Lord Carter of Coles
That the Grand Committee takes note of the Report of the European Union Committee No Country is an Energy Island: Securing Investment for the EU’s Future (14th Report, Session 2012–13, HL Paper 161).
Lord Carter of Coles
My Lords, I chaired Sub-Committee D—the Sub-Committee on Agriculture, Fisheries, Environment and Energy—when this report was produced at the end of the previous Session. I have since stepped down from that position. I am therefore very grateful to the noble Baroness, Lady Scott of Needham Market, for allowing me to introduce this report today. I should also like to record my thanks to the Government for their comprehensive response to our report and for their positive engagement with us during the inquiry. I should be very grateful if the Minister would be kind enough to pass on our thanks to the Secretary of State for giving evidence to the committee about some of these issues on 15 July.
Sir John Beddington, the Government’s former Chief Scientific Adviser, famously described an imminent “perfect storm” of water scarcity, food shortages and energy insecurity due to a global population projected most recently to reach 9.6 billion by 2050. Our two major inquiries prior to this were on EU freshwater policy and agricultural innovation. We therefore considered it appropriate to look at the third strand of the food-water-energy nexus and seized the opportunity to do so after we assumed responsibility for energy last year.
Another compelling reason to undertake the inquiry was timing. We knew that the European Commission planned to review the EU’s energy and climate change policy this year. I was therefore delighted that we were able to publish in good time, to respond formally to the Commission’s consultation. Of course, we were also mindful of an increasingly intense domestic debate about energy. This culminated in the Energy Bill, to which I know many of your Lordships are currently devoting considerable time and, obviously, a great deal of energy. We hope that our report has helped to place the domestic debate in the wider context of EU policy.
More generally, we were interested to develop a greater understanding of some of the emerging debates in this area. The first was whether shale gas can have a transformative effect in the EU, similar to the one that we have seen in the United States. Secondly, is the EU emissions trading system—the ETS—dead, or is it drowning, or is it just desperately in need of reform? Thirdly, will carbon capture and storage be developed, and why is it remaining embryonic? Fourthly, what policy framework does the EU need to take a lead internationally? Tying all those things together, is it possible to deliver the triple challenge—the so-called trilemma—of decarbonising, energy security and competitiveness?
To dwell briefly on the latter point, it was extremely important to us to ground this work in the reality of our current economic situation. For that reason, we emphasised that policy solutions needed to be presented not as an environmental policy incurring significant and necessary cost, but as an economically beneficial solution.
During the course of our inquiry I met several journalists, and even those experienced in this policy area pressed me to explain why EU energy policy was at all relevant to the UK. The basic answer is encapsulated by the title of our report: No Country is an Energy Island. Yes, EU member states retain the right to decide on their own energy mix, but the reality is that one country’s choice has implications for others.
Europe is already joined up. The UK has gas interconnectors with Norway, the Netherlands and Belgium and an electricity interconnect with France, which seems to be a hub now as it has the interconnectors with Spain, Germany and many other parts of Europe. It is rather ironic that Germany, in its hasty move to go from nuclear, at certain times of year will probably rely on French electricity generated from nuclear power. Interestingly, too, looking at the environmental consequences, we noted that Germany managed to move its power from the north, where it was plentiful, to the south by wheeling it through Poland and the Czech Republic, apparently rather than building very big high-transmission lines across its own country.
The EU aspires to completion of a single energy market by 2014. Given where we are, there is a considerable debate about whether that will happen, but it places importance on investment in cross-border infrastructure and interconnections between member states and has clear implications for the UK’s capacity mechanism, to which I shall return in a moment.
Investors, on whom this whole agenda relies, are international in nature. Most of our energy companies are not British. Clear efficiencies can be achieved by working together on research and innovation rather than duplicating efforts; we have seen duplicative effort wasting money and resources many times. Lastly, we have shared environmental objectives, which are clear at EU level, and a common desire at this time to boost jobs and growth.
I turn to investment. As I have already indicated, we grounded the report in the economic reality of our current situation. It was clear to us that investment in energy, particularly in low-carbon energy, can bring rewards in both jobs and growth. However, that investment has to be unlocked, unleashed and brought forth. We discovered that this is no easy task and, frankly, is the key issue to be tackled. Private sector share values of generators have slumped across Europe, and the public sector across the EU is hardly in a position at the moment to make a significant contribution. Ultimately, therefore, we will be heavily reliant on institutional investors, those who manage our savings and pensions, to provide that necessary investment. I was interested to read in the Government's response that a meeting will be convened between the Commission, member states and investors later in the year. Is the Minister in a position to tell us more about the meeting, including some of the hoped-for outcomes?
In addition to tackling the issue through that type of dialogue, it was also clear that investors would like clarity on the direction of policy. The Energy Bill is designed to provide some clarity in the UK, but UK policy does not sit in a vacuum distant from the EU’s own energy and climate change framework. Our core policy recommendations related to that framework, setting policy through to 2030 at least, with both clarity and urgency. The Government have already made their position clear, including a commitment to a unilateral EU 40% emissions reduction target, with the option of a 50% target conditional on an ambitious international agreement in Paris in 2015. The committee strongly welcomed this strong commitment by the Government.
Where we differed from the Government was on the topic of more specific targets. A target is an intervention in the market and is therefore not ideal. On that, we agree with the Government. However, it was not possible for us to ignore the weight of evidence suggesting that investment, particularly in low-carbon energy, requires some sort of regulatory signal, and that the 2020 renewables target has been pivotal—in fact, central—in boosting investment in that sector and, critically, driving down the costs of those technologies.
We therefore recommended the setting of a target on the minimum level of energy to be provided from renewable sources by 2030. This may not be politically possible, so we would recommend that we certainly have an electricity-specific decarbonisation target.
Quite simply, we struggle to understand what commitment the EU can show to low-carbon electricity without some form of renewable or low-carbon power target. On a purely theoretical basis, the Government’s argument has validity, particularly for the UK energy market, supported by the energy market reform. However, we find ourselves in an EU investment crisis, where it is time for action and not theory. I would therefore very much welcome the Minister’s comment, not on the ideological principle of a technology-neutral approach in the UK, but on precisely how the EU policy will demonstrate that the EU is committed to low-carbon power and, above all, attract the necessary investment.
I will now say a few words about the ETS, the emissions trading system. We devoted a lot of attention in our inquiry to the future of the emissions trading system. I remind everybody that this scheme gives companies the option of either buying the right to emit carbon, or alternatively taking action to reduce emissions so that there is no need to buy the emissions allowances. Of course, carbon needs to trade at a price that is sufficiently high to influence the choices made by emitters. As your Lordships are aware, this has not been the case. After trading at around €30 per tonne of carbon in 2008, earlier this year the price dropped to less than €3. Clearly, there are a range of reasons for this. Probably the most specific reason is the recession, which has driven down demand. The classic case of a high level of supply and a low level of demand has led to this.
The ETS must be strengthened if it is to survive. Frankly, we see that as the only realistic option, because we could not envision an EU-wide carbon tax that would meet with general approval. The recent proposal to take surplus allowances out of the market—with so-called backloading—and put them back later has merit as a stop-gap proposal, but frankly that is as far as it goes. In the longer term we recommend the introduction of a floor price—in other words, a minimum price above which carbon would trade. Critically, this would give certainty to both investors and national treasuries, to which the proceeds of the auctioning accrue. Clearly, carbon would ideally trade above the floor price. For that to happen the overall ceiling on the number of allowances needs to be tightened. There must be a clear trajectory for tightening, so we can take this down gradually and manage the market.
