The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)
My Lords, this Energy Bill comes at a critical time for the country. Electricity demand is expected to double over the next 40 years, but around a fifth of the generation capacity that was available to us in 2011 is set to close over the coming decade, because power plants are either too old or too polluting. At the same time, we need to meet our obligations to reduce carbon emissions, as agreed in the ground-breaking, cross-party Climate Change Act 2008.
To achieve both security of supply and decarbonisation, we need to attract substantial investment in our energy infrastructure, particularly in low-carbon technology such as renewables, nuclear and low-carbon fossil fuels such as gas. We need to do this at a price that consumers can afford by helping to keep costs as low as practical and making sure that the market works for the people who pay the bills.
The Energy Bill will enable us to do this. It is a Bill for growth, and one that will support as many as 250,000 jobs in the energy sector alone. It will provide the security of energy supply that British consumers need. It will help to reduce electricity demand and to deliver affordable energy for consumers, with fewer, simpler domestic tariffs. It will ensure that we meet the ambitious climate and renewable targets set out in the Climate Change Act 2008, enabling the Government to set the world’s first legally binding target range for power-sector decarbonisation.
The Bill received strong support at Third Reading in the other place, commanding the largest majority in a vote at Commons Third Readings since the coalition came to power. This sends a clear message to investors, building confidence in the financial, legal and, importantly, political frameworks of electricity market reform. I hope that we can express an equally strong consensus in this House, sending the message that the whole of Parliament is united behind the Bill.
I extend my gratitude to the noble Lord, Lord Oxburgh, for his expert chairmanship of the Lords informal scrutiny group, which reconvened this year. I am extremely grateful to noble Lords who have attended the group’s meetings and contributed so eloquently, and to other noble Lords who met me separately. I look forward to their continued engagement in debates over the course of the Bill.
Let me turn to some key provisions in the Bill. Today, I want to set out the main proposals in the following areas. First, on decarbonisation, we are bound by law to cut emissions across the whole UK economy by 50% by 2025. The Energy Bill will help us to achieve this. The contracts for difference framework will offer long-term contracts for low-carbon technologies, giving investors confidence, and will enable renewables, nuclear and carbon capture and storage the chance to compete against conventional power stations. Importantly, this will be backed by the tripling in support for clean energy technologies by 2020.
We know that there are differing views in the setting of a 2030 decarbonisation target range for the power sector, and I would like to explain the Government’s position. By legislating now to enable us to set a decarbonisation target in 2016, we will be able to take into account the level of economy-wide emissions reductions that will have to be achieved by 2030 under the fifth carbon budget. We want to ensure that we are considering the pathway of the whole economy towards our 2050 target, rather than setting a sector-specific target in isolation, making sure that we minimise costs to both the economy as a whole and the bill payer.
We have also committed to providing further clarity up to 2030 by issuing guidance to National Grid on an indicative range of decarbonisation scenarios for the power sector to 2030, consistent with the least- cost approach to achieving our overall 2050 carbon target. No other country has yet set a power-sector decarbonisation target for 2030; the UK is the world leader.
This is not the only way in which we are leading. The Government’s decision on the UK’s position for the EU’s 2030 greenhouse gas target is another good example of our strong position. In arguing for a 50% reduction target in the EU, the UK has taken the most ambitious position of any member state. It is therefore important that we consider the wider European context as well as the level of UK economy-wide emission reductions to ensure that we do not pre-empt decision-making and agreements in the EU. However, it is important that we continue to take a leading role in that process and push for change, which we are doing. This Government are leading the way on climate change action.
Let me turn now to the proposals for electricity market reform. Electricity market reform is not a permanent intervention in the market. It is designed as the first step on the path towards sustainable and competitive low-carbon electricity generation in the UK. It will help to limit, and in the long term break, our dependency on rising gas prices globally, the main driver of increases in electricity bills.
We will send out a clear signal to investors that the UK is open for business, attracting the £110 billion investment that we need in this decade alone to replace our ageing energy infrastructure with a more diverse and low-carbon energy mix. The levy-controlled framework will provide £7.6 billion a year by 2020 to support low-carbon technologies, including infrastructure projects that are ready to go now.
The introduction of provisions for contracts for difference and a capacity market will transform the energy market to give investors the certainty they need. I will therefore spend a little time outlining how these important mechanisms will operate. First, the contracts for difference—CFDs—will give long-term electricity price stability, providing developers and investors with increased revenue certainty. Generators will receive a fixed price level—or strike price—for the low-carbon electricity they produce. When the market reference price is below the strike price, the generator will receive a top-up payment from suppliers. When it is above the strike price, the generator must pay back the difference, meaning that consumers are protected.
The Government listened to points made in Commons Committee regarding the nature of the CFD counterparty and in response clarified the drafting of the Bill at the Commons Report stage, making the policy intention of creating a single counterparty more explicit. The government-appointed single counterparty to these contracts will sign and manage the contracts over their lifetime and collect money from suppliers to meet the payments due to generators under the contract. Subject to Royal Assent, we intend to publish final strike prices for renewable projects in December 2013 and to issue the first contracts for difference in 2014. I know there have been calls to see the draft strike prices sooner and I am pleased to say that the Government intend to publish the draft EMR delivery plan in July.
The Bill also introduces provisions for a capacity market to ensure that there is sufficient reliable electricity capacity to meet peak demand. This will provide all capacity providers with an upfront steady payment to ensure that demand is met. Operators will not be dependent on volatile revenue from the energy-only market and consumers will be safe in the knowledge that there is a secure energy supply. At the Report stage in the Commons, we introduced provisions to enable electricity demand reduction to be part of the proposed capacity market, as well as the powers to take forward a pilot. Greater energy efficiency will help to reduce our carbon emissions, help to reduce demand at peak times—bolstering our security of supply —and help to reduce consumer bills.
The electricity demand reduction provisions in this Bill will incentivise the industry to deliver these benefits. Working through the capacity market will allow energy-saving projects to compete with power stations for new investment for the very first time. The Bill can incentivise permanent reductions when demand is at its peak, allowing for a more direct trade-off between generation capacity and demand reduction. It will also bring permanent demand-reduction projects into the same mechanism as shorter-term demand-side response measures to enable more effective, joined-up delivery.
In order to guarantee certainty for investors and industry, these new EMR mechanisms—contracts for difference and the capacity market—will be supported by a clear institutional framework. The Government will maintain responsibility for key policy decisions on contracts for difference, such as strike prices and on the capacity market, taking wider economic and sustainability impacts into account. We believe that the system operator, National Grid, is best placed to administer the capacity market and allocate contracts for difference, given its existing role and expertise in the UK energy market.
In response to stakeholder concerns, last year we worked with Ofgem to assess any potential conflicts of interest and published our findings in April. The report sets out that the risk of any conflicts of interest arising is low, but we have proposed a package of proportionate measures to ensure stakeholder confidence in the EMR delivery body. Ofgem will oversee the performance of the system operator and will continue its independent regulation of the market to protect the interests of consumers.
We are committed to helping independent generators secure a bankable route to market for their power as part of our wider goal of increasing competition in the electricity market. We understand that lack of liquidity is an issue for independent generators and suppliers, particularly in the forward markets. We recognise that improving liquidity would reduce barriers to entry, aid security of supply and increase the robustness of the reference price for CFDs. We support Ofgem’s objectives for reforms to the wholesale electricity market and we welcome the announcement last week of the measures it intends to pursue. However, given the importance of the issue and in the absence of significant improvements, government intervention may be necessary, and accordingly, we are proposing backstop powers in the Energy Bill to promote market liquidity. The Bill also includes powers to intervene to support investment by improving the route to market for independent generators for the sale of electricity. Although the CFD will reduce the risk for independent generators, we believe that it is important to be able to act if necessary.
We remain committed to encouraging a more diverse and competitive energy market and there are a number of related areas within the Bill that we will hope to consider further. They include giving greater certainty to independent renewable generators and, as indicated at Commons Report, we will continue actively to consider raising the threshold for the small-scale feed-in tariff scheme from 5 megawatts to 10 megawatts.
The support for electricity market reform seen at Commons Third Reading has been echoed by industry and the investment community. While we are advancing our reforms, we want to ensure that investment decisions are not postponed in the mean time. The Bill enables the Government to enter into investment contracts—an early form of contract for difference—with developers of low-carbon generation. These will be transferred to the CFD counterparty once it is established and regulations to collect payments from suppliers are in force.
The Bill also includes transitional arrangements for renewables as we introduce the contracts for difference in 2014. During the transition period between the introduction of the CFD and the closure of the renewables obligation, we will allow new generation to make a one-off choice between the two mechanisms in order to minimise any hiatus in renewables investment. For existing generation, the Bill contains measures to give confidence to generators during the final years of the renewables obligation. Fixed-price certificates will be issued in place of the current renewables obligation certificates and there will be an obligation on the purchasing body to purchase those certificates at a fixed price.
The emissions performance standard is an important supporting measure of EMR, providing a regulatory backstop on the amount of emissions that new fossil fuel power stations are allowed. The EPS reinforces our planning policy that any new coal-fired power station must be equipped with carbon capture and storage. The Bill sets out the statutory emissions limit at 450 grams of carbon dioxide per kilowatt hour—about half the level of emissions from unabated coal plant. The level is above that associated with new gas plant, as we recognise the role that it will have in providing reliable and flexible back-up generation as we transition to a low-carbon electricity system. Further certainty for new investors in gas is also given through the grandfathering of the limit to 2045.
In the light of our review of the role of Ofgem, the independent regulator, we are introducing a statutory strategy and policy statement. This will provide greater clarity and certainty about the strategic context of Ofgem’s role and clarify the demarcations between the roles of the Government, the regulator and other bodies. The Bill will further empower Ofgem to require energy companies to compensate consumers who suffer a loss as a result of a company’s breach of regulatory requirements. At present, Ofgem has the power to fine companies, but these fines are paid into the Consolidated Fund, so the consumer will not directly benefit unless the company offers redress of its own volition. Currently, Ofgem has no power to compel energy companies to compensate consumers. We are rectifying this situation through the Bill and securing a fairer deal for customers with provisions for a new enforcement power for Ofgem to require energy companies to provide redress.
We are also giving legal backing to Ofgem’s plans to ensure that consumers get the best deal by making the tariff system simpler and clearer for consumers. Our measures will help customers get the best deal by cutting the confusing array of tariffs by limiting suppliers to offering customers four core tariffs for each fuel and meter type, providing them with clear information about their tariffs to help them to make a more informed choice, putting them on the cheapest tariff in line with their preferences, and promoting competition by creating a market where suppliers are working hard to attract and keep their customers.
A range of other measures in the Bill deserve more attention than I can give them in the time available. Notably, they include measures to establish the Office for Nuclear Regulation as an independent statutory body with financial and organisational flexibility. There are also measures to allow the sale of the government pipeline and storage system and to enable offshore generators to build and test transmission assets for exporting their power with confidence that they are acting within the law. The Bill also contains two minor provisions regarding fees.
As I stated at the beginning of my address, this Bill arrives from the other place with overwhelming cross-party support. I look forward to a swift passage through this House to enable these important and urgent measures to pass into law and bring about a transformation of our electricity market. We are charged with a great responsibility to ensure the security and affordability of energy for many generations to come. Nevertheless, we are also presented with a significant opportunity to help Britain’s economic recovery through the creation of jobs and the delivery of a more stable and predictable energy market, as well as reinforcing our position as a world leader in tackling climate change. With that in mind, I commend this Bill to the House.
Baroness Worthington
My Lords, I thank the Minister for addressing us today and for introducing the Second Reading of the Energy Bill. I have been working in climate and energy policy for well over a decade—at UK and EU level. Energy is a fascinating subject. Much like the Mandelbrot set, its many layers of complexity seem completely endless. I keep uncovering whole new areas of mind-bending detail to get my head around, most recently in relation to nuclear fusion after an engrossing visit to Culham in Oxfordshire.
I have studied energy policy in a number of different roles: for an environmental NGO, for a power company, and as a civil servant. Over the years, I have come to the firm conclusion that energy policy is an area where we need the creativity and drive of markets governed by careful and well-designed regulation to guide market forces. What we do not want is for energy to become a political football, confusing and destabilising the market. We also do not want civil servants trying to second-guess what an economically optimised energy system should look like. Sadly, we begin this discussion of the Energy Bill with exactly those two sets of circumstances dominating—policy is becoming highly politicised and civil servants are set to start micromanaging almost every aspect.
There is a public spat going on between two different factions of the coalition Government, between those who believe that climate change is either not real, or that tackling it is too expensive to be bothered about, and those who believe that the vast majority of scientists are correct and that we have a moral duty to do something urgently to address the problem in ways that boost rather than damage the economy. The schism is so apparent that our new part-time Energy Minister, Michael Fallon, in an interview with The House magazine, refused to answer a simple question about his views on climate change, dismissing it as “theology”. There is a moral aspect to climate change and we will hear today from two eminent theologians. However, I have met many climate scientists, most recently the noted Oxford academic Myles Allen. Theirs is not a profession of faith or belief, but the careful study of facts and evidence and the articulation of future scenarios that accord with those facts.
Here are a few of them. The concentrations of carbon in the atmosphere, at around 400 parts per million, are higher than at any other time over the past 3 million years. Already our world has warmed on average by 0.8 degrees since the 1900s. A global average of this much equates to far higher levels of warming at the poles. The impacts of these levels, on, for example, the melting of the arctic sea ice, match the most pessimistic forecasts. They are happening at the fastest rate that has been predicted. Land-based temperature recordings, which some may cite today as evidence that we do not need to act, have levelled off for the best part of the past decade. However, ocean temperatures have not. The ocean is likely to dump part of its increased heat out on to land during the next large El Nino effect, which has occurred roughly once every decade and which could happen again at any time. Then land-based temperatures will once again rise. It would be reckless and arrogant for this Government—or indeed this Parliament—to ignore the scientific evidence and to try to change direction in terms of what is one of the over-ridingly important goals of energy policy today.
This is not a Bill solely about climate change; it is a Bill about our energy future. It is about how we maintain our energy security, now that North Sea oil and gas, just four decades after their discovery, are now rapidly declining. It is about the role nuclear power can play in the future and how confidence in the industry can be restored today. It should also be, first and foremost, about consumers and helping to ensure that they are protected through regulation that maximises competition and transparency in the market.
In addressing the trilemma of energy policy—how to keep the lights on without destroying our environment but making sure we can afford it—the Government could do one of two things. They could set clearly defined outcomes that the market must deliver or attempt to renationalise energy policy with almost every aspect dictated by government. Strange though it may sound coming from a Labour Front Bench, I strongly believe that it is the former we must do and that this Government are about to do the latter.
The Bill as it stands is a curious mixture of excessively wide enabling powers that enable the Secretary of State to do virtually anything he or she wants with anyone, at any price; or, if he or she so chooses, to do absolutely nothing. If this were not political enough, there are now some extra provisions to allow for even more finely grained politicisation. Targets can be set for particular technologies and for particular geographic locations. If you do not like wind farms, you can either ensure that the negotiations on the contracts are so protracted that they never get signed or, it seems, and to be on the safe side, set targets determining where they will or will not be accepted.
In terms of restrictive detail, when the powers to be taken are not enabling, they are disabling. The Secretary of State must not set a decarbonisation target until at least 2016, while the energy performance standard levels are fixed until at least 2044. The mix of sweeping generalisations with occasional restrictive detail results in an inelegant and potentially dangerous Bill, for which it is impossible to predict all the consequences, intended and unintended.
As the Government cannot agree on the overall purpose of this Bill, they have been incapable of presenting clear and concise legislation that can guide the market. They propose instead to take the reins of almost every aspect of investment decisions in the coming years. My great fear is that those seeking to take control are not up to the task. I imagine that the department is now realising, as I have, that the energy market is so complex that a single Secretary of State, overseeing a small department with a small number of civil servants, who are necessarily divorced from the real world, cannot and should not be deciding who builds what, when and on what terms—even if they enjoy the oversight of the great minds of the Treasury. The question I am sure that your Lordships are all formulating is: if this is the case, what would Labour do differently?
First, we would be unequivocal about the fact that, in keeping with the advice of the Committee on Climate Change, we would seek to decarbonise the electricity generation sector within the next two decades. We would set clear targets to achieve that outcome—targets that we know have the support of industry and civil society. Such targets need not dictate precisely how this outcome is achieved but give the market confidence that this is the path we are on and that we intend to stick to it. Secondly, to keep prices affordable, we would legislate to require greater liquidity and competition in electricity generation and create a new energy regulator with real teeth. Thirdly, to keep the lights on, we would focus on providing incentives to encourage more active participation in the management of demand, reducing peak demand and helping to soak up excess electricity in times of high supply. If necessary, we would also take powers to enable interventions that support National Grid in managing supply and demand.
That is what we would have done; it is not what the Government are doing. This is primarily because the impetus for this Bill was not to solve the energy trilemma. It was to provide EDF Energy with what it believed it needed in order to build Hinkley Point power station. Having decided on that outcome, the department has now had to concoct ever more complex layers of interventions to try to square the reality of the privatised market and state aid rules. A new reactor at Hinkley, if it can be delivered at reasonable cost, is a good idea. I am not disputing that. I am, however, deeply concerned about the contortions and complexities we are now having to add to an already complicated market in order to lure one company into building one project—a project that will not be ready until the middle of the next decade and that cannot help to address any security of supply concerns in the interim.
In an ideal world we would not be starting from here, but here we are and we must make the best of it. During the Commons stages we raised other important issues that we will continue to press in this House, such as the need to ensure adequate competition in the generation market so that independent generators can gain access. I was encouraged to hear the words of the noble Baroness today in that respect. We need to encourage community ownership of energy projects, which I am again very grateful for having received mention today. We also need much clearer regulation of existing fossil fuel stations, giving clarity about their closure schedule to spur investment in carbon capture and storage.
The irony is that this Energy Bill has helped to exacerbate the investment hiatus that the Government have created and that they should have been seeking to address. If, in the future, the Government will be paying everyone to build or operate plant then no company can risk moving ahead with plans until the details of these payments are clear. As a result, investment in our energy infrastructure has plummeted under this Government. This cannot be allowed to continue and Royal Assent must be achieved by the end of this year.
Let us aspire to signing into law something that creates stability in the market, so that we can stop the almost yearly cycle of energy Bills appearing before us and investors can get on with the job of addressing the challenges now inherent in providing us with energy. As we come to consider this Bill in Committee, some of the much sought-after detail should emerge from the department and we will be in a much better place to try to assess the impact of its many provisions in totality. The draft delivery plan, for instance, which is due to be published in mid-July, will include more details of strike prices for renewables, though regrettably not for nuclear or CCS, and much needed information about the Treasury’s levy control framework which will interact with provisions in the Bill in a very important way. It may sound like a lot of money but unless anyone wants to invest it will merely be a promissory note that actually may restrict investment in certain sectors and technologies.
I hope the Minister will agree that the more detail we have in front of us the better placed we will be to provide proper input. Can she give us an assurance that the department will release further information in good time so that it will inform our discussions? I am hopeful that we might be able to agree to consider relevant clauses in the Bill at the end of Committee stage rather than at the beginning. This will enable us to consider those clauses with the information in the draft delivery plan in front of us. This puts a lot of emphasis on to the department issuing its information before the Commons rises on 18 July. I hope that that will be in the public domain before 18 July.
There are things we do not like in the Bill, things we would have done differently, and things we would like to have seen given a higher priority; but we are not opposed to the broad objectives. Although lots of the detail is still missing, we are committed to restarting and increasing investment in low-carbon generation and, on those grounds, we do not seek to oppose the Bill.
We will have an excellent debate today. I am greatly looking forward to the contributions of noble Lords from whom we will have the pleasure of hearing. The number of speakers and the breadth and depth of their knowledge and experience is testament to the central importance of this issue. I am honoured to be a Member of this House and to be leading for the Opposition as we embark on the process of doing what we do best—scrutinising legislation in an environment at one remove from the cut and thrust of daily politics. In this House, we are able to take a long view and to take the necessary time to prevent poorly thought-through plans being pushed through and that is what we will do. We will seek to work constructively to improve the Bill. I very much look forward to the weeks and months ahead as we turn our attentions to this most important of subjects.
Lord Teverson
My Lords, I thank my noble friend the Minister for all the work that she, together with the noble Lord, Lord Oxburgh, has undertaken in preparing us for the moment when the Bill finally arrives in this House, and for all the teach-ins and the work that we have had to get here. One of the things that strikes me most is how great it is that this Bill has arrived. It was December 2010 when the original consultation paper on electricity market reform was published. Over the two and a half years since then, queues of industry suppliers, generators, NGOs and trade associations have tried to bend the ears of a large number of Members of the House to give us their views on this very complex legislation. We are here, and we can start this process in the Lords.
The reasons why this Bill is here are important, and they are important to go through. They include the future capacity to generate electricity for our economy and our homes and the security of supply, which is made more difficult by our own resources running out within our own geographical area. They also include keeping down costs. So often you hear about the subsidies for green energy adding to costs, yet we know that over the years 2004-12 the price of gas for households doubled from £400 to £800, and that was a sector that had no levy control framework. Electricity also went up by a huge amount, although by much less than gas, because of fossil fuels.
It is very difficult to see the future, but I am certain that with renewable energy, and in the longer term maybe even with new nuclear, with its low marginal fuel costs—zero, in fact, for wind and solar—we will ensure that our prices are far less dependent on unpredictable and expensive fossil fuels in future. The Department of Energy and Climate Change suggests that by 2020 energy prices will be just under £100 less than they would have been afterwards. To me, given the past performance of energy prices, that is absolutely credible because it is based on historical evidence. That is important for us to understand.
The real issue of the Bill is climate change. I congratulate the noble Baroness, Lady Worthington, on her description and her attack in that area. She is right that a major part of the Bill is to ensure that our electricity supply industry is not dependent on unabated fossil fuels into the distant future. It is of great concern to me that it is often not realised more broadly that coal now produces 42% of our energy generation. Once again it has replaced gas as the major fuel for electricity generation, yet it is a fuel that produces something like double the carbon emissions for every unit of energy than the cleanest gas generation. We have gone through the limit of 400 parts per million of carbon dioxide in the atmosphere and, as the noble Baroness well described, we still have all the symptoms of climate change, whether that be rising ocean levels at 3 millimetres a year, shrinking icecaps or retreating glaciers—not all of them, but the vast majority.
Let us look at the debates that there will be on decarbonisation and decarbonisation targets. I welcome the fact that there is provision in the Bill for a decarbonisation target. That was not there in the original draft Bill; it has been added. As for whether the year should be 2014 or 2016, maybe we are moving towards theology there.
Two of the things that are repeatedly mentioned to me are the risk of investment in the industry and future generating capacity. We know that the whole industry will look for less and less risk, and indeed those who provide finance will do the same in order to protect their investments, so, whatever they are given, I am sure they will ask for more. I spent a lot of years in the private sector, so I can ask what other industry is given a guaranteed price, index-linked, over several decades. No other industry gets anything like that—it would be heaven on earth for most industrialists—yet that is what we are offering electricity generators as part of the Bill. Frankly, you can start to become a little too greedy about the risk that you want to reduce if you go beyond that level.
I will come back to the agreements in that area. I see a tension within the Government. We have a £7.6 billion levy control framework commitment. That is a great win. It is substantial and it will ensure that in practice a low-carbon economy and a low-carbon network can actually be delivered.
Having said that, I feel that there are certain things in this Bill that still need to be done. I am sure that the Minister will agree with me on the vast majority of these. As for demand management, I suspect that this Bill was originally drafted by DECC officials who love shiny new power plants that impress their friends, look good when built and are great for press releases. However, we do not have such a demand. The UK electricity industry operates, on average, at 50% utilisation of capacity. To me, that is not good enough. We need to look at the demand side as well as the supply. I very much welcome the Secretary of State bringing forward demand-side factors into the capacity market, and hopefully beyond that broader demand reduction. I know that we will flesh out some of those opportunities in Committee. I welcome the Government’s very strong move in that area.
On emission performance standards, I am not quite so confident about the long-term nature of grandfather rights. I also question, and want to explore in Committee, whether there is still opportunity for coal to continue long term as a generating source of electricity under the Bill in its current state. Coal is so much cheaper at the moment, largely because of changes in the United States, along with other factors, that it may still be commercially possible to generate long term by paying the carbon floor price and re-engineering plants so that they are able to stop their sulphur emissions. I am not sure whether that is possible in this Bill as it stands, but I want to make sure that it is not. We need to take coal out of the generating system.
The other area, which I am sure Members from all around the House will be particularly concerned about, is the route to market for smaller producers. If there is one thing about the energy market that is similar to banking, it is its oligopolistic nature. That is what makes some of the strike price negotiations difficult. We need to ensure that the smaller producers, and indeed the smaller suppliers, within the market are able to have much greater access to a greater share of that pie. It is through that competition that we will ensure that price increases are far less than they have been in the past.
There is one last thing. One of the unsung things in the energy market is licence lite, which is being explored by the Greater London Authority. It is about small independent producers, in particular community schemes, being able to supply directly through local networks to final consumers at a consumer price, thus not needing subsidy for that energy. I would like to explore how that great initiative—unsung by DECC, I think—can be expanded more quickly and effectively throughout the United Kingdom.
As I said earlier, it was 2010 when the initial consultation document was produced. We need now to make sure that this Bill gets through this House, gets through it on time and lands on the statute book, so that those investors, however nervous, can invest.
Lord Oxburgh
My Lords, I declare an interest as honorary president of the Carbon Capture and Storage Association and a director of 2OC. I shall confine my remarks to electricity market reform or EMR.
National Grid figures show that unless new power stations are built by 2015, we shall be more vulnerable to loss of supply than we have ever been. To give an example, if in 2015, at a time of high demand, three power stations were to drop out unexpectedly—as they did three weeks ago—we shall be into rolling blackouts. The situation is serious.
Why are no new power stations being built? Everyone has known for a long time that the electricity market would have to be reformed. Potential investors are simply holding back until they know more about the market into which they will have to sell their electricity. The main aim of EMR is to use market mechanisms to achieve a secure, decarbonised electricity supply at the lowest possible cost. That might have been possible if this Bill had been presented two or three years ago. Then there would have been time for the contracts for difference and the capacity payments—central elements of the new market—to be thoroughly considered and properly auctioned. Today, Ministers make decisions by administrative means when they should have been the outcome of strategically planned competitions. These fundamental infrastructure decisions will determine how we generate electricity for decades to come and how much we pay for it. Nevertheless, recognising our present vulnerability, Ministers must move as fast as possible to seek bids for contracts to guarantee generating capacity. If they act rapidly, there should be just enough time to bring in new capacity for when it is needed.
What kind of electricity generation do we need? In this debate we shall certainly hear from proponents and opponents of different technologies, as if they alone could satisfy our requirements. There will be wind enthusiasts and wind-haters, and nuclear enthusiasts and nuclear-haters. In reality, every means of generation has its own cost structure and its own operational limitations that have to be taken into account in building a generation system.
For example, most of the cost for both nuclear and wind is fixed up front at the time of construction. Their costs of generation should therefore change little over time and they should offer something of a hedge against inflation. Both have low carbon footprints. However, the weakness of both is in their operational inflexibility. Nuclear is not able to ramp up and down fast enough to match the daily variation in demand, and wind is completely insensitive to demand. This is not fatal for either; it simply means that if they are used they have to be part of a system that takes advantage of their strengths and compensates for their weaknesses. By comparison, fossil fuel is dispatchable—it can be turned up or down relatively quickly to meet changes in demand. On the other hand, it is both exposed to the vagaries of international fuel prices and, unless abated by carbon capture and storage, carries a substantial carbon penalty. Other key elements of energy systems have their own costs and limitations.
The requirements of our system can be met in many ways with different technology combinations. However, the addition or removal of one component has consequences for all the others and for the system as a whole, including for transmission. A workable system will have a number of complementary elements that play different roles, add to its robustness through their diversity and have different implications for cost. With the powers that it is assuming in the Bill, central government takes full responsibility for the shape of our system. This is not necessarily bad, but we should certainly recognise that it is happening. The Government’s decisions over what CFDs and CPs to offer will determine whether we achieve an affordable and workable system that also meets its stated policy objectives. It is very easy to get this wrong.
