Thank you for contacting me about the Local Electricity Bill.
I believe distributed generation may have a role to play a part in a smarter, more efficient energy system and small scale low-carbon technologies should have a level playing field as the market for smarter services evolves.
The Local Electricity Bill was a Private Members' Bill introduced by Peter Aldous MP in the 2019-21 session. The Bill failed to complete its passage before the end of the session.
Community energy is a key part of clean growth and can decarbonise energy in local areas while bringing other economic or social benefits. However, there are other considerations which must be taken into account. For example, the Bill sought to alter the licensing provisions and Ministers have expressed their concern that changing the licensing framework would create wider distortions elsewhere in the energy system. I understand that, instead, the Government encourages stakeholders to engage with the ongoing work that the Government is undertaking with Ofgem to support flexibility and innovation more generally. This can help identify how a local element can play a part in the solution.
Furthermore, there is flexibility in the existing provisions. As you may know, electricity and gas supply licences are usually awarded on a GB-wide basis. However, Ofgem has powers to award supply licences for specified areas and specified types of premises, and that can allow licensees, to specialise and offer more targeted and potentially innovative products and services. The holder of such a licence could supply customers only in the specified geographical area and specified types of premises, with the full terms and conditions of the licence applying otherwise. Therefore, electricity suppliers can apply to Ofgem for a derogation from a particular provision of the supply licence, and if it is granted, provisions of the supply licence will not apply to them.
I understand that Ofgem is reviewing the use of supply licences that are restricted by geographic location, and Ofgem's Access & Forward-Looking Charges Review aims to improve the signals sent to all network users, which could support more localised supply.
With increased electrification of heat and transport, I am encouraged the Government and Ofgem continue to work to ensure that the systems and markets that will support this remain flexible, secure, competitive and that they meet the needs of consumers.
I am encouraged that the Government is supporting the delivery of renewable energy projects within rural communities in England through the £10 million rural community energy fund programme.
More broadly, I am pleased that the Government has acknowledged that local community participation has to be on the agenda. I look forward to further work between BEIS, Ofgem and stakeholders to identify how the UK can adapt its energy framework to modern circumstances.
Craig Whittaker MP
Additional Points: BEIS Briefing
- Peter Aldous MP has introduced the Local Electricity Bill 2019-21 as a Private Members’ Bill (PMB). The Bill has its Second Reading scheduled for 5 February 2021.
- The Bill has cross-party support, and has been presented by Peter Aldous, Sir Graham Brady, Rosie Duffield, Wera Hobhouse, Caroline Lucas, Barry Sheerman, and others.
- A previous Local Electricity Bill was introduced in the previous Parliament by Jeremy Lefroy but the Bill failed to complete its passage.
- The Bill seeks to enable electricity generators to become local electricity suppliers.
- It gives powers to local authorities to issue licences for local electricity generation and the conditions for the licences.
- The Bill hopes to support local businesses generate renewable energy, such as solar or wind. It seeks to enable more community-based energy projects, such as solar panels on local schools or sports centres.
- Ben Lake MP held an Adjournment debate on ‘Electricity Generation: Local Suppliers’ on 14 October 2020. During the debate, Peter Aldous MP raised his PMB and Ben Lake expressed his support for the Bill.
- Kwasi Kwarteng MP, Minister of State for Business, Energy and Clean Growth, closed the debate and gave the Government’s view on local electricity suppliers.
- The Minister cited the benefits of clean local electricity, including:
- Local employment;
- Local buy-in through community schemes and partnerships;
- Innovation and growth;
- Cost reductions and cutting carbon.
- However, he also highlighted the other considerations or concerns which must be taken into account:
- Changing the licencing framework would create wider distortions elsewhere in the energy system. Instead, the Government encourages stakeholders and MPs to engage with the ongoing work that the Government are undertaking with Ofgem to support flexibility and innovation more generally. This can help identify how a local element can play a part in the solution.
- There is already provision for a local licence - electricity and gas supply licences are usually awarded on a GB-wide basis. However, Ofgem has powers to award supply licences for specified areas and specified types of premises, and that can allow licensees, once they have the licence, to specialise and offer more targeted and potentially innovative products and services. The holder of such a licence could supply customers only in the specified geographical area and specified types of premises, with the full terms and conditions of the licence applying otherwise. Therefore, electricity suppliers can apply to Ofgem for a derogation from a particular provision of the supply licence, and if it is granted, provisions of the supply licence will not apply to them. There is already some degree of flexibility.
- Being an electricity supplier confers the right of the licensee to supply electricity to customers, but it also bestows certain obligations including payment of a proportion of network costs. If one is operating in a situation where one is not a licensee, then one can avoid paying the costs on which the whole system depends. [In some instances, the Licence Lite regime (see below) can remove this burden, but the Government does not want large numbers of suppliers exempting themselves from these obligations.]
- Network charges are levied on all users of the network. There are a range of measures to encourage generators to locate close to sources of demand, and placing a source of generation close to areas of high demand means that the generator gets paid credits for helping to avoid further investment in the high-voltage transmission network. Therefore, suppliers are incentivised to be in areas of high demand. There is a problem in areas of low demand, however Ofgem is looking to reform measures through improvements to network charges. It is also looking to develop local markets for flexibility.
- Artificially reducing costs for local electricity suppliers risks distorting the market. It incentivises something which may not be economical, which may result in higher costs for consumers, which would increase as more local suppliers were subsidised.
- Creating a special category brings its own complexities, and there may be unintended consequences.
- The proposals may therefore create more problems than they solve.
- Ofgem ran a consultation on how to use facilities more effectively to bring innovation to the specified locality in this retail market which closed on 12 October. It is currently ‘awaiting decision’ but further information can be found online: https://www.ofgem.gov.uk/publications-and-updates/supporting-retail-innovation-policy-consultation-ability-provide-derogations-certain-standard-licence-conditions-and-granting-supply-licences-specific-geographic-areas-or-premises-types. Minister Kwarteng noted that he hoped that ‘small-scale generators who wish to supply local communities have responded fully to the consultation’.
- The Licence Lite provision allows aspiring suppliers or local generators to apply for a supply licence and receive relief from compliance with industry codes. The Electricity Act 1989 already allows the Secretary of State to exempt, by scale, electricity suppliers from having an electricity supply licence if they meet certain conditions.
- Ultimately, the Government do not feel this is something they can adopt, but they do feel that local community participation has to be on the agenda. The Minister stated there was an ‘ongoing discussion to be had about how best to adapt our institutions to modern circumstances’, noting that the structures in place today do not necessarily reflect the of the time, before legislating to achieve net zero.
- The Minister’s final remarks were: “We have to focus on the flexibility of the whole system in terms of the current regulatory regime. If we get that right, then we can bring the innovation and perhaps some of the centralisation hon. Members want to see.’