Those are our recommendations for ETS reform. We consider that they can be presented as part of a package of measures to attract new investment and support efficiency and innovation. I would welcome any light that the Government can shed on the progress they have made on establishing their own policy on the future of the ETS, particularly as the proposals for change are expected from the Commission towards the end of the year.
I turn now to carbon capture and storage. One reason why it is so important to strengthen the ETS is that a proportion of the allowances was meant to provide a source of funding to support carbon capture and storage demonstration plants. The low price of carbon has meant that the available pot of money has been much smaller than anticipated, which contributed to the lack of demonstration plants in the EU.
As a committee, we are very supportive of CCS. Realistically we can see the challenges, but we would like to see the development of existing and innovative new low-carbon forms of energy. This is critical. However, it is inevitable that for the foreseeable future fossil fuels will deliver the majority of the EU’s energy. We have only to look at cheap coal arriving from America, or the burning of lignite in northern Germany, to see that there is still a massive dependence on fossil fuels. It is because of this dependence that the lack of progress in the development of CCS technology in the EU is deplorable. Unless we get this to work, the whole of our future policy must be under question.
We see room for a regulatory approach to be developed at the EU level, including a provisional target date for requiring CCS to be applied to any new fossil fuel power stations, based of course on the results of the pilot study. Disappointingly, the Government did not respond directly to that recommendation in our report. Yes, the UK’s emissions performance standard was mentioned, but my understanding is that this will not affect gas. I would therefore be grateful if the Minister could explain the Government’s position on potential EU regulatory action to encourage the adoption of CCS technology.
I turn to shale gas, a matter of enormous interest in our report and in recent months. We wished to understand from the outset whether the US shale gas revolution could be repeated in the EU. The answer, we concluded after listening to a wide range of witnesses, was that it was unlikely in the short to medium term.
We were told that the United States has 50 years of good seismic data, a conducive land tenure system and has drilled 40,000 wells looking for gas. At the time of our report, fewer than 100 wells have been drilled in Europe, so there is quite a long way to go if we are to have a shale gas revolution. There is undoubtedly potential for its exploration—we see this happening in the UK and possibly Poland—but the creation of an expectation that the EU can compete on the basis of cheap fossil fuels in the short to medium term would undermine the policy stability that we need to attract investment. It would be one more uncertainty if we hung our hats on that hope.
We welcome plans by the Commission to develop a framework for the sustainable exploitation of shale gas, but, as with many things in life, we should be careful what we hope for. At the moment, shale gas in the United States is selling at between $3 and $4 per billion BTUs. The major exporting countries—Russia, Qatar and Algeria—rely on a price of $10 to $12 in Europe and maybe $15 in Asia. We can only shudder to think—we saw it the last time the gas price collapsed in the effect on Russia—of the geopolitical consequences of a dramatic reduction in gas prices. I am sure that views will be expressed on that.
Before I close, it would be remiss of me not to draw your Lordships’ attention to the issue of capacity markets and interconnection. We support greater interconnection between EU electricity markets, and I have already touched on the fact that it exists widely now. More effective interconnection will also reduce the need for member states to develop their own national mechanisms to guarantee energy capacity, potentially at a higher cost than if the single energy market were to be working effectively. We welcome the Government’s approach to the UK’s capacity mechanism as a short to medium-term provision. It may or not be needed once interconnection and demand management have improved, but it is greatly to be welcomed.
I have spoken today on behalf of the committee, but have been able, frankly, only to canter over a range of subjects and hardly to touch on others. This does not do justice to the meticulous work of the committee over 10 months. I look forward to colleagues pursuing the points that I have not covered.
To conclude, I return to Sir John Beddington’s perfect storm:
“We can’t ignore food, we can’t ignore water, we can’t ignore energy demands. What will the world of 2030 look like if we don’t mitigate these things?”.
The year 2030 is only 17 years away; it is not a long time in terms of the challenge that we face. That is the backdrop to what I expect to be a colourful, interesting, informative and constructive debate today. I beg to move.
Baroness Rawlings
My Lords, I would like to add just a few words to this debate on the EU Committee report. I am most grateful to my noble friend Lord Boswell of Aynho and his committee—in particular, the sub-committee responsible for conducting this inquiry—for the timing of this debate and its dedicated work on all the EU reports. These excellent reports shine among the grey piles of paper that litter one’s desk; they are indeed one of the most respected parts of the House of Lords’ proceedings worldwide.
As a humble Back-Bencher who did not have the privilege to be on the committee, and noting the distinguished speakers here today, I would like to mention just three brief points.
First, I pay tribute to the Prime Minister’s leadership towards reaching an EU-US trade agreement. Our relationship with the EU is frequently criticised. It has been said that this was due to our lack of involvement over the years; for example, the low voting turnout at EU elections is notably lower than at general elections because it is always said that, “It doesn’t really matter”. However, our Prime Minister obviously feels that it does matter, and rightly so. It matters enough to bring this initiative to the Council. How refreshing to have a positive initiative such as Mrs Thatcher had when she was Prime Minister, with the Single European Act in 1984.
Secondly, like the noble Lord, Lord Carter, I want to highlight box 5 of the report and the development of what is termed “unconventional gas”. I am sure that many noble Lords will have read other reports about fracking and the major successes that shale gas and oil exploration have had in the United States. There may still be a debate here regarding timing but my noble friend Lord Ridley has spoken and written most eloquently on this and the extraordinary geopolitical changes that could evolve from this development.
Thirdly and finally, despite the title of this report—No Country is an Energy Island—we still read about the great necessity for an independent energy policy, which reputedly fracking could help deliver. I return to the two buzzwords of the early 1990s that everyone chanted. The first was “subsidiarity”, the idea that decisions should be taken at the most decentralised level of government consistent with effective action. The other was “proportionality”, the idea that EU legislation should be the minimum required to achieve a particular goal. Perhaps these ideas should be revisited and built upon to cope with today’s exciting new changes and developments. I greatly look forward to my noble friend Lady Verma’s response to the debate, the topic of which will no doubt have a huge effect on our future over time.
Lord Whitty
My Lords, I am delighted to see the name of the noble Baroness, Lady Rawlings, on this list, and to follow her now. This is partly because, with all due respect to other noble Lords and Baronesses in the Room, we have spent rather a lot of time together on this subject over the past few months, beginning upstairs in the committee and in recent weeks here in the Committee stage of the Energy Bill. Much of that work in the early months has been properly reflected in this report, and I praise the leadership of the noble Lord, Lord Carter, and his very comprehensive explanation of this report.
We have to deal with two things in parallel: something that is going on at the EU level and something that is transforming UK energy policy at the same time, in developing new mechanisms to deal with the trilemma, as was spelt out by the noble Lord, Lord Carter. How UK energy policy fits within the overall EU policy is not an easy question to answer. If we are honest about it, policy at the EU level has been piecemeal and partial and aspects of it have been quite a mess; policy at the UK level has not exactly been consistent either and has left us with some very serious problems.
We are not alone in that. If we look at the record of most member states, we find that there is a crisis of investment in energy in almost all of them. That crisis has been aggravated by sudden changes of policy; the most dramatic was Germany’s abandonment of the nuclear option but there are others, including within this country, such as the change of subsidy regimes and the change of direction in regulatory matters.