What, therefore, needs to be done in this House? I emphasised at the outset that the highest priority must be to secure investment in new plant. Investors have choice over not only what kinds of project they invest in but in which country to do so. The Government’s stated strategy is to achieve a massive decarbonisation of UK electricity generation. In the short term, this is not the path of lowest cost. Given the long-term nature of energy investments, investors have to be confident that the Government will stick to this path and continue to reward low carbon in the future. For these reasons, the Government’s vigorous opposition to the cross-party amendment tabled in the other place, which would have included a reference to the 2030 emissions reduction target of the climate change committee, was particularly unhelpful. It has certainly been read externally as a weakening of government resolve. To make our energy system investable, we have to consider the reintroduction of that amendment in this House.
Secondly, we shall need to scrutinise the details of the CFDs and CPs, some of which have not yet been fully worked out. Consideration of the Bill in the other place had to be completed without this detail. The workings of the present electricity system are complex and in some respects less than transparent. We are promised more of this detail during the passage of the Bill through the House and this will need to be discussed as it becomes known. In parallel—as has been pointed out—there are important proposals from Ofgem for changes in regulating the market.
There are two important elements of any energy system on which the Bill is silent and which will have to be considered alongside the generation mix: namely, the interconnectors through which we can import and export electricity to our neighbours, which is always a possibility if we cannot generate ourselves; and secondly, our national provision for gas storage. This House has discussed gas storage on a number of occasions in the past, primarily in the context of security of supply in the face of declining North Sea production. We have noted that while our domestic gas storage is measured in days, our neighbours measure theirs in months. This concern has been alleviated—but only somewhat—by the construction of UK terminals to receive liquefied natural gas bought on the international market.
Today, however, storage can help UK consumers in another way. Storage would make it possible to buy gas in summer when prices are low and use it in winter when prices rise. This is a benefit primarily to consumers rather than suppliers. Suppliers simply pass on increased gas costs to the consumer, who has no choice but to pay them. The Government should carefully consider whether this potential consumer benefit can be captured, possibly by offering a capacity payment for gas supply at a guaranteed price and guaranteed time.
Finally, we also need to consider whether in future we can avoid the acute energy difficulties in which we now find ourselves. These are entirely attributable to successive Governments’ culpable neglect of energy and the absence of any overarching strategic energy policy. Energy capability and competence within the Civil Service was over the years run down. The responsibility for energy was shuffled between government departments, and folk memory and experience were largely lost. To make matters worse, ministerial appointments were treated in a similarly cavalier fashion, with few individuals in post long enough to shape policy. At a major energy conference in Oxford attended by several Members of this House a few weeks ago, one speaker asked,
“exactly who is to make and implement the key decisions? Government per se does not have the expertise”.
Those words received universal acclaim and a standing ovation.
Speaking in an earlier debate, I raised the possibility of establishing a senior expert advisory group within DECC that reported to Parliament and contained both internal and external members. The external members would have long tenure and provide both technical and commercial expertise, and would bring a strategic overview and degree of continuity that has been conspicuously lacking. I am consulting both inside and outside the House to see whether we can come up with any proposals that might ease the present situation, which is no longer acceptable.
I have already commented on some of the imperfections of this Bill, but we need it urgently. Our top priority must be to give investors the confidence to invest in power generation in the UK. Our longer-term objective must be to ensure that a situation such as we find ourselves in now does not arise again.
The Lord Bishop of London
My Lords, we have already heard several references to theology. I propose not to speak from a great altitude, but rather from the grassroots—although, as I worked my way through this hugely complex Bill, I found myself at times wondering whether it had been drafted for the sake of archangels in retreat. As speakers have remarked before, it is extraordinarily complex in parts. Our thanks to the Minister, the noble Baroness, Lady Verma, for the way in which she introduced the debate and for the courtesy which she has shown in making herself available for conversation with Members of the House in advance of this Second Reading. It is much appreciated.
Like previous speakers, I find that there are welcome proposals in this Bill that are urgently needed and address objectives that every Member of your Lordships’ House would surely support, including security of energy supply and its affordability, together with a reduction in carbon emissions.
I declare an interest as chairman of the somewhat ludicrously named Shrink the Footprint, which is the environment campaign of the Church of England, focused on our thousands of buildings with the support of tens of thousands of volunteers. I echo many of the points already made in this debate, but I shall not repeat them. At the same time, from a London perspective, with our growing population and increasing demand for electricity, which could be as much as 4% a year, I am also clear that the Mayor’s call for a change in the system which currently prevents distribution network operators from installing more capacity in the network without first receiving a formal request for a connection to the system from individual developers, deserves immediate and urgent attention.
In the limited time available, I want to focus on energy demand reduction, which an institution in our position has very much at heart. We have been exploring how to improve our own energy efficiency; there has been some success in my own diocese of London, where over a six-year period we have been able to save about 22% of our energy use. But like others, we need the help of government to achieve the next level. My question to the Minister is: will she undertake to amend Clause 37 to bring forward multiple pilot schemes for incentivising a reduction in energy demand, allowing not only for a capital market pilot but a premium payments pilot and enabling ordinary households as well as big business to be rewarded for demand reduction?
Earlier this year the right honourable Member the Prime Minister in a speech to the Royal Society said that,
“the economies in Europe that will prosper are those that are the greenest and the most energy-efficient. Energy consumption is set to grow by a third over the next two decades alone. And in a race for limited resources it is the energy-efficient that will win that race”.
Noble Lords will be aware that the Department of Energy and Climate Change launched a consultation in November last year, and a number of ideas for reducing energy demand emerged. But in the response to the consultation last month, the Government stated that, of all the various options, just one would be pursued, and a pilot was proposed. It is good news that a commitment to this pilot has been incorporated in the Bill at Clause 37, but despite widespread support in the consultation, the option of an incentive scheme available to anyone, including individuals, who deliver an approved level of energy efficiency, has been dismissed. It would be helpful if the Minister could explain why it is not possible to undertake multiple pilot schemes. Is it possible at this stage, or in Committee, to give some greater detail on the pilot that is proposed? How long it will last and how large will it be?
Reports from all over the country from people anxious to act in an environmentally responsible way detail the frustrations and complexity of the Green Deal. Will the Minister consider ways in which the Green Deal can be simplified and streamlined to improve take-up? For all its imperfections, this policy remains a potentially transformative long-term project, but it is so complex and paper heavy that it has resulted in only about 200 people to date accessing Green Deal finance.
Small to medium organisations, which include dioceses and individual churches, and faith communities of all kinds are finding the deal hard to implement, while it has also proved difficult for smaller independent companies and co-operatives to access the market. Here, I echo comments made by the noble Lord, Lord Teverson. On the point that he raised, I note that there is no specific mention of community energy in the Bill, although I was encouraged by what the Minister said in her introductory remarks. I hope that she will be able to enlarge on those a little later.
Allowing the participation of independent generators in the energy market, via the introduction of some kind of green-power auction, would help to increase competition, while encouraging the engagement of local communities with their energy production. This is an objective in tune with the Government’s emphasis on localism. The Shrinking the Footprint campaign, which I chair, is part of a general community energy coalition. Already church buildings across the country feed into the grid from more than 100 solar-panel installations.
In a highly complex society, security and affordability of energy are crucial. I imagine that noble Lords will have taken to heart the comments of the previous speaker on the enormous responsibilities that the Government are taking on through this Bill: any mistake will have grave consequences. We can all see the importance of the Bill. On these Benches there is general support and a commitment to work hard with other Members of the House to make it even better in Committee.
Lord Deben
My Lords, I refer the House to my declarations of interest and particularly to my chairmanship of the Committee on Climate Change. In that position I am bound by statute to be independent, and on this subject it is not difficult to be independent because all parties have a less than good record in facing up to the issues of energy. The noble Lord who spoke a moment ago was kind. Successive Governments have recognised that this is a tough thing to deal with and often better left alone. At one stage we had an energy Bill in which every date had been removed except 2050, which was well beyond the lifetime of any living politician. This enabled people to promise good things for the future without having to pay for them in the present. This Bill is entirely different and I congratulate the Government on bringing it forward. It seeks to face the real issues and accept the price of facing them. Sitting where I do geographically, I recognise that there are some who have not accepted the reality of the danger, so I ought to start by explaining why—for a simple reason—we do not have to argue about it.
There is no doubt that there is sufficient scientific belief and evidence that climate change is happening, is caused by human beings and could be disastrous. It is therefore a threat with which we have to deal. There are two ways that you can deal with a threat: the first is to insure yourself against it, and the other is to hope for the best. There is a problem with the climate-change deniers. I use the word denier because they are no longer sceptics. I am a sceptic—I wish that climate change did not happen. I am sceptical in the sense that I work with scientists, and therefore one is sceptical about everything that is put forward. The problem is that those who deny climate change start from the assumption that it is not happening; that if it is happening, we do not need to do anything about it; or that if we did do something about, it would be far too expensive.
In this Bill we are seeking to provide the insurance that any sensible father would have for his children. I am sure that there are no Members of your Lordships’ House who do not take out insurance against their house burning down, although there is a 99.8% chance of it not burning down. Yet we all spend about £140 a year protecting ourselves against such a thing happening because the horror of it is so great that it is not something that we wish to carry.
The chance of disastrous climate change occurring is enormously greater than the chance of your house burning down, yet we are now seeking to say that we should not spend certain sums. At the moment, for an average family the cost is about £60 a year and by the end of 2020 it will be £100 a year. We might increase that by about £20 if we take the serious and important step—I say this to the Minister—of having a carbon intensity target for 2030. Thereafter, what we will have insured against will in fact provide us with lower energy costs and a real future.
Therefore, the choice is between accepting the infallibility of those who deny climate change and accepting sensible insurance in order to recognise what the vast majority of scientists are putting forward. There really is no argument, and there is no argument in the view of the public. That perhaps explains why, however difficult it is, there remains, and is increasingly, a demand by the public that we do something sensible about this.
The question is: how do we get the very important matter of electricity reform to deliver a decarbonised source of energy for us? We cannot do all the things that we need to do to meet our statutory requirement of reducing our emissions by 80% by 2050 if we are not able, for example, to use electricity in a pure and clean form for motorcars and the like. Therefore, electricity decarbonisation is an essential part of what we are doing and the Bill paves the way for that. It does so by giving sufficient security to private investors to invest, but I warn the House that many other people are seeking to do the same.
Those who deny the issue, of course, are always saying that we are the only people doing this and that we are right out in front. In fact, GLOBE International, of which I am president, recently produced an independent report with the London School of Economics showing that more than 33 countries are dealing with this issue, some of them more extremely and better than we are doing. China, for example, has made a huge investment in making itself increasingly the centre of renewable energy. Mexico, South Africa and Korea are other examples. All around the world people are encouraging others to invest in order that they may achieve those ends. Therefore, if we want investment here, we have to recognise that we are in a competitive market. I say to my noble friend Lord Teverson that that is the issue concerning greed.
The fact is that if we want the investment and the jobs here, we have to provide the security that enables people to invest. That is why I again say to my noble friend that the very sensible proposal of the Committee on Climate Change that we should have a carbon intensity target for 2030 is essential not for climate change but so that we get the investment for Britain plc. If we want to show people that there is a continuum of support, that it will not drop over the precipice in 2020 and then arrive again in 2050, we have to have some kind of assurance. The beauty of the assurance that we have suggested is that it is not prescriptive. It does not say how we should do it; it merely says that there will be a clear indication that we want decarbonisation of electricity and that the carbon intensity target that we set will have to be reached by whatever means we wish. It might be achieved by advancing CCS, by having more nuclear or by producing more offshore or onshore wind, but we know where we are trying to do it, and we know that we are doing it so that all of us in this country can see the benefits of the investment we are making.
I want to be the first to congratulate the Treasury on producing £7.6 billion of investment to enable us to do that, but if that investment is to do Britain the best that it can, it must encourage people to bring their supply chains into this country and not maintain them elsewhere. It also means that we have to have very clear visibility between now and 2020. My noble friend has promised to let us have this information early. I hope that we will not go for just a year-by-year arrangement. We must know so that people who are making investment decisions now—which will emerge in 2018, for example—know exactly where they are going to be.
Against that background, I suggest that there is another issue which the right reverend Prelate the Bishop of London did not refer to but which I know is close to his heart. We are arguing this case in a world that will have 9 billion people. The idea that we will have cheap energy with the pressures of 1.5 billion more middle-class people demanding the sort of lives that we live, or the idea that there is some mysterious and magical world around the corner with cheap gas, seems beyond any sane measurement. Of course we have to use our fracked gas, of course we have to make sure that we use what resources we have, and of course we need carbon capture and storage to make that gas as low in its emissions as possible. At the same time as paying this very small amount to give us insurance against climate change, exactly those same efforts are giving us insurance against ever-higher gas prices. After all, the International Energy Agency has made it clear that gas prices are likely to rise—to double in the United States—over the next 10 years.
It will also give us sovereignty, and I will finish on that point. I do not want my children to be in the hands of Mr Putin’s children. It is a simple matter. If we can create our own energy here, we are not only protecting ourselves against climate change and taking insurance against high gas prices but ensuring that, by having a portfolio of energy resources, we in this country control this crucial element in our future. I therefore congratulate the Government on bringing the Bill forward. It needs one or two tweaks, and I shall be pressing for those tweaks—and I know that many will join me. It is the first time that we have had so far-reaching and far-looking a Bill before this House on a subject that has for far too long been at the bottom of the list of priorities.
Lord Roper
My Lords, it is a particular pleasure to follow my noble friend Lord Deben, who is a very effective advocate for this Bill, even if the levy-controlled framework is, I think, a little more complex than he described. Given the complexities and the length of this Bill, I have begun to regret that just over a year ago, when I ceased to be chairman of the European Union Committee and I decided to take up a new subject from scratch, I chose energy. Given what we have come to, I think it may have been a problem, but I am extremely grateful to the noble Lord, Lord Oxburgh, and to the DECC officials, who, in the informal group that has met on the draft Bill and more recently on this Bill, provided particularly useful tutorials in helping me to understand a pretty complex subject. As the noble Baroness, Lady Worthington, said, each time one thinks one understands it, one discovers yet another twist to the complexity.
Before giving this Bill a Second Reading, we have to agree that there is a need to decarbonise our electricity industry and, if that is the case, whether the principal elements of the electricity market reform set out in Part 2, the contracts for difference, strike prices and the capacity mechanism, are the right way to achieve such reform. On the first issue, over the past year, I have tried to follow the debate on global warming. Indeed, there are those who argue against it, sometimes —we may well hear them later—fairly effectively. But although there are significant arguments against the scientific consensus, I have reached the judgment that in applying the precautionary principle there is no case at all to resile from the commitments which this country took under the Climate Change Act 2008.
As referred to by my noble friend Lord Deben, the argument is also developed that our efforts are of little relevance given the absence of comparable actions elsewhere in the world, with the statistic of three coal-based stations being built a week in China perhaps being most frequently cited. In fact, as we have heard this week—indeed, he referred to the work done on climate change in China—China is rolling out an emission trading system starting in Shenzhen and then extending elsewhere in the country. It has been carrying out a significant programme of work on carbon capture and storage which compares favourably with what we have done in this country. Therefore, the argument that there is no point in doing anything because things will go wrong elsewhere does not seem to hold very much strength.
Given the case to move to a low-carbon generating technology and to encourage the necessary investment, what are the policy instruments which can do that most effectively? Sitting on these Benches and having been taught some of my micro-economics by Milton Friedman, I have to look very carefully at any attempt to intervene in markets. That often causes more harm than good. I was very glad therefore that my noble friend the Minister in her opening remarks was able to assure us that the contracts for difference and strike prices are transitory measures, particularly that they will be set on an administered basis for this transitional period. My noble friend also referred to the fact that the delivery plan will be published in July. I hope very much that when the Captain of the Gentlemen-at-Arms produces an order of consideration, the sections dealing with Part 2 can be placed towards the end of our consideration in Committee in order that we will have the benefit of seeing the delivery plan before we come to consider them.
Subject to that, the very useful impact assessment published with the Bill shows that the market failures and imperfections justify the proposals for electricity market reform in Part 2. Contracts for difference are the means of providing revenue certainty for low-carbon generators and thereby the incentive for investment in nuclear and renewable generators. They would enable development of such projects to obtain the finance for their investments and the impact assessment shows a significant net present value. As we have heard, the capacity market is the mechanism for ensuring security of supply and although the impact assessment in this case shows that there could be small net costs compared with a perfectly functioning energy market, it is very difficult to accept that we have a perfectly operating energy market. It seems a rather useful insurance mechanism to avoid loss of supply.
The question of the nature of the energy market is, as we have already heard, central to our consideration of the Bill. There has been much discussion on the illiquidity of the market, and Ofgem’s announcement last week is therefore of great importance. We shall need to consider it when we come to consider Chapter 6 of Part 2 of the Bill. The asymmetry of the market between the larger generators and suppliers and the smaller ones has led to many reports of illiquidity and difficulties for small developers of renewable projects in accessing the market. In the Commons, consideration was given to a green power auction market. This was resisted by the Government. Others have suggested an off-taker of last resort. It will be essential for us to return to this in Committee as energy market reform will not succeed unless we provide a satisfactory route to market for independent generators.
There have been difficulties in the recent past for such generators to get satisfactory power purchase agreements with large suppliers, and the nature of PPAs will themselves change with the introduction of contracts for difference. How do the Government intend to ensure a satisfactory development of PPAs after EMR? As my noble friend Lord Teverson and the right reverend Prelate said, Clause 37 is extremely important. It is the amendment which was introduced on Report in the Commons to deal with demand management. Although the reference is to a pilot scheme, I think that if I remember rightly, in moving the report, the Minister referred to several options within this pilot, so perhaps it is not quite as narrow as was suggested by the right reverend Prelate.
I also find some confusion, probably it is my ignorance, between permanent reduction in the demand for electricity as described by the right reverend Prelate, and demand-side response in the context of the capacity market. Will my noble friend tell me which of the two is being referred to in Clause 37?
I welcome the fact that Part 1 gives the Secretary of State a power to set a decarbonisation target range for 2030 and implicitly prevents him from setting it before 2016. As we have already heard, there will no doubt be discussion in Committee on the date. However, I hope that as well as the date, it will be possible to consider whether the Bill should be amended to require him to set a target rather than to give him the power to set a target, which is an important distinction.
Finally, I wonder if my noble friend can tell us about the position of the European Commission as far as any possible state aid implications of the Bill are concerned. Are we likely to have problems with that at a later stage? I think that this is a difficult Bill, but I look forward to continuing my education on the subject in Committee.
Lord Cameron of Dillington
My Lords, I must first declare an interest as a farmer and landowner with family and trustee interests in small renewable energy schemes.
Electricity is now as vital a part of modern human life as air, water or food. It is only a mild exaggeration to say that we cannot survive without it. So much depends on it: from the pumped water we drink and the growing and processing of the food we eat, to lights, heating and cooking, through music, communication, navigation, health, design and even democracy—think about this Chamber with its lights, air-conditioning, microphones and TV and radio services all dependent on electricity. Furthermore, our use of electricity can only increase: electric cars, for instance, could be a huge new field of demand.
It is therefore vital that we plan well ahead to ensure that we “keep the lights on”, Bear in mind though that that flippant phrase could equally well be replaced with “preventing catastrophic life-endangering situations”, or “maintaining the vibrancy of our economy”. Electricity is the vital fuel of modern life and it would be unthinkable for our system to fail.
Noble Lords will have gathered that in the trilemma between decarbonisation, the cost of power and the security of power, for me the greatest of these three is security. If we do not have security of power, the rest are as of nothing.
Ensuring security of power means that we have to plan ahead for more than one decade. Even a gas-fired power station, from conception through planning, construction and commissioning, can take the best part of a decade, while a nuclear station takes considerably longer. Furthermore, if you take a long-term view—decades rather than years—I do not believe that there is a straight choice between green energy and cheap energy. The danger of ever rising costs of fossil fuels in the long run is possibly even a greater danger than the initial high cost of alternative sources of energy.
For instance, looking forward, between now and 2030 it is likely that China will increase its use of gas by over 500%. What will that do to the world price of gas? Or you may prefer to look at, say, Germany, where since 2000 the price of electricity has gone up by 61%, of which 75% is due to the rising cost of gas rather than its support for renewables. It is the same in the UK. Only a small proportion of the increase in the cost of our power is due to renewables—less than 15%
So never mind the climate change debate—although I should make it clear that I am a firm believer in man-made climate change—in the long run we need as many alternative sources of energy as we can muster or encourage. Furthermore, we must never put all our generation eggs in one technology basket.
Therefore, the overriding need for and the purpose of this Bill, to me, is that during the next two decades or so we will need huge amounts of money to be released for investment into the generation of power, the transmission of power and even the saving of power—literally hundreds of billions of pounds. Coming straight, therefore, to the $64,000 question—or perhaps that should be the $1 trillion question—will this Bill be enough of a signal to release that kind of money for the markets? Possibly, is my answer.
Contracts for difference are excellent; they seem a fair way of supporting new technology and even old technology, speaking as one who lives not a million miles away from Hinkley Point. CFDs seem a fair way of balancing the demands of new sources of power against the interests of consumers should there be a dramatic shift in the marketplace. However, as other noble Lords have mentioned, I worry about the complexities and uncertainties of CFDs for the small-scale generator. We still need either a small-scale FIT or a green power auction mart or something similar to give the small-scale generators—or, more importantly, their banks and backers—the 15 to 20-year comfort they need to enable them to invest. These are expensive projects for often quite small players. With all the money needed up front, you cannot start small and grow as in a normal business venture. We need this investment.
The capacity market, again, seems a good way of keeping the lights on and all that entails. As I say, security is the key. However, I am concerned that, with the first auction in 2014, the intention is to have a capacity market in place only by 2018, and I ask whether we could not do it a bit quicker. Sadly, the baton of the 2015-16 power supply was dropped some time ago and power cuts at that time seem quite likely.
The only other problem with the capacity market exercise as currently planned is the likely lock-in to gas generation, possibly up to 2045. When we are trying to get out of expensive and non-renewable gas this is an unfortunate, but perhaps inevitable, result of our need for security in the medium term. I hope that CCS could be a solution.
I support the levy control framework as providing a cap on the effect of alternative technologies on fuel poverty and manufacturing competitiveness. We will have to consider both these issues in Committee but the levy control framework allows people to know where they stand, at least up until 2020.
That brings me to the major point of contention surrounding the Bill: do we or do we not need a decarbonisation target for 2030—or, more precisely, do we need to set a decarbonisation target for 2013 and 2014 or will it wait until after the next general election? Will a two or three-year delay make all the difference in releasing the billions of pounds desperately needed to keep the lights on?
If it was merely a question of buying wind turbines and towers to place offshore, say, in the 2020s, it would not necessarily matter. However, we know that Gemesa, Siemens, Vattenfall, Vestas and so on need the signals as soon as possible to start building the factories, to create the jobs and to build the parts necessary for such wide-scale investment in power in the 2020s.
The same goes for CCS, although this time the signal is as much for the Treasury as the private sector: it really needs the self-discipline to commit this time to what could be a very profitable area for the UK. There will be a huge worldwide market for CCS if we can create a safe and reliable system. I sympathise with the Government over decarbonisation targets. There is a lot of uncertainty about where our power sector could go over the next 15 to 20 years. Will we have a shale gas revolution? Will nuclear become too expensive to replace? Will the only practical source of power be gas and will CCS fail? Will the gas lock-in, which I spoke about, become an accepted feature of our energy landscape? Can we burn cheap coal-bed methane or will algae be the solution to the world’s energy problems? Will the economy soar and increase demand, or will it plummet and make cheap electricity the overriding need? It is hard to know which will be the safest road. We could go in any direction.
That is the key point. These same thoughts are going on in the minds of investors, too. They, too, do not know which way to jump. They, too, are tempted to hold back their billions until they see which way the cookie is going to crumble. Which technology is going to succeed in the UK? What is going to happen to the levy control framework after 2020? It is all very well the Government relying on the Climate Change Act, but that is about general targets across the board. What sector-specific commitments are the Government giving within the electricity industry? Why should investors commit their money if politicians cannot commit their and their successors’ reputations? In my view, the Government should provide certainty to investors. The target need not be as low as 50 grammes per kilowatt-hour, but a target is needed. Then the investment that follows will, in my view, bring down the cost of power, boost our employment and economy, and raise the certainty and security of power, which is really important.
Lord Lawson of Blaby
My Lords, like other noble Lords who have spoken, I begin by declaring an interest. It is a non-remunerated and non-pecuniary interest, unlike some noble Lords’ interests. It is the chairmanship of the Global Warming Policy Foundation. While I am about interests, perhaps I should declare two past interests, which I think are slightly more relevant to this debate: one which was remunerated, not particularly well, Secretary of State for Energy, and the other, president for a very long time—indeed I am the immediate past president—of the British Institute of Energy Economics. I have been tilling this soil for quite a long time. I am glad to say that next to me here is my successor as president, my noble friend Lord Howell, who was my predecessor as Secretary of State for Energy. Unfortunately, his other commitments prevent him from speaking in this Second Reading debate but I hope he will bring his great wisdom on this issue to bear in further stages of this Bill.
I do not blame my noble friend the Minister in the slightest for the fact that this is the worst Energy Bill in living memory and, indeed, probably the worst Bill of any kind that the present Government have brought forward. That may to some extent explain why it is so enthusiastically welcomed by the party opposite. It has, as the Minister made clear, one purpose and one purpose only: to reach the very demanding—that is an understatement—and radical decarbonisation targets in the Climate Change Act, which, as she rightly said, is something on which no other country has embarked. She seemed to think that was a good thing. In my opinion, it is just because no other country is so stupid.
The policy too has a particular characteristic. It has been characterised by our leading energy economist, Professor Dieter Helm of Oxford, as the Gosplan approach—his word, not mine. The noble Baroness, Lady Worthington, had a similar critique of this Bill. It is a curious, arbitrary form of nationalisation with much greater discretion for Ministers and officials than any of the old-fashioned nationalisations. The noble Baroness developed a powerful critique. It was probably the only aspect of her speech with which I agreed, but nevertheless she made a very important point. The other claims for the Bill are, of course, poppycock.
As my noble friend Lord Teverson pointed out, this is not a new Bill. It was first published in draft in 2010, and in gestation it inevitably goes back beyond that. Since then, absolutely everything of importance in the energy field has changed. Incidentally, we need to distinguish between the climate change issue and the energy issue. For example, Professor Helm, to whom I referred and whom I have known for many years, is, on the climate change issue, at the alarmist end of the spectrum, yet he has produced the most devastating critique of the Bill because he is, among other things, unlike some noble Lords who have spoken, a highly competent economist.
Anyhow, since the Bill first came forward, everything of significance on the energy scene has changed. On climate change, too, it is now agreed even by the Met Office that there has been no further recorded global warming for the past 16 years or so. That has led to a great debate among scientists as to whether, as seems likely, they exaggerated in the past what is known in the jargon as the climate sensitivity of carbon. There is an emerging consensus among scientists that the climate sensitivity of carbon is probably less than they thought. That means, importantly, that any dangers from warming, if they occur, are postponed well into the next century. It means that there is no urgency to go ahead in this way, not only because the uncertainties are in the distant future but because we have no idea what technologies will develop over the next 100 years. All we know is that there will be technological development, because there always has been and always will be.
Again, the Kyoto agreement has collapsed with no successor. The whole of the Bill was predicated on the idea of a global agreement, but we now know that there is no global agreement and that there will not be a global agreement on mandatory carbon emission controls. In the European Union, which is the closest to us in going in this direction—although it has no Climate Change Act as it is not so stupid—the renewables industry is in meltdown. Over the past five years, the share price of the renewables companies has fallen by at least 80%. The countries concerned are busy withdrawing their subsidies and one renewable company after another is going bankrupt.
The final thing, to which allusion has already been made and which is probably the most important, is the shale gas revolution. The development of fracking, as many noble Lords know, means that it is now possible economically to win gas from shale on a massive scale. Indeed, the United States, which was first in the field, is already doing it for oil as well. It is getting oil from shale. That has transformed the picture economically. The price of gas has collapsed in the United States, the price of coal has collapsed in accordance and even the oil price is looking a bit shaky. That also has an important geopolitical consequence as shale is in abundance throughout the world. In this country, we have large deposits in the north-west, in Lancashire—in the Blackpool region—and in other places. That means that we no longer need to have any fear of being beholden either to an unstable Middle East or to an unreliable Mr Putin. There is an abundance of fossil fuels throughout the world. Everything has changed. We have an abundant supply and a prospect of lower prices. As other speakers have said, on the old forecasts it was thought that prices of fossil fuels were likely to increase. Even the International Energy Agency now thinks—although obviously it is all very uncertain—that they are just as likely to fall as they are to rise in the future. Yet despite these revolutionary changes, the Government’s policy and the Bill itself are completely unchanged from when they first came forward. They are ploughing on as if nothing had happened, despite the fact that the whole energy scene has totally changed.
