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Mr Tim Yeo (South Suffolk) (Con)
I remind hon. Members of my entry in the Register of Members’ Financial Interests, which relates to a number of businesses in the energy and transport industry.
This debate is also timely. Electricity market reform is very much on the agenda of policy makers, industries, non-governmental organisations and even consumers. We are in a crucial period for energy policy decisions. As I mentioned in the previous debate, the three drivers—independence and security, emissions reductions and price—will be uppermost in our minds. In addition, the consequences of the decisions taken during this Parliament will be far-reaching and long-lasting. With that in mind, I believe that the principles of EMR are right, and I congratulate the Government on moving substantially in the right direction after a period when energy policy was at a bit of a standstill in the UK and time was lost unnecessarily.
With a quarter of our electricity-generating capacity shutting down in the next decade as old coal and nuclear power stations close, more than £100 billion of investment will be needed to build the equivalent of 20 large power stations and to create a new low-carbon energy infrastructure. In the longer term, by 2050, electricity demand is likely to double as more transport and heating is shifted on to the electricity grid.
Let me straight away address emissions reductions, which are the second driver of policy. A clear target for decarbonisation would increase certainty. The Government’s goal to largely decarbonise the power sector by 2030 is a bit too vague for my liking. The Energy and Climate Change Committee’s report recommends that the Government should set a specific target of 50 grams of carbon dioxide emissions per kilowatt-hour by 2030, and should also set out a clear trajectory on how Britain should reach that target. I regret that the Government have so far not accepted those recommendations, but merely reiterated their intention that the sector be largely decarbonised by 2030.
As important as a clear target for decarbonisation is the need for a stable policy framework. Another priority for Government must now be to create confidence for investors quickly, but without setting the level of renewables obligation certificates, feed-in tariffs and other incentives for low-carbon energy at levels that are so generous that the subsidies become unaffordable. The huge spend of more than £100 billion may be beyond the resources of the big six energy companies, so Britain must compete for energy investment in a global financial market at a time when many other countries are also seeking huge funds to increase their electricity-generating capacity. For many years, the major utilities have financed renewable projects as well, but their balance sheets are now being loaded up with increasing levels of debt at a time when there are competing investment opportunities and when prices are under pressure. The challenges of financing the new investment that is needed, especially in low-carbon technologies, are formidable.
The main mechanism for creating certain returns for low-carbon electricity generators in the long term will be feed-in tariffs. The White Paper has improved the proposals for feed-in tariffs, again reflecting the recommendations from the Committee:
“different levels of Feed-in Tariff…are required to support technologies at different levels of maturity and with different financing needs.”
We also said that the Government
“should set out conditions under which it would shift to an auction-based process in the future.”
The White Paper suggests a move to an auction-based approach. It accepts the need to begin with technology-specific auctions before moving to a general low-carbon option in the longer term. It suggests that technology-specific auctions or tenders will start by 2017, and that greater competition between the technologies will be introduced in the 2020s. Again, I support that approach and look forward to learning more details in due course. I invite the Minister to set out the thinking behind those dates if he can. For flexible and base load carbon generation, feed-in tariffs with contracts for difference will be used on a reference price, such as the annual electricity price.
Detail about how that reference price will be calculated is very important and eagerly awaited. For intermittent low-carbon generation, average prices are generally a problem, because when they are generating wholesale prices tend to be low. The best prices are clearly likely to be when the wind is not blowing. Basing the top-up for intermittent generators on the market price they actually receive, rather than an average, would give more certainty, although that might also have cost implications. In the meantime, against the background of rising concern about consumer prices, I invite the Minister to explain how he hopes to ensure that the levels of support offered by the feed-in tariffs will also be economically efficient and affordable.
It is important that lessons are learned from recent experience with ROCs and small scale feed-in tariffs. The Committee’s report recommends that the process of setting subsidies should be transparent. Levels must be set for a defined period, with clear triggers that would activate a review if levels need to be reassessed so that investors are not taken by surprise. The report also states that there must be a clear mechanism to allow levels of subsidy to shift automatically in response to changes in the cost of low-carbon technologies. The contracts for difference regime provides an umbrella mechanism, under which the levels of support for each technology can be set. This makes it possible to stimulate the deployment of different low-carbon technologies by adjusting the strike price. However, I hope that Ministers avoid the temptation to tinker with the regime too often early in the process through too many early reviews of support levels. The regime is open to that, but I hope that that temptation will be avoided. I therefore invite the Minister to put in place an automatic mechanism for feed-in tariff strike prices to respond to changes in cost and thus avoid the problems seen recently with the solar PV feed-in tariffs.
Will the Minister set out in advance the dates when the Government will review the feed-in tariff levels and make a commitment to avoid early reviews? We also need the right kind of institution to implement the feed-in tariffs. The report concludes that the Department of Energy and Climate Change must identify which institution will be given the power to create appropriate contracts and set this up as quickly as possible. If that role is not taken on by Ofgem, a shadow body should be set up in advance of legislation. The agency must be totally independent and not susceptible to political influence.
The Government appear to have agreed to this recommendation, however the details of the kind of institution that will be counterparty for the feed-in tariffs are still rather scarce. Will the Minister shed more light on the details of this institution, and on how responsibility will be divided between the feed-in tariffs institution and the Government? Who will actually decide the levels of support for different low-carbon technologies and the overall energy mix?
