My Lords, I thank all noble Lords for this short debate, and I thank my noble friend Lord Jenkin for his amendment. Amendment 53BA proposes that payments under capacity agreements should be commenced by the settlement body within six months after the national system operator has run a capacity auction. The Government have confirmed their intention of running the first capacity market for delivery of capacity in 2018-19, subject to state aid approval. Capacity auctions will take place four years and one year ahead of the delivery year. For example, for the delivery year 2018-19, capacity auctions will be held in 2014 and 2017. Successful bidders at auction will be awarded capacity agreements which provide a steady payment for capacity in return for a commitment to deliver electricity when required in a delivery year or face a penalty.
Payment under capacity agreements will not occur until the delivery year. This is because we believe that payment should not occur until the plant is providing capacity. We do not want consumers to pay in advance for a service that they have not yet received. In addition, providing payment in the delivery year means that plant performance can be tested and, if necessary, penalties can be applied if performance is not as promised. If payments were made ahead of the delivery year, that would be impossible and might provide an incentive to game the system. Our position is therefore that capacity providers should be rewarded for delivery in a delivery year only, rather than in advance.
My noble friend questioned whether the capacity market’s first delivery year could be brought forward, and I suspect that that is likely to be the aim behind his amendment—in fact, he made it clear that it is. However, we have chosen a four-year gap for a good reason. If we do not have such a gap—for example, if we run a capacity audience in 2014 for delivery in 2015-16—new plant would not be able to participate, given the time required to build the plant, which was the point made by the noble Lord, Lord O’Neill. This would mean we would risk an uncompetitive auction with only existing plant competing in what could be a tight market. We believe that this would lead to a potentially inefficient auction and would risk consumers’ value for money, a point raised by my noble friend Lord Ridley.
We are not complacent about the security of supply. We recognise that Ofgem’s 2013 capacity assessment suggested that there may be a capacity problem in the middle of the decade. That is why we support National Grid and Ofgem’s current consultation on the need for and the design of a new balancing service for this period. If needed, this would keep existing plant on the system or get it back on if it had been mothballed for the period before the capacity market was in operation. This would be limited intervention and would mean that we do not have to run a full capacity auction with only existing plant competing. As such, the proposed measures offer a cost-effective means to ensure security of supply in the middle of the decade before the capacity market starts to deliver capacity in 2018-19.
I hope that I have reassured my noble friend that the measures we are taking are short-term interventions and, on that basis, I hope he will withdraw his amendment.