This is not just a stupid energy policy; it is also an extraordinary foreign policy. I see a distinguished former Permanent Secretary at the Foreign Office in his place, the noble Lord, Lord Kerr. He used to be my Principal Private Secretary, so he is obviously a good man. I remind noble Lords that in the other place the Energy and Climate Change Committee produced a report on low carbon growth links with China. It concluded, and I am not making this up:
“China … should be at the heart of HMG’s climate change mitigation strategy”.
There was, of course, a response from the Government as there always is to Select Committee reports. This was jointly from DECC, the Department of Energy and Climate Change, and the Foreign and Commonwealth Office. They said:
“We therefore welcome the Committee’s report, which rightly concludes that the UK has an important role in encouraging the trend to low carbon in China”.
They went on, correctly:
“As the UK is responsible for less than 2% of global emissions, we need all other major economies to reduce their emissions as well”.
They then added, and I quote:
“By demonstrating political leadership … the UK can have a powerful influence on the speed of transition to low carbon economic models in other countries”.
What on earth have they been smoking? Their view, it seems, is that the Chinese cannot make up their minds whether they really want to decimate their industry on the altar of higher energy prices and impoverish their still quite poor people even further and that they are only looking for a lead from the Foreign Office in Britain before deciding to do just that. What sort of world do they think we are living in? It is complete lunacy. China and India, despite what noble Lords may have heard earlier in this debate, have not the slightest intention of following us down this crazy path.
We must also look at the oil industry. Your Lordships may not like the major oil companies, but they are not stupid. If they really thought for a moment that we were going to move into a decarbonised word, would they be spending untold billions on exploring for new oil and gas—and even more for developing them? What about the financial markets? What happens when one of the oil companies makes a great discovery? Do the shares go down because, after all, fossil fuels are completely obsolete and they are pursuing a damaging strategy? No, the shares go up when they have a great oil or gas find.
This is an Alice in Wonderland world in which the Government live and in which this debate is taking place. Nor is this policy a harmless lunacy. UK energy costs and prices are inevitably bound to rise as a result of this Bill, which will become an Act, I am sure. The purpose of this legislation is to push up energy prices, because that is the only way that renewables, and even nuclear, can be made economic. British electricity prices are already, as a result of government policies in this area, among the highest in the world. According to the energy experts who have studied the Bill they are set to double by 2030. As we move from low-cost carbon to high-cost renewables, we will be damaging the economy and damaging industry and it will be the poorest families that suffer the most. I am astonished that we did not hear a word from the spokesman for the party opposite on the plight on the poor who are suffering from fuel poverty, and who will suffer even more as a result of this legislation.
This is a bad, bad Bill. There is not a single energy expert of repute, whatever his views on climate change, who believes that the policy enshrined in this Bill is sustainable. However, that is no consolation because the damage that will be done before the inevitable U-turn takes place will be incalculable.
Baroness Liddell of Coatdyke
My Lords, I, too, must draw attention to my entry in the register of Members’ interests as a director of the Offshore Renewable Energy Catapult. I should also take my lead from the noble Lord, Lord Lawson, who pointed out that he was a previous Secretary of State for Energy. I was a Minister for Energy but, being a woman, I was expected to multitask, so I was also Minister for competitiveness in Europe. Tempting though it is to follow and challenge some of the lines of the noble Lord, Lord Lawson, I notice that the noble Lord, Lord Stern, is in his place and is soon to speak. I think that he will probably do a much better job of it than I could conceivably do.
Yet like the noble Lord, Lord Lawson, I am not an unalloyed fan of this Bill. Professor Dieter Helm’s analysis of the Bill was actually very interesting. I see that the noble Lord, Lord Birt, is to speak later on. Perhaps he, too, could take up the issue of the bias against understanding contained in this Bill because it is of considerable complexity, and within that complexity there is the opportunity for a considerable mistake. However, the Bill is needed, although it may not be in the right shape. Also like the noble Lord, Lord Lawson, I am concerned about the lack of impact on fuel poverty, which I will come back to in my section on demand reduction. I am not going to say much about decarbonisation, but when you put those issues alongside the decommissioning of existing capacity, there is a crisis of security, as the noble Lord, Lord Oxburgh, pointedly set out.
It may have been the intention that this legislation would end uncertainty. The Minister referred to that in her opening remarks but, frankly, its long gestation period has added to the uncertainty, as well as the fact that we need more detail on the setting of the strike prices and the need for secondary legislation to support the Bill. We have a considerable difficulty here around uncertainty. If I may give just one example, Ernst & Young has recently done some research on the international investment market for renewable energy. Because of uncertainty in the British market, we have dropped to sixth place in terms of our attractiveness for that investment.
In the area of offshore wind, where Britain is actually a leader, we have lost our top position. If noble Lords want an idea of the scale of this, let me point out that last year, €4 billion of manufacturing capability was commissioned in Europe. Some 75% of the turbines for offshore wind were built in Britain. There is a huge opportunity for offshore wind and we have managed to fail to exploit it to the full because of the slow progress in proceeding with this Bill.
This Bill is an example of market manipulation. I do not have a problem with that; infant industries often need market manipulation. The noble Lord, Lord Roper, is right to ask for an explanation of where we are in negotiations with the European Commission on state aid. I would also be very interested to know if the Minister could enlighten us on where we are in relation to the impact on UK energy costs compared with our EU competitors. That is a critical balance, and not just in terms of how our economy operates. The noble Lord, Lord Oxburgh, referred to interconnectivity; the direction of flow with interconnectivity will be based on the relative prices on either side of the interconnector. Like the noble Lord, Lord Deben, I worry about sovereignty. This is one of the key issues of the past 10 years. If someone has the capability to switch off access to energy, they will have strategic control over what happens to the economy of this country.
Going back to the complexity issue, there are some aspects of EMR that have been tried elsewhere and some experience of capacity markets in the USA, but I am not aware of any country using the model of contracts for difference and capacity markets at the same time. I would be very interested to know how the Minister sees some of these issues working.
We also have a pressing need for diversity of energy-generating capacity. Many of us in this House are in our prime and we can remember the six-day war. We also remember what happens when we become overly dependent on one energy source as against another, and we must ensure that that does not happen again. There is a place for all sources of energy, including fossil fuels. This is a real challenge for the scientists and engineers who, for as long as I have been around, have been promising clean coal technology. Carbon capture and storage is the holy grail, but I have been waiting for far too long to see its commercialisation. The Minister skirted over nuclear in talking about the Office for Nuclear Regulation, but in a situation where EDF is in a monopoly position in negotiations with the Government, where are these discussions? What conclusions will we come to? The Committee on Climate Change has said that at least 16 gigawatts of future supply should come from nuclear, but it is difficult to see how that is going to come on stream in time to impact on the insecurity of supply that we have to deal with.
There are some of us who do not necessarily remember it but know that there was shale gas in this country before. I live very close to West Lothian, where there was quite an industry around shale gas in my father’s day. There have been recent announcements about the prospect of 37 gigawatts of gas generation being sanctioned, alongside the prospect of shale gas—with envious eyes across the Atlantic looking at how shale gas has impacted on US energy markets. Are we going to end up with a dash to gas being forced on us because we need security of supply? We need to get a move on with nuclear and with investment in renewable energies. We are seeking economic growth, so it is all the more critical that manufacturing capability which we can rely on in the future is developed. What is going to happen about strike price setting in practice? What will the setting of the strike price be, taking into account new nuclear? How will a competitive model eventually operate?
Let me turn now to the lines on capacity markets to deliver energy saving. Frankly, I think it is fanciful. I am with the right reverend Prelate when he asks why we are having only one pilot. Why are we not in a position to look at other ways of managing demand? One of the best ways of ensuring a robust energy market is to ensure energy efficiency. I ask the Minister to answer this in her summing up: if I were Mrs Liddell of Coatdyke in North Lanarkshire, living in a damp council house with inadequate insulation, possibly a post-war house with no upgrading since, how would that affect my fuel bill? It would not. And please do not tell me about the Green Deal; you need £150 even to get your foot in the door. That may buy a rather nice dinner in the Barry Room, but it is a king’s ransom for some of the people who are most intimately affected by this.
I turn my attention to an area that has caused considerable concern throughout the country: the mis-selling of tariffs for electricity. I am not suggesting that there needs to be some kind of retrospective legislation with regard to this, but I am asking that we get some clarity on the Prime Minister’s claim that people will be put on the lowest possible tariff. How is that going to work? We need that spelt out, and quickly. We need additional powers and resources for Ofgem, which at the moment is apparently looking at 27 cases of mis-selling, both formal and informal. Mis-selling is fraud against the most vulnerable in our society, and this Bill is not going to help that.
I look forward to our deliberations on the Bill. There are critical issues that need to be raised. We need an energy Bill but, sadly, I am not sure that this Bill as it stands is the finished article. I hope that by the time we get to the end of July, it might be.
Baroness Maddock
My Lords, I need to declare my interests as president of the Micropower Council—contrary to what noble Lords might have read in the Daily Mail, you do not get paid for being president of something—and vice-president of National Energy Action, a charity dealing with fuel poverty. Like the previous speaker, I will say a little about fuel poverty in my remarks.
There are many reasons to support the Bill but we have also heard about some of the problems surrounding it. Maybe we in this House can ensure that it is better by the time that it leaves us. However, it will address some of the challenges that we face such as the security of supply and the need to invest to meet our current and future demand for electricity. It has been estimated that we need at least £110 billion to do that. We need to improve the national grid, as others have mentioned; investment in the grid has been neglected for a long period. The Bill will also address our aim, which some people agree with and some do not, to decarbonise the electricity sector by the 2030s as part of the global challenge of tackling climate change. We hope that the Bill will support the construction of a diverse mix of renewables, new nuclear, gas and carbon capture and storage—many of the things that people have said in the debate that we need.
It is estimated that electricity market reform could provide around 250,000 jobs. Coming from the north-east of England, I think that creating jobs away from the south-east is really important. I associate myself with the words of my noble friend Lord Deben about the importance of a supply chain. Already in the north-east we have industries providing pieces for turbines for onshore and offshore wind, and I hope that that will continue.
My interest in how we protect our environment globally and locally stems from three years that I spent over 40 years ago living in Stockholm in Sweden, where I realised that if a home was properly insulated it cost a fraction of what I had been paying in England to heat one. I also realised, because I was teaching English at the time to old-age pensioners, that they did not die in the winter because they were living in cold and damp homes, and that there was no such thing as fuel poverty. Shortly after that we had the world oil crisis, which brought home to me the need to not be wasteful with our global natural resources. Whatever we believe about climate change, that is something that we should all be aware of.
In the 1970s, when I joined a political party, it seemed to me that at that time only the Liberals were genuinely concerned about these issues, although I must say that that is not the only reason that I was a member of the Liberal Party and am now a Liberal Democrat. In my early days, campaigning to be elected and serving as a councillor in Southampton, I was often mocked for what I was talking about with regard to these issues. I particularly remember being mocked when we were trying to introduce recycling in the city. At one point, three colleagues and I held the balance of power on the council and we managed to set up an environment committee. Not everyone at that time was a dinosaur and one of the colleagues that I worked with—we worked across party lines—was the honourable Member for Southampton Test, Alan Whitehead, who has played quite an important part in this Bill’s passage in another place. At that time we managed, using some geothermal energy, to set up a district heating system that has become one of the most successful in the country.
So when I was elected in another place, now 20 years ago, it is not surprising that I chose to promote the Home Energy Conservation Act. I was fortunate enough to be No. 1 in the ballot for Private Member’s Bills and, with the help of a lot of other people and organisations, that Bill became an Act.
I think that a majority of people today—although not everybody, including my noble friend sitting in front of me—are very concerned to protect our planet now that we have seen the data and how human activity affects our climate. In my early days of campaigning on these issues, it was a wild dream that Liberals would be in government and that we might see a Liberal Minister leading a Bill of this nature. So I am particularly pleased that my longstanding colleague, my right honourable friend Ed Davey, has been spearheading this Bill.
Given my background, I think that it is not surprising that the two things that I have chosen to concentrate on in this Bill are electricity demand reduction and help for consumers, particularly with fuel poverty. Several other noble Lords have mentioned electricity demand reduction. A major criticism of the Bill has been that, in its original form, it did not contain measures on electricity demand reduction. During the passage of the Bill in another place, the Government introduced amendments, which have been spoken about, to enable electricity demand reform to form part of the capacity market and for there to be pilot schemes. However, among many of those—including me—who are pleased to see this step, there are concerns about how capacity market measures will operate and whether they will actually achieve substantial reduction in demand, particularly permanent reduction. There are also concerns about the nature of “a pilot”, rather than several pilots, and what actions might follow as a result of such pilots.
Following the initial criticisms, there was a consultation from DECC to explore the options to encourage electricity demand reduction. Of the options put forward, a majority of respondents favoured a system of electricity-efficiency premium payments which would provide electricity users with a payment on top of the savings that result from reduced electricity usage. I strongly support something of this nature. During the time that I lived in Stockholm in the late 1960s and early 1970s, most of the electricity used in Sweden was hydroelectricity. However, they had had two or three very dry summers and there was a shortage of electricity. There was a huge campaign about how to save electricity and measures were advertised, from how many times you should open your fridge to persuading you and those you lived with to sit around one light when you were in your flat in the evening. It resulted in huge savings of electricity. There were no blackouts. The area that saved the most got their bills reduced. So there is evidence that this is something that works.
As to the role of the capacity markets, there is evidence that a capacity market is of limited use in rewarding energy savings—I believe that experiences in America have shown that to be the case. Payments from capacity markets are uncertain and it is not yet clear when or if a capacity auction will be triggered here. Could the Minister, when she replies to this debate, address this issue? As energy efficiency and demand reduction reduce the risk of capacity shortage, it is rather perverse to make support for them dependent on those shortages occurring. I hope that we will address this during the passage of the Bill.
Capacity markets are not suitable for delivering energy saving for households or small businesses. The complex design of the capacity market means that only large energy suppliers and other specialist companies are likely to participate. It is vital that we have mechanisms to capture savings from small businesses and homes if we are to achieve the full electricity-saving potential that the Government have identified. A capacity market is primarily designed to ensure capacity during troughs in supply, so it rewards energy efficiency for only its security benefits, not for the much larger benefits or for emissions reductions and affordability.
I am disappointed that on Report in the Commons, cross-party amendments that would have introduced simple transparent payments for households and businesses that save energy were not addressed favourably. Will the Minister look again at such proposals, which may come forward again during the passage of the Bill in your Lordships’ House?
Clause 37 allows the Government to introduce a pilot for electricity demand reduction. Will the Minister also look very carefully at this? I am not the only one to raise this matter today. We would like to see more than one pilot and a variety of schemes.
As I declared in my opening remarks, I am a vice-president of a national charity that works in the field of fuel poverty. The charity works with government and others to ensure affordable energy for disadvantaged customers through a wide range of activities. National Energy Action is currently helping the regulator Ofgem to refine the contribution of district network operators to permanently reduce electricity demand within the UK. District network operators will be subject to an energy efficiency incentive during the new distribution price control—ED1—and will be encouraged to foster innovation and support low-income and vulnerable customers through new social outputs. Therefore it would be very helpful if Clause 37 could be amended to show that the Department of Energy and Climate Change is aware of the role of district network operators in encouraging permanent electricity demand reduction.
Finally, I turn to consumer bills, which other noble Lords have already mentioned. I am pleased that there is something about this in the Bill. However, due to my experience of the big six energy companies and the various bills that I get from them, I am not holding my breath. I am always shocked by the way in which they try to follow whatever they have been asked to do. They recently began to try to explain to customers, partly because it is in the Bill, how much electricity and gas the customers have been using and how much they can save on one tariff. I usually pay my bill by cheque when it comes. I received a bill—I will not mention from which company—which said on the front that if I paid it by direct debit, I could save X amount of money. On the next page it told me that if I paid it by direct debit I would save 10p. On the front of the bill the figure was several hundred pounds. That does not give me confidence that even the proposals that the Government want to see from energy suppliers in assisting customers may be forthcoming.
A representative of one of the suppliers—I think it was British Gas—came up to me one day proudly talking about their bills and how they set them out. For many years, as noble Lords will have learnt from my comments, I have been a political campaigner. I learnt very early on where you put something on a page so that people look at it first when it comes through the door—the famous Liberal “Focus” leaflets come to mind. I suspect that British Gas had paid huge sums to people to advise them on how to set out their bills. However, the thing that they wanted you to read was down there on the page, not in the top right-hand corner, which is where everybody looks.
I hope that many of the things in the Bill will assist people who find paying their bills difficult—those in fuel poverty—and make sure that we have a secure energy supply. I am sure that the expertise that we have heard this afternoon, and will hear later this evening, should assist us all in ensuring that this Bill is a lot better when it leaves this place and achieves some of the things that we all want to see.
Lord Stern of Brentford
My Lords, I refer to my interests in the register, in particular my chairmanship of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, which is part of my role as professor of economics at the LSE. I am perhaps one of the few unretired professors of economics in your Lordships’ House, if not the only one.
I will not dwell on the science—after all, I am an economist. This House has often heard on this issue from two former presidents of the Royal Society, the noble Lords, Lord May and Lord Rees. Noble Lords can also consult the current president of the Royal Society, Sir Paul Nurse, and Sir Brian Hoskins of Imperial College, who leads for the Royal Society on climate change. If any noble Lords have new results that can overturn 200 years of research, dating from the great French mathematician and physicist Joseph Fourier in the 1820s, and can contradict the 98% of peer-reviewed papers that identify anthropomorphic climate change, they should immediately publish them in one of the learned journals.
If you want to learn more, consult the Royal Society, the US National Academy of Sciences or the French, Australian or Chinese academies—whichever you choose to turn to. It is surely to the learned societies, scientific societies and the journals that we should go for serious science. Taking the long-term view, the world is warming and the only plausible explanation is human activity. We cannot predict the outcomes with certainty; this is about risk management, but it is surely clear that we are embarked on a reckless and potentially irreversible experiment with the only planet we have.
The risks are more severe and will come earlier to the poorest among us, but we all face them, whichever country we live in and however well-off we are. Contrary to what the noble Lord, Lord Lawson, has just claimed, the broad estimates of climate sensitivity are fairly stable. If he wants a discussion about those estimates, I again refer him to those who know about these issues and study them professionally. I have discussed them intensively with Professor Myles Allen, of Oxford University, who has already been referred to, with Sir Brian Hoskins, whom I mentioned and leads on climate for the Royal Society, or with Julia Slingo, the chief scientist at the Met Office. We are all confident that the IPPC report, looking across the whole waterfront of the evidence and reporting this autumn, will say exactly that—the estimates of climate sensitivity are broadly stable.
Let me turn to where other countries are going. It is all too easy to say that we are small—accounting for perhaps 2% of global emissions—and to claim that other countries are doing little. That is not correct. I have worked on China as a professional economist and as chief economist to the World Bank for more than 25 years, including intense discussion over the recent 12th five-year plan. China is midway through that plan, which contains strong emissions reduction programmes. Its carbon intensity reduction target to 2020, relative to 2005, is 45%—considerably more ambitious than our own 30%. China is ranked third on the Climate Institute’s low-carbon index. China plans to peak coal use during this plan period—that is, within three years—and is considering peaking annual emissions by 2025.
Why is China doing this? I certainly agree with the noble Lord, Lord Lawson, that it is not because it studied the United Kingdom with great precision. It is doing it because it understands the grave risks of climate change and because it realises that there is a green race, which it intends to win, or at least compete in very strongly. That is the kind of race that we should seek. The US is now reducing emissions rapidly and energy-related CO2 emissions are back to the levels of the mid-1990s—achieved by a combination of substituting gas for coal and regulatory standards. They could meet their 17% 2005 to 2020 reduction targets without national legislation. Brazil is targeting 40% reductions for 2005 to 2020. I could go on. Those are three very big and important countries.
The world is doing too little, but it is absolutely not true that other countries are doing nothing. The more we recognise, country by country, what others are doing, the sooner the much needed acceleration of action will come. The global race is becoming a green one, and those who attempt to stay dirty will find other, cleaner countries understandably placing restrictions or tariffs on their imports. They will be WTO-compliant, because they will counter a subsidy on dirty. In this international context, UK climate change legislation is wise and forward-looking, not only from the perspective of climate change, fundamentally, but from the point of view of future growth. So, too, is this Bill wise and forward-looking.
What about costs to consumers? Energy bills have increased by around £400 for the typical household since 2004, from £600 to roughly £1,000. Of this increase, 80% was unrelated to carbon policies and was due largely to the increased price of gas, together with some increase due to investment in networks. Much of the remaining 20% was associated with investment in energy efficiency, which will bring its returns. In future, low-carbon policies aimed at supporting investment in clean power generation technologies will add £100 to the energy bill per annum of the typical household by 2020—around a 10% increase. There are opportunities to more than off-set this through energy efficiency improvements, particularly through more efficient boilers and appliances. The low-carbon policies are more likely to bring a reduction in bills by 2020 than increases. Over the past decade, the reliance on hydrocarbons has forced up prices.
Gas has a real contribution to make to emissions reductions in substituting for coal, but the benefits of shale gas in the UK are more likely to be in the energy security and profits that it could bring than in the price impact. Prices in the UK will be largely determined by Europe and world markets. Gas could indeed play a useful role in meeting ongoing demand for heat, balancing generation on the power system and gas generation of electricity with CCS if this is shown to be viable. It can be a valuable bridge to the medium and long term but, without CCS, gas cannot be the long term.
The future is uncertain, as many have remarked, and we will have to learn and be flexible. We will need a range of technologies and a smarter, more flexible and better interconnected grid. This will include improved energy storage, more interconnection with other European electricity networks and, crucially, better demand management. Additional R&D in all these areas will be essential to ensure that a full portfolio of options is available in the coming decades to manage the uncertainties and opportunities that are likely to emerge. Energy efficiency must, of course, be at the heart of all we do.
In thinking about investment, let us recognise that government-induced policy risk is the greatest threat to investment around the world, wherever you look, be it through threats of nationalisation, corruption, the speed of the law courts or whatever. That is a lesson that I have learnt in a lifetime as an economist specialising in development and growth, but also in a decade that I spent directly involved in supporting and financing investment, particularly infrastructure investment, first as chief economist of the EBRD and then of the World Bank. For the UK, clarity of policy is paramount to deliver the investment needed to decarbonise the power sector. The opportunity to leverage private sector investment now is potentially huge, with low interest rates, liquidity in much of the private sector strong and investors waiting for real clarity. It is the noises off and the apparent vacillation—the idea of constantly reviewing policy—that has undermined confidence. There is now a need for clarity in the wake of past confusion, and I warmly welcome the Bill as making a major contribution to reducing that confusion and giving a clear sense of direction.
We need substantially more strengthening of the necessary confidence. In particular, we need a stronger institutional structure to bring confidence to the investment framework. For example, the LSE Growth Commission, which reported in January and of which I was a member together with the noble Lord, Lord Browne, and others—I apologise for referring to the LSE again—recently proposed a new institutional architecture for infrastructure, including an infrastructure strategy board that could radically reduce medium-term policy instability. The energy and transport sectors are around 70% of this infrastructure story.
Lord Vinson
My Lords, the noble Lord, Lord Stern of Brentford, has failed to mention the cost of energy to British industry. Is that not a vital and essential part of maintaining jobs and our competitiveness, and helping us correct the huge export-import imbalance that we have at the moment? He has not mentioned anywhere the cost to industry. Is that not a fact that should come into his and his department’s calculations?
Lord Stern of Brentford
I do not have a department. I am chair of a research institute and an academic.
The cost of energy to industry is indeed an important factor in its competitiveness, but it is not nearly as important as the investment climate, wage rates, productivity and exchange rates. This is of fundamental importance. Primary energy in the UK and similar economies is about 5% of GDP. Even a 20% increase would give you a one-off 1% increase in costs. That does not move industry from one place to another. You can study some of the publications on our website. If you look at what determines where people are, the data are made up of those issues that I have described: investment climate, wage rates, productivity and exchange rates. This is an important part of the story, but a small one relative to other big factors. Furthermore and fundamentally, I have given reasons why over the medium term the policies that we have been describing here are just as likely to force prices down over 15 or 20 years as to raise them, if not more likely to do so.
A target for power sector decarbonisation that gives a crystal-clear signal to investors is essential. Without such a target and with potentially mixed messages from government, there remains a high degree of uncertainty that will deter investors. The best way to address this government-induced uncertainty is to include in the Energy Bill a target for power-sector decarbonisation, specifically a target to reduce the carbon intensity of power generation to 50 grams of CO2 per kilowatt hour by 2030, as recommended by the Committee on Climate Change as being necessary to meet overall emissions reduction targets. I urge your Lordships to support the Bill. It is a wise and sensible step in a good direction. It would be much stronger and wiser with a decarbonisation target.
In summary, there are five reasons for this target. It is the responsible way to play our part in a world at immense risk from climate change. It is necessary to reach the target for emissions reduction that we have sensibly set for ourselves. It is necessary for the credibility and clarity to foster the confidence necessary for the investment on the scale that we need. It will allow us to move still more rapidly into the world markets of the future. Finally, as that investment takes place, we will find that it plays a key role in fostering the investment and infrastructure that will deliver the energy security, affordable energy and growth that this country sorely needs.
Lord Judd
My Lords, as an emeritus governor of the LSE, I take great comfort in the presence of the noble Lord, Lord Stern, in our academic ranks.
By the 1980s, the management of the economy of the Soviet Union had become a nightmare and a very sick joke. The bureaucratic jungle that stifled decision-making and obscured responsibility was a breeding ground of disastrous corruption, inefficiency and ineffectiveness. Sometimes I wonder whether, paradoxically, the management of the UK and western economies is not increasingly being tempted into exactly that direction.
The roots of the problem seem to me to lie in our becoming prisoners of ideology. What is too often lacking is an overriding, self-evident commitment to the public good, based on social-ethical values, principle, pragmatism and common sense. Where for the fulfilment of that public good is public ownership more appropriate, and where is private ownership better equipped to deliver? There are complex challenges in trying to mix the two. The private sector is driven by profitability; the public sector should aspire to cost-effective, high-quality public service. Bureaucratic structures will never sort that out. Only a deep sense of shared responsibility and commitment with powerful leadership will produce the answer, but just how can that be achieved?
A naive faith in market ideology has been allowed all too much to blind us to common sense. Muscular, tough, pinpointed accountability is not always there. We of course recognise that to leave the management of such a fundamental necessity for society as energy to market forces alone would be unforgivable irresponsibility. We therefore have before us a scheme devised by very clever and dedicated experts which is intended to guide, restrain and police the market. However, I suggest that it is a scheme which is prepared within the context of market fatalism and which, as the right reverend Prelate the Bishop of London said, is beyond the comprehension of all but a small number of mandarins, politicians and academics—a scheme which has already been described by some as “theory gone mad”. It is so remote from the cut and thrust of real life and from basic realities in human behaviour that it is destined, I fear, to become a dangerous minefield of controversy between the different participants. Conspicuously absent is any underlying driving concern for the regeneration of a public service ethic of responsibility—an ethic which has been repeatedly and systematically undermined for the past half century, and an ethic without which we shall always be in trouble. Long-term sustainability, environmental issues, care for qualitative, aesthetic and scenic dimensions of any civilisation worth the name, climate change and security all make the ethic an imperative.
The prevailing intention of the Bill is to generate more electricity, but is that really the first priority? Is not the higher priority to assemble all the wit and skills, not least engineering and architectural skills, at our disposal to reduce the escalating need for always-greater energy consumption? With the majority of the world’s population yet fully to mobilise their fair demand for energy, does this not become critically urgent? Of course, there are genuflections in the Bill towards conservation but they are not in the engine room of the Bill. They are, in effect, in an aspirational department. Just where are the specific operational targets and who is pinpointed to deliver them? Where are the arrangements for the essential nationwide cultural education on personal responsibility? One has only to walk round the House of Lords at any time, let alone in the evening, to count the number of lights and the amount of equipment needlessly devouring power at unoccupied desks and in empty rooms. Where is our personal example to the nation in all this?