On the assumption that substantial investment in low-carbon generation will take place, the problem of intermittency must also be addressed. New capacity is required to fill the gap when generation shuts down, but the capacity mechanism proposed may not be available soon enough to achieve that. In future, however, we are likely to have more inflexible and intermittent generation. Some premium payment may be needed to ensure that enough flexible generation is available to meet demand. The White Paper does not present a finished design for a capacity mechanism, but it sets out two options: a “targeted mechanism” in which a central body would procure a strategic reserve that would not participate in the electricity market and would only be used under “exceptional circumstances”; and the introduction of a “reliability market” to operate alongside the electricity market, in which generators would receive a payment for the availability of capacity, as well as for the actual electricity that they generate. Prices would effectively be capped so that generators receive a predictable but low-level payment from the capacity market in exchange for forgoing very high prices in the electricity market at times of peak demand. Both the targeted mechanism and the capacity market would also be open to demand-side response.
Will the Minister clarify what kind of plant will fill the capacity gap, which could influence the kind of capacity mechanism that is needed? If an existing high-emission plant is expected to run for very short periods—for example, oil-fired generators—an early signal will be needed before these plants shut down. Otherwise, there is a danger that some serviceable plants that could run for a few hours a year will close down and leave us needing new reserve capacity.
I have previously expressed my support for the principle of emissions performance standards. However, the EPS proposed in the White Paper will not have any material impact. An EPS set at 450 grams of carbon dioxide per kilowatt-hour, with exemptions for carbon capture and storage demonstration plants, does not provide any additional environmental benefits beyond existing planning requirements. I note that the Government plan to review the EPS level and the grandfathering arrangements in 2015. I hope that the Minister will recognise the advantages of setting out well in advance how the EPS may become much tighter. Unexpected changes are obviously potentially harmful and a deterrent to investment.
The Government have proposed that the EPS would be grandfathered for a predetermined period—for example, 20 years—rather than for the economic lifetime of a particular plant, as previously suggested. However, even a 20-year period would allow gas-fired power stations built before the 2015 review to operate unabated into the 2030s, which could make achieving our long-term climate goals much more difficult. Some of what was said in the previous debate is also relevant to that point. Will the Minister say how often he expects the EPS level to be reviewed, and whether he would consider setting a long-term trajectory based on the carbon targets set in the fourth carbon budget?
Let me turn briefly to the carbon price floor. In Brussels last week, Commission officials seemed rather baffled by this. They felt that it would do nothing to reduce EU emissions, because any reductions would be soaked up under the cap in the trading sector. In effect, there is a danger that it will mean that the UK pays more for its emissions reductions, provides a subsidy to other member states and reduces the economic efficiency of the emissions trading system. Our report recommends that the Government should explain how they plan to deal with the problem of potential windfall profits arising from the introduction of the carbon price support, as set out in the White Paper. We suggest that the White Paper should set out in what circumstances the Government would take action to address any resulting windfall profits. If such measures were to involve a tax, what would happen to the revenues? Would it be matched by an increase in the support for a green investment bank?
In the event, the White Paper left the issue of windfall profits arising from carbon price support untouched, but the Committee believes that such profits could accrue from the increase in electricity prices resulting from the price floor and that they will be enjoyed by current low-carbon generators without any effect on the proportion of low-carbon generation in the short term. Can the Minister comment on the possibility that the carbon price floor would raise electricity bills until the 2020s without stimulating additional emissions reductions?
The dominance of the big six is another topic much in people’s minds. Reform of the wholesale electricity market is now widely regarded as essential. The big six generate around 80% of the electricity in the UK and supply 99% of electricity to retail customers. Does the Minister agree that real competition is needed in the wholesale and supply markets, so that consumers can be confident that the path to a low-carbon economy is being followed in the most efficient way possible? Does he agree that competition is vital to ensure that consumers get a fair deal? The big six are almost unchallenged in the sector, as they dominate both generation and supply, and little room is left for independent or decentralised generation.
The lack of liquidity in the market makes it hard for potential investors to have confidence in the prices that they will receive. Currently, our electricity market—for GB day ahead—trades volumes of around 40 GWh per day, with a further 200 GWh traded through the brokered markets, compared with markets such as Germany and Nordpool, which clear between 500 GWh and 750 GWh each day. An illiquid and opaque wholesale market poses difficulties for new entrants and can weaken the effectiveness of the feed-in tariffs proposed by the Government. Is the Minister contemplating a more thorough plan for reform of the wholesale and balancing markets—in other words, real electricity market reform?
In that context, the Committee recommended that the Government incorporate a review of the present trading arrangements and of liquidity in their White Paper, but the Government largely delegated the responsibility to Ofgem, which has subsequently proposed that utilities must auction 20% of their electricity by 2013 in a range of products including near-term supply. It is not clear, however, that the 20% will make a sufficiently big difference. Scottish and Southern’s pledge to sell 100% of its electricity in the spot market is welcome, but the details about how SSE will deal with its futures contracts still need to be spelled out if we are to see what benefit will be achieved.
I entirely share the Government’s reluctance to consider a reference to the Competition Commission because of the delay involved in a report and any conclusions. Ofgem has for a long time been responsible for tackling the problem, but we need to do more to ensure real competition by the time that the EMR proposals are finally implemented in two or three years. The White Paper acknowledged:
“To the extent that there are continued barriers to entry that are not addressed through Ofgem’s actions, the Government will work with all stakeholders to identify appropriate solutions.”
That seems to emphasise the option of more Government intervention if Ofgem’s liquidity reforms are insufficient.
My Committee also argued that the EMR proposals could be jeopardised by the lack of competition. A liquid market with clear price transparency is particularly important for small suppliers and generators, and we argued that a strong reference price would need to be given by the market to give confidence to small suppliers wishing to invest, and to give a credible strike price for the contracts for difference. We were glad to hear that the Secretary of State has taken up our call to break up the dominance of the big six. However, leaving the responsibility for improving the sector to Ofgem does not guarantee that that will happen. The Government’s response stated:
“To the extent that there are continued barriers to entry that are not addressed through Ofgem’s actions, the Government will work with all stakeholders to identify appropriate solutions.”
