Grand Committee
The Deputy Chairman of Committees (Viscount Ullswater)
My Lords, if there is a Division in the Chamber while we are sitting, the Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes.
Energy Bill
Lord Jenkin of Roding
“( ) for payments under capacity agreements to be commenced by the settlement body within six months after the national system operator has run a capacity auction;”
Lord Jenkin of Roding
My Lords, one of the themes running through our debates on the Bill has been the need to ensure that the UK has sufficient generating capacity to meet likely demands and to avoid power cuts. It is what is meant by security of supply. This concern has been sharpened by last month’s worrying 2013 report from Ofgem on electricity capacity and the forecast of margins falling perhaps even by the middle of this decade to dangerously low levels. The central purpose of this Bill, through EMR, which is at its heart, is to address this issue, and the capacity market is one of its principal instruments.
I must say at the outset that in the circumstances in which the nation finds itself Ministers have been quite right to identify this as a solution to the capacity problem—or at any rate to try to find a solution. They were right, too, to bring forward the first auction for the capacity market to 2014. But to retain 2018-19 as the earliest date for any payment under the capacity market is a serious mistake. What matters to potential investors is not the date of the auction, but the date on which they can be sure of the first payment if they are successful in the auction.
What I suspect lies behind this four-year gap between the auction and the payment is an idée fixe—an idea somehow firmly held within the corridors of DECC that what it is addressing is really confined to building new plant, for instance to commissioning new generating plant such as a combined cycle gas-fired plant. Yet what we are faced with now is that the problem is on us sooner than anyone had anticipated. The Ofgem report has aroused a great deal of concern, which is not unjustified. The National Grid, supported as one might expect by Ofgem, has reacted by suggesting what I can only describe as a couple of temporary expedients, aiming to tide the system over until the EMR really begins to bite towards the end of the decade. My impression from the welcome briefings we have had, not least that of yesterday, is that these temporary expedients are what DECC is really basing its hopes on: that we shall not in fact have any power cuts. What is strange is that these temporary expedients had previously been rejected by DECC because of their potential adverse impact.
Ofgem’s electricity capacity assessment concludes that risks to security of supply are likely as early as 2014-15, driven by further reductions in electricity supplies from the withdrawal of installed generation capacity. The report also highlights that future policy and price uncertainty are continuing to limit investment in thermal generation. The assessment bolsters the case for bringing forward a mechanism to deal with the underlying issues contributing to generation inadequacy, which some commentators have described as the “missing money” as in a world of high renewables, thermal plant will run less and less often at suppressed prices. There is also the uncertain economic viability of conventional generation going forward.
Yet against that background, the grid launched what it called an informal consultation last month on two new temporary expedients. I think I need read only the title:
“Demand Side Balancing Reserve and Supplemental Balancing Reserve: Informal Consultation on the Development and Procurement of two new Balancing Services”.
What is needed is new capacity, not temporary sticking plaster. If the required plant is not in the system, it simply is not available for balancing anything. However, it is actually worse than that. The consultation document acknowledges in paragraph 32 on page 9—I have it here if necessary—that,
“security of supply is a function of the market which is underpinned by the energy policies under which the industry operates”.
It also says that it is not National Grid’s role,
“to ensure there is sufficient generation capacity available to meet demand”.
Yet the proposals aim to ask National Grid to do precisely this, by procuring capacity through the supplemental balancing reserve and demand-side balancing reserve.
The SBR is essentially a form of strategic reserve with last-resort despatch. As I intimated earlier, the strategic reserve was rejected by DECC, while acknowledging that such a mechanism does not address the missing money in the energy market but could even make the problem worse, in that investors might fear that the strategic reserve will be deployed before it is envisaged it would be—that is, when other capacity is available, albeit at very high prices. This would dampen the investment signal for players outside the strategic reserve, leading to what one might describe as a slippery-slope effect whereby no new investment is viable without an SBR contract. More and more capacity would then have to be procured within the strategic reserve. The result is that it simply displaces the ever-dwindling part of the market, with no intervention. What is needed is to bring forward not only the auction date under the capacity market but the date on which payments under the capacity market will be received. That is the purpose of my amendment.
At Second Reading, noble Lords may well remember that I drew attention to the substantial amount of mothballed plant held by some of the larger generators. They were mothballed because it is simply not economic to run them at current prices and in the light of uncertain futures. Some of this capacity could well be brought into production over the next six to 18 months, provided—this is what has to be hoisted on board—that capacity market payments can be made as soon as the plant is available and commissioned. That would happen if this amendment were to be accepted; both Ofgem and the grid recognise that the immediate problem is about capacity, not balancing. If my noble friend is unable to accept the amendment as it stands, perhaps she would agree to reflect on the situation I have described over the recess and consult further with those who are trying to help the Government to avoid the risk of serious interruptions of supply. The mechanism would be there but the implementation dates need to recognise the growing immediacy of the problem we face.
I make just one final point. This is not primarily about improving access to the market—other amendments will address that—but about reducing the risk of blackouts. I repeat what I have said previously; if the country faces interruptions in electricity supply, it is Ministers and the Government who will be held responsible. I, like everyone else, wish to avoid that. I beg to move.
Baroness Worthington
My Lords, I am extremely grateful to the noble Lord, Lord Jenkin of Roding, for tabling his amendment. We discussed the capacity mechanism in the previous session, when our focus was on the interplay between existing generation, more supply coming on and the demand side of the capacity mechanism. This amendment gets to the heart of how the capacity mechanism is proposed to work. One of my major concerns about the Bill relates to this mechanism because it is quite a dramatic intervention into the market, yet we still have very little in the way of detail as to how it is proposed to operate. I urge the Minister to give us some reassurances that we will see the draft statutory instruments pertaining to this part of the Bill as early as possible. It is one of the most unworked-through parts of the Bill and it is only when the SIs are drafted that we will be able to answer some of these important questions raised by the noble Lord, Lord Jenkin of Roding. Can we therefore have some reassurances about the timetable for publishing the draft SIs for this part of the Bill?
Lord O'Neill of Clackmannan
My Lords, I am at a wee bit of a loss here. My understanding was that markets operate on the basis that if there is a shortage and there is a demand, the price rises, and that plant which is presently idle will be brought into play.
The noble Lord, Lord Jenkin, made no reference to those plants which are either under construction or for which planning permission has been granted, and which may well be up and available, if not running, in the period between 2014 and 2018-19. I think that he is taking the long overdue siren noises from Ofgem of June a bit too seriously. Most people just said, “It’s typical of Ofgem”. It has taken so much longer to wake up to the fact that all this capacity is going out because of European directives and the like that there is going to be a problem. So his new-found urgency here I find somewhat unconvincing, because of his dependence on Ofgem's latest edict. I am not sure whether we need to wait four years, but I do not think that six months is necessary. It would be helpful if the Minister could give us some idea; it would be nice if we could get what was going to be in the SIs in the autumn, but not necessarily that. Perhaps she could give us some idea of the estimates and what the nuancing is of the information. As far as I can see, there is idle plant which, if the price was to rise, would become attractive to operate. Furthermore, there are a number of schemes which are either in the course of construction or would be accelerated once the process started. You do not build a power station in six months; you build it in about three and a half years. I suspect that that is the reason for the four-year timeline. So I am not sure that we need the amendment at all, but it would be helpful if the Minister could give us a clearer idea of the forecasts from DECC and others on the availability of plant, which would allay some of the anxieties.
Lord Jenkin of Roding
I remind the noble Lord of some of the figures that I gave at Second Reading. I have been provided by some figures by one of the companies that have mothballed plant; its national estimate is that there would be mothball capacity that could be brought back into production within three to six months of 2.6 gigawatts; between six to 12 months, a further 1.4 gigawatts; and 12 to 18 months, 2.6 gigawatts. That is not in the least bit inconsequential; these are important figures. If nobody is going to get any payment until 2018-19, that is how they will stay—mothballed—because they will not see what their payment is going to be.
Lord O'Neill of Clackmannan
If this plant were to become necessary, the price would rise—but the “if” involved in the “were” of this plant becoming necessary is still open to doubt. The noble Lord has taken the worst possible scenario and tried to build the case on it for something that will be extremely attractive and very convenient for the companies that have been lobbying him. It might suit their purposes but it might not suit everybody else’s—and it may not even be necessary in the first place. That is why I have doubts about this sort of stuff, which is almost built on the back of Daily Express scaremongering. We know that there is going to be a terrible winter next year, as there is going to be every year—and, we are told, there are going to be blackouts. Well, we have had terrible winters and, so far, we have not had any blackouts. It is getting worse because the generating capacity is diminishing, but it is not yet diminishing at the rate that would necessarily require us to do what the noble Lord asks us to do.
Viscount Ridley
I had not intended to intervene on this point, but I would like to make a similar point to the noble Lord, Lord O’Neill, although coming at it from a rather different direction. I agree with him that what we will see in terms of the capacity squeeze are price spikes, and, therefore, capacity coming back into use. In that context, it is very well worth noting that, at the cost end of the spectrum for the generators, there is an increasing view among markets—not a consensus, which would be the wrong word—that gas prices are likely to fall over the next few years. I do not know whether anybody saw the FT blog from Nick Butler yesterday, but he made the point that for four reasons gas prices are likely to fall. Not one of those reasons included shale gas; he was saying that, even outside the effect of shale gas, we are likely to see huge new resources coming on stream in the Mediterranean and East Africa and offshore in the Americas, that the LNG market will produce a much more globalised market in gas and that the Japanese uptick in gas demand following the closure of the Fukushima nuclear plant is coming to an end. Combine that with falling demand in India and China, and it is quite possible that we will see falling gas prices. It is quite possible that, as the noble Lord, Lord O’Neill, said, we will be able to see this mothballed plant come back into operation because of rising prices for electricity and falling prices for gas without having to, as it were, bribe them. It is important that we are not in the business of making life easy for producers but in that of making life as easy as possible for consumers of energy.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)
My Lords, I thank all noble Lords for this short debate, and I thank my noble friend Lord Jenkin for his amendment. Amendment 53BA proposes that payments under capacity agreements should be commenced by the settlement body within six months after the national system operator has run a capacity auction. The Government have confirmed their intention of running the first capacity market for delivery of capacity in 2018-19, subject to state aid approval. Capacity auctions will take place four years and one year ahead of the delivery year. For example, for the delivery year 2018-19, capacity auctions will be held in 2014 and 2017. Successful bidders at auction will be awarded capacity agreements which provide a steady payment for capacity in return for a commitment to deliver electricity when required in a delivery year or face a penalty.
Payment under capacity agreements will not occur until the delivery year. This is because we believe that payment should not occur until the plant is providing capacity. We do not want consumers to pay in advance for a service that they have not yet received. In addition, providing payment in the delivery year means that plant performance can be tested and, if necessary, penalties can be applied if performance is not as promised. If payments were made ahead of the delivery year, that would be impossible and might provide an incentive to game the system. Our position is therefore that capacity providers should be rewarded for delivery in a delivery year only, rather than in advance.
My noble friend questioned whether the capacity market’s first delivery year could be brought forward, and I suspect that that is likely to be the aim behind his amendment—in fact, he made it clear that it is. However, we have chosen a four-year gap for a good reason. If we do not have such a gap—for example, if we run a capacity audience in 2014 for delivery in 2015-16—new plant would not be able to participate, given the time required to build the plant, which was the point made by the noble Lord, Lord O’Neill. This would mean we would risk an uncompetitive auction with only existing plant competing in what could be a tight market. We believe that this would lead to a potentially inefficient auction and would risk consumers’ value for money, a point raised by my noble friend Lord Ridley.
We are not complacent about the security of supply. We recognise that Ofgem’s 2013 capacity assessment suggested that there may be a capacity problem in the middle of the decade. That is why we support National Grid and Ofgem’s current consultation on the need for and the design of a new balancing service for this period. If needed, this would keep existing plant on the system or get it back on if it had been mothballed for the period before the capacity market was in operation. This would be limited intervention and would mean that we do not have to run a full capacity auction with only existing plant competing. As such, the proposed measures offer a cost-effective means to ensure security of supply in the middle of the decade before the capacity market starts to deliver capacity in 2018-19.
I hope that I have reassured my noble friend that the measures we are taking are short-term interventions and, on that basis, I hope he will withdraw his amendment.
The Earl of Caithness
Should the situation be even more dire than my noble friend Lord Jenkin suggested, presumably there is nothing to stop the Government running a capacity auction just for the existing plant as a short-term measure. I know the Minister said she does not like it, but should the situation be very bad, or be forecast to become very bad, and the proposals for Ofgem and National Grid are not going to meet the requirement, surely it is perfectly possible to run a capacity auction in which existing plant holders could take part.
Baroness Verma
My Lords, I referred to that in my speaking notes. We are keen not to cause an imbalance in competition between new and existing plant. The proposal of my noble friend Lord Jenkin—and yourself—is that that is what would happen. It would generate an uneven competition.
Baroness Verma
My Lords, I will try to get the passion back into my voice. I was responding to my noble friend Lord Jenkin. If I can just give him a word of comfort: the current Ofgem and National Grid consultation will most likely focus on ensuring that some plant is held in reserve. I know that my noble friend is concerned that there will not be enough capacity in reserve. This is a short-term intervention to bring back already mothballed plant. The capacity market is a medium-term intervention that we hope will incentivise investment. We want to ensure that the market itself stands on its own in the coming years. We are trying to assist enough capacity on the grid.
I forgot to respond to the noble Lord, Lord O’Neill, and the noble Baroness, Lady Worthington, about the consultation on the SIs. We intend to consult from October on the detailed implementation of EMR. This will give noble Lords an opportunity to scrutinise the detail of the EMR ahead of Report. Further detail of our plans for secondary legislation can be found in the memorandum that we recently sent to the Delegated Powers and Regulatory Reform Committee. I hope that having given my noble friend that extra response, he now feels that he can withdraw his amendment.
Lord Jenkin of Roding
My Lords, I began my speech a few minutes ago by saying that I found the Minister’s response very disappointing, and I do not think that anything she has added since then alters my reaction. I am grateful to all those who took part in the debate, and particularly the points made by the noble Baroness, Lady Worthington, that it is very difficult to know how this will work until we have details of the statutory instrument that will implement it. I entirely endorse her demand that this must be available before Report so that we can make sense of it. She also agreed that we may be seeing more mothballed plants by 2020. That is an estimate that I am not in a position to either endorse or deny. She is also absolutely right that we have to get the demand side response appropriate, and I know that the Government are working on that.