The electricity industry is expressing itself clearly, well and strongly on the Bill. Others in civil society are making challenging and significant observations. I think of Which?, the WWF, the John Muir Trust, the CPRE, the RSPB, the Campaign for National Parks, of which I am glad to be an honorary vice-president, and many others. They raise vital issues, to which I hope the Minister will respond well before Committee.
Matters surrounding the Bill which particularly concern me and on which I hope the Minister will be able to comment include the need for more specific demand reduction measures in the Bill. While I recognise the proposal to “bolt on” demand reduction to the capacity market, there is a remaining serious doubt about just what savings will really be achieved by this, especially for households and small businesses. Taking into account the experience of the US, where only a tiny percentage of capacity payments have in practice gone to demand reduction projects while the overwhelming majority have gone to fossil fuel generation, there is clearly a lot of hard work still to be done on this front. Investors, as has already been argued in this debate, need to be confident that there will be a minimum level of delivered energy savings. It would be tragic to miss a great opportunity of being among the world leaders in engineering and manufacturing capacity on all this. There are the dangers of a dash for gas and the need to ensure that non-generation, interconnected capacity and demand reduction can participate successfully in capacity auctions, receiving a growing proportion of capacity contracts. The indispensability of supply-side capacity auctions invariably requiring independent, transparent and published evidence, which must at all times be robust, is becoming self-evident.
It will be important for the Government to pilot multiple EDR schemes, including those designed for households and small businesses, to ensure thorough and meaningful evaluation. It is vital for an independent panel of experts to scrutinise strike prices agreed between government and investors before contracts are signed. There is still a need to establish the real total cost of transmitting electricity from planned large-scale wind power installations in remote areas to consumers and the economic viability of such projects. Let us take, for example, the issues raised by the escalating cost of the Beauly-Denny overhead transmission line. This was originally estimated at £330 million but it is already thought to be costing £557 million or more. There are lessons to be learnt, especially about the crucial importance of proper scrutiny, the proper consideration of options and the pitfalls of fast-tracking.
It is imperative to take peat lands fully into account in calculating targets for greenhouse gas emissions reduction. There is the imperative of debarring new grid systems from being routed through national parks and areas of outstanding natural beauty. Where they are to be adjacent to these priceless assets, let alone—God forbid—within them, it is imperative to place them underground or under the sea. Equally firm provisions are required on all forms of energy construction and infrastructure. The national parks and areas of outstanding natural beauty must be exempt from permitted development rights granted for renewable energy infrastructure which is likely to have a significant impact on landscape—for example, wind turbines.
On the face of the Bill there should be targeted and clearly identifiable responsibility for removing installations and infrastructure when they become surplus to requirements or obsolete. The continued indispensability of the visual amenity allowance introduced by Ofgem to fund the undergrounding of existing distribution lines should be underlined, as indeed should be the implementation of National Grid’s research findings that the allowance recently introduced for transmission lines should be doubled. There is a need for strengthened financial incentives, such as grants, payment tariffs, green taxes and charges for the adoption of low-carbon technologies, coupled with strengthened penalties for unsustainable practices.
It is surely essential to tighten emission performance standards still further than is envisaged at present. I am certain of the indispensability of more research into new forms of renewable energy, not least those that would be appropriate for national parks and areas of outstanding natural beauty. The current pilot to test the potential for underwater tidal energy generation in Pembrokeshire is very important, as indeed is the promotion of mini hydro-generation schemes for villages and hamlets. There is a need to take the potential contribution by geothermal heat far more seriously than, quite inexplicably in my view, we have so far done.
Whatever we do on energy legislation and policy should always have, as a non-negotiable principle, a determination to avoid scarring the unique and special inheritance of our countryside and open spaces. These are essential for our national morale, spiritual regeneration, psychological stability and physical and mental well-being. This should be clearly reflected in the Bill. If ever there were a sphere of life in which an effective, comprehensive and clear-cut national plan, with detailed provision for delivering its objectives, is essential, energy is exactly that. Social justice demands that it is not the already deprived and relatively less influential sections of our nation that are, in the end, landed with the heaviest burden of all the paraphernalia of energy production, distribution and maintenance.
Before I conclude, I will just say something about the nuclear dimension. If we are to go ahead with another phase of nuclear energy, it must be justified by convincing economic analysis, and it must never be secured on the basis of direct or indirect subsidies that are not available for the development of other technologies. It is also deeply disturbing to be entering into a new phase without yet having convincingly demonstrated how lethal waste, with all its hazards and acute dangers for our children and grandchildren and for very many generations ahead, is to be resolved. The recent saga in Cumbria has surely underlined beyond doubt the urgent requirement for a convincing, transparent and prioritised report by highly qualified independent experts on the most suitable and least hazardous sites in the UK. This will be for extremely long-term waste disposal. It will have to cover geological suitability, climate change and its consequences, security and other key factors.
Meanwhile, the existing highly dangerous waste is standing in the open. Radioactive birds and insects are multiplying. The acute dangers of terrorism, and now drones, remain. Time is not on our side. Urgency is paramount.
The Lord Bishop of Hereford
My Lords, as others have said, there is much to commend in the Energy Bill, which proposes significant and welcome changes to create an energy sector fit for the 21st century, not least the reforms to the electricity market and the attention paid to domestic tariffs. However, there are some glaring omissions, which seem to present an opportunity missed. I regret that the Bill does not put into law a requirement on the Secretary of State to set decarbonisation targets for the electricity sector. The reasons have been debated in the other place and there have been references to it in your Lordships’ House, but I would be grateful if the Minister would comment on simply leaving it as a power and not making it a requirement, a point raised by so many others.
Furthermore, it seems to me that to have phased targets would be a benefit. There has been debate about even the 2030 target, but that is many years away. Given our five-year electoral cycles, I would have more confidence that we would address seriously the 2030 target, let alone the 2050 target, if we were to give ourselves graded and stepwise targets along the way, and certainly a requirement that there be at least a 2030 one.
Given the focus on decarbonisation, I am surprised that there is not more emphasis in the Bill on nuclear. The noble Lord, Lord Judd, has just referred to it in relation to waste products and some of the risks—I will say something about those in a moment. It saddens me that the newly suggested body, the Office for Nuclear Regulation, is to be given tasks focusing only on safety and security. Those are, of course, crucial, and nobody questions that. However, it leaves aside many of the other dimensions of the nuclear option that I think we so greatly need. We need, not least, more money for research and development, and we need government investment. There has been a great deal of talk from other noble Lords who know far more about the economics than me, and about the way in which a decarbonisation target would itself help to lever in private investment. If we are to have investment in nuclear energy, with further middle and longer-term aspirations, it seems that without a government commitment, private money is less likely to follow.
It is worth reflecting, perhaps, when we consider nuclear energy in relation to our decarbonisation targets, that to produce 1 gigawatt of electricity, which would power a city of about 1 million people, would take 3.2 million tonnes of coal, which itself would produce 8.5 million tonnes of carbon dioxide—to say nothing of 900,000 cubic feet of toxic waste. Noble Lords will not be surprised to hear that, by contrast, those 3.2 million tonnes of carbon could be produced by 200 tonnes of uranium or 1 tonne of thorium. The green arithmetic is not too difficult for us to understand. That alone, notwithstanding what the noble Lord, Lord Judd, said, should surely justify putting more money into our nuclear research.
Back in 1975, nuclear fission research and development received about £450 million a year. The figure reduced a bit in 1980, and I believe that the current levels of investment are only 7% or 8% of the 1980 levels, let alone the 1975 heyday. Sir John Beddington, until recently, as Members of the House will be all too well aware, our government Chief Scientific Adviser, said that he could not see a future for UK energy without nuclear energy. It is currently producing about 18% of our energy needs, and he anticipated, as others have, that it could rise to well over the 80% that we are already seeing in France. It may be 86% here but, of course, this cannot be achieved without research and development funding. It needs the Government to lead on that. It needs a joined-up approach, not just in government money but in our national nuclear laboratories, which I would love to see become national again. It also needs a joined-up approach involving the NNL, as well as our universities, and the encouragement of our own industry in its development and research, both here and indeed overseas. John Beddington also said:
“Clearly I think that if we’re going to be thinking about a significant expansion of nuclear capacity as we move toward our goal in 2050 of an 80 percent reduction in greenhouse gas emissions, we need to keep options open … And part of those options is … having the R&D to think about taking it forward”.
There is reference in the Energy Bill’s summary impact assessment to decommissioning, which, I understand, takes currently about 69% of DECC’s £2.3 billion a year. Our own view about decommissioning is remarkably negative in that we see all the waste products, to which the noble Lord referred, only as waste. I do not think we have enough confidence yet to see them also as an asset—as a fuel. It will be quite possible to use some of the plutonium in MOX reactors, with both uranium and thorium reactors, to make the waste into a fuel and make it an asset rather than a liability. Exploration of that is urgently needed. I understand that this is happening in Canada and certainly in China, to which much reference has been made. Indeed, India, to which little reference has yet been made, is also investing huge sums of money in precisely these routes and these options. I ask again whether the Minister would give consideration to that, and whether a wider brief could be given to the new body that will be set up.
We need, therefore, to change our mindset as well as put money into research and development. If we were able to make some waste into an asset and use it for our nuclear fuels, perhaps that would help to reduce the decommissioning budget. It could also release money which could be put back into the research and development that originally enabled some money to be released. More of that is needed for us to be able to walk this path with greater confidence.
Reference has already been made, not least by my noble friend the right reverend Prelate the Bishop of London, to reducing the energy demands. A number of other noble Lords have spoken about Clause 37. I, too, would encourage that. As well looking at reducing our carbon footprint from energy, we also should look to complete the circle through reducing our carbon footprint by reducing our demands.
The number of lights switched on in the House has been mentioned. It may seem rather a small matter in comparison with the rather grander and much greater issues in the Energy Bill, but taking small steps as individuals would have a cumulative effect as well as give a lead. I would couple the comment about the number of lights that are on with the fact that it always amazes me that our printers are not set to a default mode of double-sided printing. We can make little steps. If we can get into that mindset, there would be a cumulative contribution and effect, even if it seems rather removed from the arithmetic that we are mostly addressing in this debate.
Noble Lords have also spoken about fuel poverty. I want to close by saying that I regret that this legislation is not bolder in addressing the inequality of domestic energy tariffs. The Government go some way towards addressing the complex and impenetrable tariffs that consumers face today, which is to be commended. However, I am not confident that this sufficiently addresses issues of fuel poverty. Members of the House are well aware that those who pay the most for their domestic energy are often the poorest in our communities. Many of those in fuel poverty pay inflated prices through the meters in their homes or are paying for other types of fuel, which are not addressed in this legislation. Is the Minister able to assure the House that the Government will address these wider issues, so that those currently experiencing fuel poverty can pay a fair price for their energy?
EDF recently said that it will have one domestic tariff if other energy companies follow suit. I understand that Ofgem does not recommend this as a way forward. It may be right. As we debate this legislation in this House, I hope that we will take the opportunity to send a clear message to Ofgem and the energy providers that the pricing structure needs to be fairer, more transparent and clearer. I wonder whether this debate also offers the opportunity to discuss again the possibility of setting a legal framework that requires domestic customers to pay more the more energy that they use. The current position whereby the more energy I use at home, the more likely my tariff is to reduce, is surely unsustainable. There is a cost to the earth and to the poor of the world who are most impacted by climate change as a result of our energy consumption. Surely the Bill provides an opportunity to reflect the wider costs of all our energy habits.
Earl Cathcart
My Lords, I should like to start with the assumption that the Government’s primary objective for energy must be to ensure that it is available and affordable. Self-sufficiency, sustainability, energy security and green energy are equally admirable aims but they are in my opinion secondary to the primary objective. It is no good achieving any of these secondary objectives if energy is not sufficiently available or affordable.
This is an ambitious Bill and I wish for a successful outcome but I have three areas of concern. My first, shared by the right reverend Prelate the Bishop of Hereford, is the alarming number of households in fuel poverty: 4.5 million, or nearly one in five households. This is appalling, if not embarrassing, for one of the richest countries in the world. We are being told constantly that there is no easy solution because if the present tariff system is changed it may put vulnerable households in a worse position. So, nothing is done. I would say, “Where there’s a will, there’s a way”. Unfortunately, there does not seem to be the will.
High fuel poverty probably has something to do with the fact that fuel prices have doubled in the past seven or eight years. That brings me to my second concern. If fuel prices have doubled in the past seven or eight years, what will happen to them over the next seven or eight years? Some experts have argued that they expect them to double again, which no doubt would exacerbate fuel poverty. I hope that the department has done its sums and that the Minister can reassure me that prices will not double. I am quite sure that prices will go up but the question is, by how much?
The Government’s aim is that our energy will come from nuclear and renewables, predominantly wind turbines, with gas as the back-up. Energy from wind is more expensive than that from fossil fuels, and offshore wind generation is more expensive than onshore wind. Also, the cost of building nuclear power stations is enormous but the Liberal Democrats will allow them to be built only if they receive no subsidy from the taxpayer. Therefore, this huge cost of construction will no doubt be passed on to the consumer. Two of our coal-fired power stations have already closed and the Government aim to tax the remaining ones out of existence. Until they finally close, no doubt they will recover this tax charge by passing it on to the consumer.
There is something here that I do not understand. We are taxing our coal-fired power stations out of existence—admittedly they are quite old—no doubt because of an EU directive, while India and China are planning to build 800 new ones between them. I know that China also has huge investment in nuclear and renewables but, all the same, it is still a huge investment in coal when we are scrapping ours. If it is because of a directive from the EU, why is it that Germany is to build 20 new coal-fired powered stations? Will Germany’s 20 new coal-fired power stations be required to have carbon capture and storage built in, or not? If not, why are we taxing ours out of existence? I just do not see the logic.
Getting back to my concern, I do not see how prices will not continue to increase, which will further pile on the agony for those already in fuel poverty and increase the number of households getting into fuel poverty. However, it is not just households: what will these rising costs do to the competitiveness of British business and industry, especially those few industries that are heavily dependent on energy?
Recently, my right honourable friend the Prime Minister, making a speech about Britain being in the global race, said that one goal is to make Britain one of,
“the top five places in the world to do business”.
Quite so, but probably not for those industries heavily reliant on fuel, especially as fuel prices in America—with its shale gas—China, India and no doubt others are already half of ours. Let us hope that our fuel prices do not drive any industries heavily reliant on fuel away from Britain. I hope that the Minister can reassure me on this.
This brings me to my third concern. With these huge changes proposed by the Government, have the Minister and her department done the sums to ensure that there will be sufficient power available for all our needs until such time as all the new proposed power stations are up and running? Is there a margin of error built into their calculations? What concerns me is that the Government are relying on nuclear to be a major part of the new mix, but the Government have yet to agree any contract with EDF, which, worryingly, is the only player in the field.
Obviously, we hope that the new power stations go ahead, but if they do it will take at least eight years, if not more, before the first is commissioned. What happens between now and then, especially as we will be taxing our existing coal-fired power stations out of existence before we have secured any deal with EDF? If agreement with EDF cannot be reached, is there a plan B? I am sure that some of these topics—fuel poverty, energy prices over the next seven or eight years and the possibility of a shortfall in energy during that time—will be raised in Committee. I look forward to the Minister’s response.
Lord Berkeley
My Lords, along with many other noble Lords I welcome this Bill and think it needs support, but there does appear to be quite a lot wrong with it. It is going to be difficult to scrutinise. It seems that every clause refers to regulations yet to be identified. I have checked the Bill and its schedules, and the word “regulations” appears 403 times. I do not know whether that is a record, but it is not going to be easy to scrutinise this legislation if it has 403 regulations. However, it demonstrates the need for us to be given a lot more detail if we are going to do our job properly. My noble friend Lady Worthington asked for some details before we get to Committee, but it would be useful if the Minister could tell us when we are going to get information about the regulations.
I am going to concentrate my remarks on the industry structure, but before I do so, it is important to support my noble friend Lord Judd, the right reverend Prelate the Bishop of Hereford, and many others who have emphasised the need for greater support and encouragement for reducing energy consumption. We seem to have incentives to meet demand with supply; I think that is wrong. We should have incentives to reduce demand. It is the same with water. Why are the water companies not installing meters to reduce consumption and plugging the leaks? London is one of the worst offenders but, of course, they make more money that way. We really need to change our policies because there are good environmental reasons for reducing the supply of both water and electricity, and thus reduce demand.
I am both interested in and worried about the negotiations with EDF on nuclear power stations because we have a single supplier looking for some kind of firm contract for 20 or 30 years. I wonder whether these are what one might call balanced commercial negotiations: a single supplier and a single customer in the Government. The Government are up against probably the best international negotiators in the world. I compare that with what went wrong a year or so ago with the west coast main line negotiations on the franchise when Virgin exposed a number of serious mistakes in the Government’s handling of them. It is probably true to say that one of the causes was that soon after the general election, the then Secretary of State announced with glee that 30% of the civil servants were to be sacked and that they were not allowed to take any external advice, particularly legal advice. Therefore, it was a contract—rather larger than the contract to build one of our aircraft carriers, which I think is taking place at the moment—between a civil service that had lost a large number of its best staff and was not allowed to take external advice, and an international company that probably has some of the best lawyers in the world. I hope that that does not happen this time, but I do not have much confidence that it will not. If we do not get it right, the customers are, quite frankly, going to be screwed for the next five, 10 or 30 years.
I turn now to biomass. I have been looking into this quite a lot because it seems to be the short-term solution to the energy problem which the Government are proposing, and certainly before the nuclear power station gets up and running in 10 years’ time—if we get it. As noble Lords will know, biomass requires a large investment. For Drax and Eggborough, two of the power stations doing it, it has certainly been a big investment: there is the plant, the special handling facilities and the trains—I was involved as chairman of the Rail Freight Group. One possibility is to import biomass from north America into Milford Haven, which has some of the deepest water in the UK, and that will need 42 trains a day. That is a big investment, plus all the handling equipment at both ends and, of course, the ships.
I understand that Drax and Eggborough together will produce somewhere between 8% and 10% of our capacity. If the agreement with the Government on the selling price for electricity which is contained in this Bill does not go ahead, the investment will not go ahead. I also understand that this biomass negotiation cannot be completed until the nuclear one is completed. What is going to happen next winter and the one after that? According to Ofgem, last winter we had 15% spare capacity over demand, but apparently this coming winter it is going to go down to 3%. If Drax and Eggborough do not go ahead, I think we will need some candles; it is going to be quite serious. I hope that the Minister can tell me what the timescale is for the nuclear negotiations and for any relating to biomass because I think we ought to know. These companies are not going to hang on waiting for a decision for ever. Whether it is in this Bill or elsewhere I do not know, but it needs to be done soon.
The real problem is that the market structure that we seem to have ended up with is wrong. The big six generators also have retail ability. The Government policy is to deliver somewhere between 35% and 50% of generating capacity by independent renewals, which entrenches the dependency of the independent renewal energy generators on the large vertically-integrated utilities through long-term power purchase contracts. That is the big six. My understanding is that the problem for the independent retailers is that the big six will buy from the independent generators only if they cannot supply themselves. Therefore, the big six retailers always buy from their own generators as long as they have the capacity; otherwise, they buy from the independents. Apparently it has very little to do with prices. Perhaps the Minister can put me right on this, but I am not sure how the independent generators have the comfort of an open market, which they need to attract investment.
The problem is vertical integration, which means that the generators are also able to retail. In my book, it promotes monopolies, higher costs and poor services. It happens on the railways, which I follow a lot. On the railways, the Government’s policy, which I fully support, is a total separation of the train operators and the infrastructure manager. You cannot have fair competition on the railways if the train operator also runs the infrastructure, and the same applies to electricity. Vertical integration is wrong. It means that the market does not work properly.
I have information that similar things have happened in Germany, where the market does not really work. It has four big suppliers and there is not much competition at the consumer end, although it depends on which part of Germany you live in. However, the big four do very nicely and prices are high. It is interesting that the German Government are doing their best to make sure that that the vertical integration model still applies to the railways across Europe, so they clearly know something, but I hope we do not have to continue with it in the UK. There is a serious risk to investment by the independents, as the noble Lord, Lord Teverson, said, and I question what Ofgem is doing about it. I thought Ofgem had a duty to protect consumer interests but, as it stands, this seems to be a Bill to allow the big six to print money, which I am sure they will love. I do not see much competition. I see higher prices than there would need to be if there was a functioning market.
In the course of scrutinising the Bill, I hope that we will discuss how to break the dependency of the independent generators on the large, vertically-integrated utilities for long-term contracts. That would send a clear price signal to the market that would encourage as many new entrants as possible to participate. It would enable them to sell their power in an open market rather than coming second to the big six once they have got rid of their own electricity at whatever price. Otherwise, the independents will not be able to invest and we will be looking at such a reduction in supply that I suggest we all go out and buy candles for next winter.
Baroness Parminter
My Lords, like others, I welcome the Bill. It is critical that investment in the energy sector is procured and any policy inertia or uncertainty now will have a crippling effect on delivering that, securing the energy we need and meeting our legally binding carbon reduction targets. It is the only sustainable way to help keep energy affordable for hard-pressed consumers.
It is naïve to think that policy makers can control price volatility but action can mitigate its impacts, particularly those of volatile fuel supplies. Customer bills are likely to increase long term if we do not develop a clear policy framework to ensure adequate investment in low-carbon sources.
This is about bills and about jobs. The CBI recently reported that in trying economic times the UK’s green businesses have continued to grow in real terms, carving out a £122 billion share of a global market worth £3.3 trillion and employing close to 1 million people.
We have heard today from some climate sceptics—one particularly vocal noble Lord is no longer in his place—but they are in a minority in this House and around the globe. It is interesting that in the United States some of the strongest climate sceptics, including Karl Rove, support government initiatives for renewable projects, such as wind energy credits, given that wind power generates well paying, desirable jobs in rural areas. It is also seen as a cost-effective insurance against the growing number of climate change disasters. Insurers said that last year was the second most expensive in American history for disasters related to climate change, costing them $139 billion. However, private insurance paid only a quarter of those costs, leaving taxpayers to cover the rest. As the Economist highlighted last week, by comparison, funding renewable energy properly seems rather cheap. That was the point that my noble friend Lord Deben, who is not in his place, made earlier in stating that this Bill is UK plc’s insurance policy.
The majority of us accept that the Bill is right to introduce a capacity mechanism that seeks to ensure domestic security of energy supply. It is also clear around the House that there is a majority in favour of demand side response measures. Like others, I am pleased that that issue was addressed on Report in the other place through the introduction of an amendment for a pilot scheme for electricity demand management. However, given the limited opportunity to scrutinise these demand management proposals, I add my voice to the near unanimous number in this House who have called for a close scrutiny of the proposals in Committee. I support the call made by a number of my noble friends and noble Lords on the other side of the Chamber for more than one pilot scheme to be a critical part of the Bill.
There is one difference between myself and my noble friend Lord Deben, who is not in his place, in that I would not say that sovereignty is the only means of ensuring energy security. Yes, it is important, but it is not the only means. Measures better to exploit the benefits of co-operation with our European neighbours through interconnection are omitted from the Bill. Greater interconnection could help with the reduction of costs, particularly by making more efficient use of renewable energy. This view was strongly endorsed by the recent report of the House of Lords EU Sub-Committee on Agriculture, Fisheries, Environment and Energy on European energy policy.
Levels of interconnection between the UK and mainland Europe are much more limited than, for example, the 20-30% of interconnection between Belgium and the Netherlands. I applaud the Secretary of State for the recent memorandum of understanding with the Irish Government to trade renewable energy but there are outstanding barriers to better interconnection. Ofgem has highlighted the problem of congestion in the south of England which would require the existing onshore grid to be strengthened to accommodate major trade flows.
The full benefit of interconnection can be delivered only from greater deployment of high voltage direct current lines which allow electricity to be transported over long distances economically. The Bill does not say anything about the potential of interconnection, or how necessary grid strengthening can be financed or, as crucially, how public support can be gained for significantly higher pylons than are currently used. I hope that in Committee we seek clarification from the Government on their policy intentions on interconnection, on overcoming the barriers to building up the European electricity grid and on enabling Britain to benefit from increased security of supply.
There is much to be welcomed in the Bill but I am disappointed that it is a vehicle to provide public subsidy for the nuclear industry. Nuclear may be low carbon but that fact cannot hide the astronomical costs of building—and, indeed, decommissioning, as the right reverend Prelate the Bishop of Hereford ably pointed out—nuclear sites or the failure, after 60 years, to find solutions to storing high-level radioactive waste. All this on top of the fact that the British taxpayer is liable for any clean up of a major nuclear accident. Corporate liability for any nuclear accident is capped at around £1 billion—a derisory sum given that the estimated total clean-up costs for the Fukushima nuclear accident are likely to top £160 billion.
I wish the Bill well, but as we are not an energy island a strong European energy policy framework is critical. I commend the Secretary of State for his leadership in Europe and for arguing strongly for a binding emissions reductions target of 50% on 1990 levels by 2030 in the context of an ambitious global climate deal. Such leadership will be aided by the successful passage of this Bill and help move us towards the all-important global climate deal in Paris in 2015.
Lord Davies of Stamford
My Lords, I always listen to the noble Baroness, Lady Parminter, on these subjects with great interest and respect. She has great command of the subject. I think what she said about interconnection was a very valuable contribution to the debate.
I do not think that anyone who has read the report of the noble Lord, Lord Stern, published a few years ago, or least of all who, like me, has seen the dramatic retreat of glaciers in the Alps and the Himalayas evidenced in photographs taken only 50 years ago, can be in any doubt at all about the reality of climate change and the challenges we face.
I see the purpose of this Bill to provide the country with a diversified and secure basis for future energy supplies on the one hand and to achieve our international obligations on decarbonisation on the other. I totally support both objectives and I certainly will be voting for the Bill on Second Reading in the very unlikely event that there is a vote.
However, there are at least four respects in which I very much disagree with the Government’s approach to energy, and I rather think that the noble Baroness, Lady Parminter, has persuaded me to add a fifth to my list: the need for greater investment in interconnection. First, this Bill does not require the Minister to produce a decarbonisation target. In this respect, I totally agree with the right reverend Prelate the Bishop of Hereford and others who have said that this Bill should be prescriptive and not permissive on this point. Secondly, I am very disappointed that the Bill says nothing about demand reduction. I have yet to hear the Government set out their strategy quite clearly on that. Certainly I cannot find such a strategy in this Bill and we definitely need it.
My third problem with the Government’s energy policy is that we have made a probably excessive commitment to wind power, certainly to offshore wind power. It seems to me that the Government, under pressure from their Back-Benchers, are using the planning system to stop more developments of onshore wind power and are pushing it all offshore. However, offshore is an extremely expensive form of energy and it does not make any sense at all. The usual comparisons are that the cost of nuclear energy is somewhere between 6p and 10p per kilowatt-hour and offshore wind power is somewhere between 11p and 16p, which is about twice as great. However, you are not comparing two comparable things. Wind energy is not base load. It is not even a reliable peak load that you can turn on and off as you require, which you can with a combined-cycle, natural-gas-fired, thermal power station. It is extremely expensive for something that is not that valuable. I think we have gone perhaps too far in that direction.
My real quarrel with the Government is about nuclear power. What they propose is not in any way adequate. I would not go quite so far as the right reverend Prelate the Bishop of Hereford who wants to see 80% of our electricity generated by nuclear fission. That is, as he rightly said, the case in France. That is going quite far and would deprive us of the potential quite considerable advantage of benefiting from shale oil fracking to produce gas in the future. It looks as though gas prices are going to come down quite dramatically as a result of that. We have large reserves in this country and it would be a pity to give up that bonanza.
What is more, for the reasons I have just mentioned, there are advantages in flexibility in having in your portfolio a considerable degree of capacity from combined-cycle natural gas generation as well as nuclear. It is very alarming that the proportion of our electricity produced by nuclear fission has now fallen to below 20%. It was 25% a few years ago. If the proportion does not go up to 80%, as the right reverend Prelate would like, I would certainly want to see it above 25% very rapidly and it should be 30% or 40%.
If I asked the Government why we do not build 20 new 1.6 gigawatt nuclear stations rather than 10—they have not got round to signing a contract for one yet—they would probably give two answers. I have never asked them so I am probably putting words into their mouths. First, they would say that it would be inordinately expensive and, secondly, that there is very limited appetite in the private sector for this type of risk. This has been demonstrated by the difficulty they have had in getting people to bid for their business in this context already. The two German potential partners, E.ON and RWE, have walked away.