Can Ministers explain when they will judge whether Ofgem has been successful in addressing the barriers to entry, and on what basis they will make that judgment?
Recently, the energy sector has been delivering investment of only £6 billion or £7 billion each year, according to Ernst and Young, and uncertainty about or delays in implementing EMR might even reduce that figure. Will the Minister tell us how much investment there has been in the past year, since the EMR proposals were first mooted? Does he believe that we are on track to achieve the £200 billion figure widely quoted as necessary? If we continue to attract less than £10 billion a year through till 2014, that will leave quite a big burden for the remainder of the 2010s.
Time is short and several of my colleagues wish to contribute to the debate, so I shall conclude. I hope that the Government recognise the urgency of reaching conclusions in the EMR debate, because we are in danger of creating a period of hiatus for investment. I am disappointed that the timetable for publishing the new energy Bill, on which my Committee has been invited to conduct pre-legislative scrutiny, appears to be slipping a bit, and important chunks of the Bill might not even be available in time to scrutinise. However, I look forward to what my colleagues and the Minister have to say.
Mr Dai Havard (in the Chair)
In my estimation, we probably have about 25 minutes for a general debate to leave enough time for the Opposition spokesman and the Minister to speak and for Mr Yeo to reply, should he wish to have a few minutes at the end. Perhaps hon. Members will take that into consideration.
Barry Gardiner (Brent North) (Lab)
My pleasure at speaking under you as Chair, Mr Havard, is exceeded only by my awe at having to follow my own Chairman of the Select Committee, the hon. Member for South Suffolk (Mr Yeo), who in his 16 or 17 minutes did not canter but gallop through the entire report in the most comprehensive fashion.
I often think of the Minister, for whom I have the greatest respect, as sitting in his Department twiddling a Rubik’s cube. The trouble is that someone has peeled one of the colours off this particular Rubik’s cube and put the wrong colour in its place. No matter how hard he tries to get the six sides all looking as they should, the task is pretty impossible. I do not underestimate the challenge faced by the Minister.
We need to replace 25% of our existing generating plant by 2020 merely to keep the lights on—that is one side of the Rubik’s cube. We are obliged by the European Union to have 30% of our electricity come from renewable sources by 2020—currently it is only 7%—and that is another side of the cube, as is energy consumption in the UK being set to double by 2050 if we continue with business as usual. We also need to tackle fuel poverty and to keep prices low, and that is a big side of the Rubik’s cube. We need to decarbonise our economy to combat climate change—yet another side. The sixth side is that we need to incentivise £200 billion of investment in new capacity and infrastructure in the space of only nine years. The puzzle is intractable indeed.
Take any two of those sides at random, such as the renewables obligation and low fuel prices. Professor Dieter Helm, in his evidence to the Committee, dismissed the Government’s projection of only minimal rises in customers’ bills by 2020. He told the Select Committee that to think that energy efficiency and other demand reduction measures could balance the increased costs of low-carbon supply to the extent that the effect on consumers’ bills would be only 2%,
“is again really stretching one’s imagination.”
Let us pick another two sides of the cube: what of delivering £200 billion-worth of infrastructure and of decarbonising our economy? Investment analyst Peter Atherton told the Committee that
“it is going to be extraordinarily difficult to get non-recourse debt into new nuclear in the UK. That basically means that it all has to be done on balance sheet.”
The Government’s strategy is market driven. It is predicated on getting the right incentives and believing that the market will then arrive at the correct solutions.
There are four pillars. Feed-in tariffs will incentivise at two levels. First, by encouraging microgeneration and paying people for the energy they feed into the grid through their solar panels and domestic wind turbines. No doubt we will come back to solar panels later. Secondly, by giving a long-term contract to large-scale low-carbon generators like offshore wind farms. This will guarantee a better price to them in comparison with carbon-intensive generators such as coal or gas-fired power stations. Those are the “FITs”.
Carbon price support is like a tax on carbon, as the Chairman of the Energy and Climate Change Committee said. It simply makes the cost of generating electricity from fossil fuels more expensive, and that means that carbon-free generation like wind becomes relatively more attractive the higher the Government set the carbon price.
Capacity payments, the third of the four pillars, are the price the Government are willing to pay to ensure that back-up is always available. The system needs flexible generation that can respond to the peaks of demand and any gaps in supply. They propose payments to generators that will give them increased certainty of revenues if they guarantee to be available when other supply is not—for instance, when the wind does not blow.
Emissions performance standards is the fourth of the pillars: the final tool in the Government’s incentives box. In reality, the EPS is more a disincentive, because it simply proposes a ban on any generator emitting more than a certain level of CO2 per kWh. The Government want to set that limit at 600 grams of CO2 per kWh. In practice, this would stop only unabated coal—the coal-fired power stations that did not have CCS fitted to reduce their emissions. It would still be enough to allow gas-fired stations. That is not good enough, given the Committee Chairman’s earlier remarks about adopting the Committee’s fourth carbon budget with targets of between 40 grams and 60 grams per kWh.
If the banking crisis should have told politicians anything, it is this: a strategy of “incentivise and then sit back” ignores the fact that markets need more than incentives. Markets need certainty, capacity and regulation. Peter Atherton put it nicely when he told the Committee:
“I warn you that it is not a question of making the rewards more and more, because the more you make the rewards, the less trust investors will have that those rewards are going to be sustainable.”
He went on:
“There are really five big risks: planning, construction, power price, operation and decommissioning.”
The mistake that the Government appear to be making is to think that by putting greater and greater incentives on power price, they can resolve all the problems that need to come within electricity market reform.