The Minister said something with which I entirely agree: there must be no payments in advance. We cannot ask customers to pay for something before it actually happens. I never suggested that. If she looks at Hansard eventually she will see that I indicated, “provided the market payments can be made as soon as plant is available and commissioned”. That disposes of that argument entirely. I am not for a moment asking that payments should be made in advance. That is not how the system is supposed to work as I understand it. My noble friend also seemed to imply that we could not have different auctions for different years. For the life of me I cannot understand why it should not be possible to have an auction for people who would be able to bring back mothballed plant within, say, 18 months. If that were the conditions of the auction, the firms that have mothballed plant and could bring it back within 18 months would be able to bid for it. That does not mean that there would not be another auction, even perhaps operating in parallel. There will not be many takers in the early years. We were told the other day that contracts for CFD might be over a period—was it 60? That is the sort of numbers we are talking about. It should be perfectly possible to have different auctions for different periods with the payments made appropriate to the date of the auction. This needs to be examined more carefully and we should not just accept my noble friend’s assertion that it would simply muddle up the whole auction process. I do not believe that for a moment. We can be a great deal more subtle than that.
Baroness Verma
My Lords, let me assure my noble friend that mothballed plant will be able to participate in the capacity auction.
Lord Jenkin of Roding
Yes, but it will not be able to get any money until 2018-19. That is the point of this amendment. If they can bring the plant back and have capacity available for meeting the demand and operating under the SBR before that, and it is available and commissioned, why should they not get their money? Why do they have to wait another two years?
Baroness Verma
My Lords, let me again assure my noble friend that those who are successful in the capacity auction held four years out will receive a capacity agreement which guarantees them a steady payment in the delivery year.
Lord Jenkin of Roding
That is completely new. Does the Minister mean in advance of 2018-19? No, she is being advised from behind her. She may not have got that quite right.
I think that there is sufficient confusion on this that we must wait until we have the full details of how the scheme is going to work. That will require our having the details of the statutory instrument that implements it. I reserve my right to return to this matter.
Lord Deben
Can I underline what my noble friend has just said? It is extremely difficult to discuss these issues without having the details, and all the details have come very late. I have to say that it is extremely hard for us who may instinctively wish to support the Government if we do not have the information. This is another example of that. Either we have the information and can have a Committee stage or we do not have the information and have to spend our whole time making it difficult for the Minister, who herself does not have the information because she does not know—and it is not her fault—what will be in the statutory instrument. I therefore ask the Minister to go back and make sure that we can feel we are in charge of the facts, so that we can have a proper discussion.
Baroness Verma
No, my Lords. I have pointed out that we intend to consult from October on the detail of implementation. I have also referred to the secondary legislation. Further detail of our plans for secondary legislation is in the memorandum to which I think noble Lords have access.
Lord Jenkin of Roding
What my noble friend Lord Deben has said merely reinforces the condition that we will have every right to return to this matter on Report, because we are having to debate it in Committee with less than half the necessary information. I still think that there is a perfectly valid way through this, which is to have different auctions for different periods between the auction and the payment. For the life of me, I cannot understand why that could not happen. But it needs to be examined: there may be absolutely indisputable objections to it; at the moment, they have not been pointed out to me. However, I think that we have said enough and I beg leave to withdraw the amendment.
Baroness Worthington
“( ) Electricity capacity regulations must make provision for capacity auctions to be conducted so as to prioritise the lowest carbon providers.”
Baroness Worthington
My Lords, this is very much a probing amendment, designed to enable us to discuss again the detail of how the proposed capacity mechanism might work. One of the biggest problems with the mechanism is that, on the one hand, it purports to be technologically neutral by somehow treating all capacity as if it were equivalent; yet, on the other, interventions are proposed that go against that principle—the debate that we have just had is an example of that. Deciding to host the first auction in 2018-19 is not a technologically neutral decision; it is a decision designed to enable CCGTs to compete—so, already, we have a conflicting message coming from government.
Another aspect of that lack of technological neutrality is the proposed differing lengths of contracts. Again, this is explicitly stated as a way of trying to rig the market in favour of a certain outcome. In this case, it is offering potentially 10-year contracts to CCGTs and is designed as a kind of carrot to get those plants built. Similarly, three-year contracts might be made available for plant which is seeking significant refurbishment—again, another intervention to try to achieve a certain outcome. Unfortunately, the proposals will not work. The confusion between a desire to be technologically neutral and these interventions is creating a great deal of uncertainty.
My concern is that insufficient attention has been paid in the department to what I would call scenario planning in relation to the current two big market drivers, the cost of coal relative to the cost of gas. Here, while I do not fully agree with the noble Viscount, Lord Ridley, on everything, there is a real issue about the relative future prices of fuel. They are an essential component regarding whether this capacity mechanism will be needed. At the moment, gas prices are very high and gas plant is losing money, hence it being mothballed. That is neither environmentally desirable, nor is it desirable for security of supply. I can therefore see why the Government have come to the conclusion that a capacity intervention is needed. However, my concern is that the way that this is being done will not achieve the desired outcome.
The reasons for that are multiple. One is that we are in a situation of oversupply. Even though we have lost 7 gigawatts of old coal capacity, we were at historically high levels before those closures. We are still in a situation where the wholesale price is not sending a signal to either keep more expensive plant in the system or build new plant. That signal is further diluted by the fact that we are about to intervene in the market to create contracts for difference for significant volumes of new capacity. The net effect is that if you are sitting there with a consented gas plant and deciding on whether to invest hundreds of millions of pounds in it, there are significant, real-world hurdles before you would say yes to that project. The way that the department is approaching the capacity mechanism is not going to address that real-world problem.
My concern relates to the fact that existing plant in a capacity auction that is pretending to be technologically neutral, if we have an oversupplied market, will always squeeze out new capacity because the existing capacity is already on the bars and has none of the costs and risks associated with new capacity. The legacy plant will be bidding in the intervening period. While that legacy plant might be useful for keeping the lights on, it creates an environmental problem. The technology-neutral approach that the Government have chosen, although they are not consistent in that, poses a problem. Coal plant is making an enormous amount of money, far greater than the returns being made by gas plant. These coal plants are capable of running for many, many decades and are at a point when they are considering whether to continue operating under tighter air-quality restrictions. These plants have the capability of operating for many years to come and at high load factors if they decide to fit new filters, new scrubbers, to make themselves compliant with the requirements of the integrated emissions directive, the IED.
I am concerned that this capacity mechanism is not going to work because, in trying to bring on CCGT and reach that Nirvana of new investment, you are necessarily going to be paying a high price for capacity. That will provide a windfall to existing coal operators, which, if it were not for the carbon floor price, would certainly want to run for decades to come. The carbon floor price is the only thing holding them back because it is that which lowers their position in the merit order.
The capacity mechanism—you will not find this in any of the literature, advice or information that has been provided—could provide in the region of between £50 million and £75 million per year, per plant as an up-front payment. If a plant that is considering a life extension can win a three-year contract, it will then receive between £150 million and £240 million in guaranteed payments. I posit the problem—and I would like the Minister to respond to this—that that might be enough to nudge them in favour of investing in those air quality filters and would be sufficient to give them comfort that they should upgrade the plant and continue to operate. No one can predict the future, but the sums of money involved in the capacity mechanism are such that it could well be a material influence on decisions about what to do with those coal plants.
My fear is that the Government have no back-up plan for if that happens. Previously in Committee, we have discussed measures that could apply—an emissions limit for carbon for coal plants seeking life extensions—and they have been rejected. We have also tabled suggestions that suppliers ought to have a decarbonisation obligation. They have been rejected. It is almost as if the Government are not really committed to decarbonisation. I am sure they are, but if you look at the Bill at the moment, it is very possible that this will see a large number of coal plants opting in to the ID, refurbishing and staying on the system well into the 2020s. That is not compatible with a strategy for building CCGT because it will simply squeeze out the capacity that is expected to be brought on.
Combined with that, we have a demand profile that is flat, or falling, and the peak is falling, so not only are the demand profile and the whole not rising, but the peak is softening as demand is shifting. If we had a rising demand profile, one might be able to argue that that is where CCGTs will bid in. We would still have all the old coal, we could bring back the mothballed gas and there would still be room for CCGTs, but with a flat or declining demand profile, there is simply not the room. What scenario planning have the Government done for a situation where a larger number of plants than expected opts into the ID, fits filters and stays on the bars? What impact will that have on our emissions profile, our carbon intensity and the cost efficiency of the whole EMR package?
The EMR is meant to be about trying to transition to a low-carbon economy. We should be seeking to do that in the most cost-efficient way. It is evident that the most cost-efficient way is to switch from high-emissions coal to low-emissions gas. That is what we did in the 1990s and it delivered all our targets to date. We can obsess about tiny micromanagement of renewables and try to get nuclear on the bars, but if we get the coal to gas ratio wrong, we will be running to stand still. We will not see emissions or carbon intensity coming down. In the interests of consumers and the environment and security of supply, we have to get the capacity mechanism right. At the moment, I am very worried that it is not.
I have one or two specific questions. I have been trying to dig down to where the Government’s optimism about the closure of coal comes from. It is obviously partly because they have great faith in the carbon floor price. I do not share that faith. It is a highly political policy with only two years of forward planning. For me, it is not a politically bankable policy. There is also some analysis underpinning this. There is a reference to research done by Redpoint. I can give the reference. It is mentioned on page 30 of National Grid EMR Analytical Report. I would like to see that analysis. It seems to be the crux of the Government’s assumptions about the impacts of ID. We should see that because it is so crucial.
I could go on and talk about the falling costs of the air scrubbing equipment and the fact that there are flexible options now arriving in the market which mean that you can fit a low-cost version of SCR and still comply. There are lots of ways of trading once you are in TNP that give you flexibility, but I do not want to bore the Committee with the detail. The main point I am trying to make is that there is a great possibility that the Government’s modelling does not match what is happening in the real world.
I would like to see far greater emphasis on scenario planning that looks at the relative impact of coal. I am supported in this; the EMR panel of technical experts, in its final report for DECC, said:
“It might be helpful if DECC considered best practice from the private sector by adopting a light-touch Scenario Planning methodology. In this, the models play an important but more limited role compared with exogenous guidance. We believe that this could lead to greater realism and enhance plausibility. Most importantly, we believe this or a similar methodology could promote deeper discussion and broader consensus on the key market drivers”.
It went on to relate a whole series of advantages that would come from this light-touch scenario planning, as opposed to the pure quantitative modelling approach, which I am fearful underpins some of the Government’s assertions and plans.
Lord Deben
My Lords, this is an occasion when the Committee in the House of Lords is particularly valuable to the Government, because this is the moment when, perhaps, unexpected things in legislation can be found. There was a time when that used to happen in the House of Commons; it does not happen any longer, because of the way in which it has changed its mechanisms for dealing with these things—I think rather shamefully. So it is in our hands.
My noble friend will probably be pleased that we have debated this subject, because it is something that causes very considerable concern outside. If the mathematics stacked up, we might find ourselves supporting the very thing that we do not want to support. No one is suggesting for one moment that the Government intend that, but the consideration of the Bill leads one to discover those things. I remember sitting in the Minister’s position in the House of Commons, on a number of Bills, when one was very grateful for a discussion because issues were raised which made you think again about how you were going to do things, simply because one had not thought about that particular outcome. Although no doubt she will have some answers to this, I think that there is a real issue here that might be solved in a whole range of ways, which is why the noble Baroness is moving this probing amendment.
I do not think that many would call me a Thatcherite, but the idea that we were spending money to keep in operation entirely outdated systems would rather run against the grain of what I understand to be the view of the present Conservative-led coalition. I do not think that anybody in the coalition, whether from the right or the left, can possibly think that it is a good idea to continue with a mechanism that is manifestly unacceptable. I am sure that the Minister does not intend to do that.
I hope that the Minister will accept that there is sufficient doubt about how this might work out to make it important between now and Report to see whether there is a mechanism powerful enough at least to assuage those doubts. That is all the Committee can reasonably ask at this moment, but it is certainly something that we ought to ask and ask very strongly. If we cannot end up with that we may have to do find something ourselves at Report, but it would be very much better if the Government could reassure us and, if not, find something that will reassure us.
Baroness Worthington
I thank the noble Lord for his intervention. I want to clarify that I am not in any way saying that we should keep coal out of the capacity mechanism. I am stressing that we need to think very carefully about the design of the capacity mechanism so that it does not produce unintended consequences. I am also suggesting, as I have done in previous discussions, that there should be a back-stop measure to prevent the base-loading of coal should all the extra scenarios line up to make that the thing that they economically choose to do.
This is not about saying no to the capacity mechanism or to coal within that and I would not want to see coal closing unnecessarily. I want to see its role constrained to providing peaking and backup power rather than base-loading as it is today because it is so profitable.
The Earl of Caithness
My Lords, I could not help but smile when I heard my noble friend Lord Deben start his peroration to us because my mind went back to the 1980s when House of Lords Committees were doing exactly the same as they are doing today in a very effective way. My noble friend happened to be a joint Minister with me on a couple of Bills. He did not like what we did then I seem to recall. I am very glad now that he thinks we were right all along and doing a very good job in the 1980s as well as in 2013.
Turning to the amendment, I was interested by what the noble Baroness said because that was not how I read her amendment at all. She said, particularly when she intervened just now, that she did not want to drive coal out. But the effect of her amendment would be to drive coal and gas out and rely solely on renewables. The way that she phrased things at the end was much more balanced. She is a great crusader for renewable energy, but having read her amendment, I thought, “Well that’s great: the nuclear industry has the best advantage now. We can build a whole lot of nuclear plants because they have no carbon and that would be extremely good”.
I have always supported the nuclear industry. It is a pity that the previous Government did not support it more fully. We might not now be in the potential difficulties that we face, which my noble friend Lord Jenkin outlined in his amendment. Given what the noble Baroness said later in her intervention, I look forward to what the Minister has to say.
Lord Berkeley
My Lords, I support my noble friend. The amendment only says “prioritise”: it does not say only lowest-carbon providers should be involved. She has a very good point. The amendment, as other noble Lords said, is not the answer, but it does enable us to have a debate. Since most of the low-carbon providers are probably the independents, which are not part of the big six, this rather confirms the argument that I put in an earlier debate on Amendment 55, I think, that it would be fairer if there was a separation. There is a wonderful potential for the big six to keep many of the low-carbon providers out that they do not own. I look forward to hearing a little more from the Minister about how this can be resolved.