The Government have produced this situation by their own errors. They have adopted the wrong model for nuclear generation—one that is based on misallocation of risk and which consequently is unnecessarily and excessively expensive and deters potential private sector investors. The risk of design, construction and operation should be borne by private sector investors and contractors. It is vital that the same partner is responsible for all three so that design and construction are informed at every stage by the need for maximally safe and efficient operation. That is clearly a role for a contractor, but the Government are quite wrong to think that it is better for the private sector contractor to manage the commercial risks involved.
The Government have already retreated and accept now that the counterparty for contracts for differences must be a single counterparty backed by the state. Previously they were saying that the generators could just deal with the suppliers in an open market. They got that completely wrong. They have realised now that they have to take back that risk for the Government, so they have already accepted the logic of my argument. However, there are many other respects in which commercial risks are better handled by the Government. For example, anything to do with network risk, the failure of the system, and difficulties with suppliers or distributors or anything of that sort is probably better handled by the Government as they have the means to intervene.
If there were a shortage of uranium in the world—very unlikely at present but we are talking 60 or 70 years ahead—the Government are much better able than a private sector contractor to deal with that. We have our own sources of uranium. I speak as the former Minister responsible for the Atomic Weapons Research Establishment. We have international agreements and so forth. There are many respects in which the state is better able to handle those risks than a private sector body.
Some risks have already been mentioned. The noble Baroness, Lady Parminter, referred to one of them, which the taxpayer or the energy consumer cannot walk away from anyway. For example, there are the risks of an accident costing beyond £1 billion and the risks of decommissioning. It is all very well to say that a contractor has to make provisions. Under the contracts that have now been negotiated he will have to provide for the costs of decommissioning, but who knows what they are going to be in 60 or 70 years time, or what the value of the fund accumulated in EDF Energy or any other contractor will be by that time. Again, in practice the state will be standing behind those risks and reinsuring them. There will be a contingent liability on the state.
What does all this mean? If you construct a model on that basis, you are passing to the private sector risks that it can less efficiently manage than you can yourself. Therefore they are going to cost more by definition. You are passing to the private sector risks, some of which remain with you anyway, so you are paying double for them. It is not a very intelligent policy. The private sector contractor will factor in those risks in his costing, which will be very expensive. What is more, because of the lack of competition in this business he will expect a very high profit and get away with a very high return, so the cost of capital is going to be extremely high.
With the long lead time in constructing nuclear power stations, the cost of capital will be a major factor, if not the most important factor, in the total cost. The Government have created the problem of the extreme cost of this business. I will give a simple example so that noble Lords can do their own calculation. The impact assessment predicts a cost of capital of 10% for nuclear power stations. I think that might be a little less than the likely level. The cost of equity is vastly more than that, I would have thought twice that at least. What the weighted average cost of capital will end up being I do not know. Take the 10%—do not take any figures that I might suggest—that is used in the impact assessment. That 10% is four times the Government’s cost of capital—2.5% is the 10-year gilt rate at the moment. The Government are paying four times more than they need. I think that is bad Government. It is a great mistake and they have gone for the wrong model.
I am sure that if you put that to the Government or to the Treasury, they will say that they could not have the state owning the stations and raising the finance from the gilt market because that would mean an increase in our total debt ratio, our debt to GDP ratio, and cause us problems in the markets. That is very naïve. First, it means that we are paying a very considerable price in economic terms for purely presentational advantage; and, secondly, that argument depends on the markets being so stupid that they cannot look through the presentation for the reality and do not actually know what is happening.
Of course, the markets are perfectly capable of doing that. The markets will factor in the contingent liabilities of the state for the environmental risk that I mentioned. They will factor in the contingent liability that the Government are now incurring in standing behind the counterparty for contracts of difference. That is obviously a contingent liability in itself. That is not a sensible answer; it is also a reflection of not very intelligent government.
I fear to say that we have sold the pass on that. Of course, we cannot go back to any other model for the construction of those vital nuclear power stations, but we should be aware that by going down this road we have deprived ourselves of a lot of investment that we might have had to build much greater nuclear capacity. That is a great mistake and we should look very critically at what the Government come up with in energy policy because, up till now, they have shown something very much less than the competence one would like to see.
Lord Browne of Madingley
My Lords, I declare my very extensive financial and non-financial interests in the energy sector, which are all set out in the Register of Lords’ Interests. I particularly draw your Lordships’ attention to my position as partner and managing director at Riverstone Holdings, which manages several energy-focused private investment funds with stakes in a range of UK-based and international companies. Those companies operate at all stages of the supply chain and in almost all energy markets.
When the Bill was first published, I wrote that it was complex and that it introduced a range of new risks into the market, threatening to deter planned investment. Since then, some of my concerns have been satisfied. For example, the move to a single counterparty CFD is particularly welcome, and lends the financial instrument at the heart of the Bill a creditworthiness that it was lacking. There remain risks in the Bill, such as the danger that the new regime will make it more difficult for smaller, independent generators to sell their power in a market dominated by large, vertically integrated utilities. Risks such as that must be assessed carefully and adjustments made if necessary.
I want to make two further points about the Bill. The first concerns any amendment to add a decarbonisation target. In my experience as a businessman and investor, a decarbonisation target for 2030 would have little impact. Decarbonisation is just a means to the essential and, indeed, existentially important end of reducing carbon dioxide emissions. Companies do not listen or react to long-term political aspirations, because there are too many technological, economic and political unknowns for them to be taken seriously.
The incentive structures contained in the Bill are far more important than targets or aspirations, because they are the mechanism for action. Only credible, consistent and creditworthy incentive structures can unlock the investment needed. Take carbon capture and storage, for example. CCS is a young technology which requires the state to underwrite some risk so that it is developed here in Britain. That will enable us to benefit in an even more environmentally sustainable way from our abundant domestic gas reserves, which, in any case, have a lower carbon footprint than imported gas.
However, investment in CCS, gas or renewables will not come from a decarbonisation target. It will come from simple incentive structures which allow different energy technologies to compete on a level playing field, with their full set of externalities taken into account, and which are implemented reliably, transparently and quickly. It is therefore critical that the Bill is not subject to yet more delay from wrangling over a decarbonisation target. Uncertainty about the direction and speed of travel has been far more damaging to investment than questions about the detail of policy.
My second point concerns the broader strategic framework within which the Bill sits. Decisions on energy policy and public investment in energy infrastructure are based on criteria which change frequently, depending on the people in charge and the priorities they decide to pursue. That has proven to be inefficient and damaging to investment in the North Sea, for example, which has seen cycles of windfall taxes followed by tax breaks followed by more windfall taxes. There is no need to reinvent the context every time an investment or policy decision is made. It would be sensible to set an overall strategy just once and then make subsequent decisions with those long-term strategic goals in mind.
The London School of Economics Growth Commission, of which I was a member with the noble Lord, Lord Stern, proposed an infrastructure strategy board to provide independent advice to policy-makers about strategic priorities. That would not be a radical innovation. It is the model followed by NICE, the healthcare body, and the Monetary Policy Committee. A panel of independent experts with knowledge, expertise and experience of the industry could consistently check everyday decisions against the long-term strategy set by the Government. That would be enormously helpful in the energy sector, where different technologies and fuels cannot be assessed in isolation. They are part of a system. Independent and expert advice could help to turn a set of disparate and often conflicting energy policy decisions into a real energy strategy. In this regard, I support the comments of the noble Lord, Lord Oxburgh, and I hope that the Minister will consider in her response whether that will deliver strategy.
We must judge the efficacy of the Bill by its results. Success will come from higher quality investment from a diverse set of investors; investment in a greater range of energy sources, including hydrocarbons used for power, such as gas and the encouragement of CCS; respecting existing commitments, such as the phasing out of coal; and an electricity price that maintains the competitive nature of British industry. Those are the tests against which the Bill should be judged. We have spent almost three years debating the structure of this reform package. I believe that it is now time for implementation and action.
Viscount Ridley
My Lords, I begin by declaring an interest in coal-mining on my family’s property, as detailed in the register, but I shall not be arguing for coal today but for its most prominent rival, gas, in which I have no interest.
I thank my noble friend the Minister for her courtesy in discussing the Bill and welcome the fact that the Government have grasped the nettle of energy policy, especially on the issue of nuclear power, after the deplorable vacuum left by the previous Government. However, I am concerned that we are being asked in the Bill to spend £200 billion, mainly on the wrong technologies, and that we will come to regret that. We are being asked to put in place a system that will guarantee far into the future rich rewards for landowners and capitalists, while eventually doubling the price of electricity and asking people to replace gas with electric space heating. That can only drive more people into fuel poverty.
We have heard a lot about the needs of energy investors and producers. We have not heard enough about consumers. If the industry gets an 8% return on the £200 billion to be spent, just two offshore wind farms or one nuclear plant would be declaring profits similar to what British Gas declares today. That will be an uncomfortable position for the Government of the day.
The Bill is a dash for wood and wind—two medieval technologies—and it is twice as big as the dash for gas of the 1990s. Between 6 and 9 gigawatts will have to be built a year for the next 16 years, compared with 2 gigawatts a year during the dash for gas. I am not sure it can be done, let alone affordably. In the case of biomass, the only way we can source enough is by felling trees overseas. As the noble Lord, Lord Berkeley, said, Drax will soon be taking more than 40 trains a day of wood pellets from North America. That is not energy security.
Under the Bill,
“‘low carbon electricity generation’ means electricity generation which in the opinion of the Secretary of State will contribute to a reduction in emissions of greenhouse gases”.
Shades of Humpty Dumpty: a word means just what I choose it to mean. We are being asked to pretend that the most carbon rich fuel of all, wood, is not a source of carbon. According to Princeton University, trees used for biomass electricity generation increase carbon dioxide emissions by 79% compared with coal over 20 years and by 49% over 40 years, even if you replant the forest. We are through the looking glass.
Offshore wind, meanwhile, is a risky technology with a track record of engineering problems, sky- high costs, disappointing lifespan and problems of decommissioning. At the moment, we generate less than 1% of total energy, or 6% of electricity, from wind, despite all the damage it has already done to our countryside and economy. We are to increase that to something like 30% in just a decade or so, maybe more if nuclear is delayed. It is a huge gamble, and if it fails, the only fallback is carbon capture and storage, a technology that has repeatedly failed to meet its promises at all, let alone affordably, a point made earlier by the noble Baroness, Lady Liddell.
Even if this wood and wind dash is possible, under the contract for a different system proposed in this Bill, while better than the renewable obligations that preceded it, the subsidy to renewable energy will quadruple by 2020. That is only the start. On top of that, there are system costs for balancing the unpredictability of wind; transmission costs for getting wind from remote areas to where it is needed; VAT; the carbon floor price; not to mention the cost of subsiding renewable heat and renewable transport fuels. Hence, at a conservative estimate, the Renewable Energy Foundation thinks that we will be imposing costs of £16 billion a year on our hard-pressed economy for several decades.
Why are we doing this? We are doing this because of four assumptions that were valid in 2010 but, as my noble friend Lord Lawson pointed out, are no longer valid to the same extent. First, we assumed we would not be acting alone, so we would not damage our competitiveness. Instead, not only is there no longer a Kyoto treaty, but China is planning to build 363 coal- fired power stations; India 455. On top of that, the European trading system has collapsed to less than €5 a tonne of carbon. Our carbon floor price is more than three times that: £16 a tonne, rising to £32 a tonne in 2020 and £76 a tonne in 2030. Acting unilaterally in this way does not save carbon emissions. It merely exports them and the jobs go with them. Northumberland’s largest employer, the aluminium smelter at Lynemouth, has closed with the loss of 500 jobs, almost entirely because of carbon policies.
The second assumption behind the Bill was that the cost of gas would rise, thus making the cost of energy rise anyway. The Committee on Climate Change said recently in a report that:
“Consensus projections are that gas prices will rise in future”.
This remark has been described by the utilities team at Liberum Capital as “genuinely amazing” in the light of recent events. Now that we know that gas prices have plummeted in the United States to roughly one-quarter of ours, thanks to shale gas; now that we know that Britain probably has many decades worth of shale gas itself; now that we know that enormous reserves of offshore gas near Israel, Brazil and parts of Africa are going to come on line in years to come; now that we know that conventional gas producers such as Russia and Qatar are facing increasing competition from unconventional and offshore gas; now that we know that methane hydrates on the ocean floor are more abundant than all other fossil fuels put together and that the Japanese are planning to explore them; in short, now that we know we are nowhere near peak gas, it is surely folly to hold our economy hostage to an assumption that gas prices must rise.
We will need the gas anyway. The intermittent nature of wind means that we will require increasing back-up and we cannot get it from nuclear because it is not responsive enough to fill the lulls when the wind drops. Far from replacing fossil fuels, a dash for wood and wind means a dash for gas too, only this time we will have to subsidise it because the plants will stand idle for most of the time and pay a rising carbon floor price when they do operate. Having distorted the markets to disastrous effect with subsidies to renewables, we are now being asked, under the capacity market mechanism, to introduce compensating countersubsidies to fossil fuels.
The third assumption was that the cost of renewables would fall rapidly as we rolled them out. This has proved untrue and, indeed, as the Oxford Institute of Energy Studies has shown, the cost curve for renewables inevitably rises as the best sites are used up, not least in the North Sea. I am told by those who work in the offshore wind industry that, at the moment, the industry has every incentive to keep its costs up not down, as it sets out to strike a contract with the Government. They will not have to try very hard. Even at low estimates, offshore wind is stratospherically expensive.
The fourth assumption on which this Bill is based was that the climate would change dangerously and soon. Once again, this assumption is looking much shakier than it did five years ago. The slow rate at which the temperature has been changing over the past 50 years and the best evidence from the top-of-the-atmosphere radiation about climate sensitivity are both very clearly pointing to carbon dioxide having its full greenhouse effect but without significant net positive feedback of the kind on which all the alarm is based. The noble Baroness, Lady Worthington, and the noble Lord, Lord Stern, both mentioned Professor Myles Allen and they will be aware, therefore, of his recent paper, which found significantly reduced climate sensitivity. If that is the case, the dash to wind and biomass may well continue to do more harm to the environment as well as to the economy for many decades than climate change itself will do.
However, leaving that on one side, as my noble friend Lord Lawson said, the argument against subsidising wind and biomass does not depend on a benign view of climate change. It stands powerfully on its own merits, even if you think dangerous climate change is imminent. In 1981, my noble friend Lord Lawson, ignoring the prevailing wisdom of the day, as he sometimes does, decided against the predict-and-provide central planning philosophy and instead embraced the idea of letting the market discover the best way to provide electricity. The result was the cheapest and most flexible energy sector of any western country.
We have progressively turned our backs on that. Under this Bill, the location, the technology and the price of each power source is determined by one person—the omniscient Secretary of State. Recent occupants of that position have an unhappy history of not making wise decisions. Remember ground source heat pumps? They do not work as advertised. Remember electric vehicles? They have been a flop. Remember biofuels? They have caused rainforest destruction and hunger. Remember the Green Deal? Must we go on making these mistakes?
We have returned to a philosophy of picking winners, or rather, from the point of view of the consumer, of picking losers. Not even just picking losers, but hobbling winners, because of the obstacles we have put in the way of shale gas. America has cut its carbon emissions by far more than we have, almost entirely because of shale gas displacing coal. By pursuing a strategy that encouraged unabated gas, we could halve emissions and cut bills at the same time. Instead, I very much fear we will find we have spent a fortune to achieve neither.
Viscount Hanworth
My Lords, this Energy Bill is the product of economic doctrines that have misled a generation of Conservative politicians and have penetrated deeply into the Civil Service. For a while, they also strongly affected the thinking of Labour politicians. The project of energy market reform, which the Bill promotes, is an ongoing attempt to subject the circumstances of energy production and supply to the nostrums of free market economics.
The project is being pursued in circumstances that have been strongly influenced by a previous ideologically motivated reform, namely the privatisation of the country’s electricity industry that occurred in the closing years of the Thatcher Administration. The doctrines in question derive from the ideology of neoclassical economics, which envisages a world composed of perfectly competitive agents operating in free markets, which are devoid of government interference and regulation and have been purged of state monopolies. In this world, efficient financial markets operate in such a way as to ensure that investment projects, with very different profiles of costs and benefits, can be placed on an equal footing. In effect, future costs and benefits are to be discounted by a factor that declines as one advances into the future and is directly related to the market rate of interest, which is the reward for lending money.
The resulting discount factor may be equated, in theory, to the marginal social rate of discount—if one is prepared to postulate such a thing—but some believers are keen to assert that there is no such thing as society. However, a basic proposition of the doctrine, which must surely be rejected in the context of a national energy policy, is that public investment can and ought to be evaluated according to the desiderata that govern private and commercial investment. By adhering to this proposition, one is bound to favour short-term commercial gain at the expense of long-term social benefit. The actual world is not the ideal world that neoclassical economics envisages—and it never will be—but the proponents of the ideology pay scant attention to realities. When the opportunity arises and whenever they are in a position to do so, they are liable to attempt to make the reality conform to their idealistic visions.
The free market ideology suffuses the Bill but, as time has passed, some of the more implausible aspects of its original design have been amended and obscured. I shall begin my critique by looking at its central concept, which is a contract for differences to be applied to the price of electricity. This terminology has been borrowed from financial markets, where a contract for differences is a financial derivative designed to indemnify the party who has purchased it against the effects of fluctuations in the price of a financial asset, measured as departures from a so-called strike price. The writer of the contract is described as the counterparty.
The Bill originally envisaged a multitude of counterparties, constituting a free market. In that case, the terms of the contracts for differences would be discovered or revealed by the market; and, given that markets are deemed to be efficient, it was imagined that this would create an optimal outcome. The idea has gone into abeyance. The critics have asserted that, in reality, such a market would be beset by risks of confusion and by dangers of default and bankruptcy. The outcome is that there will now be a single government-owned counterparty and that the terms of the contracts will be set through an administrative process.
However, it remains the Government’s intention that the strike price will eventually be set through a competitive free market process. An expectation of the designers of the Bill appears to have been that a competitive environment would generate a single strike price that would be applicable to all electricity generators, regardless of the technology. The beautiful idea here was that there would be no need for strategic decisions regarding the appropriate technology mix of our future power generation. This mix would be discovered by the market, as if by the operation of a hidden hand, and the outcome, according to the theory, would be an optimal one. In my opinion, this is an absurd idea. The costs and benefits of the various technologies in question have very different profiles through time. Notwithstanding the hypothesis of efficient markets, these incommensurable futures cannot be mediated solely by commercial and financial transactions. Instead, they should be determined in the light of some careful strategic planning. Indeed, the markets have no perception of the future, other than as an aggregate of the dim perceptions of the majority of their agents.
Gas-powered electricity generation has the shortest of the time horizons and, for that reason, it accords best with the short-term preferences of financial and commercial markets. Its capital costs are the lowest and its running costs are the highest. However, an imponderable aspect of this option is the future price of the fuel. There are some highly contradictory predictions of what will eventuate. There are anxieties about the security of supply given that, at present, the principal sources are in Russia and the Middle East. There is also an expectation of rapidly rising prices in the face of an increasing world demand. On the other hand, it is observed that gas prices in the US have been falling in consequence of fracking. The optimists imagine that an ample supply of shale gas can somehow be magicked out of the ground on which this nation stands to replace the depleted supplies of North Sea gas.
Those sceptical of the reality of climate change, who include the Chancellor of the Exchequer, also envisage the exploitation of Arctic oil and methane, the supplies of which are presently uncharted and undiscovered. For them, the discovery and exploitation of ample supplies of hydrocarbons is an exciting prospect. For the rest of us, who constitute the majority, this is a terrifying prospect.
The second technology to be reviewed is that of wind-powered electricity generation. Here, the capital costs are high, but the energy that drives the windmills is free. However, the power supply of windmills is intermittent and must be balanced by a compensatory supply, which is liable to be gas-powered. The intermittency implies that a very large renewables capacity is required to guarantee a minimum level of supply. The costs of wind-powered electricity cannot be assessed in isolation and the severity of the problem of intermittency will be a function of the proportion of electricity supplied, on average, by the windmills. To propose that mindless markets should be capable, on their own, of adjudicating these matters so as to determine the optimal proportion seems absurd.
The third technology that needs to be considered is nuclear power generation. Here, the capital costs come in large indivisible lumps and the stations are of such longevity that we should be considering 60 years of operation following a period of as long as 10 years for their planning, construction and commissioning. Once the nuclear power stations are in place, their operating costs are the lowest of all. The outstanding difficulty affecting a nuclear project is the size of the lumps of the capital costs. In one way or another, national Governments have hitherto been involved in the construction of every nuclear power station. For a variety of reasons, which are a mixture of ideological predispositions and budgetary restrictions, the present Government have resolved that the capital costs of nuclear power should be borne entirely by commercial suppliers. There are few suppliers willing to bear such costs, and the majority of those who originally expressed an interest have withdrawn.
We are left with one major potential contractor, which is a French nationalised industry in commercial disguise. This is EDF, or Électricité de France. It is an outstanding irony that their pursuit of a free market ideology has brought the Government face to face with a foreign state-owned monopolist. This supplier is expecting to assess the future costs and benefits according to the criteria of a short-term commercial investment appraisal that envisages a rate of return in double figures. In such an appraisal, the future benefits of a nuclear power station, which are delayed in time and subject to a heavy discount, must be weighed against the current up-front costs. In order that the benefits should outweigh the costs in such a calculation, an exorbitant rate of return is demanded. Moreover, this return is being demanded for an extended period. We believe that a contract for differences, designed to provide secure revenue, would be extended over 35 years. This would be a perilous commitment for any Government to make.
There is an obvious recourse that should be available to any Government who are not blinded by their ideology or hamstrung by their fiscal anxieties. It is that the Government should, at their own expense, commission the building of nuclear power stations which should then be owned by the nation. If need be, the stations could be leased out to commercial operators but, given their low operating costs, such arrangements would be a matter of minor detail. In assessing the benefits of nuclear power, a marginal rate of social discount should be used that is considerably below both the commercial rate of discount and the 10% that has been used by the Department of Energy and Climate Change in its calculations of the so-called comparative levelised costs of electricity generation.
I am an ardent protagonist of nuclear power generation and of the yet-to-be-realised superior nuclear technologies that would be available to us if we were actively to pursue their research and development, as the right reverend Prelate the Bishop of Hereford so eloquently enjoined us to do. Nevertheless, I have difficulty in evincing any enthusiasm for the way in which the Government are approaching our nuclear future and our energy future in general.
Lord Stephen
My Lords, I start by referring to my interests as listed in the Members’ register.
This is an overwhelmingly positive Bill with overwhelming but not—as we have seen clearly today—unanimous support across the political parties and, indeed, the Cross Benches. Many positive changes have been made to the detail of the Bill and much of that detail is now absolutely correct. Some of the changes—for example in relation to the counterparty—have been referenced already. Having the Government underwrite the counterparty role is vital. The proposal to move the feed-in tariff limit from 5 megawatts to 10 megawatts is very welcome, while the early release next month of the draft EMR delivery plan, with the information on the strike price for the contracts for difference, will be crucial. In the short to medium term, the capacity market for gas will be crucial in keeping the lights on. The capacity market has not been an issue of huge political debate. It does not get hearts racing in the other place or on the Floor of this House, but it is very important to get it right. The first thing to happen will not be a switching-off of the lights; it will be instructions to major industrial users to stop using electricity. That will be very serious for our economy and for the messages that it sends out.
All those are good points in relation to the detail. In relation to the capacity market, I would be very pleased if more were being said—particularly in the medium to long term—to encourage the storage of renewable power. That is crucial to the credibility of the renewable sector. More could start to be done in the Bill to encourage that.
All of this represents a huge opportunity to the UK economy. The Minister said that there will be £110 billion of investment this decade and £7.6 billion per year by 2020. However, it has not happened yet. There needs to be real industry confidence. That confidence has been severely dented by delay and by the DECC versus the Treasury battle—the Conservative-Liberal Democrat battle—that we have witnessed over recent months and has been played out in the media. That sort of squabbling has done real damage. It is crucial to get not only a confirmed strike price but also EU clearance and political harmony on all of this.
I worry about EU clearance. It would be straightforward to get state aid clearance if this were only about renewables but it is not only about renewables, it is about nuclear as well. I worry about the potential delay and the impact that that could have on final investment decisions in the renewables sector. It is crucial to have continuity, consistency, clarity of political purpose and political support. In too many aspects of the industry, investment is stalled right now. Major international investors are voting with their feet and going elsewhere. I would predict that some of the big announcements that have been made—for example by turbine manufacturers—about inward investments into the UK will not happen due to the lack of continuity and the lack of clear political commitment. That is a real cause for worry.
Tackling climate change is urgent. It cannot wait. There is overwhelming evidence and overwhelming agreement about that among the scientists, the economists and other experts. We have heard it from the very good contributions made by the noble Lords, Lord Stern and Lord Deben. Global warming and climate change is perhaps an inconvenient truth but it is a truth nevertheless—and it is one that must be tackled now. The climate change deniers have got to be challenged. Do they have overwhelming, incontrovertible, infallible evidence on their side? To that I would say, “No, no and no again”. The Bill is a crucial and very major reform.
The ROC system is far from ideal. It is a system under which subsidy stays high even if electricity prices rise. Consumers’ money can therefore be very considerably wasted. It was a pretty complex and very British—solely British—solution. However, ROCs did at least create certainty and confidence in the industry. Contracts for difference are theoretically better, but the change has to be well handled to maintain confidence. So far that has not happened. Squabbling, as I mentioned, has led to a loss of confidence and the delay has created the sort of uncertainty that no industrial sector likes.
There is also a degree of illogicality in those who talk about being anti-onshore wind but in favour of offshore wind. If you want to protect the consumer and keep prices down, offshore wind is—as has been mentioned already today—much more expensive than onshore wind.
As for nuclear, I still have very serious concerns. It is slow to deliver. It is expensive. More than 60% of DECC’s budget is currently spent on nuclear. The nuclear waste is toxic and dangerous. It has a very long half-life. The nuclear sector relies on a depleting uranium supply from uncertain sources in politically unstable nations. Fusion would be a wholly different thing but we are far from there yet. Perhaps most importantly, investment in nuclear tends to reduce the urgency of the investment in renewables. As I have already mentioned, it could also lead to a delay in state aid clearance for contracts for difference, and clearly a huge amount of government resource has been taken up in the negotiations with EDF on the whole nuclear issue.
We need a simple and clear determination to stop burning fossil fuels. It is a declining resource. It will also be increasingly expensive, even if there are short-term reductions. It is a very damaging and polluting resource that causes climate change and global warming. There is no bigger issue facing the future of our planet, which is why this debate today is so important.
That brings us to decarbonisation. I would far rather see a decarbonisation target coming sooner. It is another area of coalition dispute—another Treasury versus DECC battle. There was no target in the original Bill, however, and I am very pleased that there is now provision for a decarbonisation target. Although I would be prepared to wait until 2016, the acid test will be the response and the attitude of others. Major investors, manufacturers of turbines, those involved in the renewable sector, those who make the final investment decisions, have made it very clear that they are looking for a strong decarbonisation target to support their investments. I certainly believe that it should not be an enabling or an optional provision. There should be a requirement on the Government to fix a decarbonisation target.
I want to make two final points. The first is on energy efficiency and demand reduction. There is huge potential in these areas, which are vital. They have been neglected areas of energy policy for too long. However, switching from fossil fuel—not just for electricity but also for our heating and our transport—will require very significant amounts of electric energy. That always has to be remembered.
Secondly, community renewable schemes are vital. The Bill rightly encourages them and will do more to support them. However, in the real world—in the practical world of finance—the current problems with the Co-operative Bank could be very damaging to many community projects. I believe that a great deal will have to be done to keep these projects alive. A Bill on its own will not be enough.
In summary, we need to get on with it. Let us have no more delays or divisions but instead show political clarity and unity in order to deliver the confidence needed to create thousands of jobs and billions of pounds of new investment and cleaner, greener and more secure energy for everyone in the UK—for business and for consumers. There are many other countries investing in renewable energy where the sort of political divisions that we have witnessed this afternoon simply do not happen. They are going for it and doing so with absolute determination, conviction and commitment. The Bill can help us to do that in the United Kingdom, and it must do exactly that. It should therefore be supported.
Lord Kerr of Kinlochard
My Lords, I mention my entry in the register of interests, particularly that it includes a mining company and a power company.