The EMR set out three high-level objectives: decarbonisation of the electricity sector, energy security and affordability. I wish to focus for a moment on affordability, because it is becoming—certainly for my colleagues—one of the biggest issues that we find on the doorstep. One in every four households in the UK is now classed as fuel-poor. A fuel-poor household is defined as one where the expenditure required to maintain adequate warmth exceeds 10% of household income. It is a measure of the number of households needing to make impossible decisions on expenditure just to meet their basic human needs.
If we look across Europe, there is no pan-European definition of fuel poverty. In other countries, fuel poverty might fall within general poverty alleviation programmes, or it may simply not be recognised as a major problem. Cross-country comparisons therefore are difficult and they need to employ indicators such as the winter variation in mortality levels or the number of people in arrears with their utility bill payments.
The Labour Government brought in winter fuel payments for the elderly to tackle fuel poverty, and no doubt my colleagues will point to figures that show that excess winter deaths plummeted from almost 50,000 in 1999-2000 to 25,000 in 2009-10. The truth is that while Labour can claim real success by acting to increase household income, if we look at the figures over an extended period, it becomes evident that the net effect of our winter payments strategy was only to hold winter deaths broadly static when otherwise they might have increased. If one goes back to 1993-94, one sees that excess winter deaths were again 28,630. In 1994-95, the figure was 29,720. It rose to a peak in 1999-2000, but in 2007-08 it came down to 27,480. That shows the danger of focusing on just one aspect of a problem.
Winter mortality in other European countries reveals some surprising trends. The countries with the highest winter death rate are Portugal and Spain. That is counter-intuitive, but easy to explain when one considers the low level of home insulation. What emerges clearly from such comparisons is that there is a strong correlation between thermal standards in housing and excess winter deaths. That excess winter mortality is almost twice as high in England as in Finland or Germany cannot be directly attributed to weather. However, precisely because of its cold climate, Finland already has very demanding thermal insulation requirements.
By contrast, the coalition Government have just introduced their warm home discount scheme where energy suppliers will be obliged to give rebates of £250 million in 2011-12, rising to £310 million in 2014-15, to vulnerable customers. It is astonishing that the UK continues to focus on financial solutions to what is essentially a technical problem of building standards. On the Minister’s overview of the industry, I urge him not to repeat the mistake of which I have already accused him once this afternoon by adopting a single focus solution to a problem. I fear that is what happens.
The Government have also failed to control the soaring costs of energy charged by the big six utility companies. Again, the Chairman of the Committee made strong reference to this in his remarks, because it is a major focus of our report. Household bills have increased on average by 71% in just five years. The latest attempts by Government to reform the electricity market once again let those companies off the hook by failing to break up the vertical integration of the companies.
Vertical integration allows a utility company to generate the electricity under one arm of the company, which it sells through an intermediary—often offshore—which they also own, and then on-sells to another arm of the corporation, which supplies it to us as the consumer. The result is a total lack of transparency in the true cost of electricity. All the big six operate similar structures, which prevent real competition and stop new entrants coming into the market.
When the Committee Chairman mentioned the big six and the break-up of the vertical integration of the market, he alluded to the announcement by Scottish and Southern. It is important to try to appreciate why what sounded like a major announcement from Scottish and Southern to auction all its electricity to household suppliers on a wholesale market is perhaps not the concession or big move that might have at first been perceived. One small supplier that it was supposed to help said that the move was “cosmetic” and will do little to help small suppliers gain market share. That is because the Scottish and Southern Energy Group is freeing up only short-term energy and not the long-term market on which small suppliers rely.
The big six gas and electricity firms buy and sell energy on the wholesale market, but energy is traded in two ways—first on the day-ahead price, which is where SSE said it will auction all its energy, and secondly, by smaller energy firms that trade with a longer view, buying up enough energy for up to two years so that they can guarantee a price for customers. The markets are complex and subject to many external factors that can affect price. First Utility, a small company, says that it buys less than 1% of its wholesale energy on the day-ahead market, and claims that smaller, newer suppliers buy wholesale energy on a much longer-term basis. That is why the move from SSE that the Chairman of the Committee mentioned will not free up the market and help liquidity in the way suggested.
Lack of skills is a problem in driving the investment that we need in industry. It is one thing to get £200 billion of investment, but providing the skills to deliver that is a much greater challenge. The Minister must respond clearly and tell the Chamber how he proposes to make skills available to meet the demand should such investment be obtained.
Mr Dai Havard (in the Chair)
Order. I would like to start the winding-up speeches at about five past five and other hon. Members wish to speak. I appreciate that it is a complex report and that huge areas need to be discussed, but I appeal to the hon. Gentleman’s internal discipline.
Barry Gardiner
I apologise, Mr Havard; I thought that we were working to a slightly different time scale than that outlined, so I will rapidly bring my remarks to a close. I must, however, focus on this week’s events and the change in regulation. I do not suggest that the Government are wrong to change the tariff structure and bring it in line with the levy, but they should do it at the end of March next year when the review was originally planned. By bringing the move forward by a meagre four months, the Government have reinforced a perception in the markets and business that they cannot be trusted to deliver a stable regulatory framework. The Minister shakes his head but he knows that to be true. He also knows that he will be subject to judicial review. Some companies are losing up to 45,000 workers, and many will “JR” the Government’s decision because there is a consultation period that extends 11 days beyond the deadline at which the change of tariffs will come into effect. That is dishonest and the Government are wrong to go down that route.