Baroness Verma
My Lords, I am extremely grateful to my noble friend for bringing some sanity to this debate. I begin by saying to the noble Baroness that whenever we talk about high carbon and low carbon we must also consider the costs to the consumer.
We are, through the Bill, ensuring the decarbonisation to which I know the noble Baroness is firmly committed. At the same time, it cannot be at any cost. Time and again I have stood at this Dispatch Box and said that it is really important that the measures we take do not have a profound effect on consumers’ bills. Currently, we are already seeing that there is a movement of will against the green agenda simply because people believe that the green agenda is putting extra on their bills. We are very careful in government to ensure that the measures we are taking decarbonise the energy sector at the same time as ensuring that energy is secure and that consumers do not pay heavily for the cost of our policies.
I know that the noble Baroness is passionate about this. She asked a number of questions and I will try to refer back to them. Yesterday we had a meeting. I have some notes that I hope have been distributed to the Lords’ informal scrutiny committee referring to the analyses that the noble Baroness asked about. If she does not have them, they will be made available. They give a broad outline of the analyses that we are using. But I remind the noble Baroness that it was the Conservative Party in opposition that in 2008 asked for the emissions performance standard. It was this party that was pressing ahead to ensure that we brought in decarbonisation and it was the noble Baroness’s party that opposed every action we took at that time. It is a little difficult for us to take the passion of opportunism that is now being demonstrated.
This is about working together to make sure that we not only see a decarbonised energy sector, but we make sure that consumers are not penalised heavily. The noble Baroness’s amendment seeks low-carbon technologies to be given preferential treatment in capacity market auctions. We consider that the capacity market is not the right means to deliver that objective. Decarbonisation is best achieved through other provisions that we have put within the Bill, including the introduction of contracts for difference and emissions performance standard as well as other policy interventions such as the carbon price floor and international carbon signals such as the EU Emissions Trading Scheme.
These measures are designed specifically to ensure that the economics of low-carbon generation are transformed in comparison to traditional thermal plant. The cumulative impact of these policies is such that we expect only 3% of our electricity generation to be provided by unabated coal in 2025 and none by 2030. Therefore, it is these policies that will drive the decarbonisation of the electricity sector that I know the noble Baroness wants to see, as do we all.
The capacity market, on the other hand, has been designed to ensure security of electricity supply at least cost to consumers. Again, I know that that is what the noble Baroness wants to see as an outcome. It does this by providing all forms of capacity with the right incentives to be on the system to deliver electricity when needed.
The capacity market is designed to be technology neutral and all types of capacity will be able to bid for capacity contracts, apart from those technologies already receiving support from other mechanisms. This means that no type of technology will be given preference in capacity auctions and all eligible capacity will be compared on the basis of cost.
The philosophy is one of humility and to use the power of markets. Sadly, neither I nor anyone in my department is blessed with perfect foresight. We do not know which technologies will be cheapest, what fossil fuel prices will be in the future, or what myriad other factors will determine the optimum path to decarbonisation. That is why we have designed a framework that aims to capture the power of the markets to achieve things at least cost. Prioritising the lowest-carbon generators in the capacity market would force the market to build capacity and commit capital when extending the life of an existing plant might be a better bet—both economically through lower costs to consumers and environmentally. A few years of a coal plant cleaned up to meet the emissions limits in the IED, but operating at low-load factors, while demand-side action, interconnection and CCS develop and more low-carbon capacity comes on, could be a more competitive outcome than committing capital to new gas plants.
Lord Deben
Before my noble friend sits down, I return to the question that I asked. This is not my amendment, and it is not one with which I agree. I did say that, as there is so much concern, it would be helpful to try to allay that concern. I wonder whether my noble friend feels that over the summer I could take her up on what she has just said so that we can allay the concern, which is widespread. People who are not known for being extreme, on either side, have suggested that this may work in a way that is inimical, so perhaps she would be willing to look at that and see what needs to be done to ensure that people are not unnecessarily concerned and do not unnecessarily attack a Bill that we all want to get through.
Baroness Verma
My Lords, as I said in my speaking notes, I and my officials will be happy to meet noble Lords. The invitation, of course, goes out to all noble Lords who are here today. I will make sure that that is extended to the Lords informal scrutiny committee.
Baroness Worthington
My Lords, I am very disappointed. If the noble Baroness cares to read Hansard, she will find that far from being an insane debate it is the Government’s position that risks looking insane. As you read over your own notes you will see the inconsistencies. You are saying that it is the least-cost way to get to our targets, which is what we all want to achieve. Yet, you are rigging the market in favour of new-build CCGTs, which by your own admission are not as effective as keeping on existing plant. That is the inconsistency and where the confusion comes from. There is lack of clarity from the Government and that is why the rest of the market has no idea what to do. Everyone who owns a coal plant is sitting, waiting to see whether this mess will ever be cleared up. You continue to operate in this way by refusing to acknowledge genuine concerns. This is not my personal agenda; I am merely reflecting back what I am being told by industry.
Baroness Verma
I am very aware that the noble Baroness is very passionate about this. I am also very aware that industry—I speak to industry regularly, like the noble Baroness—says that the means by which we are travelling through this Bill is absolutely right.
Baroness Worthington
Clearly, we speak to different people. Can you please answer me on whether we can see the Redpoint analysis on the impact of the IED on capacity? What I have found very frustrating throughout this process is that we have perfectly rational, interesting and varied debates in which people put forward their point, but they are then completely ignored by the Minister in response because she simply reads her notes. She is not even listening to me now. That is a reflection of the fact—
Baroness Verma
My Lords, I am listening very carefully. I am able to listen and also try to get some responses to the points the noble Baroness is raising.
Baroness Worthington
It would be helpful if they could come from you, would it not? But there we are. I am sorry this has become so annoying because you started this by making party-political points and by starting off by calling the previous debate, which was a perfectly rational debate, “insane”. I am afraid you have created a very poor feeling in an otherwise good debate.
Baroness Verma
My Lords, I think the noble Baroness has completely misunderstood the point I was trying to make. If she reads Hansard tomorrow, she will understand that the points I was trying to make were that we are all on the same sheet on this. What we are trying to deliver in the Bill is decarbonisation through a means that we think is right, and that must be at the least cost to the consumer. I am sure the noble Baroness would agree with that.
Baroness Worthington
I apologise for my lack of respect in referring to the noble Baroness, but, as you can see, this has got off to a very bad start. I hoped this would not happen because there is a very serious issue here to do with the degree of scenario planning that the Government have undertaken and the degree of rigour that they have applied to their analysis. I am very sorry that now we have lost sight of that very important point by what has just happened. I regret that deeply. I reiterate that this is a huge intervention into the market, and if you get it wrong, all sorts of unintended consequences will happen. It is simply not good enough to say that our models tell us that it will all be fine. We need to go out and talk to people in the real world, as I have done, and see what they are projecting for coal under the scenarios that we have in today’s market, the flexibilities that enable them going forward and building in the significant amount of money that is being redistributed to them through this mechanism. That is what I am seeking to explore. I have been very disappointed that there is not even an acknowledgement that this is an issue. I heard the noble Baroness’s offer of working on the detail of this over the summer; I will take it in good faith and hope that we can work through the detail.
In conclusion, it is quite wrong of the Government to pray in aid least cost to consumers. This Government introduced the carbon floor price, which has disadvantaged the UK relative to the rest of Europe for virtually no perceived outcome at the moment. We are already paying the carbon floor price. It is already impacting on our businesses and consumers. This is a Treasury money-raising exercise. If you are the party interested in keeping costs low for consumers, that is the policy you should be looking at, not the very sensible suggestion of trying to ensure that the capacity mechanism does not have unintended consequences in terms of carbon. It is absolutely clear that the quickest and cheapest way to decarbonise the economy is to switch out of coal and into gas. You can shake your head if you want to, but you need to go back to history and look at what has happened. You can build as many renewables as you like, but if you get coal and gas wrong, you will not get to those low-carbon intensities. That is the issue I am trying to get to, and for you to use least cost and cost to consumers as excuses for doing that is really deplorable when you think of the carbon floor price. I think you need to go back and think about that. I beg leave to withdraw the amendment.
Lord Jenkin of Roding
My Lords, I do not for a moment suggest that Clause 26 should not be in the Bill. I have adopted the device of having a debate on it in order to explore its intention a little more. I remind noble Lords that at one point we expected that we would reach this point last week. We have been a little delayed. I could have tabled an amendment. I would have been perfectly simple: “Page 17, line 1, leave out subsection (3)”. So I wish to ask my noble friend some questions about subsection (3).
What is the use of the four powers which the Government are proposing to take to require generating plants to operate differently? They relate to: the manner in which functions are to be exercised; restricting the use of generating plant; the way in which a plant may participate in a capacity auction; and the inspection of plant or property. These are very broad points. I am given to understand that some generators are increasingly apprehensive that the becoming involved in the capacity market could well have undesirable operational strings attached to it. There is no indication that any of the powers would be limited even once they had ceased to be part of the market. I have to warn my noble friend that I am told that this could potentially undermine the appetite of generators to become involved, which manifestly is not the Government’s intention. Here again, we have a clause which is drafted in very broad terms and we have to wait until we see the regulations and subordinate legislation that will come from it. I do not want to repeat what has been said so often, but in advance of our seeing the draft regulations, it would be helpful if the Government could explain how they intend to use the powers, especially those relating to the use of generating plant or the manner of participating in an auction. They want to ensure that generators which may be looking to participate in the capacity market can understand and have confidence in what it may mean for them in terms of plant operation once the Act comes into force.
We have heard a great deal in these debates about the problem of uncertainty and the need to engender confidence. That is hugely important if you are going to attract the necessary investment. I always come back to the meeting that we attended some weeks ago chaired by the noble Lord, Lord Oxburgh, when a lot was said by different categories of potential investor. We have got to have the Bill otherwise we will not get investment. At the end, the question was asked: if we have the Bill, will we get the investment? That was followed by a long silence. Nobody is able to guarantee this. Therefore, we must do our very best to make sure that any cause of uncertainty, any anxiety about the likely consequences, is treated as very important.
Clause 32 again gives the power by regulation to amend or repeal existing legislation. I shall not read it all out because everybody can see what is in it, but I am particularly worried about paragraph (d). Here again we have regulations that will give very wide powers of direct legislation—in a sense, Henry VIII provisions—if they are connected to the development of a capacity market, including the annual reports made by the authority on the security of electricity supplies and the report on the security of energy supplies as a whole. As I said, paragraph (d) provides for wide amendment of existing enactments. It is very broad and, here again, concerns have been raised by the industry—I am sure that it has made its views known to my noble friend’s officials—that it may take effect unpredictably. Therefore, there is increasing uncertainty and, to that extent, reducing confidence.
My amendment is simply to ask my noble friend to give an explanation. What are the likely uses of this power? How widely would it range, bearing in mind that it includes amendments to primary legislation and is consequential on provision which itself is made in secondary legislation. I understand the desire of the Government to cover every possibility, but the more they seek to cover with very wide powers of this sort without adequate explanation of how they are going to be used, the more they increase the uncertainty which undermines the possibility of investment. I hope that my noble friend will be able to give us some further information which may help to reduce that uncertainty and increase confidence.
Lord Grantchester
My Lords, we endorse the anxieties highlighted by the noble Lord, Lord Jenkin, regarding the use of powers in the Bill. In saying that, I will speak to Amendments 55ZZA and 55ZZB, as well as Amendments 55ZD and 55ZE, which are grouped with the noble Lord’s stand part debate.
As the Committee’s proceedings have continued in scrutinising the Bill, the Government have issued a response to the Delegated Powers Committee’s uncharacteristic dismay at the discretionary powers being sought by the Secretary of State in the Bill. Your Lordships’ Committee has considered this response and issued a further deliberation in its sixth report. Amendments 55ZZA and 55ZZB would implement the recommendation of the Delegated Powers Committee that all secondary legislation relating to the capacity market be subject to the affirmative resolution procedure, with the exception of Clause 27, which relates to the provision of information and advice and would be subject to the negative.
Each day in proceedings on the Bill, it has continually been highlighted that the Government are asking Parliament for an extraordinary array of powers to put at the disposal of the Secretary of State, with very little detail on how these might be used and constrained. Your Lordships’ Delegated Powers Committee stated:
“It does not … seem to us to be satisfactory that the Bill should have reached Committee Stage in the second House with so little known about the likely shape of the provision to be made about an important aspect of Chapter 3. While welcoming the additional information about capacity agreements, we remain concerned that not enough has been done to redress the imbalance between the scarcity of provision on the face of the Bill and the preponderance of delegated powers … unless the Government is able to provide the House with adequate information about the regulations for capacity auctions, the powers conferred by Chapter 3 are inappropriately wide”.
Without much more detail, it is impossible to assess the requirements for the extent and relevance of these powers.
Similarly, Amendments 55ZD and 55ZE would implement the recommendations of the Delegated Powers Committee that all regulations bar those made under Clause 7(10) would be subject to the affirmative resolution procedure. To quote again from the committee’s sixth report:
“When we first considered Chapter 2 we found it very difficult, based only on the provision in the Chapter itself and the explanatory material then available to us, to get a clear idea of the real nature of what is being proposed there, and the scale and context of the delegations of legislative power involved”.
The report continues:
“Wide and significant powers of this kind deserve a high level of Parliamentary scrutiny, and we are not persuaded that the affirmative procedure should apply only to instruments which contain regulations made under any of clauses 9 to 11”.
While the committee was grateful for the Government’s co-operation in tabling a revised order of consideration for these clauses, which has meant that we have been able to debate today the clauses on contracts for difference with the strike price published, there is still an enormous amount of detail to come. On the capacity market, for instance, the issues just debated on the impact this will have on the continuation of old coal have only just come to light as a result of information published last Wednesday, 18 July, in the draft delivery plan. Had the Committee not had this information before debating these clauses, we would have been very unlikely to pick up on this and parliamentary scrutiny would have been less effective.
I very much hope that the Government will at least accept the amendments today which implement the recommendations of the Delegated Powers Committee. It will be extremely important that the Government deliver on their commitment to publish the draft regulations by October so that, as the committee recommends,
“the House will be given time to consider the published drafts before Report Stage begins”.
We all want to see the Bill on the statute book as swiftly as possible to end the flat-lining of investment in renewables which we have seen over the past three years. Given the volume of detail delegated to secondary legislation, it will be not the primary legislation but the regulations that might in practice delay the implementation of EMR.