I will not detain your Lordships long. My understanding of this complex Bill is as yet incomplete, but it is a very different Bill from the one that the committee chaired by the noble Lord, Lord Oxburgh, reported on last July. It is a very different Bill from the one that turned up in the other place seven months ago. It is a very different Bill from the one that finished Committee stage in the other place at the end of the last session. More than 90 clauses were added at Report stage without substantive debate.
It is also an extremely dense text; a very complex text describing a very complex structure. With great trepidation, I have to disagree with the noble Lord, Lord Lawson of Blaby, who exempted me today—extraordinarily—from his strictures on everybody else in the House, the Bill, the Government and the Opposition. I was very grateful for what he said, but when he said that Dieter Helm was right to describe this as the Gosplan solution, he was wrong. I spent some time in Moscow as a young man and used to read a lot of Gosplan texts. They were clear, straightforward, decisive, precise and detailed. They were all wrong, of course, but it was all there with tremendous clarity. This text, and indeed the whole structure, seems to be a sort of magic toyshop with something for everyone, and a sometimes awkward balance between environmental aspiration and traces of the market here and there. It seems sometimes to put a little more emphasis on the greening of the economy than on cutting costs and keeping the lights on.
The Bill will take a lot of studying. Nevertheless, I welcome it because at least the long period of investment hiatus may be about to end. Companies cannot spend shareholders’ money unless the rules of the game are clear. Although I may not agree with all the rules of the game as proposed, clarity will be important. Without substantial investment soon, the lights will indeed go out. If and when the Bill passes, as I hope it will, a modicum of clarity will exist. It is not in the Bill now because the details on capacity mechanism and contracts for difference are apparently to be set out in subordinate legislation that we have not yet seen. I understand that the detail on CFDs, including draft strike prices, may appear in a draft delivery plan next month. Getting this right will be crucial to ensuring that investment in low-cost generation is cost-effective, and it is very important that this work should not be based on aspiration but should be founded on evidence-based analysis.
As for the capacity mechanism, I understand that the consultation on its design and the draft legislation is planned for the autumn and that the first auction will be next year, but that the first delivery year will not be until 2018-19, which puzzles me. Why the delay? Presumably, the Government are thinking about the construction of new capacity. However, the lights could go out well before 2018, and companies need to consider whether to run on or phase out existing plant. I hope that in Committee we will learn a bit more about how the auction system is to work and its timing.
Three points arise from the debate. First, I agree with virtually everything that the noble Lord, Lord Oxburgh, says on this subject but, again with great trepidation, I need to register a note of dissent from what he and the noble Lord, Lord Stephen, have said about the 2030 decarbonisation target and the absence of such a target in the new Clause 1 in Part 1 of the Bill. Here I agree 100% with the noble Lord, Lord Browne of Madingley. With all due respect to the argument advanced by the noble Lord, Lord Cameron of Dillington, from these Benches, companies like Siemens are not impressed by 2030 targets. Such companies make their decisions on what capacity they need and where they should site their plant on the basis of clear commitments. They are pretty cynical about targets, as am I about the idea of a legally binding target 16 or 17 years out. Bindings fray, and no Parliament can bind its successor. What matters for investors, as the noble Lord, Lord Stephen, says, is certainty and continuity. They need to see the underpinning of any targets by credible costings and a credible commitment to meet those costs. Realistically, that would not be attainable by 1 April 2014, and I do not think we are foolish to have failed to add to the Bill a requirement by 2014 to set a 2030 target. If that arises in Committee, I will be arguing against including such a target.
Secondly, I disagree with what the noble Lord, Lord Deben, said about carbon capture and storage, and here I am disagreeing also with the noble Lord, Lord Browne of Madingley. I am sure they are right that CCS is the technology of the future. A number of great companies have already spent a long time and large sums of money in trying to make it work economically, but no one has succeeded. I am sure that in 10 years’ time CCS will have a very important role to play, and I am as sure of that as I was 10 years ago when I first said it. It is the technology of the future and it may stay that way for a very long time into the future—alas, because it looks like a marvellous solution, but it is extremely hard to make it work.
Thirdly—this is very daring because here I am disagreeing with my old boss—the noble Lord, Lord Lawson, was kind enough to exempt me from his strictures on my old department and DECC for what sounded like rather absurd language about how the United Kingdom would influence the energy and environmental policy of China. I agree that there is a fly-on-the-wheel problem that one sees from time to time in such language. But the Chinese, too, deserve the Lawson lash because they seem to believe in climate change and to believe that it is at least partly man-made. They are building one nuclear plant every month, and investing hugely in LNG. They, like the noble Lord, Lord Lawson, are strong advocates of shale, and they have a huge exploration programme across China now; it is at an early stage but they clearly believe, like the noble Lord, that it too is the technology of the future. They have invested massively in solar power and have wiped out the European industry. They have a massive investment in wind power, and of course they are still burning enormous amounts of coal. They believe that the exponential increase in their demand, and the need to try to avoid dustbowls and desertification in northern China and poor air quality in the great Chinese cities force them to be as green as possible, and they would like to reduce their reliance on coal. Unlike us, they do not hang around. Like us, they think that they need to use every available source of supply. I hope that we will not hang around much longer and I look forward to the progress of the Bill in Committee and an end to the investment hiatus.
Lord Jenkin of Roding
My Lords, I start with a word of thanks to my noble friend Lady Verma and the noble Lord, Lord Oxburgh, for the several extremely useful meetings that we have had about the Bill over the past couple of months. I have found it invaluable to see what the departmental view is. We have had the opportunity of talking to many of the Minister’s officials.
I also have another source of advice. I try to talk as much as I can with the companies that would actually have to make this system work. At a breakfast meeting chaired by the noble Lord, Lord Oxburgh, it emerged in our discussions with the wind industry, the CCS people and the nuclear industry that the Bill is essential if there is to be any hope of attracting the capital that is needed for the huge investment that many noble Lords have talked about. Somebody went on to ask a rather awkward question: if we get the Bill in the form that the industry would like—and there is plenty of evidence that they like much of what they see—will we get the investment? The noble Lord, Lord Oxburgh, will remember that there was a long pause, then all the parties said, “No, we cannot guarantee that”. We have to have the Bill because without it there is no hope of getting the investment, but even with it, there is still no guarantee. I endorse totally what has been said by a number of noble Lords during the course of this debate, that the greatest danger is uncertainty. People, firms and companies will not invest when they are faced with uncertainty. We have been going through quite a period of uncertainty in this country and it has resulted in a considerable downturn in investment in the generation of energy. Somebody said a moment ago that they hope that that period is now ending. We shall have to wait and see.
I certainly support the principle that we have to get this Bill through. I hope that we will be able to finish the Committee stage before the long Recess. I foresee four or five weeks of pretty hard work. I have tried to cancel as many of my other engagements as I can to make room for it. I have been refusing things left, right and centre for the last couple of weeks.
One point by the noble Baroness, Lady Worthington, that I very much support is that this is in some ways a skeleton Bill that eventually will be filled in with various things, including a large number of regulations. I make a very firm plea: we may not get these regulations in Committee, but we must know what they are by the time we reach Report in the autumn. It will be impossible for the House to debate this in any meaningful way if we do not have a greater degree of certainty as to what is actually going to happen.
I started by thanking my noble friend Lady Verma. Having listened to the speeches, I do not envy her the problem of having to wind up this debate. It is a task that I did for various things over a number of years, and it is very difficult to do. After having listened to so many diverse views, often based on great experience and expertise, I do not envy her.
There is a general view that we face a very considerable problem. There is likely to be a 40% increase in demand for electricity by 2050, but we are facing the closure of about 30% of our existing generating capacity by 2025. Wind power is becoming more intermittent. In the opposite direction, the nuclear programme is less flexible. However, it is equally essential and we must have it. I believe that we are bound to face higher electricity prices for a variety of reasons. I do not think that we are going to find ourselves imitating the Americans. Even if we are able to develop our shale gas deposits, nobody knows how much is recoverable. We also have our environmental obligations, so these are very great challenges.
I find myself increasingly worried about security of supply for the next four or five years. Somebody mentioned the closure of power stations. I have been given a list of power stations that were running on 12 December 2012, but all of which are now closed: Didcot A—a huge one, Fawley, Littlebrook, Cockenzie, Kingsnorth, Uskmouth and Tilbury. That is a huge reduction in our generating capacity. Some have talked about a number of plants being put into mothballs. The problem with mothballing is that it takes time to start up again. The figures I have been given suggest that of 9.2 gigawatts of UK gas capacity that is now mothballed, 2.6 gigawatts are unlikely ever to operate again because they have been effectively dismantled. Of the rest, it will take anything from three to 18 months before they can become operational, because one has dispersed the labour force. The thing has been wound down, and it takes time to start up again. I have anxieties about this and I hope that my noble friend may be able to offer us some reassurance.
In the debate on the gracious Speech, I raised the question of the future competitiveness of our energy industries. In particular, I asked about the Ofgem letter that had been sent out in February to all the bodies concerned—a very wide distribution—proposing what it called “future trading arrangements”. The answer came in a paragraph of that long letter written by my noble friend Earl Howe after he had wound up that day’s debate. I have no doubt, however, that this particular paragraph was drafted by my noble friend’s department. I quote this letter of 3 June:
“The government welcomes Ofgem’s actions to improve competition by addressing poor liquidity in the wholesale electricity market. We agree that liquidity, especially in the forward markets, needs to improve and this Government is pleased to see Ofgem indicate a strong preference for intervention with a decision expected by Summer 2013”.
It may not feel like it, but we are nearly there. However, perhaps we have had a decision on this—I will come back to that. I am puzzled about the concept of liquidity, so I asked for advice on that from the department, which defined it as,
“the ability to quickly buy or sell a desired asset, commodity or financial instrument without causing a significant change in its price and without incurring significant transaction costs”.
I am not sure how much wiser that leaves me. I prefer to look at this in terms of competition. If there is a market—and much of this Bill is based on the proposition that there will be markets operating, albeit in the future—then we start from the position, as many noble Lords have already mentioned, of having the big six. They have a 98% share of the domestic retail market, a 78% share of the industrial retail market and a 93% share of the commercial retail market. Estimates typically show that the big six have a market share of 65% to 70%. They are an enormously dominant force in our electricity industry. I have had a number of meetings with the independents and those who support them, and they constantly complain about how difficult it is to break into this market. These big vertically integrated companies have enormous power.
However, it may be that help is on the way. Many noble Lords will have seen the announcement by Ofgem less than a week ago opening up the electricity market to effective competition. I quote from the Ofgem press release:
“Ofgem proposes to establish a more level playing field so independent suppliers can compete effectively with the big six … Big six suppliers and largest independent generators must trade fairly with small suppliers or face financial penalties … Wholesale energy prices to be more transparent with big six required to post prices two years in advance … Ofgem’s proposed reforms build on progress made by the industry, but seek to increase competition and address issues of fairness and transparency”.
That is a beacon of hope in an otherwise quite difficult situation. Will the Government support it? They always talk about having more competition in the industry. If they support it, will that require further amendment of the Bill or will it be covered by the powers that were added in the other place—now Clauses 43 to 45? I think that something more is required: a requirement to promote competition actually needs to be written into the Bill. I give my noble friend notice that I am contemplating an amendment to the clauses on the capacity market to add a requirement; in addition to the objectives of the capacity market set out in Clause 21, they should have an objective to promote and encourage competition in the generating market.
I hope that I am pushing at an open door. My right honourable friend Michael Fallon had a meeting the other day with a number of people who have been arguing for this. A report of the meeting states that:
“Michael Fallon noted that he expects a number of amendments to be tabled to the Energy Bill during its passage through the Lords, and did not have any objection in principle to the recommendation for a clause stating that one of the objectives of the capacity market should be to encourage competition”.
Again, I hope that I am pushing at an open door and I look forward to hearing my noble friend’s reply.
Lord Grantchester
My Lords, after much anticipation, the Energy Bill is before your Lordships’ House. I thank the Minister for her remarks explaining that the Bill is intended to establish a framework for delivering secure, affordable and low-carbon energy. I also thank the noble Lord, Lord Oxburgh, for his chairing of the cross-party seminars on the Bill, which have been extremely helpful.
These are vital moments for the transformation of Britain’s energy market. At the core of the Bill is the necessity, as older power plants become obsolete, for Britain to have enough power at a competitive price, with new infrastructure that could cost more than £100 billion, while mitigating the effects of climate change. It is always difficult to meet more than one target at once. All elements must therefore be taken into account in a multifaceted market where all technologies will be needed. While these supply-side solutions necessarily take up much debate, efficiency measures, together with management and reduction of demand, must not be allowed to slip from consideration.
The main players for 2050 are well known. I will first address nuclear. As my noble friend Lady Worthington said in her opening remarks, the Energy Bill has been characterised as a nuclear-led Bill. Nuclear has huge up-front costs, which are then fixed for life. However, on the negative side, it can be undercut by gas. By nature it is a base-load player, as it is not very flexible. I am concerned about the lack of detail in the Bill and the wide-ranging enabling powers it gives to the Secretary of State. How will a strike price be set that is fair in the long term—measured in decades—strikes a balance between risk and reward, and is a good deal for future citizens? We do not know, because the Bill is silent on power/price comparability, between price reductions from the progress in renewable technologies, with set returns to be guaranteed to nuclear.
Into this mix comes the impact of shale gas. We have yet to determine the extent of possible supplies and its environmental sustainability, which must be strictly adhered to with regulation. It can be safely said that falling prices are a long way off. At best, it seems that shale gas may achieve only a delay in price rises, rather than being a game-changer. The effect of shale gas in the US is to provide excess coal for export that is now being used as base load. Industrial emissions targets for coal and gas have resulted in the energy performance standard. However, there are a number of concerns about these proposals. First, the level proposed is very generous and would not require gas stations to constrain their emissions until 2044—the last possible moment that could be compatible with the UK’s legally binding target. Large amounts of unabated gas would not be compatible with the kind of decarbonisation targets the Committee on Climate Change suggests are necessary to take the country on a cost-efficient path to the target.
Secondly, it does not apply to old coal-powered stations that decide to fit new filtration equipment to allow them to operate post-2023. Old, inefficient coal stations may remain indefinitely on the system, unconstrained. That could not be compatible with carbon budgets or decarbonisation targets. A similar backstop to the one now proposed for new coal is needed for old coal. The Government may well look at this for marginal back-up, as peaking plant, and may provide capacity payment via the capacity mechanism, rather than being able to base-load. Thirdly, in support of the Carbon Capture and Storage Association, CCS plant may need a three-year exemption from the EPS while CCS equipment is being commissioned.
The further challenge concerns the position of renewables by 2050 and how they can be encouraged to be a rightful part of the UK’s energy mix. We can have renewable power only when we have them. Some say they are largely useless because of their inherent unreliability. However, they are vital because the resource is there and free. Will all technologies in the Bill be equal on the starting line? Indeed, should the Bill get all renewable technologies to the starting line?
There is widespread agreement that the Energy Bill must empower a wide range of new entrants to enter the electricity sector. If a more competitive, innovative and diversified electricity sector is to be part of the energy mix, all contributions must be encouraged to take part. However, the Bill delivers top-down solutions that favour centralised generation, reinforcing current patterns of ownership. Yet in Germany, myriad new types of investor are entering the market, often for lower returns than large utilities expect. In Britain, however, independent generators find themselves challenged to ensure that the Energy Bill is viable for them.
Solar power currently finds itself in a very difficult position. Investment has stalled following the EU-China trade dispute. Furthermore, all solar projects of more than 50 kilowatts are severely constrained by the very modest capacity limits. When these modest limits are exceeded, support reduces. The Energy Bill requires support for solar to be either through feed-in tariffs or contracts for difference. Given the severe constraints on FITs, this needs to be looked at again. The generation profile of wind and solar is very complimentary. If taken together, there are fewer extremes in capacity; intermittency need not be an unmanageable problem. A multifaceted energy mix must not end up in a mentality of silo solutions. A more inclusive approach, whereby everybody is aware of their energy needs and is encouraged to participate, could encourage up to 30% of the UK’s energy needs to be met by community schemes and small businesses; for example, farming and rural enterprises. That could be necessary for their own long-term survival.
An important aspect of how the Bill will bring forward different technologies is contained in the levy control framework, with a cap on the total amount of additional charges that can be added to consumer bills. The limit to this spending review period is £7.6 billion, which dictates the total value of CFD contracts that the Department of Energy and Climate Change can enter into. Yet the Bill is unclear about how the control framework and CFDs will work together. For example, when will the projects that have assigned contracts start to be counted towards a control framework? How equal and rigid is the allocation of support to different technologies and what will happen in the event of underallocation in one technology?
Will money be carried forward into future spending rounds or will it be lost if it is not spent? The existence of a cap encourages early application, yet what happens when a technology’s allocation is used up? Lastly, renewable projects can apply either for the renewable obligation or the CFD. Will projects essentially be forced to opt for the CFD, for fear of the cut-off deadline in the RO and being at the back of the CFD queue with no guarantee of funding? The Treasury appears to be trying to control low-carbon spending, while allowing uncapped spending on new centralised capacity on the grounds of security of supply, since money allocated under the capacity market mechanism is proposed to be outside the control framework.
There are concerns that the complex design of the capacity market means that only the large energy suppliers are likely to participate. To achieve the full potential electricity savings identified by the Minister’s department, it is vital that savings from SMEs and homes are captured too. The capacity market rewards energy efficiency only for its security benefits, not for other, much larger benefits. A variety of policy instruments is vital to encourage innovative solutions to all the targets. An additional policy is required to ensure access to market, where funding for payments is decoupled from the capacity auctions and sits outside the control framework.
Rewarding alternative energy efficiency would reduce the level of capacity payments needed for security of supply. This can be explored in Committee, along with ideas for more technology-neutral policies, in order to set clear objectives to decarbonise. It is certainly easier to get smaller projects away than to finance the huge construct. These rewards are necessarily focused on the supply side. As the Committee on Climate Change said in its pre-legislative scrutiny report, the draft Energy Bill was,
“fundamentally flawed by the lack of consideration given to demand-side measures, which are potentially the cheapest methods of decarbonising our electricity system”.
I am therefore pleased that the Government eventually brought forward measures on demand-side reduction, through amendments on Report in another place. However, as with much of the Bill, the new clauses leave us little clearer on the Government’s plans in this area, amounting to no more than an order-making power for the Secretary of State to embark on pilot projects. However, the idea to allow “negawatts” to compete against traditional megawatts is welcome. There are concerns, though, that the capacity market will remain the only solution to access to market. It would be vital for the department to undertake a number of pilots using other mechanisms to allow diversity and innovation. So far there has been little opportunity to debate these proposals, but they can now be Peer-reviewed in your Lordships’ House in Committee.
This side of the House welcomed the previous Energy Bill, which had energy efficiency at its heart. It introduced the Green Deal to bring about energy improvements to buildings and houses, cost savings and a reduction in demand. It is a great concern that investment has not been forthcoming, leading to a massive drop in jobs in the sector. The figures expected on the situation on 27 June underline the work that needs to be done. On Report in the other place, the key element of interconnectors to and from the European market was introduced. This will enable a strategic rethink of the levels and efficiency of supply-side generation. It will have the benefit of increasing the geographical spread of balancing energy, as was so well argued by the noble Lord, Lord Oxburgh. As before, much detail has to come forward for assessment of how this can be made effective.
The Bill is welcome. My noble friend Lady Worthington has outlined the approach that we on this side of the House will take. Once again, we will work constructively to clarify and improve many aspects contained in the Bill.
Lord Empey
My Lords, some time ago I had the opportunity to be Energy Minister in Northern Ireland for three years. Although it was only one part of my enterprise portfolio, it took up an amazing amount of time. Many noble Lords here today have served as Ministers and will be familiar with receiving a first-day brief from the Civil Service. In my case, I was advised that because energy was largely privatised, there would be little call on my time, merely a few regulatory functions to perform. How wrong that turned out to be.
Energy supply is a vital economic as well as a national security consideration, and this has become an even greater governmental responsibility in recent years. We read stories that the UK nearly ran out of gas during a recent cold spell that coincided with a breakdown in some part of the distribution and storage system. Whatever the truth, the point remains that ensuring a secure and affordable energy supply is one of the key requirements of good government.
The Government insist that this Bill is about establishing a framework for delivering secure, affordable and low-carbon energy. This is a sentiment that I am sure we all share. However, there needs to be a close examination of some of the aims and targets that we as a nation are being asked to sign up to. I know from our experience in Ulster that those same sentiments were shared in the 1980s and 1990s when the then Government signed us up to availability contracts, which have stifled competitiveness and kept energy prices unnecessarily high in Northern Ireland for nearly two decades.
Let us stand back for a moment from the complicated clauses in the Bill and look at what we should be doing and why. As a nation, the UK already suffers from a lack of economic competitiveness. We have to charge out to our customers the cost of our growing debt burden as well as our expensive welfare system. Despite the rhetoric of the Government and all parties, the export-led recovery has not yet happened. This is because we no longer produce enough manufactures and services at prices that international customers are prepared to pay. In this regard, therefore, what does this Bill do to our international competitiveness? Does it help us or hinder us? What does it do to reduce the overall amount of carbons pumped into the world’s atmosphere?
My contention is that the Bill leads to a reduction in the one and merely to redistribution of the other. I shall explain. Our competitiveness and the reduction of carbon dioxide in the atmosphere are inextricably linked. I believe that unilaterally adding cost to our energy supply for the genuine and admirable purposes of reducing carbon emissions here in the UK merely transfers the carbon emissions to China and other parts of Asia and the world. By making our already high cost base higher, it could be said that we will produce more of our energy from clean sources. That may be right. But the net effect is that, unless it is done simultaneously and universally by the major manufacturing nations, we reduce the amount of manufactures we produce and transfer that production to other places. While strides are being made in China to control emissions, there will be increased emissions, because China will be making the goods that we are no longer competitively making and in addition it will take a lot of energy to get those products to our shores from the other side of the world.
Climate change can be addressed only internationally and the EU and UK cannot allow themselves to get too far ahead of other nations. Otherwise, they will merely make themselves uncompetitive for no valid purpose. I believe that the climate is changing and that man is contributing to that change. We are certainly making a contribution, but its scale is hard to judge. Nevertheless, I do not accept the idea that it is purely manmade. Climate change is natural, but I believe that we are accelerating it. We can make a difference, and we already have. For instance, we took lead out of petrol, which has reduced dramatically the amount of lead in the atmosphere throughout the world. So we can make a difference, but let us keep it in proportion.
On the generation of renewable energy as well as nuclear, we are talking about adding a charge to consumers’ energy bills to subsidise the cost of renewables and nuclear-generated electricity. This is not a new idea, but we have to enable generators to produce electricity at a price that will allow them to borrow the money to provide the service. There is nothing wrong with that in principle, but the cut-in and cut-out points on the subsidy are critical. There is a lot of widely inaccurate speculation about what can be achieved by all this. The truth is that no alternative sources of energy come anywhere near the point where they could provide the UK with a constant and reliable source of energy. Wind is currently the major alternative, whether onshore or offshore. There is no doubt that it has a part to play, as do other forms of renewables, but let us not exaggerate its potential. In this country, energy demand rises during cold spells, which often coincide with high pressure in the atmosphere. High pressure usually means little or no wind. The classic example of this was in the winter of 2010-11 when we had five weeks of freezing weather and little wind. Without the traditional source of generation, we would effectively have been out of business.
I agree with the noble Viscount, Lord Ridley, who is no longer in his place. I cannot understand the difficulty in people grasping the fact that, even if we increase the amount of renewable energy from wind and other sources, we will still have to maintain every single megawatt of traditionally produced electricity, plus an amount to allow for breakdowns. We know that wind does not survive high pressure and that the other sources of renewables are vastly underdeveloped. Wind generation will reduce the amount of energy that is produced by traditional sources when it is functioning, but, when it is not functioning, you need to have the back-up. Therefore, the amount of generating capacity from traditional sources, whether fossil or nuclear, is not going to be amended significantly in the foreseeable future for that reason.
People are not going to tolerate the electricity supply going off. I often joke with colleagues that if the electricity went off during cup final people would be prepared to burn Chippendale furniture in the power stations to keep their lights on. The more wind that you have, the less efficient become the traditional sources of fossil fuel and nuclear supply, because that reserve, whether it is spinning or not spinning, will become less competitive. So the irony is that we will vastly increase the amount of electricity capacity in this country from renewables and non-renewables, but we still have to have the back-up. There could be five weeks of bad weather coming down the road and, if you have a series of breakdowns, you have to have power stations spinning, and they are spinning as we debate this Bill today. I do not see that people grasp that fact.
Energy from wind is great. In my own city, Harland and Wolff does not build ships any more—it builds windmills, and that is great. But the fact is that you have to have them backed up. Unfortunately, in a relatively small geographic area such as the British Isles, you have these weather patterns. Yes, we can do a certain amount with interconnection. I pioneered the gas and electric interconnectors with the Irish Republic, and we have an interconnector with Scotland. I am all for that, but the electricity interconnector has two 250 megawatt cables, and one of them is bust. So nothing is totally reliable; you have to have redundancy built in whatever the source, and you cannot have enough of it. That is the experience we all have.
In economies like India, the lights go on and off, and all the major universities and hospitals have huge amounts of generator back-up. In this country we pride ourselves on having a constant supply, which makes a huge difference to certain industries and activities that simply have to have constant, reliable supplies of electricity at affordable prices. I fully support the concept of reducing our carbon footprint as best we can—but we all know that it is vehicles that produce most carbon emissions, and not Mrs Bloggs at number 33. So this deals with only part of it.
We have indigenous potential in this country. Shale gas has been mentioned. At home in Northern Ireland we have vast resources of lignite from Lough Neagh right up through County Antrim. An Australian mining company came to me a few years ago to say, “We could open-cast mine it, because it is high-quality and low sulphur. We could build a big trench up the centre of County Antrim from Lough Neagh up to Ballymoney. We would put in an 800 megawatt power station and fill the hole in as we go along”. You can imagine the amount of interest that that had from the local community, who saw their towns, farms and everything disappearing into this great hole. Campaigns were launched, and I have to say that I took a far-sighted and courageous decision as Energy Minister to do nothing. I took the view that it should mature in the ground and that it was there if we needed it. But the truth is that we have resources and we may have to deploy them. Mr Putin and others have been mentioned, and there is no doubt in my mind that this is a national security issue, apart from anything else. We cannot allow ourselves to be at somebody’s mercy.
Research and development has not been mentioned very much. The European Union has significant resources in this area, and we have to do far more R&D into the technologies. All that we are doing at the moment is to use sticking plaster and adding bits on here and there. We are not putting enough money into the R&D of energy supply. I hope that as we go into Committee and on to Report we can drill down into some of these issues and perhaps improve the Bill as it passes through the House.
Lord O'Neill of Clackmannan
My Lords, this is an ambitious and important Bill. It is ambitious in that it is trying to achieve a unique objective—the establishment of a monitored and regulated market, which would incorporate carbon emission reduction and environmental sustainability by harnessing a variety of seemingly incompatible technologies—baseload generation involving nuclear and gas-fired CCGTs, along with biomass-adapted coal stations and smaller renewable thermals. Alongside that there will be interruptible renewables, such as on and offshore wind, hydro and small-scale, and probably as yet unproven, technologies, claiming to be renewable—and, of course, if you claim to be renewable, that is acceptable. Renewable is cuddly, small and nice. It is akin to WC Fields’ snake oil. There is basically no illness that it cannot cure. It can create jobs and reduce unemployment; it can increase productivity—it can do almost anything. The only thing that it cannot do is to produce electricity on a reliable basis in great amounts. The basic amount of electricity that we require has to come from baseload generation. The rest can be of assistance, but it cannot be a realistic substitute.
It is fair to say, however, before we go any further, that all these different technologies have inconveniently different timescales for development or for the life of the stations involved. Each different form of investment will require a different form of reassurance. This is the fundamental challenge in the creation of a new market.
Utilities have been seen historically as a fairly safe form of investment. You get a return of 7% to 9% one year after another. They can be long term. They can be pretty safe. Demand is likely to be constant. Today, technical uncertainty, because of the relative newness of some of the equipment, raises questions about the possibilities of a dependence on unproven technology, or questions of access and the interruptability of one technology against another. We do not really know about the maintenance of a lot of the technologies that we are talking about. We might therefore have unreliability of a technical character that we have not yet experienced.