David Mowat (Warrington South) (Con)
I have already spoken this afternoon, so I will be brief to let the hon. Member for Southampton, Test (Dr Whitehead) contribute to the debate. I liked the Rubik’s cube analogy that we have just heard; I will not add to that although I want to raise a couple of points that have not yet been discussed. We have spoken a little about fuel poverty, but we have not specifically mentioned energy-intensive industries. I know that proposals on that are to be published and I await them with interest. It is a major problem. I was recently told that INEOS in Runcorn uses about as much electricity as Liverpool. That is a continuum; it is not a discrete industry, and to a greater or lesser extent, all industry uses electricity. At a time when we are rebalancing our economy, it is worth noting that a unit of GDP obtained from manufacturing will always require more energy than one obtained from services.
I have two specific points. First, paragraph 37 on page 15 of the report states:
“It is important that the Electricity Market Reform package is geared to deliver our renewables targets as well as our decarbonisation objectives.”
The Government agreed with that conclusion and although I looked carefully at the logic behind it to try to find evidence for it, I could not. Cutting 80% of our carbon emissions by 2050 is a difficult challenge, and I am concerned that we are introducing subsidiary targets that will make it harder. Of course renewables are part of the solution, and nothing in my remarks should imply otherwise, but if we elevate renewables over and above other methods of reducing carbon, including nuclear power and a little bit of gas, we could be driven to make wrong decisions. I think that to an extent we are doing just that.
We have just heard an exchange about the cost of solar power, which is still high. A finding by the Parliamentary Office of Science and Technology and Cambridge university suggested that, over its lifecycle, solar power uses three times as much carbon as nuclear power, including the manufacturing cost of PV cells. I support the objectives of decarbonisation, but I wonder whether some of the renewables objectives could be a distraction.
My second comment on the report links to the previous point about fuel poverty. We have a problem with cost, which we are ducking. The danger of doing that is that it could become a cumulative issue, meaning that we will never address head-on the question of why the costs involved may be a price worth paying. We have heard in previous debates about the numbers of people who are dying in our country from fuel-related issues such as hypothermia—I think I heard the figure of 2,500 a year. Page 61 of the report implies that the EMR reforms, which I broadly support as a sensible way of achieving our objective, will have a maximum impact on energy prices over three decades of 7%—that is the highest number on the chart. That figure is based on a set of assumptions that I could not find and that I am not sure have been published. Unless we take seriously the extra costs associated with some of our actions in terms of interfering with the market, we will lose popular support for some of the things we are rightly trying to do.
Dr Alan Whitehead (Southampton, Test) (Lab)
I will limit my remarks to one or two points. One disadvantage of having such a knowledgeable, far-sighted and competent Committee Chair is that after he has spoken there are few sensible contributions left to make. I will, therefore, confine my remarks to one or two less sensible points, which I hope will add something to the debate.
In the Green Paper, and certainly in the subsequent White Paper published after the Committee’s report, one must look a long way to find comments on electricity market reform. Although the White Paper addresses a range of topics, such as capacity, the carbon floor price and energy performance standards, its central oddity is that it leaves the electricity markets as they were designed 10 years ago under NETA—the new electricity trading arrangements. It leaves the electricity markets in pretty much the same place, with the same assumptions and mechanisms. However, it countenances a very different landscape as far as electricity trading is concerned.
When NETA was set up, there was a substantial number of wholesalers selling and retailers buying. That is no longer remotely the case—not by conspiracy, but through the accretion of suppliers, generators and retailers into the big six. By accident, what has come about is, in effect, a cartel—we have to say that—that essentially hedges, using the strategies that my hon. Friend the Member for Brent North (Barry Gardiner) mentioned: it buys on the futures market and sells to itself, using the same market mechanisms, and therefore pretty much bypasses most of the things that NETA was originally set up to do.
When NETA was set up 10 years ago, it was carbon-blind. Its purpose was to secure, among other things, the cheapest price between wholesale and retail. In the early stages, it looked as though it was substantially succeeding in doing that, until other factors took over. However, there was the emergence of what one might call the other things that are central to the electricity market reform White Paper. To some extent, they were mechanisms that mediated that central electricity market. The renewables obligation, for example, was a mechanism attached to the original NETA/BETTA system to bring renewables to market; to underpin emerging technologies; and, in an echo of the recent debate on feed-in tariffs for solar photovoltaics, to recognise that over time the obligations may change as the technologies come to market. Nevertheless, the aim was to underpin those technologies in the first place.
Now, as hon. Members have said, we need to decarbonise our electricity market rapidly and invest substantially, not just in replacing capacity but in providing additional capacity, because of the nature of the capacity that we are bringing on board as far as the low-carbon market is concerned. We are talking about perhaps £200 billion in investment. All but two of the big six companies have pretty much borrowed up to the limit of their balance sheets, so we need important mechanisms to secure not just the good running of the market, but low-carbon investment on the basis of good value for customers. I do not underestimate at all the breadth of the challenge implied by the electricity market reforms.
There are various things in the reform. The central electricity market remaining must have a substantial question mark against it, with regard to whether it is fit for purpose as one of the central mechanisms driving all the demands forward. I think—evidence was submitted to the Select Committee on this—that a single purchaser pool of some description is a necessary way of dealing with the issues of cartelisation and the lack of transparency in the wholesale market that has emerged. There must also be a question mark against the contract for difference as set out in the White Paper.
Barry Gardiner
I absolutely agree with what my hon. Friend is saying. Will he say something about liquidity and the ability of smaller companies to enter the market with regard to the changes that he is discussing?
Dr Whitehead
My hon. Friend has just stressed that point. Given that I have about one minute left, expatiating on liquidity to any great extent is probably beyond my abilities. However, he is absolutely right to raise the question of liquidity in the market and the fact that as a result of the lack of liquidity, small companies are pretty much shut out from gaining a foothold in the market. Whatever is done about the big six, that is a very important issue.