We have also seen growing public opinion, of which we should take greater account. On the one hand it is quite hostile to some forms of energy development, notably—for reasons with which I do not sympathise—to aspects of renewable energy, in particular wind energy; in other countries, as well as to some extent in this country, to nuclear developments; and elsewhere to the revival of coal. That means that there is a political problem for Governments and for the EU, as well as a technical problem, with which we grappled in both the Bill and in the sub-committee’s work on this report.
The problem is encapsulated in a concern that the lights may go off all over Europe, but it is even more fundamental than that. The issue is whether we have grasped what the structure of the energy industry should be in 10 or 20 years’ time, in a context where we are trying to decarbonise, increase Europe’s energy security and at the same time ensure that the price paid for energy by both ordinary consumers and business—which will have an effect on Europe’s international competitiveness—can all be brought together. For that reason as well, consumer reaction is part of the political reality that we are facing.
My noble friend Lord Carter quoted the Commission and other European institutions as saying that the internal market in energy would be completed by 2014. That is Eurospeak at its worst. There is nothing like an internal single energy market in Europe. We are a long way off. We have 27 different energy markets. Some are still dominated by state or ex-state incumbents. Others are dominated by companies that operate right across Europe, such as our own. Still others have insufficient investment because they have insufficient domestic companies to provide that investment. Therefore, we have a hotchpotch of energy policies, and the European effort of bringing them together has not, despite a third and now a fourth energy package, created an internal energy market in the sense that other markets have been created.
Some of this could be addressed by greater physical interconnection. A strong case is made in our report for increasing the degree of interconnection. The UK has some interconnections. In our Grand Committee on the Energy Bill the other day, the right reverend Prelate pointed out that he had an app on his iPad that could have told him that we were 6% dependent on the French nuclear industry at that moment. That is a reality, but we could get much more cost-effective value for money from our energy system if two-way interconnection were more the norm right across Europe.
However, we have not only 27 different regulatory regimes but 27 different contracting arrangements, 27 different energy mixes, and 27 different forms of anxiety about what the future holds. There is a lot of anxiety, in eastern Europe in particular, for obvious reasons, about being dependent on Gazprom and the whim of the Kremlin for its gas supplies. We have seen the Government of Bulgaria effectively stopped as a result of energy prices. We are seeing problems in the switch back to the energy sources that we know. Heavily carbonised coal and lignite are being adopted in Germany and Poland as the main platform of their energy policy. As a result, their carbon targets are seriously in jeopardy.
We are faced with this range of problems. Overriding it is the level of investment required to even address them. We are talking about €3 trillion over the next period. It sounds a lot of money, but some witnesses told us that the money was around and that the issue was how we attract it and get it invested in energy. It will not come from any of the member states, or from the energy companies’ balance sheets. Some accusations of profiteering may be correct. There is a certain lack of transparency in their balance sheets, as the Select Committee’s report in the other place published today underlined, but the fact remains that there is not a lot of money on their balance sheets, and their stock market ratings are a fraction of what they were 10 years ago.
If investment will not come internally, it must come from the markets. To attract the markets’ money into energy in Europe, including the UK, you need to give investors far more clarity and a greater sense of direction on how that market will go. On the face of it, it is a long-term investment with an almost guaranteed return. Some of the provisions of the Energy Bill try to institutionalise that as far as this country is concerned, but there is actually huge uncertainty.
This is not surprising, given the fluctuations in energy policy and the energy markets over the past few years. It is also not surprising given that Europe is still floundering about whether it can actually make effective the one measure which has been adopted on a pan-European basis: the European trading scheme. At the moment it looks very poorly. Certainly, at the market price it is not going to work. The European Parliament and the European Council of Ministers were even reluctant to make the relatively minor reforms to the ETS of the system of backloading. This would tighten the market slightly in the current phase and the next phase. They were reluctant to do that. If they are also reluctant to adopt more radical measures, such as the carbon price floor to which my noble friend Lord Carter referred, then we are in serious difficulty.
The successful part of pan-European policy so far is the targets for 2020, most of which will be hit or almost hit. Yet there is still an argument within Europe and within the UK—along with a certain reluctance within the UK Government—about what the targets should be for 2030, particularly in relation to decarbonisation of the electricity supply.
There is also the big problem of how we tackle the technological challenge. If we do not develop a technically, economically and commercially effective form of CCS then there will be a reversion to significant proportions of our energy supply being delivered by coal, by lignite and even by gas. This would mean that nothing like the trajectory to meet our decarbonisation targets for 2030 and 2050 can be achieved. Without CCS—with unabated coal, unabated gas and unabated lignite—there is no way in which those objectives can be achieved.
We are seeing not only a dash for gas—which is probably sensible and rational at this point, although it will not be much cheaper in the short term even with significant amounts of shale gas, and which is itself carbon-intensive—but a significantly more damaging role for coal. This is happening in eastern Europe and Germany, but if we are not careful, it might also be a side-effect of the capacity mechanisms that we are developing within this country.
We need technological progress on carbon capture and storage, which still seems a long way off. We need a more genuine single internal market for energy, which involves more physical interconnection. We need more moves to harmonise our regulatory structure, and more effective regulators. There is criticism here of Ofgem as a weak regulator, some of which I agree with, but some of the regulators on the continent are yet weaker and markedly less independent of the industry or the government. We need to develop a common approach to developing this internal market. It is a big challenge; a political challenge, a technical challenge and an economic challenge. If we do not meet that challenge, I think this report underlines the fact that there will be serious failures right across Europe. We need to be careful that we do not jeopardise whatever measures we put in place.
If we go too far down the road of capacity mechanisms, state by state, then we are actually moving in the opposite direction to achieving a single market and the cost benefits which would come from that. Although I broadly support the capacity mechanisms proposed in the Energy Bill, there are consequences to relying too heavily on those here. Some of the other mechanisms which have been developed in Spain and elsewhere jeopardise the objective of a single market. Those of us who are, broadly speaking, pro-European need to push for that. Those who are perhaps more hesitant about that must recognise that it needs to be an important part of the national policy, along with action at European level.
Lord Maclennan of Rogart
My Lords, I begin by declaring an interest as chairman of a start-up marine power company. The report could scarcely have been more timely. I thank the noble Lord, Lord Carter, for his very skilful chairing of the committee and all those who gave evidence, much of which pointed in similar directions.
There is no subject at the moment that is more worthy of considered attention than energy policy. We have heard the carbon problems, the security of supply and the problem of potential fuel poverty described as a trilemma, and the European Union does not seem to be making the best fist of those challenges. Part of that is due to the relatively recent focusing on these issues. Energy policy was not an original competence of the Union, despite the coal and steel community having been the original organisation. Even since the treaty of Lisbon, with shared competences, it has also been guaranteed that member countries would be free to choose what fuels they wished.
On top of that very difficult issue, we have had a number of, frankly, shocking surprises that have impacted upon a number of member countries of the EU and led to sharp changes of direction. I think, for example, of the Fukushima explosion and what that did to the Federal Republic of Germany, with which we could have maintained a much closer dialogue if it had not stood its policy virtually on its head, in so far as it has moved towards abandoning nuclear power and rid itself of any commitment to carbon capture and storage. If the European Union considers this to be such an important issue, it ought seriously to contemplate the development of institutional means of ensuring that discussion takes place before these national decisions are taken, which can be very disruptive of collective decision-making.