For these reasons, the business of reassuring investors is a far greater challenge than we have had before. We have been told that we are going to get the grand design in July—we will have the delivery plan, the strike prices and the accommodation of capacity payments. We would like to have most of those things before the House rises. I take the point that this is to be incorporated within a market system. Perhaps not all of us have been students of the United Kingdom energy markets over the past 20 years but this is the fourth attempt that we have made at having a market. It is by far the most challenging one. We have had the pool system, NETA and BETTA, the three predecessors, each of which tried to correct something that was wrong with the other one. There was gaming or it was pooled; the next one was not quite good enough but the one after that would be better. This is the first arrangement that is actively seeking to incorporate within the market system questions of climate sustainability and emission reduction.
As a consequence of this and European decisions, we have to reject the coal option until such time as we have carbon capture and storage. Like fusion, that is always going to be 15 or 25 years away, depending on how optimistic you are. Coal is not an option, so we have hydrocarbons, nuclear and a range of as yet, in many instances, interruptable or unproven renewables. I am happy to have a mixture of gas and nuclear as the main components. I am not sure that we really want to change the character of this Bill to have, at the top, competition at all costs. That was part of the philosophy of the privatisers in the 1980s and early 1990s. We had a system then that, had it been taken to its logical conclusion, would have produced electricity generation along the lines of pre-Cavour Italy, when there was a succession of city states all running little power stations.
Our system never quite got to that state, but it created entities that were easy to absorb and take over. Now we rail against—or some people rail against—the fact that there are six utilities, six big players, which pretty well dictate everything. It is an oligopoly but it is a regulated oligopoly, and it could be better regulated. We could have clearer bills. We could have better tariffs. We could have systems with greater transparency. In some respects it is the toothlessness of Ofgem over the years which has allowed a number of these excesses to take place. We have to recognise that we are trying to keep many more balls in the air with our new market system than we have attempted before. That will carry risks. If we can get it, however, we will be able to secure the assurance that a number of investors are waiting for.
I am not totally pessimistic about the investment situation. When E.ON and RWE, in the shape of Horizon, its nuclear company, decided to get out of nuclear, they found a buyer, Hitachi, which was prepared to pay rather a lot of money, albeit at this stage for real estate. Nevertheless, it was prepared to buy access to the sites and the possibilities that those offered. As far as nuclear is concerned, people are not totally pessimistic and running away from it all the time. It is essential, however, that by July we get a clear indication of the strike price, the capacity payments and the nature of what the market structure will be. If we can get those with clarity and transparency we will get the beginnings of the investment that we require.
This is a large Bill. It covers a lot of areas. There is one point about the nuclear industry that has not really been made, although the Minister did refer to the establishment of the new nuclear regulatory authority. This is long overdue. When I was the chairman of the Nuclear Industry Association, I argued that it was frightening that we were seeing the departure of so many nuclear inspectors from the regulatory body to the potential players in the British nuclear industry. We now have a body that will allow the regulatory functions to be carried out in an appropriate way and the staff to be paid at the rates that the market would wear. It is highly appropriate that we are able to do that.
Under Mike Weightman, the chief executive, this body has achieved an international standing that not a lot of people fully appreciate. Mike Weightman went to Japan after Fukushima and produced a report that did not necessarily give consolation, but it was of a rigour and authority that established once again the very important position that the British nuclear industry has in the world. We talk about quangos and government bodies, but this is one that will be going out to bat for Britain in a variety of circumstances when other countries are getting into the nuclear business in a big way.
It would be churlish of me, before I finish my remarks, not to thank the Minister and her staff for the briefings that they have given us. I have to say, however, that I am reminded of F.E. Smith’s words when he said, “I may not be much the wiser but at least I’m a lot better informed by the process”. We know that there will be a lot of complexity in the Bill. For that reason the Committee stage will be exciting and interesting. However, I reiterate a point that has been made by colleagues this evening. We want to see a lot more of the flesh that there should be on the skeleton of the Bill before we get to Report. In Committee it may not be in quite the form that we want, but we can look at it carefully. If we can get a market settlement with the delivery plan in the public domain before the recess, we will have an interesting time in Committee and at Report. I wish the Bill well.
Lord Birt
My Lords, I declare an interest as a director of a UK renewable energy company and as an adviser to a fund that is a leading global investor in renewable power. Both bodies are noted in the register.
In the past 50 years, the UK has seriously lost its way with infrastructure. As my noble friend Lord Kerr reminded us a little while ago, unlike the Chinese, we do hang around. We have the least developed road and rail networks of any major country, we have struggled to expand our strategic airport capacity, and we have been slow to create an electricity grid and generation system fit for modern circumstances. This latter task is not easy. As we have heard during this long debate, we have to migrate from an era of plentiful but high-emitting coal and gas in the UK to a power system that balances three equally valid but competing objectives: security and reliability of supply; a substantial reduction in carbon emissions; and the need for economically priced electricity both for business and for consumers. The task may not be easy but we have addressed it with too little dispatch.
On renewables, far from being world leaders, we currently languish just above Malta in the relegation zone of the EU nations league for the proportion of national power produced from renewable sources. Many other EU countries, large and small, produce getting on for 10 times the proportion that we do in the UK. On nuclear, we overcame our temporary reluctance in 2005, but eight years later we have yet to contract a new generation of nuclear plants. Our storage capacity for gas, as others have mentioned, is notably low, especially by comparison with other countries, such as Germany. And we have failed, too, to build sufficient interconnectors with other electricity markets overseas, which would enable us to import more power, as the noble Baroness, Lady Parminter, mentioned earlier.
The well flagged consequence of those shortcomings is that the UK faces potential blackouts in the mid term and possibly even in the short term. If they happened, that would be a terrible indictment of our system of government—our ability to think and to plan ahead. Indeed, it would be a national shame. Will this Energy Bill put us on the right track?
The Bill sets out a new approach to the operation of the electricity market. Its cornerstones are tight emission standards, greater certainty over the long term on carbon pricing, more revenue assurance for low-carbon generation, and a mechanism to encourage reserve generating capacity. The Bill, as I think most have observed, is directionally sound but, by itself, will not meet the stiff challenges that the UK faces.
I have long supported the value of market mechanisms in both the public and private sectors, and I have long belonged to a consensus that is wary of the state picking winners, of state-owned and state-run enterprises, and of a strong directive role for government—of the kind that we still see, for instance, across the channel in France. However, the complexity of our national energy goals, embracing security and climate change, as well as economic efficiency, obliges us to find the right blend of market mechanisms and government direction, and that is very difficult to do. We need to see real and speedy progress towards nuclear commissioning, towards renewable rollout, towards greater interconnection and towards improved storage capacity and stand-by power.
Government will have to ascertain that the measures in the Bill do in practice give investors confidence, as the noble Lord, Lord Stephen, and others have emphasised. This is critical because modernising our power infrastructure probably requires—I suspect that the figure is far higher than the Government have so far estimated—something of the order of £250 billion to £300 billion of private sector capital over the next 10 to 15 years, most of which will come from outside the UK and from investors who, as others have noted, have other choices, not least as worldwide investment in this sector simply mushrooms the world over.
The risk is that the new construct of CFD and capacity payments, which is difficult to understand, as the noble Baroness, Lady Liddell, mentioned earlier—it is a construct designed to incentivise both nuclear and renewables—will prove, on the one hand, overcomplex for renewables, yet, on the other, insufficient to encourage the replacement of our existing fleet of nuclear plants. With the intermittency of renewables, about which many have spoken, and the uncertainty of gas supply in a volatile world, which I think has been underemphasised, a substantial contribution from nuclear is necessary to help manage national risk. Of course, I entirely acknowledge the challenge and difficulty of doing that.
Moreover, as we move forward, our politicians will have to be brave, as well as wise, and hold their nerve, for this transformation will be expensive, as the noble Lord, Lord Jenkin, mentioned earlier. Power prices will rise, even though the cost of some technologies—some renewables, for instance—is reducing very rapidly and is converging on parity with hydrocarbon technologies. Therefore, much beyond the passage of this Bill remains to be settled, and there is many a slip ‘twixt cup and lip.
I echo the noble Lord, Lord Browne, in saying that we will need to be vigilant to ensure—to paraphrase Jonathan Powell—that we execute, execute, execute. We need to monitor not just the introduction of the complex new systems proposed in the Bill but the outcomes, and whether these measures before us put us on a rapid track to a far more robust power infrastructure for the UK than we have now.
Lord Dixon-Smith
My Lords, it is many years since the late Lord Flowers, who knew a great deal about the nuclear industry, said to me that mankind had only one source of energy, and that was nuclear. However, mankind had a choice, which was to have his nuclear power station here or 98 million miles away. Lord Flowers knew which he preferred. I often wonder, when I get up in the morning, how many years’ worth of geologically stored solar energy mankind burns off every day to enable us to live the lives that we do. Carbon dioxide was locked in in such a way that it ultimately enabled the evolution of mankind. We need to think about that.
In the Bill before us this evening, we are discussing how to provide what I would call the procedural infrastructure to enable us to renew and refresh the electricity and energy generating industry after 15 years of what can be described only as gross neglect. However, that time was not totally wasted because it gave us the Climate Change Act, which establishes a CO2 target for 2050. We have to be extremely careful about what we do because everything we do must be consistent with that target. That target is 80% of our 1990 emissions. It is the amount of emissions that this country was producing in the 1850s, when the population was 22 million. Today we have three times the population and it is five times the energy consumption that keeps modern society going. It is quite an interesting comparison.
Energy investments by their nature are long-term, and 2050 is less than half my lifetime away now. We heard lifetimes discussed in political terms a little while ago, but I prefer the calendar. What we do, therefore, must be consistent with that target. We need to think through what that target means. I have not seen that done, so I will suggest some conclusions. We need to determine what industries we have at present that give carbon emissions, or carbon-equivalent emissions, that are so essential that they will have to continue beyond that date.
My list of industries is as follows. First, there is metal smelting; I cannot envisage how we will survive without that. Next, there is cement manufacture; again, I cannot envisage how we will survive without it. Next, there is agriculture, particularly with regard to livestock. I declare an interest as a farmer, but I have no livestock other than two children and seven grandchildren. Agriculture, of course, is a surprisingly large creator of carbon-equivalent emissions. Next, there is aviation. There is a great problem of energy density, and I rule out biofuels because we cannot today feed our existing population on this planet properly, and by 2050 there will be 2 billion more of us to deal with. Therefore, I do not think biofuels will be a viable alternative. I include shipping for a similar reason. Energy density is very important to those in that industry because ships carry cargo, so the less space that is taken up by fuel tanks the better.
Once you have gone through that list, you are a very long way towards the 20% target that we have set. If that is the case, everything else we do must become zero. All land-based transport, all our buildings and all our industries must have zero emissions. That is fundamentally important. Encouragingly, there is already a basket of technologies that could make that possible, but we do not know what technologies will win the economic race, as opposed to the calendar race.
That brings me back to the Bill for a moment. The contracts for difference established by the Bill, it seems to me, are designed to guarantee a return to investors for investing in new nuclear power stations in particular. In addition, there are safeguards in the contracts for difference to provide some protection for consumers—as far as I am concerned, consumers and taxpayers are one and the same—as regards long-term price increases. I do not envy those who are responsible for negotiating those contracts. An apparently high price today could appear to be a very reasonable price in the longer term.
I should explain that my view is coloured by my lifetime in farming. I shall use the example of farm tractor red diesel because its duty is heavily taken away. I began by paying one shilling and three and three-eighths pence for a gallon of farm tractor red diesel. That price was equivalent to about 1.3p. At present, the price is between 77p and 78p per litre. Those with quick minds will realise that we are talking about a price increase of several thousand per cent for energy, and we have been worrying about whether it might go up by 10% or 20%. Frankly, I find that quite difficult. In fact, we do not pay society a sufficient compliment for adaptability. I am not saying that we should be complacent because we should do everything to keep prices down. Returning to the contracts, a price that looks unreasonably high today might, in 20 years’ time, be an extremely good deal for the consumer. Therefore, it adds to the burden of responsibility on those responsible for negotiations.
The other thing that has happened, which could not have been imagined during the passage of the Climate Change Bill, was the advent of shale gas, and shale oil in the United States. We know now that we have large quantities in this country. They have not yet been totally confirmed and defined but they are there. We know that they exist in large parts of mainland Europe and under the eastern Mediterranean. We know also that there are considerable quantities in China. One way or another, if we can overcome the problems of providing that, it may be a very useful interim energy source.
Shale is much cleaner than coal. More importantly, using combined-cycle gas generators, it would be possible to use carbon capture and storage and to make it virtually emission-free. In addition, because you could produce clean smaller-scale power stations, you could site them near communities so that the waste heat could be used and they would become combined heat and power stations. That would be a revolution in power generation. At present, most of our power stations release nearly the same amount of energy to the atmosphere in the form of waste heat as they supply to the customer in the form of electricity. We really need to find a way around that problem.
All that may be daydreaming but the point is that we do not need more interim targets for carbon emissions because that final target already rules everything we do. It is not simply that that determines it; I am sure that there are still unknown technologies, which we will have to learn about and adapt to. Some of them may be more helpful than anything we yet know.
Lord Prescott
My Lords, I feel most inadequate as I have no commercial interests to record either in the register or anywhere else, except perhaps one: I was the UK and European negotiator at Kyoto. Therefore, my interest is to continue to argue the case for climate change—the scientific argument and the connection between carbon and the increase in climate change. This very good debate has reflected the different interests and the division between those who believe in the climate change argument and those who say, “No, it is a nonsense and we should not take any notice of it”. That was probably very much reflected in the evidence and clash of views between the noble Lords, Lord Lawson and Lord Stern. I think that the noble Lord, Lord Stern, well won that argument, but I am in that school of thought. I am an admirer of the comprehensive work that the noble Lord, Lord Stern, has done and the major contribution he has made to the climate change argument.
The noble Lord, Lord Lawson, was referred to by the noble Lord, Lord Deben, not as a sceptic but as a denier. You could tell from his speech that there is no doubt that he is a denier. Perhaps I could add the noble Viscount, Lord Ridley, to that argument. The noble Viscount is indicating that he is not and I take his correction. However, basically, they believe in leaving it to the market. I did not hear an alternative from either of them. There is a great deal of rejection about the science, what we should be doing, how it should be cheaper and how much more efficient it should be. I must say to him that the coal industry and perhaps a number of the banks are not the most perfect examples of the operation of the perfect market. At the end of the day, the state comes in and has to find the money for them.
Leaving that aside, what we have in the powerful argument of the noble Lord, Lord Stern, is what he actually said and what we all know: that thousands of scientists have come to a view about the connection with climate change. One can say that they are all wrong, but the odd voice against them does not lead me to think, “Which side of the argument should I take?”. I am for the connection. I think the evidence of the weather is there, but that debate is ongoing. However, there is quite clearly a connection. If the connection between the level of greenhouse gases and carbon is accepted, and if we want to prevent an increase in global temperatures, then it has to be kept at that level. As the noble Lord, Lord Stern, has constantly pointed out, we are at a dangerous level. One can reject the argument; once that is done, it is easy to do anything. They can attack every proposal around because they want to leave it to the market to decide. Evidence shows us that the market cannot determine everything in these matters, and it often means that a regulated framework has to be found.
Much of this debate is about the balance of the regulated framework of the market and government. There are many examples. I remember when I was in Government and we convinced the industry of the need for a climate change levy. I remember Tony Blair, the Prime Minister, ringing me up when I was abroad and telling me that we were going to introduce a climate levy. I said, “Oh, you mean an energy tax”. “We don’t call it an energy tax”, he said. That may be so, but the important point was that industry administered that climate change. The levy that was imposed actually helped to make industries more efficient, and that was what was proved by it. I understand that there is a balance in the regulatory form between what governments might do and what the private sector might do and I am prepared to concede that there may well be something in the way that the market operates.
The criticisms have been genuine and informative, and I am sure that in Committee there will be good debates on serious issues. No one is actually speaking out against the Bill. Those who criticised parts of it were saying, “I support the Bill, but there are some things that I don’t like”. I will not go into all the details because they have been mentioned in an excellent manner. However, I suppose I find myself in the same boat. I agree with a lot of the criticism. It is not as good as it could be, but it is a Bill worth supporting and I want to say why that is so.
One of my criticisms is that there is no balance of energy policy; there is doubt in all the areas. We do not know what is going to happen with nuclear and we are in separate negotiations with a French state company as to whether we are prepared to give them sufficient money to provide us with nuclear energy in about 20 years’ time, even though the energy gap is coming in the next 10 years. For wind turbines we have Siemens, who want to put massive investment into my industry and my area, but it is always complaining about uncertainty, as indeed is the case with solar power.
I rather agree with the noble Lord, Lord Teverson, that there is a role for coal. It might mean that a lot of money has to go into carbon capture, but we should be prepared to recognise the role that coal plays. Some 40% of the energy in this country comes from coal. It might not come from our own coal fields, but it is certainly coming from somewhere. There is going to be a lot more about as the Asian countries begin to develop their demand for oil and coal because it is where 60% of their energy will come from, and that will lead to increased prices. This Bill is not going to prevent an increase in prices; that is one of the realities that we are going to have to live with.
Biomass has also been criticised. It is all right not to believe in it and to attack every kind of industry for every kind of reason, but the reality is that if you do not accept the argument about carbon, then you can forget about the increase in carbon and just talk about price, production and security. But if you do believe in carbon, you have got to adjust the whole system, not only in this country but globally. That is what Kyoto is all about: to find an agreement to reduce the amount of greenhouse gases so that we can reduce carbon. There are challenges coming with climate change and the horrific circumstances that people are telling us about will come if we fail to achieve that.
The uncertainty produces real problems. In my area of Humberside we have 27% of the UK’s oil refinery capacity, 20% of its natural gas, 38% of its imported coal and 17% of UK electricity generation. All of those are an important part of the industrial base. Of course, the Siemens investment, which is now considering coming into this area, is plagued with uncertainty. Are we still going to have an energy policy? Are we going into wind turbines? I think the nimbys have more influence—and this Government gives them more—to actually turn against wind turbines. Whatever the arguments, whether or not they blow all the time, if you are prepared to accept that carbon is one of the limitations in the balance of your policy, you will end up with a different policy and leave it to the market. I know from historical experience that leaving it to the market will not provide a global solution to global problems. Why is that? Because when I was at Kyoto 1 there were only 46 nations; now there are 190 nations.
It is the politicians who have forced through some agreements, so let us not knock the politicians’ role in these matters, but getting a global solution to a clearly global problem requires a framework of consensus that is not easy to achieve. We have to recognise that developing countries which are looking to develop their riches, as we did in our industrial past, will have a high carbon growth. They depend on coal and oil and will go through our process of high carbon production. We poisoned the world and moved on, and now we want to continue doing it but feel that they have not got a place in it. If that race goes on, it will threaten any kind of global solution.
The Siemens investment, which will bring billions of pounds into our area, is an important factor that should be taken into account. I doubt that this Bill will achieve the kinds of things it seeks to achieve. Perhaps it will change in Committee. I am not sure that it will secure our energy or that it will reduce prices—I hope that it will—but in Committee we can discuss the process and find out more about the details, something that everyone has been calling for, so that we can understand it.
On the same argument, I can remember people saying that targets are not important. I believe that they are important, but we should not depend on targets because what we need is certainty. The noble Lord, Lord Browne, and others have said that we should have more certainty than targets. However, I still believe that we need the targets we set at Kyoto. By the way, many countries have achieved them. In the United Kingdom, not only did we achieve twice the levels set for us at Kyoto, but a million more jobs, growth in the economy and a reduction in gases. The argument that somehow Kyoto was a threat to employment and growth is not borne out by the facts in Europe, which is an important part of it. That was Kyoto 1 and we have to find an agreement on Kyoto 2, make no mistake about it, by 2016. The Americans do not like it. There is no difference between Obama and Bush on this matter, although Obama puts it in different words. They are still not co-operating on getting an agreement. The international negotiations are a challenge for us, but they are important.
Britain became the leader in most of these matters. It became the leader at Kyoto in 1997 and we set up the climate change levy in 2001. In 2006 we introduced the Climate Change and Sustainable Energy Act, and the Climate Change Act in 2008. In 2006, EU emissions trading was established, which was copied from us—it was not as good, but that is life—and the current Government have continued with their Green Investment Bank and this Energy Bill. Britain leads in trying to find a proper regulatory framework.
I have been happy to be involved—I notice the noble Lord, Lord Deben, is in his place—with a group called GLOBE International. I have been working with it for 12 months. The group has been working with parliamentarians in many countries. I am amazed that 33 countries have followed the lead, in different forms, that Britain has given. They can see that a statutory framework is essential if you are to get a global solution. It is coming from the back benches, not the Governments, because Governments are caught up with their civil servants. As our leader said before, there may be too much agreement and not enough common sense about it.
There is a way. We are leading the way towards the global solution which is needed for a global problem. We cannot look the other way and we cannot bury our heads in the sand. I am proud that Britain is leading and that this Government are following the same framework. The criticisms I have of this Bill are similar to the ones I have of other legislation, but at least Britain continues to lead the way on the most essential and difficult problem of how to deal with climate change. We need a regulatory framework. Britain is leading the way on that and I am glad that this Bill continues the process.
Lord Redesdale
My Lords, I am very honoured to take part in this debate because it shows how unique the House of Lords is. I do a lot of discussions about energy and climate change and I have not been in a debate recently where the fundamental basis of climate change has been questioned. Almost everybody believes that climate change is taking place. We had more than 200% of our normal rainfall last year. We are facing climate change and its consequences. How do we deal with that and how do we deal with energy generation, which is one of the biggest emitters of greenhouse gases?
We are acting as if the Energy Bill will solve the problem. It does not matter how well drafted this Bill is, it will not solve the problem. We have not built enough generating capacity for a long time. I was trying to explain this to a business audience. Politicians will not bite the bullet and build generating capacity because a power station lasts 50 years. The decision has to be made, the money has to be found and planning permission has to be obtained. It has to be built, it is used and then it is decommissioned. A Government with a maximum life of five years have to make that decision. They have to explain it to a press running a 24-hour news cycle, which has to explain to its readers, who are worried about last month’s bill not next year’s.
The culmination of that is that we have not built any power stations. There has been great talk about it but we are going to face a generating gap. Brownouts and blackouts are round the corner, as has been mentioned by a number of noble Lords. I declare an interest as chief executive of the Energy Managers’ Association. My interests are set out in the register. At a recent conference I put up a slide and asked whether people thought there would be an energy brownout in 2015, 2016 or 2017. We all had those clickers and more than 80% answered 2015. British business is beginning to get very worried about our ability to supply power and investors in British industry see it as a major financial risk.
There is no panacea. Many noble Lords have raised the issue of fracking as if it is going to solve our energy needs. The original estimate for our reserves of shale gas was that, if we used it all, we would be energy independent for a whole six months. Recently a report re-estimated the amount of shale gas at between seven and 10 years’ worth. It is an estimate, so let us take the lower figure. If we use fracking and get shale gas, that is fantastic. We are independent until 2020 for gas, after which it might all be gone. We just do not know.
In Poland, where the Government have not been so worried about the environmental constraints, they have been looking at pushing ahead with fracking but they have found that the gas is unrecoverable economically in the form it is in. America has an enormous amount of shale gas but it is in geological fields above shale oil. It was previously seen as a waste product and the difficulty of getting the oil out was that the gas was in the way. Now they are going after the gas. We do not have the same geology and we cannot claim that we are going to have a sudden bonanza. There may well be shale gas but in its present form it is more expensive to get out than would be economic at the moment.
It might be the panacea for the future but it probably will not be. To get the shale gas out we have to drill 140 test wells and we do not have the planning permission to do that. To recover the gas we need to drill 1,000 wells in the north-west. Members of Greenpeace will have a field day at all those planning permission hearings unless we change the law on planning permission.
This is the reality of what we are facing. We are very dependent on our generating capacity at the moment. Many noble Lords said that Europe is going to close down our coal-fired power stations. That is not the case. We have not built any for a very long time. The existing ones are very old, they are at the end of their run cycle and, in fact, we are increasing the rate at which they are shutting. The price of American coal has fallen as it has been displaced by shale gas so we have been firing up a lot of coal-fired power stations to run that generating capacity cheaply. This reduces the life-cycle of the coal-fired power stations we had in reserve in moth balls.
We will be reliant on natural gas. That is why I have an issue about decarbonising the electricity grid, because if you are doing it through natural gas, 70% of the energy is being thrown up the chimney of the power stations producing electricity. It is far better to put it in the grid and burn it in condensing boilers, which are about 94% efficient and are at the point of use. There is only about a 0.5% loss on the gas grid compared with the transmission loss on the electricity wires.
I am not certain that contract for difference will even work. I know that that probably puts me in a minority on this side of the House, where we are saying that it will work. Before everyone gets excited, I remember discussing the EMR years ago. The policy started before this Government were in power. That is the problem with energy policy. Even though it might not work, it is still coming through. I know that there are a number of reservations.
I do not think that anyone will object to the Bill as we need to push forward with the investment and the regulatory framework that means that people will invest in generating capacity. It has been the constant call of those who want to invest enormous amounts of money in the industry that we have a secure regulatory framework and security for investment.
The Bill must address the difference that we are facing in society today. The concept is that energy prices will remain at the historic low of the past 20 years. That will probably not be the case. We will probably go back to a position where energy is a far greater proportion of take-home pay than it has been in recent times. An opportunity arises from the rise in energy prices. A recent report stated that 44% of all energy used in this country is wasted. The simplest way to reduce the cost of energy is not efficiency but demand management at every level. We need to change the way that we view energy and instead of saying that we need to provide more and more energy at ever cheaper prices, we should start to pay realistic prices. It does not matter that there may be more finds of gas. Our problem is that China and India are starting to consider converting their coal-fired power stations to gas, and they are closer to the gas fields than we are.
I am secretary of the All-Party Qatar Group, and had a meeting with the Emir. I am not saying that just to drop names, although I am a very important person, of course. This was a while back. As I went in, he had a smile on his face because a Japanese delegation was leaving. He said, “Do you know what is really amusing? You are coming to talk to me about gas, but they just wanted to try to steal all your gas”. That was after Fukushima and the Japanese delegation was trying to get as much LNG as it could because they had to run their power stations. He was laughing. I found that quite scary, because it sent the price of gas up. Many areas will be looking for large supplies. There are not enormous supplies of gas out there that we can go to buy easily without political consequences.
The Bill is important. An important aspect of it should not be overlooked. The Government have said that they will be tabling amendments to address electricity demand reduction. Instead of just talking about one pilot, we should be looking at how we get the whole of the population to start changing the way that they use electricity. The place to start is business. The organisation that I run will start by introducing a concept called low-energy companies, where it trains a proportion of all staff up to energy management level 1 or 2, which involves the awareness of energy managers, and then starts to introduce energy managers. The importance of that is that very few businesses have energy managers. The last time we started hiring energy managers was in the 1970s, when the oil shock hit and prices were rising. We can create vast numbers of energy managers who can massively reduce the amount of energy that we use in British industry. That is very attractive to large companies, and we are launching it in London Zoo, in front of the penguin pool. We are launching it there because the penguin pool has a problem, which is that the penguins tend to defecate in the water. There are 100,000 litres of water in the penguin pool. The pool has to be filtered three times a day, which has a massive energy cost. You have to understand how to keep the animals fit and healthy, but if you are running a business, you also have to understand where the cost of the energy is. That is quite an interesting one.
We are bringing companies with more than 2 million employees who want to do it with their employers and they want then to push it on to their supply companies. The very real reason is financial risk. A number of these companies have been told by their suppliers that energy prices will probably rise by 20% a year for the next four years. That is quite a frightening statistic. Most people are talking about much smaller rises, but the energy companies have started to say that these larger price rises are coming down the line. If that is the case, British industry is going to have to do a vast amount more to make itself efficient, or it is going to go out of business. However, the other aspect of this is, of course, that it is not just a British problem. Other countries around the world are facing rising energy prices. Companies that think they can get cheap offshore energy prices are in for a shock in the future.
I hope this Bill is a success. I obviously believe that it will not be held up a great deal as there are incredibly important elements in it. I very much hope that we do not lose sight of making sure that one of the biggest gains in reducing energy prices is by not using energy in the first place.
Lord Greenway
My Lords, as the last Back-Bench speaker in this debate, I must admit to a certain amount of trepidation, especially when faced by a barrier of such expertise on the other Cross Benches.
