My Lords, I thank my noble friends Lord Jenkin and Lord Roper, and the noble Lords, Lord Cameron and Lord Berkeley, for their amendments. They all relate to competition within EMR and the electricity market. I should like to reassure noble Lords across the Chamber that I fully recognise the importance of effective competition in the market. I also recognise my noble friend’s desire to help independent gas-fired generators in particular. My noble friend tabled Amendment 4 in Committee, and I have considered carefully the points he made. In particular, he said that this amendment would,
“help the Government to achieve their stated desire of having greater market competition”.—[Official Report, 18/7/13; col. GC 339.]
However, I still do not think that it will deliver the competition that he rightly seeks. We will make a difference to competition only if we take action and deliver actual reforms that are designed for that purpose.
The list of matters to which the Secretary of State must have regard in Clause 5(2) is about balancing different objectives: balancing the need to decarbonise
against ensuring security of supply, and at the least cost to the customer. However, competition does not fit into such a list. We are not balancing competition against delivering decarbonisation or cost to the consumer. Competition is one of the means of minimising cost to the consumer, and the purpose of EMR is to move us to an electricity market where low-carbon generation can compete fairly on price. Amendment 4 could cause confusion as to the practical effect on the design and implementation of EMR. Noble Lords will recognise that we do not have the luxury of time at the moment, and that to understand the effect of such a change would undermine our efforts to quickly implement EMR and bring forward investment.
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Amendment 5 seeks to abolish the vertically integrated business model. While I certainly recognise that vertical integration plays a part in perpetuating barriers to market entry, it also delivers some benefits for consumers through lower costs of capital, efficient risk management and economies of scale. These benefits cannot be discounted without a clear sense of what the effects of a prohibition on vertical integration might be. There is no clear evidence that the divestment of retail businesses will increase competition or lower consumer prices. Instead, we should focus on delivering reforms that we know will increase competition. For instance, it is crucial to ensuring a reliable electricity supply that independent gas-fired generation and other forms of reliable capacity can compete in the electricity market. That is precisely what the capacity market is intended to achieve. It will do this, for example, by offering longer-term contracts to each plant, which will enable them to spread their cost of capital over a longer period. This is particularly important to independent players as they rely on securing project finance rather than financing from their balance sheet, as many of the big players do.
We have sought to factor competition into EMR, designed by running competitive auctions in the capacity market and signalling a clear intention to move to competitive allocation of contracts for difference as soon as possible. Of course, CFDs themselves will enable new low-carbon generation to compete in the market. More widely, Ofgem is taking forward an ambitious package of reforms to improve market liquidity and meet the needs of independent suppliers and generators.
Under these reforms major energy companies will be required to quote and trade at prices across a range of products up to two years ahead of delivery. This will allow independent generators and suppliers to lock in prices well ahead of delivery and will therefore enable new entrants to the market. Furthermore, I amended the Energy Bill in Committee to allow for the establishment of a power purchase agreement scheme. This will make it easier for independent renewable generators with CFDs to access the electricity market by guaranteeing access to an off-taker of last resort at a specified discount to the market price. This will provide investors and lenders with more certainty over maximum long-term route to market costs, which in turn reduces risks and therefore costs.
Noble Lords will be aware of the work we have done to simplify retail tariffs and make it easier for consumers to switch. However, I can reassure noble Lords that the Government are listening to the concerns raised, and I agree that more can be done. That is why the Prime Minister has announced an annual review into the state of competition in the energy market. As my noble friend Lord Jenkin said, this review will be led by Ofgem in conjunction with the Office of Fair Trading and will draw on the expertise of the new Competition and Markets Authority. The details will be developed by the regulators and we do not want to prejudice that. The assessment may look at prices, profits, barriers to new entrants, and how easy it is for customers to get the best deal. My department will publish more details shortly.
I have met with a group of independent generators and lenders and have very much taken their concerns on board. We have indicated our willingness to look at the length of capacity agreements for new plant to ensure that we allow a long enough period to provide certainty to investors and encourage new capacity in the market at the best possible price for consumers. We are proposing a higher cap in the first capacity auction. We will continue to engage with independent gas generators and other stakeholders and have committed to further discussions during the consultation period with a view to securing the right design parameters that will support new investment in reliable capacity.