Lord Crickhowell
My Lords, I have not intervened before now, on hearing this afternoon’s proceedings, but the reference to the Delegated Powers and Regulatory Reform Committee has prompted me to get on my feet. I am a member of the Constitution Committee, which I think would agree with everything that has just been said about these clauses. Indeed, I am prompted to think that I must go back to the Constitution Committee and make sure that before this comes before the House at Report we will have had a look at the constitutional implications of the way in which this matter is being handled. So I have every sympathy with the points that have just been made.
I make a wider point. I have been quite astonished— although I have been a very long time in Parliament, in one House and the other—as I do not believe that I have ever seen a Bill come to this stage in its proceedings with so much information still unavailable; after all, it has been through the other place and been examined by countless committees. Indeed, if this Committee stage had been held on the Floor of the House, the Government would have been in deep trouble. In Grand Committee, we go along with it—we probe and press questions and so on—and say that we will bring things back at Report. The House as a whole would have been far more impatient with the Government about the way in which they have handled this matter.
If at times my noble friend the Minister finds there are interventions from both sides, including from the noble Baroness who speaks for the Opposition, she must not be entirely surprised. If the department has not yet addressed many of the issues that one would have expected it to address at this time or to have answers to and provide information to the Committee, it must not be surprised if it gets into trouble. Therefore, as we go through the final stages in Committee, my noble friend would be extremely wise to understand the feeling of irritation and frustration that is widespread in the Committee and temper her remarks accordingly. I am not suggesting that it is her fault; it is a nightmare for Ministers in this House who have to handle Bills of this sort, since many key issues are decided elsewhere and by others. But she must understand that, as a Committee, we face the most extraordinary difficulties. We do not know half the regulations that are going to appear; we have clauses such as this one, which give extraordinary powers; and the Committee is naturally suspicious.
I hope that, as we go further down the proceedings this afternoon, my noble friend will simply accept that the Committee is faced with serious difficulties and will be prepared to say, again and again, that she understands the concerns, will listen to them most carefully, and will be prepared to discuss them as widely as possible before getting to the next stage. I hope that she will try to avoid the sense of irritation and conflict that crept in at an earlier stage this afternoon.
Lord Roper
My Lords, I do not intend to delay the Committee unduly on this point, but I echo what has been said by the noble Lord, Lord Grantchester, and my noble friend Lord Crickhowell. I have spoken before on the remarkably trenchant language which the Delegated Powers and Regulatory Reform Committee used in its fifth report—and, in its sixth report, as we have heard from the noble Lord, Lord Grantchester, it is still very concerned, particularly on the regulations on the capacity market that we are considering. Therefore, it is essential that we have detail of the regulations that are going to be introduced well before we come to Report.
Baroness Verma
My Lords, I am extremely grateful to my noble friend Lord Jenkin and the noble Lord, Lord Grantchester, for prompting this debate on the delegated powers within the capacity market and contract for difference provisions.
Clause 26 enables the Secretary of State to make provision to impose requirements, via electricity capacity regulations, in addition to those stipulated in capacity agreements. The requirements can be imposed on persons including licence holders, other persons carrying out functions in relation to capacity agreements and current and former capacity providers.
I understand that my noble friend Lord Jenkin is concerned that the provisions in this clause are too broad. However, the Government consider that the ability to address this provision in secondary legislation is needed as the requirements may change with time. The need to consider certain matters when preparing advice regarding the operation of the capacity market may also change as the market evolves, as has been the experience in international capacity markets, such as those in the United States.
With regard to Clause 26(3)(b) about placing restrictions on the use of generating plant, certain requirements may need to be imposed to ensure a fair and transparent auction and to mitigate or close off gaming opportunities that could otherwise drive up costs for consumers. In particular, it is imperative that we know the range and type of capacity, irrespective of whether the capacity operator intends to bid at auction, and we need to ensure we can address gaming opportunities, such as a plant operator notifying its intention to close in order to drive up the capacity price. Clause 26(3)(c) allows the Secretary of State to impose requirements relating to participation in a capacity auction. An example of how we envisage using this power is that we may wish to require a plant to participate in a capacity auction if it has notified the delivery body during the pre-qualification process that it is its intention to do so.
It may be necessary to place other requirements on those who have ceased to be capacity providers—that is to say, they have assigned or traded their capacity agreements—in order to determine whether they complied with their obligations while they held the agreement. For example, requirements relating to the inspection of plant or property other than as a condition of entry into a capacity auction, as described in Clause 26(3)(d), may be imposed by the Secretary of State.
The powers in Clause 32 allow the Secretary of State to amend or repeal certain sections of the Electricity Act 1989 and the Energy Act 2004 and to make subsequent amendments to any other enactment as the Secretary of State considers appropriate as a result of provisions made by electricity capacity regulations or capacity market rules. I recognise that my noble friend has particular concerns over the provisions in paragraph (d), which allows the Secretary of State to make consequential amendments to any other enactment that he considers appropriate. I should emphasise that our intention is to limit the use of the power in Clause 32(d) to making amendments that are consequential on, or to avoid duplication and contradiction of, existing primary or secondary legislation on implementing the capacity market. For example, if we modify the standard conditions of licences under the provisions of the Electricity Act, the powers for which are set out in Clause 31, it may be necessary to make a consequential amendment to Section 33 of the Utilities Act 2000. This contains general provision about standard licence conditions and includes in Section 33(1) a list of powers under which licence modifications have been made. Furthermore, any provisions to amend primary legislation through the powers in this clause will be subject to a proper level of parliamentary scrutiny through the affirmative resolution procedure.
I now turn to the amendments proposed by the noble Lord, Lord Grantchester, relating to the level of parliamentary scrutiny of regulations made under Chapters 2 and 3 of this Bill. These amendments would make all regulations subject to the affirmative resolution procedure, aside from those relating to electricity capacity regulations: information and advice and those under Clause 7(10) which set out how long a person who has ceased to be a CFD counterparty is continued to be treated as such. These would be subject to the negative procedure. The amendments are consistent with the recommendations of the Delegated Powers and Regulatory Reform Committee. As I have said in previous debates, the Government welcome the committee’s report and I can reassure the noble Lord that it is being given careful consideration. I commit to consider the amendments further and will respond in due course. I commend that Clauses 26 and 32 stand part of the Bill, and hope that the noble Lord will feel content to withdraw his objection.
Lord Jenkin of Roding
My Lords, I start by saying that what my noble friend has said in response to the amendments about parliamentary scrutiny will be very welcome indeed. The noble Lord, Lord Grantchester, is nodding vigorously in agreement, so I am delighted with that.
I tended to examine this from the point of view of the people whose investment is being sought. This is right at the heart of the Bill. Others, perfectly properly, have concentrated on the Delegated Powers and Regulatory Reform Committee, and my noble friend Lord Crickhowell spoke on the constitutional implications of the proposals. Of course, everyone will now want to study carefully what my noble friend has said, and some comfort may be found in that. We hear that it will be only consequential amendments. We will need to wait and see. I come back to the same point that we have made again and again: by Report we must know what is to be in the regulations.
I hope that my noble friend will take very seriously what my noble friend Lord Crickhowell said. If we get to the Floor of the House and find ourselves still having to make this kind of speech, the Minister will find herself in considerable difficulty. That is the last thing I want to see. I hope that her officials will take note. It may affect the date that we deal with it in October; we do not have any dates yet for Report. Getting the detail clear to everybody before we start debating clauses and amendments on Report is of the highest importance. I make no apology at all for having raised this matter at this stage. It is a hugely important issue and I know that my noble friend has taken it on board. It may be that some of her officials will have to cut short their holidays—poor them. I am sorry for that, but we are dealing with what appears to a lot of people to be legislation being made up as it goes along. That is hugely damaging from the point of view of any department which launched into this without knowing what would come out at the other end. When we come to final parliamentary scrutiny of the Bill, which will be at Report and Third Reading in this House, we really need to know what we will be talking about. With that admonition, if it may be so described, I am happy to withdraw the objection and agree that the clauses should stand part of the Bill.
Baroness Parminter
“Strategy on interconnection
Within 12 months of this Act coming into force, the Secretary of State shall bring forward a strategy for the UK to increase its interconnection links with other European countries, in order to support the continued development of a European internal electricity market.”
Baroness Parminter
I rise to speak to the group of amendments on the value to the United Kingdom of a European internal energy market, and in particular to move Amendment 55ZB, which stands in my name and that of my noble friend Lord Teverson and the noble Lord, Lord Whitty.
The amendment would require the Government to introduce a strategy to address the policy barriers to interconnection and the distortions introduced by the proposed capacity market. I highlighted at Second Reading the benefits of greater interconnection across Europe, so I will be brief now. It makes a significant contribution to security of supply as Ofgem's recent electricity capacity assessment demonstrates. If the UK imports electricity from the continent at times when supply is tight, capacity margins increase from 5% to nearly 9%. By making more efficient use of renewable energy, it can have positive effects on energy costs, as the Government have confirmed in their response to the House of Lords EU Select Committee report, No Country is an Energy Island, which is to be debated in this House next Monday.
In her concluding remarks at Second Reading, the Minister made it clear that the Government,
“are fully supportive of increased interconnection”.—[Official Report, 18/6/13; col. 236.]
I am aware of some welcome initiatives, including a memorandum of understanding with the Irish and Icelandic Governments. Also the Government are supporting Ofgem’s integrated transmission planning and regulation project to take it forward. But there is no denying that the decision not to allow interconnected capacity to participate in a capacity auction now will distort the internal market. Why? Because an overseas power generator wishing to supply the UK market will receive the wholesale electricity price alone, while generators in the UK will receive a capacity payment and a wholesale electricity price. This would mean that there would be less efficiency resulting from less competition in the auction and, crucially, less incentive to build additional interconnection capacity.
The Government have said in very recent correspondence that they are keen to find a way for interconnected capacity to participate in a capacity market in future. This is to be welcomed, but we need a clear commitment in the Bill that this Government prioritise interconnection alongside the capacity market and demand-side reduction measures to deliver the energy that we need. We need to know what other avenues they are going to pursue for interconnection and by when. It is legislation, not the sometimes contradictory comments within government, that shows investors what government will do and creates the necessary confidence to invest. Let us be clear: the European Commission estimates that investment of more than €200 billion is needed before 2020, two-thirds of that in the electricity market, in cross-border infrastructure. Putting this amendment in the Bill would help to give that investor confidence, requiring the Government and this department actively to look at ways in which to develop mechanisms, working with the regulators and European partners to support cross-border energy trade. Doing so would show that, on energy, just as on crime, trade and the environment, we are better working with our European partners and neighbours. I beg to move.
Lord O'Neill of Clackmannan
I would like to ask those who tabled this amendment about the sources of energy that we will be interconnecting with. At present, within Germany, there will be a highly distorted market, with renewables concentrated in the north, demand in the south, and nuclear power stations closing by 2021.
As I understand it, Germany’s nuclear power stations enabled the Danes to keep nice and green by exporting some of its surplus nuclear supply to them. At this stage, we can probably discount Denmark and Germany as potential sources of supply. We have been fortunate to have had an interconnection arrangement with France. In some respects, it has probably done the French more good than us, certainly commercially, but it has enabled us to keep our lights on. On the other hand, one can imagine that the parlous state of not only the Italian economy but that country’s interconnection may present problems. In this little European tour, it is most unlikely that we could depend on Italy as a source of much energy for the United Kingdom. It would be very nice to have connections with Iceland but its significance would be pretty limited.
There is always the issue that long undersea cables have significant transmission losses, and I am not quite sure how much we would get out of Ireland on a good day. We know that there may be gas around Ireland and there have been useful discoveries there. However, the point that I am trying to make is that we could conceivably get some hydro power from Norway but my understanding is that global warming there has created problems whereby hydro power is not quite as reliable as it used to be because the glaciers are getting smaller and there is too much water at the wrong times.
It would be nice to be reassured that someone in Europe at the other end of our interconnections could provide us with a lot of electricity. If we were to obtain 30 gigawatts of nuclear power, we might be able to sell some to Ireland, although the Irish might not like nuclear power. They do not seem to mind it when it comes from Scotland, so long as it is under an agreement with a company that also owns gas-fired and coal-fired power stations. Like the Danes, the Irish are able to remain rather more environmentally acceptable to other people than perhaps they are.
The point that I am really trying to get at is that this will be very expensive, there will be transmission losses because of the distances involved and I am not sure which countries will have surplus capacity capable of providing us with what might well turn out to be extremely expensive electricity. At the moment, it has been useful and helpful to have received it from France. I am pretty certain that the French will sell it to the highest bidder and there will be people on the continent of Europe who will probably need imported electricity to a far greater extent than we do and will therefore probably be desperate enough to pay higher prices for it. Before we embark on a strategy that implies great expense and investment, given the parlous state of a lot of the energy companies in terms of even their share value, increased interconnection is a wee bit fanciful. I am happy to be convinced if there are power generators across the North Sea desperate to sell to us but I am not quite sure that they are. Even if they are keen now, will they be in 10 years’ time? Although we are having administrative difficulties in getting this Bill into a shape that we can deal with on Report, we will probably eventually get it right, but we do not get the impression that our European partners are moving with even the glacial speed at which we are travelling when trying to achieve solutions. A strategy might be very nice but, at the end of the day, it might be wishful thinking.
Lord Davies of Stamford
Will my noble friend tell the Committee what is wrong with France? We have an interconnector already. Perhaps there will in future be greater surplus capacity in France which it would be willing to sell to us on a capacity market basis or directly or a mixture of the two, and perhaps it is worth investing in a bigger interconnector. I think the present one is 2 gigawatts, so perhaps it should be another 2 gigawatts. What about Scotland if it chooses to become an independent country? This amendment is permissive. It does not require for its good sense that there should be certainty that it could be utilised. It is attempting to make sure that others have a proper incentive for participating in our capacity market to mutual advantage if they are capable of doing so.
Lord O'Neill of Clackmannan
We have been told that the dome is now on the power station at Flamanville, so in the not-too-distant-future, four or five years behind schedule, we might start to get some electricity from that station. I am not being Francophobic here, but I do not think that the French will have that much spare capacity that they will want to keep selling to us. There may well be others in Europe who would be prepared to pay more because their position will be even more dire than ours could be if the worst scenario came about.
On the other question, I am confident that on 14 September next year, Scotland will vote to remain part of the United Kingdom. Then we might start to have a Government in Scotland who will not have us living off windmills, because that is the problem that we are going to have as long as the nationalist Administration is in power and we are going to have to depend on Salmond’s hot air to keep the windmills going.