The one thing that was absolutely clear, from almost all those who gave evidence to our committee about the necessary investment in the infrastructure and in technologies, was that the European Union should endeavour to have a clear, predictable and lasting policy. Up to 2020, maybe we will achieve what has been forecast and struggled for, and it is encouraging that the Commission has indicated its support for a plan up to 2030. However, Governments involved in this process are inevitably reactive to what is going on on the ground and what the temporary obsessions of their electorates may be. This is not a recommendation of the committee, but we really ought to consider having a continuing standing committee of the Council to exchange views and keep each member country closely up to date with the movements of opinion that are occurring in each member country. Coming together to the Council for a short period of time has never seemed to me to be an ideal way for such a powerful body to prepare for the decisions that need to be taken. I strongly advocate the establishment of such a body. The Commission cannot do this on its own. We have seen how national Governments have switched position and made life extraordinarily difficult.
I endorse what the chairman of our committee has said, and I was very glad to follow the noble Lord, Lord Whitty, not one word of whose contribution I disagreed with, so I do not need to repeat these matters. However, I am quite clear that even during the time when we were considering fracking and shale, the emphasis switched, even in this country, from scepticism about its relevance to our future to some kind of optimism about it overcoming our problems. I confess that I see no reason to believe that that will be the outcome on that front, but the point that it illustrates is how susceptible countries are to being blown off course.
In this area of policy we need to have steadiness of purpose, clarity of vision and close co-operation with all these other countries with which we are interconnected and whose supplies may vary, as they do, from one country to another. We should be using these differences to supplement our tools and to formulate a scheme that will enable us to go forward, not only to ensure our own security of supply, cost control and carbon control but to influence the global picture. From time to time we have been able to do so, but it is clear that Europe cannot do that effectively unless it speaks with a single voice. That lay beyond the inquiry in which we engaged ourselves, but to my mind it is none the less of critical importance.
Lord Cameron of Dillington
My Lords, I, too, served on Sub-Committee D during the formulation of this report. I have a declared interest of being a farmer with energy-producing resources on my land.
We are a European committee and I believe that the EU now has a major role to play in the trilemma of energy—the intricate balance between security, affordability and decarbonisation—which has already been spoken about. I might repeat what I said at Second Reading of the Energy Bill: I believe that the greatest of these three is security of supply. None of others matter unless we keep the lights on.
As the noble Lord, Lord Maclennan, said, the EU came to this role late in the day, only since the treaty of Lisbon in 2007, but energy should now be a major trans-boundary issue on a par with the environment, international biodiversity, fisheries, cross-border water management, international crime and the like. The EU now has a major role to play in helping provide the lead and the infrastructure for cheap, non-polluting and, above all, reliable energy for the whole continent.
Clearly, certain issues remain the responsibility of member states; for example, the direction of travel and the speed of travel in terms of sources of power generation. Keeping the lights on will indeed remain a national responsibility. On the other hand, issues such as the emissions performance standards can affect the quality of life across Europe and should remain the prerogative of the EU.
There is so much more that the EU can do than mere regulation and controls, the most important of which is interconnection. We had a good go at this when debating the Energy Bill last week and I repeat that with the advent of high-voltage direct current—HVDC—electricity can now be transported across Europe, to Romania from Portugal and to Sweden from Sicily, although north Africa is probably a better example because it has huge solar potential. Soon it should be possible to make connecting electricity from a windmill in Galway Bay to a house in Bulgaria as easy as it now is to talk between those two sites on the telephone. I am sure that noble Lords will remember the difficulty of making that telephone call only a few decades ago. Energy transmission will be the same as telephone transmission.
To create a pan-European electricity grid now would be to borrow at historically low interest rates and would create a huge number of jobs at a time when they are most needed. A pan-European grid would allow intermittent renewables to complement each other: when it is not windy in Germany, it might be sunny in Italy; when it is windy in Portugal in the middle of the night, the power can go to Poland where they are just waking up. Such interconnection could bring a whole new justification to renewables yet to be built. For instance—this is a favourite of mine—a Severn barrage producing the equivalent of three or four nuclear power stations would cost less than HS2. Although it would probably need a strike price nearly the equivalent to nuclear or offshore wind for its first 30 years, for the next 100 years after that, the electricity produced would cost only about 2p to 3p per kilowatt. Even if it is being produced in the middle of the night, it, too, can go to Greece or the like—and at that price they may even be able to afford it.
European interconnection will not only help keep the lights on but should also ensure that our economy and industrial output has access to the cheapest electricity available. That is not to say that we do not also need our UK capacity mechanism to help us keep the lights on in the mean time, as the noble Lord, Lord Whitty, said, because there is a long way to go before we achieve such continental connectivity and there is much work to be done. Not only must the European Commission inject the funds necessary; the €9.2 billion available for energy under the Connecting Europe Facility is, frankly, laughable when you consider that it also includes gas storage and pipelines across Europe. It is certainly not enough when we are told that before 2022 we are going to need €104 billion for grid connections, including €23 billion for subsea cables alone. The Commission must raise both its own funding and European Central Bank funding, and permit and encourage massive joint funding from the private sector. It has also got to clear the questions of differing regulatory regimes that exist across Europe, as well as the specification for the interconnectors and who is going to own and manage the infrastructure in the future. In other words, in order to secure private investors, the Commission has to help decide, but perhaps not dictate, how those investors are going to get a return on their money. It should also stick to the plan, unlike some member states have done recently. Politicians must resist the temptation to see energy companies making large profits and think that this is somehow wrong. If these generating companies are going to have to raise billions of pounds—€3 trillion, as the noble Lord, Lord Whitty, says—I am afraid that, certainly in the early days, they have to have huge profits in order to pay the investors. If the investors get a sniff of the fact that some politicians are going to step in and start taxing them, this investment is not going to happen.
I agree with the noble Lord, Lord Whitty, that we must try to avoid any obfuscation on behalf of these companies. Everyone should be up front, including the politicians, about the fact that we have to raise the money and that therefore the profits are going to follow, as night follows day. There has to be full clarity across the board. Everyone has to be clear in advance about what is going to happen because we have to stick to the plan; otherwise, we will not get the investment.
Another area that all parliaments have to engage in, including the European Parliament, is pressing the case publicly for interconnection and helping to overcome public antipathy to the means of connection; that is, pylons. I am afraid that in order to get the connection we have to have the pylons.
Moving on from the problems of interconnection—I suspect that we probably had enough of that last week—the two other important roles for the EU here are: to get the EU Emissions Trading Scheme working effectively and to put more money into R&D. I will not expand on the EU Emissions Trading Scheme—ETS—because I think our report does that effectively. But we need notice now of a floor price to come in, say, 2020—and, yes, if necessary, a ceiling price if that makes the politics easier—and we need an increase in the annual rate of reduction of allowances after 2020, so that everyone knows that the cost of carbon emissions is going to go up between 2020 and 2030 and they should start planning and investing for that now.
Getting the EU ETS right should be part of a larger strategy. There is a view that the ETS is now a busted flush and decarbonisation is better achieved by regulation, targets or even specific carbon taxes. I sympathise with that view but I would prefer to give the ETS one last push to see if it can work. From our conversation with the Secretary of State, I gather that that is also the Government’s position. We need to work very hard on this because it is going to be very difficult. Nevertheless, as I said, the ETS should be part of a larger strategy of ensuring that the 2030 roadmap gives the clearest, most certain and irrevocable signals for pan-European investment in energy up to 2030, because the programme for investment during that decade is just about to begin.
