshore and offshore wind bringing higher levels of intermittency into our systems, curtailment payments are set to increase, at least in the medium term. Last year, billpayers spent £1 billion balancing the grid by turning wind turbines off at times of over-generation, and now we have these capacity market changes. The increase in intermittent renewables on stream in the UK must be shored up by increasing capacity market payments. Unfortunately, this Government continually prioritise climate targets over secure and affordable energy, and billpayers are paying the price. Can the Minister please tell us what impact the Government’s clean power 2030 payments will have on capacity market payments? Are the Government still committed to reducing energy bills by £300, and will the Minister reiterate that commitment? There is no costing associated with these regulations or with clean power 2030 overall, as that would prove that the Secretary of State’s commitment to the unachievable targets he has set himself is pushing bills up. I do not wish to stand in the way of these regulations. However, I must put on record our deep concerns about the impact of clean power 2030 and all these changes on consumer bills and the UK’s overall energy resilience.

14:39:00

I will not detain the Committee for long, but I should put on record that the shadow Minister was on the judging panel for the aforesaid awards. I am not quite sure what that says for either of us, frankly, but I thank him for whatever role he played in trying to prevent me from getting the award. It clearly did not work. I welcome the shadow Minister’s broad support for the regulations, and I welcome his support for building a cleaner energy system, which I have not heard from the Conservative party for some months—I am glad he found his old script from a year ago and is repeating it in this place again, at least up to the word “however.” Of course, the shadow Minister is right that security of supply is critical, as it is for any Government of any political party. These regulations are part of ensuring that security of supply into the future, and they are part of a series of measures we are taking to build infrastructure for the future, so that we remain resilient long into the future. That investment is important. The shadow Minister talked about pricing, and I will pick out two points. First, the clean power mission is about reducing the current volatility in the price of gas. The Conservatives supported that move, and I credit them for constructing quite a lot of the renewables we have in the country, but they have since changed tack. At some point, they need to recognise that volatile gas prices are what is causing bills to increase so substantially, and that things like contracts for difference give long-term certainty on consumer bills and bring down the system cost, but the Conservatives oppose those things. Secondly, capacity market costs have increased over time, not just in the past year but more generally. They have been impacted by a number of factors outwith anyone’s control when they were introduced. But overall, this change will bring about an overall benefit. It is important that we plan the power we might need one year or four years in the future and, of course, the cost of not having a capacity market would be a significant risk to the robustness of our electricity system. Finally, and more broadly than these regulations, curtailment payments are deeply disappointing to everyone, but the answer is to plan the system strategically so that we build things in a way that makes sense. Secondly, of course, we need to build grid infrastructure to bring the cheaper power to consumers, and to reduce that curtailment payment cost. I hope we will see support from across the House on those questions of building new network infrastructure, although I suspect we will not from the Conservatives. I warmly welcome, as I always do, the shadow Minister’s wholehearted support for the work we are doing in the Department for Energy Security and Net Zero, and long may that continue. I commend these regulations to the Committee. Question put and agreed to.

14:42:00