Lord Berkeley
Is the technology at Flamanville, which my noble friend said is five years late, not the same technology with which EDF is proposing to equip our stations in this country, or is it new?
Lord O'Neill of Clackmannan
It is. Not only is it slow to build, but it is more expensive than some of the other kit that could be available. It is on a wing and a prayer. We have fallen behind. It may well be that the Finnish and the Flamanville experiences will be such that all the problems will be ironed out and we will have EDF building the first reactor at Hinckley on time and within budget. One can only hope that. Companies ride learning curves. One hopes that Arriva has ironed out all the kinks. The problems in Finland were different from the problems in France, but the combination of the two seems to suggest that they had not really done so in Europe at least, because power stations of this character are being built efficiently and speedily in the Far East but unfortunately not in continental Europe.
Lord Cameron of Dillington
Perhaps we can get back to the amendment. I support it because connectivity is like an international capacity mechanism, except that it has the ability to incorporate renewable technology and even intermittent power. I say to the noble Lord, Lord O’Neill, that it is not all about the UK. It is about sharing surplus all over Europe. That is the whole point. It is very unlikely that you will get a particular moment when there is no sun in Italy, no wind in Germany or Ireland, no water behind the hydro dams of Norway and no nuclear power coming out of France. There will always be surplus here and there. For instance, at one moment last week in the German market, 33% of the power was being produced by PV. There was a complete surplus in the marketplace. It was disastrous for the coal-fired power stations of Germany because suddenly the price of electricity went very cheap.
The interconnectivity is a transEuropean thing which we can all work together. I believe that an interconnected Europe would be a secure Europe in that way. However, we have a long way to go, and the noble Lord, Lord O’Neill, is correct to refer to the glacial speed. There are different regulations in different countries and different ownership structures, including some nationalised industries and old semi-nationalised industries, which are very inefficient yet determined to fend off any possible competition from abroad. There is also the question of different voltages operating in different countries. Hovering over all these uncertainties are the European public, who seem to want their power but under no circumstances want to have more pylons.
Meanwhile, in all this the EU Commission has made £9.2 billion available for overall connectivity, including gas, when the rough estimate for the electricity grid connections is £104 billion, including £23 billion for subsea cables alone. I ought to correct one other thing that the noble Lord, Lord O’Neill, said: with high-voltage direct current there are almost nil losses in transmission. Although the power stations at either end are obviously more expensive the line itself is much cheaper, particularly if it goes underwater.
The point is that the rest of that money—the £104 billion —has to come from the marketplace but to get even a proportion of that money, the market will need the certainty of international commitment and the certainty of a plan. It will need an EU plan set out by the Commission in a way that guarantees long-term commitment and is signed up to by all the member states involved. Eurelectric, the trade body representing the European electricity sector, says that creating a predictable policy framework would help utilities to finance their investment plans and attract the necessary funds. Incidentally, Herman van Rompuy says that the implementation of such a framework, which includes electricity and gas, could save the EU consumer up to €30 billion per annum. My point is that in order to get a firm and committed EU strategy, we need to start with a firm UK strategy. That, in a nutshell, is why I support this amendment.
The Lord Bishop of Chester
My Lords, when I am in a really tedious meeting I sometimes flick to my iPhone if I succumb to the temptation. The Energywatch organisation has a splendid app which tells you exactly what electricity generation is going on at any particular moment. I can tell your Lordships that at this moment we are depending upon supplies from overseas of 7%, or 3 gigawatts. Wind is producing at the moment less than one sixth of that. Over time, I am struck by just what a significant proportion of our electricity already comes in that way. Three gigawatts is not nothing; it is a very significant amount.
When the Minister responds, it would be helpful if she could give some indication as to what security there is. I belong to those who have some anxieties that in three or four years’ time, if economic activity picks up and some outages occur at a couple of big stations that we are not expecting, and if the weather is very cold and the wind is not blowing, we are going to depend upon electricity coming from these interconnectors. We can depend on it only if we know that they will be available. If the weather is also inadvertent in other countries, what security do we have that the electricity will be available from other places? I am entirely with the view that we should have a European electricity market. That is absolutely right but it has to be with certain guarantees for supply in this country, especially when supply gets tight in a few years’ time.
The Earl of Caithness
My Lords, I support in principle what my noble friend Lady Parminter is proposing in this amendment. The evidence that we got in Sub-Committee D was that interconnection throughout Europe needed a great deal more money spent on it, as the noble Lord, Lord Cameron, has told us. It needs to be improved, but that is a two-way process. The noble Lord, Lord Cameron, referred to some of the difficulties and I recall those being adduced to the committee.
My concern with this is therefore: what is the point of the UK producing a strategy when nobody else is producing one? We can produce a strategy and the Government can be questioned in the House about it, but if the French are not altering their system so that we are compatible and one can move the electricity to and fro, or if the problems have not been resolved with Norway—as was highlighted, there was a problem getting a connection with Norway or with the Danes—it seems a little pointless us having a strategy. Surely this ought to be done within the EU context. However, my noble friend Lady Parminter and the noble Lords, Lord Cameron and Lord Whitty, have the advantage that since I have left Sub-Committee D, they interviewed the Secretary of State. Although I have read the transcript, I would hope that they can enlighten us on what the Secretary of State had to say on our report, which we will discuss in more detail on Monday.
In some ways, I support the principle of great interconnection, although there will be problems from time to time. I know that the noble Lord, Lord O’Neill of Clackmannan, is more secure about the vote in September next year than I am. I wonder whether there is a way of preventing nuclear energy getting into Scotland because Scotland will not want nuclear energy from England. Can we adapt the grid so that one cannot get nuclear energy; it would only upset the Scots?
Lord Teverson
I rise to speak to my Amendments 55AA and 55AD, as part of this group, but perhaps I can come to the interconnection amendment of my noble friend Lady Parminter first. It seems to me to be blindingly obvious that this is something that we should do. I note the comments of the noble Lord, Lord O’Neill, who may be asking the right questions but he is being slightly too negative. A strategy does not cost billions; implementing it costs billions. When talking about investment in electricity generation, network costs, and so on of potentially £200 billion, looking sensibly at a major part of the jigsaw of interconnection is very important. We should remember that this amendment refers to the capacity payment part of the Bill, so this bit is not saying that we should run UK base load and rely all the time on interconnection. It is a common-sense look at the fact that European energy markets and individual national markets operate at different times, have their own characteristics and different peaks. Therefore, it makes a huge amount of sense to try to benefit from the synergies of capacity, weave them together and make the system work better. There are all sorts of problems with the energy market, but it does not stop the UK trying to make the best out of it, and then fit that within a broader EU strategy. I, too, look forward to the debate on Monday evening.
I move on to my own amendments and apologise to the Grand Committee for using a double negative. It is a probing amendment, trying to find out the Government’s thinking. I am trying to determine what is known as an eligible supplier in terms of the CFD market—someone who has a generating capacity outside the United Kingdom. I am not at all clear about this. I know that the Government have had discussions. We have mentioned Iceland and Ireland before but it would be useful to understand generating plants outside the United Kingdom. I am especially thinking about those that are dedicated to the UK, but there is a broader issue, which is maybe more difficult, on whether they can enter into contracts for difference.
I was struck by the Minister’s comments on the importance of price to the consumer. If we looked at it on that basis, clearly we should be buying internationally as much as we could in terms of bringing extra competition into the market and trying to bring prices down. Clearly we would not entertain CFD contracts that were more than that. Of course, there is the strike price. I would hope that with that extra competition there would be pressure on bringing the strike price down over time.
My second amendment, Amendment 55AD, would put a timeframe on the Government for making arrangements for such extraterritorial generation in order for CFDs to come on board. We often talk about offshore wind generation. This is perhaps the ultimate in offshore wind generation and other forms of low-carbon electricity. I look forward to the Minister’s response.
Lord Deben
My Lords, I hope that my noble friend the Minister will look at these amendments as probing amendments, because there are some important issues which we need to cover. I declare a past interest in the sense that I was involved in trying to get a particular interconnection. My experience from that is that there are many difficulties which are not systemic difficulties, as the noble Lord, Lord O’Neill, might refer to them, but simply difficulties about the way in which we do things in this country which makes it very complex.
There are two different issues here which are covered in the first of the amendments, which was introduced earlier by my noble friend Lady Parminter. One is connection and the other is connection,
“in order to support the continued development of a European internal electricity market”.
Those are two different things, although I hope that they would run in parallel. Manifestly, in the long-distant future, it would be quite sensible to have a lot of windmills when there was wind and a lot of solar when there was sun. Being able to pass that along would be very good. Modern methods of transmission are very much less wasteful than previously and there is some indication that we will be able to move things very well in the future.
Obviously, therefore, there is a long-term interest in linking up the systems more effectively. I do not know what the latest figure is, but it has been estimated that if we made certain, not-very-difficult changes to the northern European connections, we could save about 11% of our emissions, simply because they are now wasted due to the connecting arrangement. That may have been updated now, but there are clearly savings to be made there. They are the sort of savings that we should make before we do other things. It always seems to me that wastage—I am glad that right reverend Prelate the Bishop of Chester came into this debate—is the least acceptable manner of putting emissions into the atmosphere. It just does not seem to be a right thing to do.
Even if it were not for that reason, we need to open up the opportunities for people to invest. The noble Lord, Lord O’Neill, is right that such investments are quite expensive, but if you open up the opportunities for people to invest, the market will sort out which investments are sensible and which are not. There will be an opportunity then for perhaps rather more cost-effective investment, which would involve interconnection.
The purpose of the amendments, so far as I can see, is to ask my noble friend the Minister, “Are we sure that we’ve looked at this sufficiently well in the general panoply?”. The climate change committee, of which I have the honour to be the chairman, has always talked about a portfolio of energy supplies as being the basis for energy sovereignty, for making sure that we do not become subject to very high prices of gas and for making sure that we fight against dangerous climate change—these three things come together. The portfolio approach is the one that I am always looking at. I am very keen that we should not write this Bill to exclude this. The noble Lord, Lord O’Neill, would probably go along with the concept that we should make sure that there is not an opportunity here. I am not sure that the Bill does that. If my noble friend could say to the Committee that she will make sure there is not a lacuna here, it would be a very helpful outcome of this debate.
Lord O’Neill of Clackmannan
I want to make this point to the noble Lord. We have a department that at the moment cannot provide us with important, immediately required, documents. We are asking them to produce a strategy in 12 months, a lot of which at the moment seems to be wishful thinking. Are this lot capable of doing it?
Lord Deben
I knew that I should not have raised the noble Lord’s name, because it gave him the opportunity to say what he so often does, which is anything that is not complimentary to the Government. I remind him of the early part of Wuthering Heights where there is a peculiarly nasty individual. He ransacked the Bible for the promises that he pulled to himself and the curses that he threw at other people. Sometimes, I am reminded of that in the speeches given by the noble Lord.
Lord Whitty
My Lords, my name is also on this amendment and I sat on the same committee, as the noble Earl, Lord Caithness, indicated. We are debating that whole subject on Monday night. The noble Lord, Lord Cameron, and the noble Baroness spelt out the general thesis of that report and I do not intend to repeat it.
I say to my noble friend Lord O’Neill that I do not think he entirely deserves the strictures from the noble Lord, Lord Deben, on fictional characters, but he does like to stir up a little controversy. In a sense, the title that we chose for that report in the sub-committee was intended to pre-empt the sort of attack that my noble friend Lord O’Neill produced. It is that no country is an island in relation to energy supply—not Scotland or Great Britain. Indeed, the other part of the United Kingdom, Northern Ireland, is already utterly dependent on interconnectivity both for its gas and electricity. The idea that we should ignore interconnectivity as part of the solution, particularly when we are discussing capacity markets and capacity mechanisms, seems to ignore something obvious. Certainly, by the end of our deliberations on that committee, it became obvious to us.
The noble Earl, Lord Caithness, asked what the Secretary of State’s response was to the committee. I thought that we had a very good session with the Secretary of State. He took it up. He obviously had some briefing and had to be a little cautious, particularly on delivery within the European context, but he was keen that we should take it up. To be fair to the Government, they have picked up this point but it is not yet reflected in the Bill.
The amendment of the noble Baroness, Lady Parminter, gives the Government a chance to have another look at this and see what relationship there is between an attention to interconnectivity and both the contracts for difference, which could include a contract for difference for generation occurring outside the United Kingdom, and the capacity mechanism, which should also include provision for interconnectivity to be part of it. Indeed, it is an obvious part of an overall capacity mechanism. Two-way connectivity must be a way of bringing down costs across Europe as a whole with the development of an internal market which at present does not really exist, despite what the Commission claims on occasion. That must be to the benefit of the costs of investment in energy as a whole and ultimately to the price to the consumer, whether a domestic or industrial consumer.
The message from our report—and that message also lies behind the requirement that the amendment would place on the Government—is to develop a UK strategy in order to push forward the European agenda on this, but with particular reference to those bits of interconnection between us and Ireland, us and France and potentially further afield in Norway, Iceland and Holland. For all those reasons, this needs to be seen as a way of meeting our energy requirements.
Unfortunately, in this context, the Government are not being as ambitious as the Secretary of State was in his response to the committee. They are saying that connectivity would effectively be regarded as a passive contribution. For example, in the letter that the noble Baroness wrote recently—noble Lords may have seen it—she says that if interconnection provided 2 gigawatts then clearly that would have an effect on overall costs and would be of benefit. However, that is looking at it in a very passive way. If we developed a strategy, we could look at the matter in a more constructive and creative way as one of the major contributions of the diversity of sources to meeting all our objectives: energy security, decarbonisation and lowering the price to industrial and domestic consumers.
Interconnectivity is big in that respect, and significant in avoiding disruption and shortages. My noble friend Lord O’Neill ought to look at this matter again and accept, without determining what the outcome of such a strategy should be, that part of the jigsaw must be a strategy on interconnectivity. I therefore strongly support the amendment.
Baroness Verma
My Lords, I am grateful to my noble friends Lady Parminter and Lord Teverson, and the noble Lord, Lord Whitty, for providing me with an opportunity to respond on the very important issue of electricity interconnection.
I turn first to Amendment 55ZB on electricity interconnection. The physical linking of the GB electricity market to others in Europe has the potential to offer a range of benefits, as my noble friend has ably set out. The Government firmly believe that greater levels of interconnection would be good for Britain and build on the 4 gigawatts that we have. A large number of interconnector projects are at different stages of development, including to Norway, Belgium, France and Ireland. Indeed, when you add up the capacity of potential projects, it comes to more than 12 gigawatts.