Finally, I want to emphasise two things. First, the contract for difference as currently proposed conflates mature technology, the overall costs of which will not change, with emerging technology, where costs may well change. That is to say, it rewards, and particularly in the future will reward, old nuclear technology, as well as new nuclear power stations, for their output. That seems—the Committee alluded to this—a considerable concern, given the pronouncements that continue to be made that the Government are in favour of new nuclear but with no public subsidy. It is necessary at this stage to say either that there will be no public subsidy—that nuclear will not be rewarded for being a mature technology in the way that emerging technologies are, but will take its chance in the market—or that we need to do something about public subsidies for nuclear, for reasons that may be perfectly honourable to consider, and we must be up front and deal with that. Electricity market reform continues to fudge that essential choice that we have to make.
Secondly, we have to enter into capacity payments with a clear understanding of demand-side analysis, which is substantially missing from the proposals in the electricity market reform White Paper. We need to consider capacity payments for energy efficiency and reduction in output, and in relation to things such as interconnectors and electricity storage, which will be an essential part of a balanced, very low carbon economy that takes serious account of the demand side as well as the supply side.
Trying to deal with the entire landscape of electricity market reform in eight minutes flat was a difficult challenge. I hope that I have contributed a few thoughts to the debate, and I look forward to the Minister’s response to a number of issues that hon. Members and I have raised.
Mr Dai Havard (in the Chair)
I hope that we can give the Minister and Mr Yeo sufficient time to respond to the debate.
Tom Greatrex (Rutherglen and Hamilton West) (Lab/Co-op)
I will endeavour to be brief to provide that time, but I want to say a few things. I welcome the report and the clarity that it brings, because it puts very technical issues into relatively plain English. I congratulate the Select Committee on doing that. I am conscious that in coming months, when the energy Bill is published, the Minister and I will have plenty of opportunities to get into the weeds of these issues, so I do not intend to speak for long.
My hon. Friend the Member for Brent North (Barry Gardiner) outlined a number of the issues arising from the EMR process, as well as some of the omissions from the EMR proposals. I will touch on a couple of issues. I want to re-emphasise the most glaring issue, which has been referred to by the Chair of the Committee, the hon. Member for South Suffolk (Mr Yeo), and by other hon. Members—the omission from the EMR proposals of reform of the wholesale electricity market. I hope that between the White Paper and the Bill, the Government will look to deal with that, or others may well do so, because it is a pressing issue. It has come to the fore in recent weeks, and we know the reasons why. Those reasons have been acknowledged by some of the energy companies themselves. In particular, Ian Marchant of SSE has been candid in acknowledging that there is a trust issue. They have a trust issue because the market in which they are operating and the behaviours that go alongside it bear the hallmarks, in some respects, of a cartel. That is unsatisfactory and needs to be dealt with. The Committee report rightly highlights the proposals from Ofgem in relation to the 20% figure as relatively timid, and much more substantial work can be done on that. I am sure that the Minister will appreciate the support from the Opposition if he attempts to deal with some of those issues or, if not, we will find a way of giving him the opportunity to address those issues in the next few weeks.
I want briefly to touch on carbon price support, which the report is critical of. As my hon. Friend the Member for Southampton, Test (Dr Whitehead) has noted, the report reflects on the issues regarding the encouragement of new as opposed to older development. The report states that carbon price support
“will not influence investment decisions until 2018 at the earliest…Until then, the Carbon Price Support represents little more than an additional energy tax, which will be passed on to consumers.”
The hon. Member for Warrington South (David Mowat) has referred to energy-intensive industries. That is an important issue, particularly with the impact that the carbon floor price could have on some of those industries. I have a constituency interest in the issue, as do many other hon. Members. It is important to ensure, as the Select Committee warns, that UK companies are not disadvantaged in the long term compared with their counterparts in the EU and more widely across the world. I know that the Chancellor is seeking to address that issue in his growth statement at the end of the month, and I implore the Government to look seriously at the impact. I know of energy-intensive companies in my constituency that contribute to other objectives set out in the report and in the EMR process—for example, manufacturers of offshore wind turbine parts—and those companies might end up going to other parts of the world, causing the UK to lose growth and jobs.
Other aspects of energy policy will need to change and feed into the time scale of the reform. The Minister touched on one of them when we debated the potential changes regarding shale gas, and I want to refer to another, transmission charging. I know that the Minister now knows the arguments well. The Select Committee report points out that the TransmiT review will have an impact on the development of renewables, the siting of such developments and their attraction in association with the ROCs regime.
I know that the Minister is aware of the way in which such arguments are sometimes used to support a particular political agenda. The issue is not necessarily about discriminating against one part of the country, but it is a fact that the transmission charging regime was established in a pre-renewables world. That needs to change. I hope that if the outcome of Ofgem’s review is too timid, the Minister will use his powers to ensure that that is addressed to provide the right signals and basis for the market.
Finally, the Select Committee report notes:
“‘Affordable’ electricity in the short term cannot be achieved at the expense of meeting the other objectives of Electricity Market Reform. Lower prices cannot be a primary driver of energy policy, but developing greener and more secure sources of electricity needs to be accompanied by sound social policy to protect vulnerable consumers.”
We have seen a change in recent months that perhaps calls some of the sentiments behind that statement into question. While it is important to consider the security of supply and decarbonisation, we must always keep the people across the country who are struggling to meet energy bills at the forefront of our minds. The issue is not about a small number of people in fuel poverty, because it affects families and businesses up and down the country. Too often, in some of our discussions, we overlook the impact on consumers. We must ensure that we do not do that when reforming the electricity market and as the Bill progresses in the next Session.