Turning to R&D, I note that the recent EU financial framework has increased the overall research budget from €55 billion to €80 billion. But is this enough on a continent whose economic future depends on being at the cutting edge of technology in so many different fields? You have to ask how much of this will find its way into the energy sector. During our investigations I was very struck by how many of our witnesses reckoned that with the current windmills and PV panels we are really only floundering at the edges of renewable power generation, and how we have yet to make those important breakthroughs that will achieve zero-carbon power emissions. We do not know what the future will hold but, as sure as goodness, we need to spend a lot of time and effort trying to find a way to a better future. We need to considerably increase our R&D spend.
That brings me to carbon capture and storage. This is not so much of European importance but is of crucial importance to the world. World electricity usage is estimated to rise by 84% between 2008 and 2033, and well over 50% of that new power will come from coal. Already China’s annual increase in coal-powered electricity equals the whole annual electricity demand of the UK. That is billions of tonnes of CO2 escaping into the atmosphere. But if we could pilot and promote an effective and practical system of CCS, we would be doing something hugely important to save the world. It would take most, or all, of the sting out of coal and gas-driven energy. However, it became obvious during our investigations that the rest of Europe seems to have turned its back on CCS, so once again it is up to us, the UK, to keep our nerve and push on with our CCS projects.
I left my remarks on CCS to the end because I think they are the most important. Europe uses 10% of the world’s electricity so what we do and how we do it is not very important in the overall scheme of things except to our own economy. But CCS is important and if we can come up with a viable solution here, not only will we have a technology that we can sell but one for which the world will—or certainly should—be eternally grateful.
Baroness Byford
My Lords, I begin by thanking the noble Lord, Lord Carter, for introducing the debate this afternoon. I remind the Committee that unfortunately, because of my husband’s illness, I was not able to take part in earlier discussions. Therefore, I will perhaps raise more questions today than other contributors will. I declare my interest as a farmer. We grow oilseed rape.
I will start with a certainty. As others have said, the EU Emissions Trading Scheme should be strengthened. Clearly it is not working at the moment. This should be addressed. I hope that the Energy Bill will encourage that to happen here. If it is not working here, one wonders what on earth is happening in the other countries of Europe. As the noble Lord, Lord Cameron, said, this country should take the lead. I am particularly disappointed that the projected income from it has failed to materialise. One of the areas to which the money would have been devoted is research aimed at perfecting a system of carbon capture and storage.
All across the world, coal and other fossil fuels are the main source of heat, light and power. I believe that they will remain so for many decades to come. A reasonable way of combating the carbon emissions involved is to trap them and store them where they can do no harm. Natural gas, which includes shale gas, produces 57% less carbon dioxide per kilowatt hour than coal. Even so, its emissions must be captured. The policy brief, A UK “Dash” for Smart Gas, introduced in March this year, contains a wealth of data that include the US Energy Information Administration figures on world recoverable resources of shale gas. Interestingly, China has the most. The United States is next, with Argentina third. The UK has a tiny amount by comparison, but DECC has stated in its Energy Security Strategy that it will,
“support new ways of tapping our indigenous resources, where this proves economic”,
and that it will carry out extraction,
“safely and with full regard for protection of the environment”.
Part of this protection will be carbon capture and storage. In a Written Answer of 20 June this year, the Minister pointed out that the 2013 Budget had announced the selection of two preferred bidders in the CCS selection competition. I understand that that progress will be assisted over four years by the Government’s £125 million R&D programme. That is a start.
Energy security has obviously been strengthened by efforts and investment in the renewables sector. I agree with others that it is slow and very varied. There is tangible evidence on the questions of onshore and offshore wind farms, the use of landfill gases, sewage sludge digestion and anaerobic digesters. Studies of barrage and marine turbines also have a role to play. However, the House of Commons report of 3 July this year stated that job and investment announcements in the renewables sector since 2010 show that in Scotland, £1 billion has the potential to support 697 jobs; in Northern Ireland 878 jobs; in England 1,287 jobs; and in Wales 1,395 jobs. What causes this variation, even in our own country, and what is the variation across Europe? Does anyone know? Does it matter? Are there things that we could change to improve it? Will it be more advantageous to site energy plants across the continent, or could enormous gains be made by locating them in one place in a number of regions? Does energy generation benefit from special factors, as our textile industry did in the 18th century?
Investment in renewables, broken down into English regions, shows an even greater variation than the one I quoted earlier for the countries of the UK. Hence, £1 million spent in the West Midlands has the potential to support 8.24 jobs; in the south-east, it would support 6.1 jobs; in the south-west, only 1.12; and in the east, which has had more than half the total recorded investment since 2010, it would support only one job. Is it possible that the explanation for these figures might indicate that certain types of investment in renewables would be better made in one place than another?
I turn to DECC’s annual report and accounts for 2012-13, and specifically to Table 8, “Total identifiable expenditure on services by function, country and region, for 2011-12” under Chapter 8, “Financial Core Tables”. Interestingly, expenditure in England on economic affairs was £393 million, of which £119 million was spent in the north-west. On environmental protection, the total for England was £1,644 million, of which the north-west had £1,044 million. DECC’s total spend in England was £2,048 million, of which the north-west had £1,165 million. Does this mean anything of which we really should take note? Is it an important message that should be considered in the energy security debate? If such variations are happening in our country, one wonders what is happening in other countries.
Will Europe’s self-sufficiency in energy be undermined by external forces? On 27 March, on Radio 4’s “Today” programme, there was a report that one of the big six UK power companies had completed a deal with the US to import shale gas in quantities sufficient to power 2 million homes. I have not heard anything further, so it may not have concluded into a firm deal, but what would be the knock-on effect if such deals were concluded in several or all European countries with supplies from China and Argentina as well?
As other Members have said, energy security is vital to our future, and is clearly recognised as such throughout the EU. I, too, have been disappointed by the lack of agreement on the ETS, the lack of progress on connectivity between us and the continent, and the obvious difficulties around carbon capture and storage. It was, therefore, something of a surprise to learn from the final paragraph of Annexe A of DECC’s Energy Security Strategy that:
“The US Chambers of Commerce produces an international index of energy security, from 1980 to 2010, for 25 developed and emerging economies”.
That index apparently stated that,
“since the 1980s, the United Kingdom has scored consistently in the top three most energy secure countries in the group of large energy users, and … ranks second after Mexico”.
That is good news, but we are an EU committee that looks across the EU. Clearly, in some countries where we took evidence this improvement is sadly lacking.
It may well be that historically we have been blessed with abundant coal, oil and natural gas. The outlook, however, is less satisfactory, with particular questions over security of supply, connectivity and affordability. Reports in the press, magazines and journals, and on the radio, make it clear that we are short of available people with the necessary skills to move from conventional energy supply to renewables. There are also concerns over the practical lifetimes of items such as solar panels and wind turbines. Issues of commercial confidentiality seem to prevent the publication of data on energy outputs, and comparisons between what is promised and what is achieved.
Everywhere I look I find contradictions that raise yet more questions. In his introduction, the noble Lord said that these questions were political rather than party-political, and that each member state must face them.