The UK Government are already playing an active role in seeking recognition of several UK interconnection projects as European projects of common interest under the EU regulation on guidelines for trans-European energy infrastructure. This regulation, which the UK Government were actively involved in negotiating, aims to accelerate the development of cross-border energy infrastructure with a view to completing the internal energy market.
Successful projects are due to be announced in early autumn, and will benefit from streamlined planning procedures and, where necessary, a mechanism to agree cross-border cost allocation. They will also be eligible to access financial instruments such as loan finance, grants for feasibility studies and, potentially, grants for works under the Connecting Europe Facility—a pot of €5.1 billion over seven years. The Government also continue to discuss interconnection with our counterparts across Europe. My noble friend may be aware that the Prime Minister committed last year to supporting the development of an interconnector with Norway, and we have signed a memorandum of understanding with Iceland to explore the possibility of linking our markets.
In part, the large number of projects in development is due to work that Ofgem has been doing to develop a new regulatory approach for interconnection. This “cap and floor” model retains the market incentives for interconnection but reduces some of the risks to revenue that merchant developers face. This regulatory model is initially going to be applied to the project with Belgium, Project Nemo. Cap and floor has real potential in driving forward interconnector investment but, by its very nature, looks to consumers to potentially take on some risk in return, which will need careful consideration. Ofgem is taking this into account as part of its wider integrated transmission planning and regulation project, in which it is exploring whether there needs to be enhanced planning or strategic evaluation of future interconnection.
I should also like to highlight two further important developments that are taking place. First, developers invest on the basis of price differentials on either side of the link. Ofgem is working to ensure that Great Britain’s electricity prices reflect scarcity to a greater extent, thereby increasing the incentives for investing in interconnection. Secondly, on 27 June, the Government committed to continuing to explore ways in which interconnected capacity can participate in the capacity market. This is not simple and no other country has found a way to do this, but a solution could further increase investment appetite. It is worth reflecting that the single market is about not only the infrastructure between member states but the way in which that infrastructure operates.
The Government, with the support of Ofgem and National Grid, are playing an active role in the development of the European technical codes that will govern how trading over interconnectors will work in practice. This is essential if the full benefits of the infrastructure investments are to be realised.
The Lord Bishop of Chester
I raised a specific point about the extent to which existing capacity, which may get as high as 12 gigawatts, is taken into account in energy security. To what extent is the Government’s strategy on energy security dependent on the interconnection?
Baroness Verma
I apologise. I had a note for the right reverend Prelate the Bishop of Chester, but I forgot to allude to it. The loss of supply from interconnection, like other forms of capacity, would be handled by the system operator in the same way as additional capacity would be sought through the National Grid’s balancing services. There would be a mechanism in place.
The Lord Bishop of Chester
The noble Baroness may want to write to me rather than answer now, but if supply gets tight under the scenario that Ofgem has said is possible—although we hope it will not come to that—does continuation of the Government’s current strategy at that point depend on the availability of electricity at a level between the current 4 gigawatts and the prospective 12 gigawatts?
Baroness Verma
My Lords, it might be wise for me to write in detail to the right reverend Prelate and the Committee with a fuller answer.
Lord O’Neill of Clackmannan
Given that the Minister is not opposed to the amendment in principle, if the words “12 months” were removed from it and the amendment were to be retabled on Report, would she look at it in a more sympathetic light?
Baroness Verma
I see that the debate has changed the mind of the noble Lord, Lord O’Neill, but, as with all debates in Committee, I shall go away and look carefully at Hansard to make sure that I have understood the debate fully.
Lord O’Neill of Clackmannan
I am just an old hand at this game. Ministers who do not have very much to offer Committees sometimes throw them bones and say, “We like the principle but not the text; were you to change it, we might look sympathetically at it”. That is the kind of thing that prevents unnecessary tensions and allows people to leave with a wee bit of a skip in their step. I was merely asking because I am sure that some of the old greybeards on the noble Baroness’s side would say that that is one way of throwing bones to other Members. Is she in a bone-throwing mood?
Baroness Verma
My Lords, as I have said, I read Hansard with great care to see what responses I can give to noble Lords, but I consider every amendment very carefully and, of course, pay great consideration to each and every point that is raised.
Lord Teverson
Perhaps I may thank the noble Lord, Lord O’Neill, for the consideration he has given to this side and for his suggestions. That was an excellent analysis of how things should work.
Baroness Parminter
I thank all colleagues on both sides of the Committee for their contributions, some of whom have made the case more eloquently than me. Certainly, the noble Lord, Lord Deben, in his imitable style, did just that with his portfolio analysis. I am also grateful to the Minister for outlining what are, in effect, the initiatives that the Government have taken to date on interconnection, which give life to what the Secretary of State told our committee last week—I think that his words were that he was as passionate as we were about interconnection. That is to be commended. I remain of the view that it would be helpful to have a clear commitment to a strategy in the Bill. In the light of the Minister’s comments, I will go away with a skip in my step and hope that over the summer the skip might progress into a run, and that we might eventually see something in the Bill. Despite all the work that we are doing to ensure that we have sufficient supply in the UK to keep the lights on, to keep consumers’ bills as low as possible and to deliver the energy that we need, it is imperative that we look to opportunities with our European partners. On that basis, I beg leave to withdraw the amendment.
Lord Gardiner of Kimble
Perhaps this may be a convenient moment for the Committee to adjourn during pleasure until 6.18 pm.
Baroness Worthington
“( ) The Secretary of State must ensure that any price designated for the purposes of 2(a) incentivises uptake of contracts by eligible generators.”
Baroness Worthington
My Lords, the amendment would add a new subsection to Clause 6. We now come to the meat of the Bill: the contracts for difference, which it is proposed will restart investment in low-carbon energy. I think that this is the bit of the Bill that we all share a desire to see succeed and do exactly as we hope.
The reason for my tabling the amendment, which, again, is very much a probing amendment, is for us to have a brief debate about the transition from the current support mechanism for the renewables obligation and the proposed contracts for difference. We will have an opportunity to discuss this further when we come on to the parts of the Bill that deal with the transition, but I have put the amendment here because it is important to highlight how important the strike prices will be in the new mechanism for supporting renewables.
The renewables obligation, which this replaces, had within it a mechanism that created a demand for renewables—an obligation on suppliers to go out and source renewable obligation certificates. That was seen as an essential part of moving us into a low-carbon system at a time when we had a perfectly well functioning system of high carbon. It was accepted that, to create the space for these new sources of power, we needed there to be an obligation to drive that market. We are moving away from that to a system whereby the contracts will be offered and strike prices published but there is no obligation on anybody to come forward and bid for them.
I am very grateful for the information that has been provided by the Minister recently, showing that a number of applicants have come forward for the financial investment early decision contracts. I think that 50 projects have come forward, with 18 potential gigawatts of capacity. So clearly the draft strike prices are driving interest and have given people a reason to come forward with projects, which is very encouraging. It would be useful to have something in the Bill that ensures that that is the situation going forward. It has been mentioned on a number of occasions that one problem we have is that, beyond 2020, there does not appear to be very much certainty for investors in renewables. There are a number of reasons or that. It is partly because the legally binding renewables targets set at a European level stop in 2020. Let us be honest in saying that that is what drives the majority of interest from the Government in seeking renewables, although I also acknowledge that the benefits that renewables bring in diversity of supply and potential cost reductions for consumers are also sought by government.
It is true—and I do not think that it would be particularly controversial to say—that there appears to be some mixed messages coming from the Government that some parts of government are less enamoured of the benefits of renewables than others. So there is this potential issue post-2020. The levy control framework will dictate a large part of how the contracts of difference work, and that, too, only has a time horizon to 2020. So there is understandable nervousness in the industry. I do not want to go over old ground, but we have had lengthy debates about the need for decarbonisation targets post-2020 to try to give back some confidence. In the absence of such targets, we are reliant at the strike prices being set at a favourable level to bring forward interest. That is why we have tabled this amendment—on the off-chance that there should be a moment in future when the Government are slightly less enamoured or, potentially, more hostile to renewables, and that there will not be the ability to kill off this market by simply offering very low and unattractive strike prices. That was not possible within the RO, because it had an inbuilt mechanism to keep demand growing for those technologies. Here we are very much more reliant on a planned, administratively and government-controlled mechanism. For that reason, we have sought to clarify that the purpose of the strike prices is to ensure that they are sufficiently attractive that investors will come forward.
This amendment also gives me an opportunity to comment on the strike prices. Those that were published are subject to consultation, and I am sure that the Government are busy receiving evidence from participants in the market and potential investors. I have heard that the offshore renewable community do not consider the proposal for offshore wind to be sufficient. Again, I think that that highlights how important the strike prices now are. The concern is that the length of contract is too short, that the digression in prices kicks in too soon and that the cost reductions expected are just not realistic. That further underlines why we need to get the strike prices right.
The amendment needs to sit alongside the amendment that we will come on to debate about an expert panel. I know that an expert panel is already in existence and has been helping the Government, which we acknowledge has been a useful part of this process. We will come on to discuss how that could be maintained and even enhanced by making it a more visible part of the infrastructure of the Bill.
I also take this opportunity to say—this is slightly technical so I apologise in advance—that the way in which the supply obligation created in Clause 9 also interplays with the strike prices is important. I am stretching the amendment a little too far, maybe, to talk about this here, but it is worth noting that how you construct the obligation on suppliers to pay towards the strike prices could have quite an impact on the incentives that the suppliers have to then go forward and seek CFDs. If you constrict the supplier obligation in one way where the suppliers are directly exposed to the prices set in CFDs, they will have a greater incentive to go forward and seek those CFDs. If, however, it is a levelised, averaged-out cost to which they are not able to hedge their position through their own participation, it dilutes that signal.
I apologise, but that is all wrapped up in our concern to get the strike prices right. We will, I hope, soon discuss the technical expertise needed to make sure that that happens. I have mentioned why I think something should be in the Bill because it acknowledges the different system that we are moving to from a situation where the RO had an in-built guarantee that there would be demand for these projects to one where we are very reliant now on getting the price right. I beg to move.
Viscount Hanworth
My Lords, we know that strike prices will differ across various technologies but I query whether that degree of flexibility is sufficient. There may be a case for varying the strike prices to cater for the different components of the same technology. I am thinking, for example, of the differences within the technology of gas powered LGC generation between the base load CCGT plant and the plant that is devoted to satisfying peak demand, which may be OCGT.
The cost profiles of the two varieties may be very different as will the wholesale prices commanded by their outputs. Should they be subject to the same market reference price and the same strike price? I am asking that question, in all innocence; it is not a tendentious question. But I have observed that the Minister has indicated or implied that there may be special accommodations within certain technologies for interconnection. If I am making any assertion, it is that we need a lot more detail and I am not sure that it has yet come forth. We need a lot more detail that would address the realities of electricity generation.
Lord Teverson
While I am sympathetic towards this, I have the impression that if the Government do not want this to work they will find a way to make it not work. Such an amendment is probably not the thing that saves this. Therefore, I am not sure that this works, but in terms of trying to make sure that there is some commitment to this form of energy generation in the future, I understand the motivation entirely. However, I suspect that any future Government who did not want to do this would find another way around it.
Baroness Verma
My Lords, I thank the noble Baroness, Lady Worthington, for her amendment and for prompting the debate on strike prices for CFDs. Amendment 55ZC raises the important point that the draft strike prices we published on 27 June must be set at a level capable of incentivising investment. This is extremely important, and I am grateful for the opportunity to reassure noble Lords. As they will be aware, the draft strike prices were published on 27 June with their supporting detail for consultation in the draft EMR delivery plan on 17 July.
I would like to provide reassurance to the Committee that the Government have put extensive effort into ensuring that strike prices are set to balance the objectives of EMR stated in the Bill we are debating currently. They are to drive the necessary investment to meet our important targets while ensuring security of supply and value for money for consumers. The Bill ensures that all the functions exercised under it will take these important objectives into account. I therefore reassure the noble Baroness that the intent of this amendment is being achieved without the need for a further statutory requirement.
Further, we are working hard to ensure the process through which final strike prices are set is transparent, robust and informed by a full range of expert input, including from consumer groups. Our reason for consulting on the draft strike prices is to allow industry and all other stakeholders to scrutinise the figures and the evidence used to develop them and provide us with feedback to inform the final strike prices.
The strike prices proposed by the Secretary of State in the draft delivery plan were informed by two pieces of independent advice: first, analysis provided by National Grid to help the Secretary of State understand the potential impacts on the Government’s objectives, including the potential generation mix that the decision may incentivise, from different strike prices; secondly, that analysis has been subject to independent scrutiny by a panel of technical experts, as the noble Baroness said. Both these reports were published alongside the draft EMR delivery plan and copies were deposited in the Libraries of this House and the other place.
Turning to the setting of strike prices for investment contracts, as we set out in our update on Final Investment Decision Enabling for Renewables, which was published on 27 June 2013, strike prices for renewables generation will use the strike prices published in the final delivery plan. The potential terms, including the strike price, for any investment contract for Hinkley Point C will be set through bilateral negotiation, with specialist advice sought as appropriate and rigorous scrutiny of proposals.
I will write to the noble Baroness regarding the supplier obligation. I hope that she will withdraw her amendment.
Baroness Verma
I am having an amnesia moment. Will the noble Viscount remind me?
Baroness Worthington
I thank the Minister for her response. I am glad we have restored our equilibrium. We have had a very good working relationship throughout this and I apologise for my—I slightly put it down to the heat, if that is okay.
I am grateful for the response. This was a probing amendment, and we recognise and welcome the Government’s efforts to have input into strike price setting. It is important to the functioning of this EMR package, and we hope that it does what it hopes to do. I acknowledge that there will be, I hope, opportunities to review those strike prices should it turn out that the first prices do not do what we expect.
The Minister mentioned strike prices for non-renewable technologies. I have seen from documents that we might expect some more information on strike prices for CCS and nuclear in early August. If confirmation of that could be included in the letter, that would be fantastic. I beg leave to withdraw the amendment.
Lord Whitty
“Expert Panel
New schedule [“The Expert Panel”] has effect.”
Lord Whitty
My Lords, this amendment would provide for the setting up of an expert committee or advisory group. Our other amendment, Amendment 55ZG, would effectively write a schedule setting out the role and operation of that group.