The Minister of State, Department of Energy and Climate Change (Charles Hendry)
We have had an interesting debate. This is one of the rare occasions where one can say that we should have had more time to have a debate on energy; we would happily fill a much longer time scale. That says a great deal about the complexity of the issues, the knowledge of many Members on both sides of the House and our joint determination to try to reach the right conclusions.
Mr Dai Havard (in the Chair)
At one point, Minister, I seemed to have managed to stop time, but I cannot stretch time. Carry on.
Charles Hendry
I know that you, Mr Havard, are capable of so many miracles and magical things that we thought that nothing was beyond your capabilities.
The hon. Member for Brent North (Barry Gardiner) made an interesting comparison to a Rubik’s cube, but I think of the issue as more of a complicated jigsaw. With a Rubik’s cube one makes a move and moves everything else out of place, whereas with a jigsaw, one gradually puts in place the elements that build up the whole picture. One has to do that in a structured and sensible way, because some parts are more complicated than others. Nevertheless, we are keen to take forward the challenge.
What we are about here is securing £110 billion of investment over this decade. The £200 billion includes investment in gas infrastructure, the wires and the pipes, but it is still an enormous investment. It is twice the rate of investment every year of this decade than has happened in the past decade. We need to recognise that the old market structure did not bring forward the necessary investment—it sweated assets to try to keep costs down—and could not price in the cost of carbon, which is one of the big issues that we have had to address. Therefore, I do not see market reform as being about subsidising nuclear, but about how we make all forms of low carbon feasible, affordable and economically attractive.
The Chair of the Select Committee on Energy and Climate Change, my hon. Friend the Member for South Suffolk (Mr Yeo), asked a number of questions when introducing the debate—it was like a bullet train going through the energy terrain. A comprehensive range of issues and questions were raised. He asked how much investment we have seen in the past year. Just in the renewables sector, in six weeks between 1 September and early October, we saw £800 million of new investment, offering nearly 2,000 new jobs, and we expect that to pick up. However, he has had to accept that much of the investment is lumpy—a nuclear power station needs £5 billion or £6 billion of investment, and an offshore wind farm needs billions of pounds of investment. Therefore, there will not be a straightforward progression to 2020, but we will have big steps up over time. We are quite clear that without the measures we are putting in place, it will not be achievable.
My hon. Friend also asked why we had not gone for a target such as 50 grams per kilowatt-hour for the electricity sector by 2030. We will set out our formal response to the Energy and Climate Change Committee later in the year. We recognise, through the work that we have done, that there are a number of ways to reach our 2050 requirement, which is that we need to have reduced our carbon emissions by 80%. There is not just one way to do that, and we need to look at what is the best way. At the end of the day, we need to do it in a way that is cheapest for consumers. A common theme in this brief debate has been to ask how we deliver that in a way that will protect consumers, both industrial consumers and people in their own homes.
We have covered a number of measures regarding market reform, and I want to address each of them briefly. We have adopted a system of feed-in tariffs with contracts for difference, because we believe that that is the best way of getting the best deal for consumers and giving the greatest certainty to investors. By clawing back when the wholesale price is high and paying more when it is low, the system is more predictable, and it is easier to bring in investors from outside.
One of the things that Mr Atherton from Citi, who has been referred to, has not fully taken account of is that we are trying to take the system closer to a regulated rate of return. Many institutional investors, such as sovereign wealth funds around the world, are now looking at the opportunities to invest in the UK energy sector precisely because of the structure that is being put in place and the fact that we think that the CFD mechanism delivers the policy more securely than any other mechanism.
My hon. Friend the Member for South Suffolk asked us not to tinker with the policy as it progresses. The history of previous Energy Ministers suggests that I will most certainly be long gone by the time anyone gets a chance to tinker, but if I am still in the position at the time, I guarantee to him that the whole system is designed to stop tinkering. It is not just an agreement or Government policy, but a long-term contract that tells investors over 20, 30 and more years how much they will be paid for each unit of electricity generated by a certain technology. That means that we need to build a system that is as close to automatic as possible in order to recognise how the costs are coming down, so that new entrants coming in beyond a certain point understand how they will be remunerated in the process. The policy will also deliver investment, particularly in renewable energy, at a cost lower than that of the existing renewable obligation. As the policy supports all low-carbon technologies, it will make a greater contribution to our decarbonisation targets than is otherwise possible.
The discussions, particularly my hon. Friend’s remarks, also focused on the emissions performance standard. My intention with such a standard will be to give a long-term signal for what we believe is acceptable and to start to set out how that degression might take place when it is considered. Above all, it has to be a driver for investment. It is easy to set it in place in a way that kills off investment decisions. How we have done it, which is to say that it will not be reconsidered before 2015 and that investments happening before that will have perhaps 20 years of assured production on a certain emissions level, will strike the right balance.
I was intrigued by the comments my hon. Friend the Member for South Suffolk made in the earlier part of the debate. He sees the role for shale gas as having been underestimated. He said that we should be having much more shale gas and gas in general in the mix, with perhaps less energy from renewables, offset by the structure that he was calling for in the second part of the debate, which would be subject to an emissions performance standard. We will not get the investment that he wants to see in new gas generation if there is a much tighter emissions performance standard biting at an earlier stage on gas generation.
We have also said that the capacity mechanism should be part of this process, because we recognise that we need to know exactly how we will keep the lights on at all times of the year, as well as ensuring that there is back-up capacity and, critically, building in that demand-side response, to see whether we can find cleverer ways of dealing with this than building new power stations that will only be used for a small part of the year. If we can find ways of taking demand out of the system during times of particular demand, it will be a big gain for the consumer and save £1 billion on new plant. Clearly, whether that is a new plant or an old plant going for a few hours a day will depend on how that capacity mechanism is structured. We are determined, however, that that demand-side response element should be part of the structure as well.