Under some of the resource headings that I looked at, Bulgaria’s electricity prices, in euros per kilowatt hour, are split between households and industrial units, and Bulgaria is the cheapest under both headings. Denmark is the most expensive for households at 0.298, but seventh cheapest for industrial uses at 0.093. Sweden is eighth from the top of the list for households, at 0.204, but sixth from the bottom for industrial use at 0.083. Is there any significance in this, and why is there a difference? Would we benefit from a clearer understanding of how such variance occurs?
I congratulate the committee, which, as I say, I joined only towards the end. It raised many questions, and three themes will stick with me. The first and most important is security of supply. Secondly, there is money around in the money markets, but people need decisions in order to make long-term plans. Thirdly, affordability is not just what it costs the individual but the implications that that has for businesses across Europe.
Lord Giddens
My Lords, I join other noble Lords in congratulating my noble friend Lord Carter on his excellent chairmanship of this committee. We now have a no less excellent chairperson with us here today. I also thank Alistair Dillon, Aaron Speer and Kate Chapman for all the work that they put into the report. We pretend that we produced it but, unless it is illegitimate to say so, they wrote it and produced some of the ideas that we incorporated as our own. Perhaps we could ask to strike that out of Hansard if we are not allowed to say it; I am not sure.
As noble Lords have said, investment in energy is crucial for the EU and its member states. The reasons can be set out briefly and easily: first, there is the need to combat climate change; secondly, energy security is elemental to wider security in the EU; and, thirdly, as noble Lords have said, this is a crucial moment in European history in terms of economic recovery, and anticyclical investment to promote recovery demands that energy should form a core part of that. The interesting thing about the report is that it shows that these three are in tension with one another. This is the famous energy trilemma, which I assure noble Lords has now entered the energy hall of fame; since I read a lot about energy, I have now seen many references to it, for which certain figures sitting behind noble Lords should perhaps take the credit.
I am pro-European—not just “broadly speaking”, as my noble friend Lord Whitty is—and I believe that climate change is one of the most dangerous threats that we face in the 21st century. It is quite right that the EU has sought to combat this with its “20-20-20” targets and its offer, which has not so far been taken up, to increase one of those to a 30% emissions reduction target.
However, as other noble Lords have said, there is a really big range of problems with European policy in terms of both climate change and energy. Other noble Lords have drawn attention to at least some of the issues. I shall mention three in the area of climate change policy, which I suppose is my prime specialty. First, although I know the noble Baroness, Lady Parminter, probably will not agree, the precautionary principle, on which Europe has based a good deal of its environmental policy, is actively incoherent and has had unfortunate consequences for European policy. This was well demonstrated in a celebrated book by an American author, Cass Sunstein, called Laws of Fear, in which he thoroughly deconstructs the precautionary principle. Basically, the precautionary principle prioritises the everyday statement, “Look before you leap”. That is a good enough principle but, as with every popular saying, it has its opposite—such sayings are very handy for so-called common sense because with them you can make sense of everything after the event—which is, “He who hesitates is lost”. In my view the United States is right never to endorse the precautionary principle. It has an inherent conservatism, which follows from the fact that you are simply using one everyday saying and not the other.
This has had consequences for the EU’s attitudes to biotechnology and to shale gas, which has an amazing history. We read about it for years and now suddenly shale gas is on everybody’s lips. You cannot open a newspaper without a mention of shale gas. I hope someone will ban the word “fracking”. It is such a stupid word. All the newspapers have headings such as “Not Fracking Likely”, and so forth. They should call it “shale gas” or “shale oil”. That is much more down to earth.
I had a certain disagreement over shale gas with the committee, because it is truly transformational. Europe cannot stand aside from it because it affects energy prices so much. My noble friend Lord Carter said that it is impossible for Europe to resist its impact. It has a very direct impact on European competitiveness at the moment, for example vis-à-vis the Americans. Therefore, shale gas will have a transformative effect even if the Europeans do not drill lots of wells themselves, which they probably will. Europe will have to import gas, probably from Algeria, where it exists in large amounts. The price in Algeria will probably come down a lot, and will tend to meet the American price. I see it as being a transformative thing whether you like it or not.
I will not spend a long time on the second problem with climate change policy: the failure of the ETS. This was much discussed by other noble Lords who contributed to this debate. It is a big test for Europe. Can it get its act together on this? The temptation is just to fiddle with it, and to do backloading and so forth. That is hopeless. It has been a failure in the core terms in which it was established. It is all very well to have a floor, but it should probably have a ceiling. The danger is that the ETS will be an example of how not to do it for the rest of the world as they start their own schemes. California’s scheme seems to me to be much better thought-out, with a floor and a ceiling and more chance of being effective. Whether Europe can get its act together on this is a big thing. It is not at all easy to do.
Thirdly, as other noble Lords mentioned, there is the return of coal in Europe. As someone who is deeply concerned about climate change, to me this is very important. Coal is returning, not only in terms of heightened production but also the import of coal from the United States, extraordinary though it would have seemed a few years ago. You would never have believed it would be possible. Cheap coal is coming from the United States because of shale gas.
This is probably the most lethal thing in terms of emissions. If you believe that climate change is dangerous, you must reduce emissions. This shows that it is a mistake simply to suppose that if you have a certain proportion of renewables, you are thereby reducing emissions. It depends on what you do with the rest of your energy mix. It may therefore be a bit unfortunate that the EU took on a renewables target, because it should also have set a coal target. There is an EU policy on coal, of course, but it is not functioning.
Moving on to energy itself, there are major problems to which other noble Lords referred. The main one is simply the structural difficulty of the European Union. It wants to implement grand plans, and at this point in its history it needs grand plans. However, it does not have the capability to do so because most policy in key areas is in the hands of member states. This is particularly true of energy. There is an unbelievable diversity to the energy mix of European countries. Poland gets 70% of its energy—not 70% of its electricity but 70% of its energy—from coal. That is really archaic in contemporary terms. Sweden, on the other hand, gets 49% of its total energy from renewables. It is extraordinary. France has the highest proportion of nuclear energy in the world, while Germany is phasing out its nuclear altogether. It is a horrible mix for the EU to have to deal with, and it will hamper investment.
We need large-scale investment, as other noble Lords said: really big investment. I am not at all convinced that the markets will supply it. In the EU we will probably have to add quite a lot of direct intervention. The EIB is too small and does not have the resources to provide it. The ECB is unable to do so. Therefore, the dilemmas are huge. I do not see where investment on the scale demanded will come from. It seems to be another bit of paper. The European Commission has these massive goals, but in the mean time the whole thing is limping along.
I will pass over modernisation of the grid. My main difference with what other noble Lords said is that I do not think that it has proceeded very far at all. There has not been much progress. We still have energy islands in the middle of the European Union. The Baltic states are an energy island. They get almost all their energy from the former Soviet Union. There are several energy islands. The most important interconnections have been made where states have particular driving needs. I refer, for example, to what is happening in Germany at the moment.
I will finish with two questions for the Minister. The Government made a very detailed and good response to the report, but when the response discussed the ETS, it stated that it had worked and had served to reduce carbon emissions. I hope the noble Baroness will forgive me when I say that that is a ludicrous thing to say. The mechanism has not been there to reduce carbon emissions. It may have made an impact in its very first phase, but carbon emissions have come down for a cluster of other reasons, including the recession. A big thing facing Europe is what will happen when we get an industrial renaissance. Europe is not really prepared for the expansion of emissions that will come from that.