As my noble friend said just now, there are, of course, technical advisory groups available to the Secretary of State, the department and Ofgem on all sorts of aspects of the Bill. They exist as energy policy is developed. The importance of this role is that we would be putting it on a statutory basis to ensure that there is some check on how the process that we are setting up under the Bill is operated in practice and to give all parties some degree of reassurance and demystification about a process which is very novel and not widely understood. It is one where the Government are still working out the details and which will undoubtedly encounter some hiccups, growing pains, difficulties and setbacks as they try to implement it.
As far as the general public are concerned, this is a completely novel concept. They sort of understand a market, but this is not a market. They understood the old CEGB system, more or less, but this is not a centrally controlled system. It is not a system which is really being delivered by the regulator in the normal sense, which was how the market was for the past couple of decades. It is, perhaps, a managed oligopoly but with big companies—big oligopolists—which by and large are not trusted. These are government deals which necessarily have to be complex and negotiated behind closed doors, but the outcome will arouse misunderstanding and suspicion unless there is some assurance that they have been properly audited in some form or other.
These are contracts for a major part of our energy supply, which last for 15 or 25 years. We are locked into those contracts, and we therefore need experts to look at how they will be operated by the department or Ofgem, or possibly its successor under a different Government. The way in which they deliver will determine a lot of our energy mix and, effectively, determine what broad price business and domestic consumers will face. Hence, they will have social, economic and competitiveness implications and may have serious implications for our energy security, as they are one of the main means of delivering it.
Part of the mystery of all this—even to me, who has tried to understand it through these deliberations—is that the contracts will all be delivered by a counterparty whose form has yet to be defined. We now know that there will be a single counterparty, although that is not fully reflected in the Bill. We know that it will be a private but government-backed company. Apart from that, we do not know what its responsibilities, accountability or structure are likely to be. It will be responsible for the government side, or perhaps the societal side, of these very important contracts. Over 15 or 25 years, the contracts will go through periods of substantial change and may be required to be reviewed or reassessed. In some cases, the contracts will probably not last the full 25 years with the same company because the structure of companies is likely to change, as it has over the past 25 years.
We need some reassurance. At the moment, the Secretary of State and the rather shadowy counterparty are the responsible bodies, supported by Ofgem and by advice from National Grid. Before we go on from this part of the Bill, we need at the very least to have a formal system of advice built into that process so that on each contract for difference and each investment contract there is somebody looking at its financial and legal structure and its value for money. That would not be for the company or indeed for the strategy, but for the consumers and for the security of supply to our businesses and householders. The advice that will be given to the Secretary of State, the authority and the counterparty needs to be seen to be neutral or non-interested in the affairs of the various parties involved.
The first part of the amendment sets out the duties of such a group to advise the Secretary of State and the counterparty on the development of those contracts and to look contract by contract at their effectiveness. The last part deals simply with the composition, but the composition is important. Vitally, it has an independent chair appointed for probably two terms of up to eight years in total, and importantly has a consumer representative involved. At the end of the day, as the Minister reminded us, and as her predecessor constantly reminded us when discussing energy Bills, this is ultimately government policy focused on benefit to the consumer, by which we mean both business and domestic consumers. We need consumer representation and technical, academic, economic and technological advice to the counterparty and the Minister in drawing up these contracts. We are looking at value for money for the consumer.
I hope that the Government will take seriously the need to build into the process some form of such a body. They may not approve of the wording of the amendment and may wish to narrow or broaden its terms of reference. On the face of it, there is no reason why this should not be extended to capacity mechanism deals as well. I hope that the Government will see the sense in having a body that is publicly accountable and will report to Parliament. Certainly if the Secretary of State refuses to accept its advice in relation to particular contracts, it will require the Secretary of State to spell out why such advice has been rejected, and there will be a report to Parliament.
This must be to the long-term benefit of this process in working out at the point of delivery the policy objectives behind this Energy Bill and delivering the long-term interests of consumers of energy in this country. I hope that the Government will consider the proposition. As I say, I do not expect them necessarily to accept the wording, but I hope that they will come up with an entity that performs this and provides a degree of demystification, accountability and a high degree of public and consumer reassurance. I beg to move.
Lord O’Neill of Clackmannan
I express my support for the amendment. A number of the utilities are doing something on their own behalf to try to present themselves to the regulator as responsible citizens, as it were. They tend to use expressions, such as stakeholder engagement monitoring, which is a bit of a mouthful. If it is good enough for the utilities to do it independently to try to present themselves in a way that will meet the requirements of the regulator, it is surely appropriate that this rather complex market system that we are seeking to construct should have a degree of independence. I do not think that it should be seen as anything other than sympathetic monitoring. It is in everyone’s interests that the system works and that those who monitor are credible and independent.
The manner in which it has been constructed here, as my noble friend said, is not necessarily the final word, but the principle of having in the Bill a monitoring mechanism that is seen to be independent—to the extent that these things are possible—of government, the utilities and other players is a highly desirable state of affairs. There is an awful lot of public concern and lack of trust in the utilities and the associated bodies around them. This would go some way to reassure the public that there was an independent monitoring body.
Viscount Ridley
My Lords, I sympathise with a great deal of what the noble Lord, Lord Whitty, said, but I worry that the amendment would be counterproductive and produce a worse result. We had an interesting debate last week about the importance of competition in keeping capitalists honest. We are all agreed about the danger of setting up a system that will be extremely prone to crony capitalism, which will be such an oligopolistic system that it will be easy to game and to lobby the Government in ways that can be helpful. I am worried that this panel of experts will probably make the problem worse and will remove accountability from Parliament, which is ultimately where we will be able to scrutinise this. As the scientist Richard Feynman once said,
“Science is the belief in the ignorance of experts”.
We have to bear in mind that experts get things badly wrong quite often.
We have heard a great deal, even today, about the need to help producers of energy. I am sorry if I sound like a cracked record on this, but we are not here to help capitalists. We are not here to give certainty to investors or to make producers of energy comfortable. We are here to get the best deal for consumers of energy, whether they are pensioners, single parents or indeed the owners of small businesses. We will not do that by offering these extremely high strike prices and then leaving a group of experts, who will be easily captured not just by the industry but by other pressure groups, to monitor the system. We therefore have to be careful when handing responsibility away from Parliament and the Government to a panel of experts who, as I say, will be easily captured by industry or pressure groups.
Lord Oxburgh
My Lords, I support the general thinking behind the amendment, which is different from the amendment that we debated a week ago about a higher-level advisory committee. I am not sure that I agree with the noble Viscount, Lord Ridley, in his pessimistic approach to this. I do not see the amendment as taking power away from Parliament or diverting interest in that way. It could provide the kind of information and scrutiny that makes Parliament’s role easier.
The one point that I would make, which has not yet been made on the amendment, is that the most important thing about a panel is not just its expertise but its continuity. At the moment, there is very little corporate memory within DECC, and bodies such as an expert panel can indeed provide continuity. I agree that it has previously been very important to solve things in this way. I therefore hope that the Government will take on board the broad intention of the amendment.
Lord Jenkin of Roding
My Lords, my mind goes back to the group set up last year under the chairmanship of the noble Lord, Lord Oxburgh, to look at the draft Energy Bill. My recollection is that as a result of the evidence we received, which was very good and knowledgeable, our main worry about the contents of the draft Bill was the huge powers being given to Ministers. Some of that has now been modified. For instance, there is now an infinitely better counterparty arrangement than existed previously in the draft Bill, in which there was almost nothing. There have also been other changes.
However, certainly in the initial stages of the operation of this contract for difference, one is going to be almost entirely in the hands of Ministers. They are of course accountable to Parliament, and I entirely accept the point made by my noble friend Lord Ridley that that is the main avenue of accountability. What worries me is the question of whether the panel that has been proposed by the noble Lord, Lord Whitty, would actually make any difference. When you have so much power concentrated in the hands of Ministers—and one has to say that there is not all that much public faith in Parliament at the moment or in whether parliamentary accountability would be effective—one is running the risk of endless cases of judicial review. The growth of judicial review in our system over the past 20 years has been absolutely colossal. Everyone finds it possible in some way or another to take a complaint against authority to judicial review. Some of it has no merit at all but is enormously time consuming, very expensive for those who have to defend it, and a great absorber of the judicial power of the courts. I worry, given all these powers in the Bill, whether accountability to Parliament will be enough.
I listened carefully to the noble Lord, Lord Whitty, and there are obviously some attractions in what he was saying. On the other hand, the point made by my noble friend Lord Ridley about the way that any panel such as this could be got at is not without substance. We are all familiar with situations of that sort. In relation to another amendment, which I may not be here to move because I shall not be here in August and we will not reach it tonight, the power of very large corporations such as the big six generators and distributors, when contrasted with the power of very much smaller bodies that might be affected by their activities, is something of which people are very well aware. What is your remedy? You can go for judicial review, and a panel of the sort suggested may be subject to the same pressures.
All this is inherent in the nature of the new electricity market reform, which is the main purpose of this Bill. I agree with those who say that there is a great deal of hope about it on the part of the Government that it will work. I studied the paper sent to the Delegated Powers Committee of this House, in response to its request for more information, and wondered how anybody could make that system work. That is my great anxiety on this issue—and I am not sure that a panel would have any impact.
For the remainder of the time we have to scrutinise the Bill, we must do as much as we can to try to get the regulations in a form in which the authorities can be made accountable to Parliament as to whether they are in breach of regulations or not. Everybody has to do their best to make it work, but I shall listen with great interest to what my noble friend the Minister says in answer to the suggestion of a panel. I think that we shall hear what we heard before—that there are a great many advisers already in the department and they do not want any more, thank you very much. I understand that argument. But the more I hear about how the system is intended to work, the more we have these huge volumes of paper that are churned out by the department, which is doing its best to keep us informed. It fills me with great foreboding. I hope that I am wrong, but I have a horrid suspicion that things are not going to turn out quite as has been hoped for by everybody who has expressed themselves, as I have, in favour of this Bill.
I shall listen to my noble friend on the question of whether a panel would help or not. At the moment, my mind is not yet clear on this.
The Earl of Caithness
Given that the noble Lord, Lord Whitty, wants to formalise this proposal and put it in the Bill, does he anticipate that members of the panel, and the staff, should be paid? If so, is that going to be pensionable? If that is the case, where is the money coming from?
Lord Berkeley
My Lords, I would like to speak briefly in support of the amendment. I see it as a way of advising the parties on the details in the contracts, which are quite often unclear or not there at all. As we have debated before, and many noble Lords have said, we are dealing with some very large companies and very large amounts of money are at stake. So I think there is a comfort in having something like this, but the key is probably who will be on the expert panel and what their background, experience and history will be.
The Minister said in her response to the last amendment that the Government took independent advice on the strike price and scrutiny from technical experts. I would like to ask who they work for, or have worked for, because I am afraid that that sometimes colours how one thinks about these things and how they might like to think. If they are seconded from the big six, as consultants or something, how independent are they? It would be very helpful if the Minister could write to me and say who these people are, and who they work for or have worked for. At this stage, it would give people a lot of comfort to know that there was something like this—an expert panel to look at these things and form an independent view on things such as strike prices and all the other things in Clause 2. I do not think that Members of either House, in the Chambers or the committees, will want to look at those things in too much detail.
Baroness Liddell of Coatdyke
My Lords, I have great sympathy with what my noble friend has said. The noble Lord, Lord Oxburgh, drew attention to the fact that we see in DECC no institutional memory. We should put alongside that the fact that Ministers rotate regularly. There needs to be somebody or some organisation in the middle that is the honest broker. When I was the Energy Minister, I had a panel of experts which was hugely valuable to me. It involved people such as Dieter Helm and had real gravitas. It was really useful to be able to bounce ideas off people, but this proposal takes it to another level. My noble friend said that people in the very enclosed world of energy policy have often had opportunities to work in the big six or for some of the significant players in the field. It is useful to know who is taking these decisions. To the noble Earl, Lord Caithness, I would say that sometimes you have to spend a penny to save a penny. If you spend your money on getting people who can stop you making mistakes, you will avoid spending not just millions but perhaps billions of pounds making mistakes just for the sake of a few ha’pennies to ensure that you have proper advice. My goodness, government spends enough on consultants. Why not put some of that money to good use getting some expert advice?
Baroness Verma
My Lords, I thank the noble Lord, Lord Whitty, for his amendments. Amendments 55ZF and 55ZG would set up an expert panel to provide independent advice to the Secretary of State on setting strike prices, development of contract terms and whether to issue CFDs or investment contracts. These are extremely important matters and I am grateful to the noble Lord for the opportunity to debate them.
The Government wholly agree with the noble Lord that independence, expert scrutiny and engagement with a wide range of stakeholder views are important principles. For the purposes of setting strike prices for renewable technologies, we are ensuring that the process through which those strike prices are set is transparent, robust and informed by a full range of expert input and stakeholder consultation. On 17 July, we launched a consultation on the proposed strike prices to allow industry and all other stakeholders, including consumer groups, to scrutinise the evidence and analysis that informed them. We are asking for their feedback to inform the final strike prices.
Further, to ensure that the strike prices proposed by the Secretary of State in the draft delivery plan were informed by independent advice, we asked National Grid to conduct analysis to help to understand the potential impacts of strike prices on government objectives. We also commissioned an interim panel of technical experts to scrutinise that analysis impartially. Both those reports were published alongside the draft EMR delivery plan and copies deposited in the Libraries of this House and the other place.
The process allows us to be confident that the strike prices are informed by robust evidence in an appropriately transparent way. We have been able to use existing powers to appoint the interim panel of technical experts, so they are already performing their scrutiny role. Following Royal Assent, we intend to establish an ad hoc advisory group, with Clause 139(2)(c) providing the spending authorisation to support this work. This, with the steps described above, will ensure that the Secretary of State makes an informed decision having considered a full range of views before setting the level of support in the final delivery plan. However, I do not agree that these principles need to be delivered by creating a new public body; we are already delivering them.
On setting strike prices for investment contracts, as we set out in our update on Final Investment Decision Enabling for Renewables, published on 27 June 2013, strike prices for renewables generation will use the strike prices published in the final delivery plan. The Government have appointed external specialist advisers to help to ensure that any investment represents value for money. We will publish summaries of reports from these advisers alongside the contract, in the event that agreement is reached, when it is laid before Parliament. In addition, the Government made commitments and amendments in the Bill in the other place to ensure that investment contracts are transparent. For all these reasons, we do not think it is necessary that there is separate scrutiny of whether an investment contract should be offered by the counterparty.