The final element of the package is the carbon floor price. The carbon floor price is important for giving investors confidence. Currently, if one looks at the history of the European emissions trading scheme, it has been impossible to guess where it will be in a few months’ time, let alone in nine years’ time. The people who are making investment decisions that will not come to fruition until the end of the decade need greater clarity. Putting in place a carbon floor price is all part of that process.
The trajectory that we have taken is to show them that we are serious. If we had said, “Yes, there will be a carbon floor price, and it will be introduced by the next Government after the next election, at a level to be established,” nobody would have taken that seriously. The way in which that has been done shows a much greater commitment to giving the industry the clarity that is necessary. A measure of success in this will be whether we can bring new entrants into the market. Improved liquidity will be one of the benchmarks by which we can test whether market reform is working. Undoubtedly, we want to see more liquidity and more players. That is primarily the responsibility of Ofgem, and we know that Ofgem will look at this further if that proves to be necessary. The Government have said that they will act, if necessary, to address those structural barriers.
My final point is on fuel poverty and feed-in tariffs. One cannot, on the one hand, talk about concern for those suffering from higher fuel bills and, on the other, baulk at every measure that is designed to take pressure off their bills. The cost of solar technology has come down by around half since 2008. Degression was always built into it, from the very first brochure, signed off by the right hon. Member for Doncaster North (Edward Miliband), who is now the leader of the Labour party. He said that degression should be part of that process. As the prices have gone down much faster than anyone anticipated, it was right to do that. We know that a domestic installation can be done in a few weeks and had we not acted quickly—if it had been announced that it will come into place in the spring—there would have been a complete explosion in demand and installations, which would have completely destroyed the budget that has been set for this and led to the complete collapse of the industry, because anything after that would have been much more draconian.
Charles Hendry
I fear that this is not an integral part of the debate on market reform and, while I want to respond to the hon. Member for Brent North, we owe it to the Chair of the Select Committee to give him time to come back.
I do not think that, on the one hand, someone can argue on fuel poverty that they want to take pressure off consumers while, on the other hand, opposing the decisions we take to help consumers, such as the billions of pounds taken off the feed-in tariff costs out to 2020. It is not possible to do both.
Charles Hendry
I am not going to give way, because I want to give time to the Select Committee Chair. I have spoken for less time than the hon. Member for Brent North, so I hope that he will understand if I do not give way. I am grateful for the advice and input of the Select Committee, and I hope that we can put in place a structure that recognises the scale of the challenge, the need to decarbonise and the need to rebuild our energy infrastructure, while doing it at the lowest cost to consumers.
Mr Yeo
With your permission, Mr Havard, I will comment briefly on what has been said. As the Minister has said, it has been another debate that could easily have gone on for longer, which is a tribute to the well-informed contributions. I want to thank my Select Committee colleagues, the hon. Members for Southampton, Test (Dr Whitehead) and for Brent North (Barry Gardiner), who have made useful comments this afternoon. They are also both exceptionally knowledgeable and experienced in these issues. As far as I am concerned, it makes the work of the Committee a pleasure, as well as often being intellectually stimulating. I think that we can continue to prosper together in addressing these issues.
I was also grateful to my hon. Friend the Member for Warrington South (David Mowat) for mentioning the position of energy-intensive industries, which is a real issue. I know that Ministers have confirmed on this and other occasions that it is very much in their minds. One of the things that we do not want to do in our determination to make Britain one of the leaders in moving towards a lower carbon economy is to destroy the competitive position of successful British businesses. That is a tricky balance to strike, and it will need continued attention.
Many points have been raised, and I will not comment on them all. I fully accept what the Minister has said about the potential conflict between a long-term tightening emissions performance standard and my suggestion that we might see significant investment in gas-fired capacity in the short term. We have to find a way of doing that. Obviously, emissions performance standards, which are applied on a per plant basis, would run into that conflict. If the emissions performance standard was applied to a country’s whole portfolio of generating capacity, that might offer the chance for a mix. It might also be an incentive for some companies that wanted to expand their gas-fired capacity to invest in some low-carbon alternatives. There needs to be a bit of imagination applied to how the EPSs could operate in this way, without ruling out the prospect in the near term of some new investment in gas. Of course, the pre-2015 investments will, in any case, be grandfathered for a sufficiently long period for investors to have a return.
I was glad that the Minister confirmed that the Government are keen to see barriers to entry in the market minimised. That is a work in progress. We have to see how Ofgem’s measures apply and whether they are successful. If they are not, we will have to return to that issue urgently, because it is one of the real difficulties, which has blind consequences for consumers as well.
I accept the Minister’s concern about the impact on consumer prices of the cost of various forms of incentive for low-carbon energy. Again, there is a trade-off that we have to reach the right judgment about. We all want to see a substantial, rapid increase in low-carbon electricity generation, but many of those low-carbon technologies require an incentive, which will be either at the cost of taxpayers or, in the present situation, consumers. Those categories are ones that in any case largely overlap.
I want to congratulate the Minister. He has displayed a remarkable grasp of very complex issues in his period as Minister. It is a pleasure to have him before the Select Committee and to hear him on other occasions in the House. He has a real grip, and we get thoughtful and well-informed responses to the questions that we put to him. For that reason, I hope that he will remain in his job for much longer than most of his predecessors, perhaps indeed for the rest of this Parliament. That will enable the Committee to go on engaging with him and means that we can hold him to account for some of the things that he is telling us now in three and a half years’ time.
I am grateful to everyone who has taken part this afternoon. I hope that we have a chance to return to these issues either on the Floor of the House or in another debate in Westminster Hall.
Question put and agreed to.