Secondly, in the light of what the noble Lord, Lord Maclennan, said, I would like to hear the Minister’s response on German Energiewende: energy transformation. What view do the Government have of that? One reads so many things that suggest that the Germans are stupid to try to reduce their energy system to large-scale renewables. They are not stupid. I have studied this in some detail. They have a very sophisticated policy. They have thought about all the things such as interdependence. You can get the most amazing technologies that transfer intermittent energy at the borders of countries and normalise it. Germany has a well worked-out plan. It might not work, but I would be very interested to hear the Government’s view of the German experiment.
Baroness Parminter
My Lords, it is always a pleasure to follow the noble Lord, Lord Giddens, and I look forward to discussing in Committee the merits, as I see them, of the precautionary principle, and the benefits that it has brought to the environment both of the UK and, more broadly, of Europe. Like other members of the sub-committee, I thank our chairman, the noble Lord, Lord Carter of Coles, for his excellent chairing and for the debate today. I also thank the Government for their response. They found that there was much with which they could agree, although on the targets for renewable energy we obviously have a strong disagreement.
Given that a number of us are speaking today, I will choose one issue on which to focus. I am sure that colleagues who have been sitting through the Energy Bill will be delighted to hear that I am not going to speak on my particular topic of interconnections because the noble Lord, Lord Cameron, spoke so well about it and because, following the very welcome comments of the Minister last week in Committee, I look forward to returning with an amendment on Report.
Instead, I will turn to the issue of shale gas and the need for a robust regulatory structure for its exploitation in the European Union. Both our report and the Government’s response are cautious about the likely extent of EU-produced shale gas. The Government state that,
“it should not be assumed that it will bring impacts comparable to those seen in the US”.
However, the Government, while not getting too excited by the idea that shale gas can reduce Europe’s energy dependency or solve the problem of high prices, have clearly been persuaded that it can at least stop an increase in dependence. In recent weeks we have seen the Government easing the path for shale gas companies with generous tax breaks and the creation of the Office of Unconventional Gas and Oil to encourage the development of the industry. Beyond that, they have said that they plan to cut environmental permitting processes from the current 13 weeks to less than a fortnight.
What is needed now is a robust regulatory framework that gives certainty for investors and addresses the environmental impacts. However, in their response to our report, which calls for a regulatory structure for the exploitation of shale gas in the EU, the Government argue that they are,
“not convinced that substantial new action at EU level is required”.
It is clear that securing an EU regulatory framework will not be easy. Both France and Bulgaria have banned extraction but José Manuel Barroso, the President of the European Commission, has said that those member states that wish to begin fracking—I use the term unapologetically—should do so. The Commission plans to bring forward a proposal for a framework on shale gas by the end of the year but it is not yet known whether this will be just guidelines or something more robust.
It is disappointing that the Government seem to see the prospect of a revised EU framework as something that could seriously restrict opportunities for exploiting shale gas resources rather than as an opportunity to address the genuine environmental concerns that it brings and, as crucially, to help deliver public confidence in the process. The events of the past two weeks at Balcombe in West Sussex, where Cuadrilla is drilling for oil, could indeed mark the beginning of open guerrilla-style warfare if such concerns are not addressed.
It is worth reminding ourselves that the existing EU regulatory framework is designed for the conventional hydrocarbon sector. Fracking presents a whole series of new challenges. There are real concerns that the chemicals used in hydraulic fracking can seep into water supplies, as Water UK, the industry body that represents all major water suppliers, made clear earlier this month. It was Water UK, not a group such as Friends of the Earth, that went on to highlight that aquifers can be contaminated by fracking, by leaks from wells or by the poor handling of chemicals or wastewater on the surface, and that fracking requires huge amounts of water, which will inevitably put a strain on supplies in areas around extraction sites. All this is in addition to the small earthquake tremors caused by the horizontal drilling necessary to extract the gas.
These issues need addressing and it is not sufficient to be thinking in terms of minor amendments to the existing regulatory framework, as the Government seem to wish to do in order to help grow the industry rather than deliver sustainable shale gas extraction. Given what they say in their response to our report, what is the Government’s approach to the Commission and counterparts in other member states to influence their thinking on the proposal for a framework on shale gas? Do they want minor amendments to a regulatory framework prepared for the conventional hydrocarbon sector or do they accept the need for such a framework to take into account the full environmental impacts of shale gas?
Only by delivering a robust regulatory regime can the legitimate environmental concerns about shale gas be addressed and, just as crucially, public confidence secured. As the shale gas exploiters admit, their attempts to test Britain’s shale gas potential will be hamstrung unless they can win that public support.
Lord Kerr of Kinlochard
My Lords, I need to mention that I am on the boards of a mining company that digs up coal and uranium and a power company that sells gas and electricity, and I was on the board of an oil and gas company.
I wish I could say it is a pleasure to follow the noble Baroness, Lady Parminter, but I would be lying because her expertise shows up mine, which does not match my stated interests. I greatly enjoyed this report and I am grateful to the committee for producing it and to the noble Lord, Lord Carter, for his masterly introduction. I am also grateful to the Government for what seems to be a rather thorough and clear response, which helps our discussion.
I am particularly grateful to the noble Baroness, Lady Rawlings, for she is, I think, apart from me, the only non-member of this committee who is speaking in this debate. I approached it with tremendous trepidation, surrounded by all this expertise, experience and knowledge. She of course sailed straight in with style, panache and daring, so I am following in the wake of her battleship.
I want to say something in general about energy policy, then concentrate on five points in the report, and then come on to shale gas and comment on what the noble Lord, Lord Giddens, said. My general point is that if the three aims of energy policy are to cut costs, cut emissions and keep the lights on, the country seems to be doing quite well on the second, rather badly on the first—partly because we are setting the pace in Europe on the second—and risking serious trouble on the third, as far as I can see and as far as Ofgem seems to be telling us, because of lack of investment.
I have to admit that I am not convinced that the Energy Bill, on which the Grand Committee is working so hard, will change the picture much. It seems to maintain the current balance between the three objectives and is a bit of slow-burner, with capacity payments—whether or not they are a good thing—not coming in for another five years. Nor do I believe that achievable changes in EU energy policy would make a great difference either, although some of those proposed by the committee make obvious good sense; for example, it is clear that the ETS badly needs reform and that the most obvious reform is the backloading of the auction of allowances, which I really hope will be agreed second time round.
However, there is not a great deal that the EU can do given that the treaty makes it clear that each country’s national energy mix is a matter for it alone. Like the committee, I think that there could be rather greater stress on interconnection in energy grids and energy pipelines, for oil as well as for gas and electricity—the report is curiously silent about oil, which is likely to remain the principal transport fuel for Europe for some considerable time to come. If you look at countries such as Bulgaria, which, as the report points out, is still 100% dependent on Russia for its gas, and the Baltic states, where most links still run back to old Soviet suppliers, it is clear that interconnection should be a priority. It increases competition, reduces costs and volatility, and increases security, in political as well as security terms, if you look at things from Vilnius, Tallinn or Riga.
I hope that the Commission will not stop trying to encourage member states to overcome their reluctance to accept common carrier obligations. Europe’s fractured energy market would be much more efficient if pipelines and grids were subject to the same sort of rules as apply in the UK domestic market or in the EU transport market.
In general, however, I would not want the Commission to be too ambitious this year. The committee is rather more expansive, and the points that I shall now make on the report are where I think it is asking either for a little too much or for the wrong thing. Sometimes, its enthusiasm has run away with it. I give five examples: first, paragraph 54 recommends that the Commission should require member states to submit obligatory annual reports on national energy policies and should assess those reports for the compatibility of such policies with the EU’s state aid rules.