Finally, the noble Lord raised concerns that the contract terms should be subject to scrutiny and that there should be independent scrutiny before the counterparty offered a contract. I strongly agree that the terms on which the CFD or investment contracts are set need to be scrutinised. However, I consider that this should be done not by a separate expert panel but by the industry and consumer groups at large. This is why, over the past year, we have been working with an expert group consisting of industry and consumer group representatives in the development of key terms, something that I am sure the noble Lord, Lord Whitty, will welcome.
We have also had extensive discussions with industry, consumer groups and others with regard to how contracts will be allocated. The allocation process will be run by National Grid which will act within rules set out in secondary legislation to allocate CFDs to eligible applicants. The intention is that the allocation process will be rules-based and relatively mechanistic to allow investors and developers to make an informed decision about their chance of being allocated a contract. If an applicant is successful, National Grid will direct the counterparty to offer it a contract. Therefore, we do not think it appropriate to include another process which would add considerable complexity to the system.
We will shortly be publishing the CFD contract spine and further detail of the allocation process, which builds on the draft contract terms and operational framework published in November 2012. This will allow industry and other stakeholders to examine the terms of the contract and the allocation process and to discuss them further with my officials. Renewables investment contracts will be based on the final standard form CFD and therefore will be subject to the same scrutiny as aforementioned.
Before I ask the noble Lord, Lord Whitty, to withdraw his amendment I shall give some further information. He asked about the structures advising the Secretary of State and the counterparty beyond Ofgem and National Grid. For the first panel, we used a procurement process but, following Royal Assent, we intend to establish an ad hoc advisory group. We have not only made a policy commitment to establish a panel of technical experts but already appointed an interim panel to ensure they are operating in a timely and effective manner.
On reviewing strike prices, we have the opportunity to revise them through the annual updates to the delivery plan, and we intend to do that to set strike prices at an appropriate level.
My noble friend Lord Jenkin asked whether there would be enough accountability. We recognise that there is a need for robust accountability and transparency with such powers, which is why we introduced a duty on the Secretary of State to report on the Government’s activities in relation to all EMR functions provided for under Part 2. There is also a five-year review in Clause 55.
The noble Lord, Lord Berkeley, asked who made up the panel. I have a list of the members and their résumés. I think it would be helpful to the Committee if I do not spend time going through them but write to members of the Committee on the make up of the panel. I hope the noble Lord, Lord Whitty, will withdraw his amendment.
Lord Whitty
I thank the Minister for that detailed reply, and I thank my noble friends Lord O’Neill and Lady Liddell and the noble Lord, Lord Oxburgh, for supporting this amendment. I think the Minister missed an essential point. Obviously, the Government have made great efforts, and a lot of people in the industry and even in consumer groups think they have been properly consulted in the process of reaching the stage we are at. However, consultation is not the same as having a firm, continuous source of advice, independent of the department.
The names that the noble Baroness will supply us with may be exactly the kind of names we would want on a Committee of this sort. It is impossible to avoid all possible accusations of conflict of interest in this because the energy field is fairly esoteric. Nobody can be as pure as Caesar’s wife in this area, as we have probably all found, but they would demonstrate a degree of expertise. The Minister described it as an ad hoc technical advisory group, which does not provide the confidence needed in the industry, among the public, parliamentarians and consumers, that this process is being put on the best possible basis with the best possible technical, consumer, economic and legal advice.
The noble Lord, Lord Jenkin, raised the issue of judicial review. All Ministers are beset with advice from officials saying, “If you do this you will be subject to judicial review”. There are both positives and negatives from that. The process in this proposed new clause would protect people against frivolous attacks on judicial review. It would mean that the Minister had to go through a process with a body embedded in statute, had some responsibilities to Parliament and consisted of people with a wide range of technical, legal and financial expertise. I am afraid that reference to an ad hoc committee is not the same. It was also argued that it is Parliament’s job. It would probably help Parliament in the guise of select committees, as my noble friend Lord O’Neill suggested, to do its job in relation to what are vital contracts that will last for an enormously long time and have tremendous implications for our future energy situation. At the very minimum, the Government need to recognise that reassurance is needed that the proper process has been gone through.
The noble Lord, Lord Oxburgh, who is no longer in his seat, mentioned continuity. People who are appointed for four and eight years in this area will outlast every Minister and most officials. It is important that that kind of expertise is retained. I would think of extending the terms if I were writing the proposal properly. The Government may have views on that. Having that separate from the day-to-day responsibilities of Ministers and officials, and the month-to-month responsibilities of a regulator is an important part of the process that we are putting into law. We are moving into unknown territory in some respects and doing so by a leap of faith—one that is well informed by those who have been involved, but not understood by those who have not been involved.
It would be a protection for Ministers, as well as for the process, the counterparty and the Secretary of State, if we had a body with this authority, independence and statutory backing. I am disappointed that the Minister is not tempted to go down this road. As I said, I never expected her to pick up the exact wording, but this concept needs to be maintained in our minds. It may well be that we will return to this later in the proceedings. I beg leave to withdraw the amendment.
Lord Berkeley
“(4) Regulations must set the duration of support provided by CFDs to renewable technologies at a minimum of 25 years.”
Lord Berkeley
My Lords, I tabled the amendment as a result of a lot of communication from the renewables sector about its concerns about raising finance, given the current uncertainties that are going on, not only around the Bill but around a few others things that I will mention. The sector says that that is making it difficult to raise finance, which of course means that less electricity will be produced.
The risks and uncertainty are around the strike price and whether and how much of their power these companies can sell. In addition to that, there are other uncertainties such as planning. The planning system has become better in recent years with the legislation that both Governments have taken forward, but it is still uncertain. We still sometimes see ministerial decisions that look a little odd. It takes time and a lot of money, as we all know. But there is also the question of political risk. However, it is not helpful when Ministers and, I am sorry to say, Prince Charles make statements about not liking windmills or something. This does not apply only to windmills, but these technologies should be developed and commissioned and permissions sought for their planning on their merits, be they offshore or onshore. We have even heard about how successful PV is in Germany today, because the sun is shining.
There is a risk to these new developments. The renewables sector has said to me very strongly that if it could get 25 years, duration of support for CFTs, it would encourage companies and their investors to go for a greater volume of the different technologies, not only the ones that are going up already quite successfully but new ones, much more quickly and easily. I beg to move.
Viscount Ridley
My Lords, I know that particularly in the case of offshore wind a Royal Academy of Engineering report is forthcoming, which I hope we will see before Report. Rumours are that it is extremely negative about the risks and dangers of the practicalities of installing wind turbines on a large scale, and in particular on their likely lifetime.
If we were to consider giving an offshore wind company a 25-year contract for a technology that is supposed to last 20 years, and many engineers think will not last more than 15 years, we will not have done the consumer and indeed the taxpayer a service. We would have let them down very badly. We have to take into account that a lot of these technologies will turn out not to last as long as we thought and deliver the benefits that we thought they would. In the case of offshore wind, once again, it is becoming clearer by the day that the carbon dioxide savings that offshore wind will deliver will be very disappointing because of the need for backup power, the need for that backup power to be open cycle, as has been mentioned, and because of the cost and carbon cost of some of these technologies.
It would be a mistake on behalf of the consumer to enter into these eye-wateringly high, £155 per megawatt-hour, strike price costs for a quarter of a century when all sorts of things may change over that time.
Baroness Liddell of Coatdyke
I should remind your Lordships of my registered interest as a director of the Offshore Renewable Energy Catapult. I am not going to debate with the noble Lord the benefits or otherwise of offshore wind, other than to say that it is not a brand-new technology. I can remember something like 20 years ago inaugurating the first offshore wind farm at Blyth in Northumberland. The technology in its basic form is tried and tested, and is another bit of our armoury. Those of us who, like me, are in our prime, remember the six-day war and the consequences of not having a wide basket of energy sources available to us.
I am not 100% certain that I agree with my noble friend that we should be talking about contracts of a length of 30 years. However, we are talking here about a probing amendment and the uncertainties. We are coming into a big part of the Bill, where we are going to talk about uncertainty for investors. It is about how you secure a rate of return and mitigate risk. That is what was in my noble friend’s mind when he tabled his amendment, and on Thursday we will come to an amendment from the noble Lord, Lord Roper, which also brings us back to the issue of uncertainty.
I support what my noble friend is trying to do. There is a bit of a debate on the length of time, but the key to this aspect of the debate is to remove uncertainty. When the noble Lord, Lord Jenkin, was speaking, I came across a good analogy. When you get on a plane, after take-off the pilot comes on and says, “Don’t worry, I’ve never flown this plane before, but I’ll have read the manual before it’s time to land”. We have a wee bit of a feeling like that about this Bill.
The Earl of Caithness
I hope that my noble friend will not be lured by the special pleading of the noble Lord, Lord Berkeley, on this issue. I particularly thought that the noble Lord was wrong to say that it was unhelpful for anyone to say that they disliked windmills. I dislike windmills; I happen to be able to count 11 wind farms out of my window, which is probably more than anyone else can in the Committee, and I would be very pleased if they were not there for 25 years. It does not do tourism much good and, as a countryman, I think that it spoils the country. If there were modern, different technologies that could replace wind farms, which I agree are at the moment essential, although perhaps not in that quantity and dispersal that I can see, I would be only too pleased if they were removed.
One of the most interesting bits of evidence that we got in European Sub-Committee D was how wrong everybody has been on energy in the past. I see that the noble Lord, Lord Whitty, is in agreement with me. For those of us who were relatively new to this subject, it is fascinating how wrong the forecasters have been time and again in the past 15 years. So for goodness’ sake let us not fall into the same mistake of tying the Government down to a 25-year timescale when things could change. I have absolutely no doubt that they will—and do not let us give too much security to the producers of electricity. Capitalism is about taking risks. In the past, people have taken enormous risks. Some have fallen flat on their face and some have been hugely successful. However, it should not be for us as the consumer or the taxpayer to featherbed them; they must take a fair share of the risk. It is a very difficult balance that the Government are trying to get right, so please let us not make it more complicated by tying them to a 25-year timescale.
Viscount Ridley
My Lords, I quickly intervene because I failed to declare an interest. The noble Baroness, Lady Liddell, mentioned Blyth, which reminded me that one of the turbines at Blyth turned out to have been built on land on which, although I do not own it, the mineral rights were reserved by my grandfather. Therefore, I discovered that I was unwittingly receiving money from a wind turbine. I shall give that money away so that I do not feel sullied by it—but anyway, I feel that I should declare it.
Baroness Liddell of Coatdyke
I should reassure the noble Viscount that the wind farm that I inaugurated was offshore, so he is to be congratulated if he managed to get some money out of it.
Baroness Worthington
My Lords, I am grateful to my noble friend Lord Berkeley for tabling this amendment for no other reason than that we found out that very interesting fact. We cannot support this amendment. I have great sympathy with the concerns that have been raised that 25 years may be too long, but the way this amendment is phrased means that it would capture all renewable technologies. There is a great range of technologies that the strike prices are seeking to bring forward, and at the moment it seems that the majority of them might be conversion to biomass. I do not think you would want to lock that in to 25 years. I support the spirit behind the amendment of questioning and trying to understand the different lengths of contracts. That is something that we could discuss, but I do not think this amendment should make its way into the Bill.
We now have the draft delivery plan and the strike prices for renewables. The plan contains some suggested lengths for contracts, but I do not think we yet have anything similar for CCS and nuclear. We are expecting some more information on that in early August, when we will all be having a much deserved and well earned rest. It would be helpful if the Minister were to say something about that in her response.
Baroness Verma
The amendment moved by the noble Lord, Lord Berkeley, seeks to ensure that renewable technologies in receipt of a CFD have a contract life of at least 25 years. As the noble Lord is no doubt aware, we have recently published more detail on the contract terms, building on the operational framework of November 2012. This reconfirms our position that the appropriate contract length for payments to renewable technologies receiving a generic CFD remains 15 years.
In determining the length of the CFD, we considered a number of factors. The 15-year length is based on a trade-off between value for money for consumers, affordability within the levy control framework and bankability for investors. For the purpose of setting the contract lifetime, we have assumed that investors will require debt to be repaid within the CFD life. Therefore, having too short a contract length could impact on the cost of debt finance, given the increased exposure to wholesale price risk. Our analysis also indicates that investors discount very heavily the last few years of revenue from a project, particularly when compared to the social discount rate. Taking all these factors into account, extending the length beyond 15 years would not necessarily be significantly valued by the investor but would come at a cost to consumers.
In addition, the noble Lord may be aware that guidance from the European Commission states that support must be less than the accounting life of the asset. Extending the lifetime duration as the noble Lord proposes would extend a CFD beyond the asset life of a number of renewables technologies, which are generally less than 25 years. All these factors suggest to us that a contract life of 15 years is still appropriate.
I should also make clear that just because there is a generic contract, that does not prevent the Secretary of State directing the counterparty to issue a contract which differs on certain terms where that is considered appropriate. We have retained the ability to do this and would look to treat such occurrences on a case-by- case basis.
The noble Baroness, Lady Liddell, asked about the uncertainties of risk, mitigating them and ensuring appropriate rates of return. The strike price provides certainty on levels of support for the length of the contract. There will also be some change in legal protections. More details on the CFD terms will be published in early August, as the noble Baroness, Lady Worthington, said.
The noble Baroness, Lady Worthington, asked about nuclear and CCS. As she knows, we are currently in negotiations on a nuclear project, so I am not able to comment further on that point. On CCS, it may be better if I write to her. I hope that the noble Lord, Lord Berkeley, will withdraw his amendment.
Lord Berkeley
My Lords, I thank the Minister for her reply and am grateful to all noble Lords who have spoken on the amendment. I did not expect that it would be accepted but we have had a good debate. The noble Earl, Lord Caithness, indicated that I had a go at him for not liking windmills, which is not true; I did not mention his name.
The Earl of Caithness
You commented that you did not like people who said that they did not like windmills; I just fall into that category and am happy to be there.
Lord Berkeley
Perhaps I may suggest that if the cap fits, wear it. More seriously, as regards whether the specified period is 30 years, 20 years or whatever, I worked briefly on North Sea oil projects 30 years ago, some of which did not last that long. My noble friend declared her interest and I am sure that windmills will need regular servicing in that time. The key question after they are built is whether they will continue to operate, produce good electricity when we want it and make a good return for their investors. We have had a useful debate and I shall mull over what noble Lords have said. I beg leave to withdraw the amendment.