Electricity and Gas (Internal Markets) Regulations 2011

My Lords, the regulations under consideration implement the EU third energy package in Britain. This is a significant tranche of EU legislation, consisting of two directives on gas and electricity and three regulations. This legislation makes progress in enhancing consumer protection, promoting competitive energy markets, and increasing security of supply. It is a welcome step for the EU and the UK, where we will see many benefits for consumers and businesses alike. The regulations introduce new consumer protection measures to ensure that British consumers get the most out of a competitive market. Furthermore, the regulations focus on breaking down barriers to entry and enhancing competition in our energy markets. Northern Ireland has introduced its own regulations, and will be consulting on further implementation measures to complete UK transposition. In July of last year the Government issued a consultation on proposals to implement the third package's requirements. This was followed, in the autumn, by two more detailed consultations on areas of particular interest to industry: the amended licence modification process and the need for owners to license exempt networks to provide third-party access. In our approach to implementation we have tried to take on industry concerns and minimise uncertainty as far as possible. However, it has been important to try to strike the right balance between the interests of consumers and industry, while ensuring that we fully implement the requirements of the third package. The implementing regulations before us today cover four main areas: consumer protection measures; measures which encourage competition by imposing minimum separation and independence requirements when companies or their associates have control of key infrastructure and carry out certain energy activities, such as supply; the extension of third-party access requirements to licence-exempt undertakings; and changes to the duties and powers of the regulatory authority, including a new licence modification procedure. I shall give a brief summary of some of the key measures included under each of these headings. Consumer protection is covered in part 2 of the regulations and in the changes to supply licences made by Schedules 7 and 8, introduced by part 10. Primary changes include a requirement for customers to be switched within three weeks of expressing a wish to do so, from the end of any cooling-off period. Suppliers will also have a new obligation to improve the switching process. In addition, there are new requirements for energy suppliers to provide customers with more information, to ensure that customers are aware of their rights and enable them to make informed decisions. A consumer checklist of information is to be provided and will be produced by Consumer Focus to this end. Changes are being made to ensure that certain activities are carried out independently of other energy activities; such separation is referred to as unbundling. This will increase security of supply by promoting fair access to infrastructure, with resulting benefits to competition. Furthermore, these measures promote unbiased investment decisions by large players in the market, and create a fairer playing field for smaller companies and new entrants. Part 3 of the regulations requires the ownership of transmission systems and interconnectors to be completely separated from interests in those of supply and production, unless an exemption is held or the operator satisfies the requirements of one of the alternative models being made available. It will be for Ofgem to decide whether companies qualify for these alternatives when individual applications are made. The alternative models to ownership unbundling have been made available to provide British businesses with as much flexibility as possible. Part 4 of the regulations prevents owners of gas storage facilities producing or supplying gas, and requires facilities to be operated independently of such interests, unless the storage facility is not considered to be technically or economically necessary for the operation of an efficient gas market. Part 5 prevents distribution system operators producing gas or generating electricity, though an exception is being made for businesses with less than 100,000 customers. This is to avoid conflicts of interest in investment decisions and promote transparency. Another significant change introduced by the regulations is the requirement for licence-exempt owners of distribution networks to grant unrelated-that is, third-party suppliers-access to their systems, as established in part 6 of the regulations. This will benefit consumers connected to these networks, who as a result of this change will be able to choose their energy supplier and receive the advantages of competition. Some industry parties have expressed concerns regarding the burdens that this will place on small businesses. As a result, we have tried to impose the lowest burden possible on these networks within the EU requirements, and will produce guidance to provide as much clarity as possible for affected businesses. Of the changes relating to Ofgem, which part 7 of the regulations designates as the regulatory authority for Great Britain, the most noteworthy is the alteration to the licence modification procedure, as set out in part 9 of the regulations. Under the third package, the regulatory authority must be able to take autonomous decisions and implement binding decisions by the European Commission and the Agency for the Co-operation of European Regulators. In parallel, parties affected by those decisions must have access to suitable mechanisms of appeal. Under the current system Ofgem's proposals for licence modifications can be blocked by 20 per cent of relevant licence holders based on market share or number of licence holders. Besides disadvantaging small players in the market, this can hardly be described as autonomous decision-making. We are therefore introducing a new licence modification process that allows Ofgem to make decisions and act on them autonomously, but gives those affected by the decision the right to appeal. I am aware that some market participants do not welcome these changes and believe that by applying this system to all licence modifications, rather than simply those resulting directly from European obligations, we have gone further than is strictly necessary in our implementation. However, in many instances modifications may relate to both an EU obligation and a domestic matter, rendering a dual system impractical, if not impossible, to operate. Instead, we are proposing a robust, transparent and coherent decision-making framework, with an appropriate appeals mechanism. I hope that the Committee will agree that these regulations represent a sensible transposition of the third package requirements. They will improve the functioning of our energy markets and bring real benefits to consumers while improving our long-term security of supply. I therefore commend them to the Committee.