I intend to take a slightly different tack from other noble Lords, but first I should like to say that I wholeheartedly agree with the remarks of the noble Lord, Lord Oxburgh. We are now reaping the rewards of government inaction in not renewing our nuclear capacity when it should have done so. That is a tragic mistake. When I came into this House some 38 years ago, we had the greatest experts in the world on nuclear energy among our membership. Alas, where are they now? All gone—we have lost that expertise and that is to be greatly regretted.
I entirely agree with the right reverend Prelate the Bishop of London and others who said that more effort should be made to reduce demand. The noble Lord, Lord Redesdale, who has just sat down, mentioned that as well. There are many ways in which we can educate people that electricity simply does not grow on trees, and that when they turn on a switch everything will happen. Great strides should be made in educating people in how to reduce their demand for and reliance on electricity.
Solar power has been mentioned only briefly. Living in the south-west, where the sun is supposed to shine rather more than in other parts of the country, I find it very strange that new towns being developed outside Exeter are not mandatorily fitted with solar panels by the property developers. That is something that should be done automatically, certainly in the case of commercial developments.
I said that I would take a slightly different tack and I will direct the major thrust of my remarks to the nautical side of power generation—that is, offshore wind, tide and wave. The first is the most prominent today, as it was the only alternative green energy source available following the Kyoto treaty. It is, as we have heard, an expensive and unpredictable way of generating power and the installation of offshore wind farms is considerably more expensive than that of onshore ones. That expense will increase as the future planned farms move further offshore into deeper waters. The industry is aware of this and is now looking to develop floating turbines to reduce the installation costs. Speaking as a mariner who has witnessed the odd storm in his time—I am sure one or two other noble Lords may have done so as well—I have grave doubts about floating wind turbines surviving a major storm at sea, particularly in deeper water. My doubts also extend to the development of wave power, where the same situation applies. To be really effective, wave power has to be some way offshore, where the waves are largest. A major Atlantic storm off the south-west would simply blow the whole thing away.
One of the unintended side-effects of the proliferation of offshore wind farms relates to navigation. This has certainly been exercising Trinity House, which is responsible for the provision and maintenance of aids to navigation. I declare a non-pecuniary interest as an Elder Brother of that organisation, which will be celebrating its 500th anniversary next year. Initially, the Crown Estate and the developers of offshore wind farms had little knowledge of where ships went and proposed sites that cut right across well used shipping lanes. I am happy to say that things have moved on since then, and that Trinity House and the other two general lighthouse authorities are now properly consulted beforehand. However, the positioning of some offshore wind farms has meant that shipping has often had to make considerable deviations around them, which of course leads to greater use of fuel and therefore greater emissions from ships.
In other cases, shipping is squeezed into comparatively narrow channels between wind farms. It is estimated that at these choke points, the risk of collision is increased by more than 400%. I have said on a number of occasions in this House that if you place an object in the sea, either a fixed structure or a floating one, sooner or later a ship is bound to hit it. Thankfully, many of the wind farms in the Thames Estuary are built on sandbanks, so a ship would run aground long before it ran into one of the turbines. However, as these wind farms move further offshore that will not be the case, so there is a danger that two large ships could collide and drift out of control through a wind farm, which would be rather akin to two large balls rolling through a skittle alley.
Great play has been made of the production of jobs but I see no real evidence of it, certainly not in offshore wind. Once the farm is built, it requires only 100 or so people to maintain it. As one noble Lord mentioned, maintenance is a problem. It is not often mentioned but in offshore wind, between 20% and 30% of the time people are unable to get out and do the maintenance because it is too rough. They are either sick or unable to climb the ladders if the swell is too big. I can only hesitate at what it would be like if you had a floating wind turbine, which would be moving. Anybody who has tried to get from one ship to another at sea will know the problem of getting on to that turbine from a moving ship.
I turn now to tidal power, which has received only a brief mention; I think it was from the noble Lord, Lord Judd. We are blessed with a fairly good tidal range in this country. In two areas, the Bristol Channel and the Channel Islands, we enjoy tidal ranges of around 40 feet at spring tides, which are second in the world only to the Bay of Fundy. There is enormous potential for tidal power generation. Unlike wind, tides are predictable for many years ahead and there are effectively four movements a day—two flood tides and two ebb tides.
I am surprised that no noble Lord has mentioned the proposed Severn barrage, about which we had a debate a few weeks back, which may be because the Select Committee in another place rubbished the idea rather effectively a week or so ago. I have never been in favour of a fixed barrier but there are alternatives. I understand that other developers are now looking at alternatives such as tidal lagoons or tidal fences, as I believe they are called. Tidal generation is proven. We know that the technology works; the Strangford Lough installation has been working for around four years. That, however, is a column-based installation. These suffer from the same problems as offshore wind turbines, in that they are very expensive to install.
To my mind, floating structures, which are being developed at the moment, are better propositions. These vary but one example is that being developed by Scotrenewables of Orkney. This is essentially a floating tube with two extending arms, each of which has a propeller in it. Systems such as this have great potential for fast-flowing estuaries such as the Severn, Thames, Humber and Mersey—areas where, as we heard from the noble Lord, Lord Prescott, power demand is already large and where existing power stations would enable relatively easy connection to the national grid. They would have the additional benefits of operating near the surface, where the tidal flow is strongest, and would be comparatively easy to install and maintain.
I know that the Government are aware of the work being done in this field, but I should like the Minister to confirm that they will not ignore the potential of tidal power. I am sure that the Government are only too well aware of the paltry sums that are being put into research and development in this field, compared with the money being lavished on offshore wind.
The noble Lord, Lord Cameron of Dillington, said that it is a question of which technology will succeed in the UK. The jury is out on that and I suspect it will be out for some further time. More importantly, will it be British-made? It certainly is not at the moment.
Lord Whitty
My Lords, this has been a fascinating, interesting and well informed debate. I pity the Minister who has to sum it up, so I will try to help her out by giving my view of the debate.
My thanks to the Minister and her staff for all the information that she has given to us, in particular to the noble Lord, Lord Oxburgh, and his group. That was a good preparation for this debate, and it is something that we perhaps should follow in other circumstances.
This is a radical Bill. It needs to be a radical Bill because we have a serious problem. However, it is also a flawed Bill. Many noble Lords have pointed to some of the flaws and suggested ways of addressing them.
Going back to first principles, there are three reasons why we need the Bill so urgently. The first reason—and the one that has been the most remarked on—is that it should be a means of achieving our decarbonisation targets. To decarbonise our economy we need to decarbonise electricity supply first. Without that, we cannot decarbonise transport and we cannot decarbonise building heating.
I was pleased that my noble friend Lady Worthington, followed by other noble Lords including the noble Lords, Lord Teverson, Lord Stern and Lord Deben, and latterly by my noble friend Lord Prescott, set out the case for us to take climate change seriously. It was a minority view within this House that argued against that. The noble Lord, Lord Lawson, and the noble Viscount, Lord Ridley, did not express a general view in the House. However, I would caution the Government that that does not necessarily reflect the degree of difficulty in explaining our commitment to decarbonisation targets to the country. There is some scepticism there. While most of us may disagree with the noble Lord, Lord Lawson, that does not mean that there is not a resonance out there, and a political problem for the Government in providing a narrative that can take consumers and business along with them in delivering the objectives of the Bill.
The second main reason, which is connected, is that a very large amount of investment is needed regardless of whether we are meeting decarbonisation targets— £110 billion is the figure that has been referred to. We need to ensure that it is brought here. To get it, as many noble Lords have said, we need greater certainty in what the regulatory framework will be, or at least significantly less uncertainty. We need that to keep the lights on and to provide for our longer-term energy security.
The third reason goes back to those who use the electricity—to household consumers and to British business. As it stands, and I cannot see any other way of doing it, the Bill places the whole burden of paying for the investment that is needed on consumers. That needs to be done in a way that does not damage British industrial competitiveness, that is fair to domestic individual consumers and, in particular, that will not worsen the terrible situation with regard to fuel poverty. I am afraid that there is virtually nothing in the Bill that provides a new regulatory framework to achieve that.
I therefore want to start on Part 2 of the Bill, which is the most important part, on the issue of consumers. The provisions on consumers in Part 5 of the Bill are, frankly, woefully inadequate. The Government, the industry and the regulator are all under scrutiny by consumers, and the Government need that credible narrative in explaining their Bills, their choices and their need for energy efficiency measures. A number of noble Lords, particularly the noble Baroness, Lady Maddock, referred to this issue. It is not only a question of energy efficiency but a question of fuel poverty.
We could have used the Bill to greatly strengthen the regulatory framework for the tariffs that we charge to domestic consumers, but it was very late in the proceedings in another place that we introduced Clauses 127 to 130, I think it is, on simplified tariffs. The Bill is still pretty vague about how they are going to work. I appreciate that there are political problems. The Prime Minister committed himself rather rashly a few months ago to simplifying tariffs, and Ofgem and DECC have been struggling to find a way of delivering that ever since. As yet, the Bill does not actually deliver that. The late addition regarding simplified tariffs is welcome, obviously. We all welcome simplification, but simplification in itself does not improve either fairness or effectiveness in driving consumers to better choices with regard to how they use their electricity.
At present, and the noble Earl, Lord Cathcart, and the right reverend Prelate the Bishop of Hereford particularly emphasised this, we have a tariff structure that is illogical in that it both encourages the use of electricity, since the marginal cost of electricity falls as you use more, and is socially unjust as it hits the poor more than it does the better off. That needs to be changed but the Bill does nothing to change it. As I understand it, the Ofgem activity to try to deliver the simplified tariff structure does not do anything either.
Nor does the structure ensure that the ECO mechanism, which is still in its infancy, performs in a way to reduce fuel poverty. At the moment there are fewer resources being devoted to fuel poverty than there were under the old system if you combine EEC, CERT and expenditure on Warm Front. They are also being used inefficiently. Unit costs for cavity walls, for example, are going up. At the same time, there are installers and workers in that area who cannot actually get work. That is aggravated because of the slow take-up of the Green Deal, but it would have applied in any case. At the moment the ECO is not quite a poll tax but it is close to one, and it is deeply regretted. It also disproportionately falls on electricity consumers as against gas consumers. There is no real logic in that. If we are discussing tariff reform, these issues also need to be tackled.
Tackling fuel poverty and providing for improved domestic energy efficiency need to be a central part of the energy strategy, as the noble Baroness, Lady Maddock, and my noble friend Lord Judd emphasised. The original part of the Bill concerned with consumers, when it first went to the House of Commons, was timely and related to redress. Indeed, we need to do something about redress; my noble friend Lady Liddell was pointing to the number of cases where there are problems of mis-selling to consumers. However, the provisions are pretty weak, as is the enforcement. For example, I do not understand why mis-selling redress is limited to five years. That is not the situation with financial services; a lot of the PPI claims that are going on go back years and years, so I do not understand why energy should be restricted in this way. There is also no provision for collective redress, which would be the most effective way of dealing with past problems.
I intend to come back pretty heavily on these consumer matters. My general approach is very similar to that of my noble friend Lord O’Neill, who has regarded, as I have, Ofgem as being pretty toothless in this area over many years.
I turn to a couple of other parts of the Bill that have been less remarked on. On nuclear regulation, again I agree with my noble friend Lord O’Neill that we need the ONR to be set up and that all parties are key to that. However, I do not understand why we have 50 clauses setting up the ONR when it is essentially a simple task of transferring the responsibilities from what was an agency of the HSE and putting it on to a statutory basis. We have 50 clauses and, I think, 60 pages of schedule setting up the ONR. Before we come to that part of the Bill in Committee, I think that the Minister and her officials need to set out where the responsibilities, duties and resources are actually different from those of the HSE and the ONR acting in shadow form within the HSE. Obviously there are advantages in having an independent quango of a new sort with new governance, as it can escape some of the restrictions on civil service pay and attract nuclear inspectors and others with expertise at rates which the market is now throwing up. This would keep it out of the restraints that are being imposed by the Treasury. I do not suppose that that was greatly remarked upon in Treasury circles, but it is the main and most immediate advantage of having the ONR put on a new basis. I largely approve of that. However, does it require all this superstructure?
Very briefly, I also ask whether the Minister can point out where these requirements on provisions for strategy and policy statements differ from the requirement on national policy statements that we already have on energy matters. I am not sure whether this is a step forwards or a step backwards in terms of the transparency of the Government’s strategic thinking.
I go back to Part 2 and energy market reform. Contracts for difference is a bold innovation, as has been pointed out, and in this exact form it has no parallel anywhere else in the world. When first proposed, it was greeted with scepticism by supply companies and others, but we have moved on and seem to be accepting that this is the only show in town. I agree with that. However, we have to recognise that it is, in some ways, a very odd proposition—particularly, if I may say so, coming from what is supposed to be a free market oriented Government.
It is neither a free market nor, of course, a command economy, but it has aspects of both. At the moment, it is all about the Government providing very long-term contracts that are technology-specific and, in many cases, location-specific, to large individual oligopolistic companies, effectively giving them a price guarantee for 10, 25 or 35 years. While that is not quite Gosplan, it is, shall we say, a little more Vladimir Putin than Milton Friedman. It is a partially centrally controlled system operated through an oligopoly. During the course of the Bill and once we have seen the draft delivery plan, we hope to be able to insert a little more competition and choice into this process, and a little more ability to have break points in the contracts where we can review, in the light of economic, technological and environmental change, whether they are still appropriate. However, that depends on a proper regulatory framework. I, like many other Lords, hope that the Minister can guarantee that if we get to Report stage in the autumn, we will have at least some of the major pieces of draft secondary legislation before us so that we can see what we are doing.
Probably all I can do now is put to the Minister the questions that have largely already been asked and ensure that she covers all these points. On CFDs, that includes whether she can give us an indication of the likely length of the contracts, whether there will be a break point and what exactly is the role of this rather shadowy counter body. Is it correct that it will be a public body now and that there will be only one of them? I believe that is the case, but we need to be quite clear what the nature of the body is and whether, even if it is a semi-private body, it clearly has the backing of the Government, as my noble friend Lord Davies asked.
Can independent generators easily access this system and bring different technologies into it? How do individual site-based generators or community generating projects fit into the scheme? Is there scope for a green market auction or is the Minister prepared to extend the ceiling for FITs above the five megawatt limit so that they can provide for community and other one-off generation schemes? Other noble Lords pointed to a potentially damaging hiatus between the ending of the ROCs system and the full effects of CFDs coming into play. Are the Government prepared to envisage extending the demise of ROCs beyond 2017? If not, a number of serious investment projects will be stalled. There needs to be some overlap until 2020 or even beyond.
CFDs are essentially for nuclear and renewable low-carbon technologies, so I am not clear how carbon capture and storage fitted to gas appliances fits into this. The noble Lord, Lord Dixon-Smith, referred to using the heat from gas or biomass generators. If we were to come up with a proposition that was seriously low carbon because it reused what would otherwise be waste heat, would that also qualify under CFD? Will the Minister respond to the questions about state aid and say something about the likely timescale? Will the investment contracts provisions, designed in part to cover a period when we might still be clarifying state aid, run into the same kind of problem as CFDs?
The Government have to answer a lot of questions on CFDs, as well as some on the capacity mechanism. A major improvement appears to be the recognition by the Government in Clause 37 that energy demand reduction and energy efficiency in general should be part of the approach of the capacity mechanism. The provision of energy demand reduction within the electricity distribution system itself—as distinct from action at the user end—must surely be a standard part of the capacity mechanism procedure. We therefore do not want just one, two or three pilot projects, but to work towards a situation where that is part of the capacity mechanism as a whole.
We need to see the regulations on the capacity mechanism. The noble Lord, Lord Teverson, and my noble friend Lord Grantchester said that we need to clarify the position of unabated coal-fired power stations that are extending their lives beyond 2023, when the EPS does not apply to them. They could benefit from the capacity mechanism if they made their capacity available.
Several noble Lords asked questions relating to interconnection. I asked whether the capacity mechanism would be capable of being delivered via arrangements on interconnections with the French nuclear system or Irish wind farms. If so, would they be treated as available energy or capacity in roughly the same way as domestic-based generation? The noble Lord, Lord Oxburgh, also asked about storage, which is a part of the availability of capacity.
The Government have a number of questions to answer. Colleagues will be pleased to hear that I have not gone through my full list and that I do not intend to do so. However, I will return in part to one of the most contentious issues: the decarbonisation target. I am in favour of strengthening the commitment to a decarbonisation target. The very weak provision in Clause 1(5) which simply allows the possibility of a 2030 target but does not require it, and in any case not before 2016, has already had a detrimental effect on confidence and understanding. Investors need to know that we are on a clear trajectory on this. Most of the investment decisions that will be contemplated in the next two or three years will relate to a period beyond the current target of 2020. If the House alters nothing else in the Bill, assuredly we must alter that.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)
My Lords, I start by thanking all noble Lords for their contributions in this debate. They have been wide-ranging but very informative. I particularly thank noble Lords who worked with me through the informal scrutiny group. Overall, I agree with the noble Lord, Lord Whitty, that there seems to be an overall sense of support for the Bill. Of course, there will be plenty of opportunity to scrutinise it thoroughly in Committee.
At the start of this debate, I emphasised how vital this Bill is, not just for the UK’s growth and jobs but, as noble Lords have said, for consumers across the country. This legislation marks a significant reform of the electricity market and it is important for industry, investors and consumers that we get it right. With that in mind, I look forward to debating the Bill in the spirit of collaboration. A large number of questions have been raised today and I will cover as many as I can in the time given, but I am sure that in the coming days I will have many opportunities to answer in more detail the questions that may not be answered today.
I thank the noble Baroness, Lady Worthington, for her overall support for the Bill, but I was slightly surprised and perhaps a little disappointed that she made a political point and overlooked the absence of investment and forward planning under the previous Government. The noble Lord, Lord Redesdale, made the point that the Bill is not a panacea but goes a long way to building long-term certainty for investment and energy security. As I listened to the noble Lord, Lord Prescott, I thought that this was perhaps the only Bill on which he and I will have so much in common. He is absolutely right. Without political will we cannot build political consensus. Globally, we have become the leaders in this area because we have gone out to build political consensus.
Beginning with the decarbonisation target range, a number of noble Lords asked why we do not set it now. As I said in my opening speech, the Bill enables the Secretary of State to set a legally binding decarbonisation target range for the power sector in Great Britain. This should be in 2016, when we are due to set in law the level of our economy-wide fifth carbon budget, covering the corresponding period. At that point, we will receive advice from the Committee on Climate Change on the level of the fifth carbon budget.
However, it is important that we do not set a target range in isolation. It must be done in the context of considering the pathway of the whole economy towards our 2050 target. It will also make sure that we do it in a way that minimises costs both to the economy and to taxpayers as a whole. Noble Lords said that it would be detrimental to investor certainty. I agree that investor certainty is absolutely essential to delivering our energy and climate goals at least cost, and considering investor certainty must be a fundamental part of our policy. We will continue to take practical steps to decarbonise the economy, while ensuring security of supply at the least cost to the consumer.
Investors recognise and welcome this. John Cridland, the director-general of the CBI, said that the Energy Bill,
“will send a strong signal to investors that the Government is serious about providing firms with the certainty they need to invest in affordable secure low-carbon energy”.
I am grateful to the noble Lord, Lord Browne, and others for explaining why setting the target in isolation would be unwise.
Turning to electricity demand reduction, the right reverend Prelate the Bishop of London and others asked about the prepayment schemes. I want to put on record that both prepayment and a capacity market approach are similar, in that they provide a payment for proving efficiency savings and are agnostic about where those savings are delivered. However, on balance, a capacity market was preferred, as it enables you to target reduction during valuable peak periods, and allows electricity demand reduction to compete against supply, ensuring that EDR is rewarded for the value that it provides to the system. It also avoids the need to create an additional delivery mechanism for electricity demand reduction.
The right reverend Prelate the Bishop of London and others asked about the flexibility to run more than one type of pilot for EDR. The spending power set out in Clause 37 allows the Government flexibility to run a pilot to test different approaches to incentivise electricity demand reduction. The Government will provide further detail on the pilot proposals as soon as possible.
Many noble Lords are concerned about putting the interests of consumers at the heart of what we are doing, and I agree completely that it is crucially important. That is why we have other measures alongside the Energy Bill that put consumers at the heart of being able to control their energy usage. That is why we are rolling out the smart meter programme alongside other measures such as the Green Deal, enabling people to change behaviour, which will assist in ensuring that we reduce our energy use. We have to inform consumers about how their energy is being utilised.
I turn to climate change, and noble Lords who are slightly sceptical about global warming and climate change. I am not a scientist, and I suspect that many in this Chamber today are not scientists, but renowned scientists are showing us that much is going on that is evidence of climate change. The summer extent of Arctic sea ice has declined by a staggering 40%. The Antarctic peninsula has warmed by more than 3 degrees centigrade. Glaciers in the high Canadian Arctic lost 580 gigatons of ice between 2004 and 2011 alone. These are serious figures, and we need to ensure that we take seriously climate science and the evidence and advice from climate scientists.
The noble Lord, Lord Stern, made a compelling argument on China’s commitment to act, and his expert opinion is recognised globally. We welcome the commitment that China is making and we are working closely with China to ensure that we are part of the process of assisting that country. That gives us a very good negotiating and bargaining position in the world, as the noble Lord, Lord Prescott, said.
A number of noble Lords talked about fuel poverty, among them my noble friend Lord Cathcart, the noble Baroness, Lady Liddell, and my noble friend Lady Maddock. The coalition is committed to doing all that is reasonably practical to end fuel poverty in England by 2016 and to helping people, especially low-income, vulnerable households, to heat their homes more affordably. The number of households in fuel poverty reduced in 2010 and again in 2011, although fuel poverty remains a huge challenge. A combination of rising wholesale energy prices and poor quality housing stock in Britain has meant that, despite significant investment, a large number of households are still in fuel poverty. I congratulate the previous Government on trying very hard to tackle that issue, and we are working and building on that. However, with energy prices projected to continue to rise, improving the thermal efficiency of Britain’s housing stock is key to addressing that urgent issue. That is why the Green Deal and the energy company obligation are flagship policies for improving the energy efficiency of our nation’s housing stock. In addition, the Government have a range of policies to address other contributing factors of fuel poverty, including the one-house discount, which helps around 2 million households per year, as well as winter fuel payments and cold weather payments.
I will also touch on domestic tariffs, which a number of noble Lords talked about. The proposals are to deliver the Prime Minister’s commitment and ensure that customers are offered the cheapest tariff. They will ensure that customers are on the cheapest tariff in line with their preference, the payment method that they have chosen and whether they have opted for standard variable rate tariffs, or a fixed-term or fixed-price tariff. The power in the Bill will allow us to require customers on poor, value-dead tariffs to be moved on to the cheapest standard variable rate tariff that the supplier offers. It will also require customers on fixed-price tariffs to be moved to the cheapest standard variable rate tariff that the supplier offers if they do not opt for another fixed-price tariff.
We are also capping the number of live tariffs that suppliers can offer. This package of measures means that consumers will be on the cheapest tariff that is in line with their preferences, but noble Lords are right; there is much more that energy companies can do and should be doing, and we will work with them to ensure that they are able to provide the best possible value for money for consumers.
The EMR part of the Bill will be the substantial part of it after decarbonisation. The noble Baroness, Lady Worthington, the noble Lord, Lord Roper, and other noble Lords asked whether we would commit to publishing the delivery plan ahead of the Committee scrutiny of EMR. We intend to publish the draft delivery plan before the Committee scrutiny of the contracts for difference provisions. We are working through the usual channels to agree a satisfactory order of consideration on this basis. However, as noble Lords know, it is critical that this Bill progresses as swiftly as possible.
We will have the opportunity to scrutinise the detail when secondary legislation comes before the House. Although further detail in the delivery plan will no doubt be helpful for informing consideration of the plan, it is important that we do not delay the Bill. That would risk investment, jobs and the security of the electricity supply. I encourage responsible debate that balances the detailed scrutiny, for which this House is renowned, with the need to get this legislation on the statute book.
The noble Lord, Lord Oxburgh, and other noble Lords questioned the Government’s expertise to undertake electricity market reform. I can reassure the noble Lord that we are not undertaking this singlehandedly. The department has established expert groups for the three main policy areas of the CFDs, capacity market and institutions. A panel of technical experts will scrutinise the analysis informing government decisions before they are made. National Grid will be the delivery body for EMR and is providing expert advice to the department. That does not stop noble Lords from contributing and giving advice to the department.
My noble friend Lord Cathcart asked about the cost of EMR to business. We have said that we will exempt the most energy-intensive industries from the costs of electricity market reform to ensure UK business can remain competitive. The Government will publish shortly a consultation on the scope of the exemption.
The noble Lord, Lord Davies, my noble friend Lord Ridley and other noble Lords mentioned shale gas. They asked whether this will reduce gas prices and whether government modelling of gas price rises is realistic. We expect electricity bills to rise as a result of rises in global gas prices. The potential impact of shale gas on gas prices is still uncertain. It is unclear how easy or cost effective it may be to extract shale gas or what will be available globally.
The noble Lord, Lord Grantchester, and other noble Lords asked about the emissions performance standard and grandfathering. The level of the EPS will be maintained until 2045 for plant consented under the 450 gram per kilowatt base level. It is essential to provide sufficient certainty to those investing in gas-fired generation that we will need over the coming years to maintain security of supply. Grandfathering will not prevent us meeting our objectives.
Turning to the capacity market, my noble friend Lord Jenkin and other noble Lords asked about proposals for a new clause to encourage competition. I agree with my noble friend that the capacity market should encourage competition between incumbents and new entrants, between technologies, including generation and demand-side response, and between new and existing plant. I look forward to discussing this in detail in Committee with him and other noble Lords.
The noble Lord, Lord Kerr, and others asked about the capacity market timings. The Government are minded to run the first capacity auction in 2014 for the delivery year of 2018-19. This is to allow new plant to compete alongside existing capacity to enable a competitive auction.
Noble Lords raised the question of interconnection. The Government are fully supportive of increased interconnection and are working with Ofgem to ensure that we have the right conditions to bring forward the planned significant increase. We do not think that a financial incentive is needed to bring forward this already-planned investment. It is very important that the Bill does not adversely impact on interconnection, and this is a key requirement in designing electricity market reform.
I shall touch very quickly on nuclear. My noble friends Lord Cathcart and Lord Ridley and other noble Lords asked about plan B if there is no new nuclear. The aim of EMR is to bring forward a diverse mix of low-carbon generation, including renewables, nuclear, CCS and demand-side measures. We can meet climate goals without new nuclear, and we have been clear that we will reach an agreement on a contract only if it provides value for money and is affordable.
The noble Lord, Lord Judd, asked about GDF. I know that the noble Lord takes a keen interest in this and we have had many conversations about it over recent months. The Government remain committed to the policy of geological disposal. Following their reflections and the continuing “lessons learnt” exercise, the Government have confirmed that they believe that the site selection process can be improved on. On 13 May this year we announced a call for evidence, which ran until 10 June. That will be followed by a public consultation later in the year, and I hope very much that the noble Lord will take part in that. However, GDF will be the Government’s preferred option in dealing with long-term nuclear waste.
In reference to the ONR, the noble Lord, Lord Whitty, asked why the Government are creating quangos when their intention is to do away with them. The ONR currently exists as an agency of the Health and Safety Executive, and the Energy Bill will establish it, rightly, as a stand-alone body outside the Civil Service. I think that the noble Lord himself agreed that that is the right place for the body. In that way, the expertise of those who serve in the ONR will be reflected in financial packages suitable to a body that has to deliver world-leading advice to a sector that requires that advice. The noble Lord asked why we had so many clauses in the Bill. It is absolutely right that the ONR should be a stand-alone body and that it goes through a full scrutiny process. That will give it a full mandate as a stand-alone body. He also asked about the feed-in tariffs from five megawatts to 10 megawatts. I am currently looking at that and I hope to have some further details to impart in Committee.
I am being told that I have only a minute to speak, so I will very quickly close. Once again, I commit to having further discussions inside and outside the Chamber on the concerns that noble Lords have raised. There have been many excellent contributions today. I look forward very much to the debates that are going to follow. In the mean time, I hope that the Lords’ informal scrutiny committee continues to work closely with me, and if any other noble Lord wishes to raise a concern, my doors are always open. I encourage noble Lords to use either or both of these avenues in order that the Bill might make progress to Royal Assent without delay. I am sure that noble Lords will concur with the statement that I have made, and on that note I urge the House to support this Bill and give it a Second Reading.