It would be very good if the EU did have a single market in energy rather than 27, as the noble Lord, Lord Whitty, pointed out, but it does not. If energy were widely traded across national frontiers, it would be reasonable—indeed, essential—to apply the competition rules assessing the fairness of national support schemes, but I am not sure that member states, including the UK, are quite ready now for the Commission to step in. For example, with regard to the announcement last month that the strike price for offshore wind in the UK might be as high as £155 per megawatt hour, would we want the Commission to tell us that that was potentially a breach of European competition rules?
The point is that it is no accident that the treaty says what it says now, which results from a long process of negotiation and is as far as the member states were prepared to go. They have not conferred on the Commission the power to run a real energy market. I therefore agree with the Government’s rather guarded response to this recommendation, and I think that the Commission is quite right to be pretty reticent about applying the rigour of state aid rules in the energy sector.
Lord Giddens
I thank the noble Lord for giving way. There is an interesting discussion to be had about having a parallel to the European semester in energy. The European semester appears to have achieved quite a large rate of acceptance, obviously because it originated in the eurozone, but it is not completely implausible to suppose that you could have some kind of analogue to that which would be to everyone’s benefit, precisely because we are, or we want to be, using interdependent energy, and it would make sense to get the same kind of information-sharing that the European economic semester provides.
Lord Kerr of Kinlochard
I entirely agree with the noble Lord. An exchange of ideas of the kind that the noble Lord, Lord Maclennan, was talking about, would be highly desirable and moderately helpful. However, the committee’s report talks about the application of the state aid rules. We are moving on from something like the European semester on economic policy to something like the entity talked about in the French-German paper at the end of May, which would have fiscal rules enforceable with sanction powers. That is not likely to happen in the short term, but I do not think that full application of the rigour of state aid rules is either necessary or desirable at the present stage of the development of EU energy policy.
Paragraph 98 deals with nuclear power. The Commission is trenchantly urged by the committee to address outstanding issues, particularly liability, waste and, again, state aid. Why? Is it plausible that the Commission could find a solution that would satisfy the nuclear French and the now anti-nuclear Germans? What are we supposed to do? I do not understand the purpose. Do we need a single common answer? Provided that safety rules and high safety standards are enforced across the whole of the Union so that safety is assured—remember that the closure of their Chernobyl-style plants was a precondition for accession countries joining the European Union—subsidiarity should apply. I do not see why there need be an EU regime for waste or a particular EU level of liability rules, let alone state aid rules. I note that the Government’s response passes over this recommendation in silence. I find that silence sensible and eloquent.
On the subject of border taxes, I know that what we are talking about are global border taxes, but that seems like the argument that a financial transaction tax would be fine if it was global, when we know that it is not going to be. Paragraph 133 talks about the idea that imports from countries with low energy costs and environmental policies that we deem inadequate should be subject to an import tax in order to reduce carbon leakage. The Commission opposed this, citing huge administrative complexity. I agree, and I would also cite higher costs for our businesses and consumers, the certainty of retaliation against our exports and the probability that the precedent would prove interesting to those on the French left, for example, who regularly call for restrictions on imports from countries where labour costs are low.
Lord Deben
Does the noble Lord not also agree that this particular recommendation is often used by those who do not want to improve what we have but who always seek something that in their mind would be perfection, which we do not have; and that this is a dangerous route to go down because it normally means that we do not do either?
Lord Kerr of Kinlochard
The noble Lord is a great expert on such things. I will only say that I agree that it is a mirage. If we were to do it not as part of a global agreement, we would damage ourselves very seriously. If we believe in free trade, open borders and low tariffs, we need to be very careful of well intentioned exceptions.
My fourth point is that I am uneasy—I am getting into deep theological territory—about the call in paragraph 126 of the report for binding EU-level 2030 targets on energy consumption. What growth assumptions would underpin that target? If a member state of the European Union managed, by the skill of its economic policies and the energy of its population, to achieve an astonishingly high growth rate and therefore higher energy use, what would we do about the binding target? Would it mean that the state would have to be fined? If so, we would need to amend the treaty to give ourselves the power to do that. Let us not go there. Again, the Government’s response seems to be wisely silent on this recommendation.
Lastly—and here I am probably taking a step too far and pushing my luck too hard—I am not sure that I buy even paragraph 103, which has a marvellous ex cathedra ring to it when it states:
“Member States must be under no illusion: failure to agree a 2030 framework will restrict investment”.
I am in favour of a 2030 emissions target, but I am not 100% convinced that whether there is one will have much effect on the quantum of investment. Such targets undoubtedly have an indirect effect on the energy mix in member states. The mechanism is peer pressure from colleagues in the Council.
In fact, energy mix decisions probably owe more to what national electorates want or are prepared to wear, but there is no doubt that targets have some effect on energy mix. However, I doubt whether they affect the quantum of investment because companies do not base investment decisions on such targets. They are moved to invest or not invest by the clarity, consistency and credibility over time of the policy regimes in force in member states, and by whether profits will be permitted. Companies like profits. If they are going to invest, they want some kind of assurance about profits.
What deters investment is uncertainty, not targetry. What deters investment in this country is in part the hypocrisy of doubling the social and environmental costs paid by the energy consumer through his utility bills—the carbon taxes, installation costs, smart-metering costs and other energy-efficiency costs that have doubled in the past 12 months—while at the same time supporting and encouraging populist criticism of the industry for putting up prices. Of course it will put up prices if it has to charge all the levies in its bills. I find it objectionable to make the consumer rather than the taxpayer foot the bill for environmental policy. That seems to me to be socially regressive. But if you do not allow profit, you will not get investment. For the investor, long-term targets are neither here nor there. That may sound cynical but it is true.
I will turn to where the noble Lord, Lord Giddens, took us and talk about gas. The report sees it as a transition fuel and the committee worries that investment in gas could be at the expense of investment in renewables. I prefer to go with Energy Commissioner Oettinger who argues:
“Without gas, renewables have no chance”.
I do not mean just the intermittency problem. The fact is that when the EU economy takes off again, if emissions are to stay down, we need to replace coal with gas. That would cut emissions by 50%, which is the biggest single thing that we could do.
Poland today is 90% dependent on coal burn for its electricity generation. No wonder Poland leads the way in shale gas, with more than 130 concessions already granted. Coal-burn generation is increasing across the EU and in this country. Seaborne Appalachian coal is back on the market here, driven out of the US power market by shale gas. The speed of the shale gas revolution is striking. I think that the committee may have slightly underestimated its scale and effects. I am not talking principally about indigenous UK reserves or even EU reserves, although that story is quite dramatic.
At paragraph 74, the report quotes the British Geological Survey estimate of UK reserves of 150 billion cubic metres. However, last month the British Geological Survey raised its estimate from 150 billion to 37 trillion cubic metres, which is more than 500 times our current annual gas consumption. I do not expect us to exploit the Bowland shale nearly as quickly or efficiently as the Americans are exploiting Eagle Ford and the Bakken, or as quickly as the Chinese are already starting to, and will, exploit theirs.
I am talking about—as was, I think, the noble Lord, Lord Giddens—the effect on global markets and the new ability to access tight gas, coal-bed methane and shale gas. In the US, gas prices for industrial users fell between 2005 and the end of last year by 66% in real terms. In Europe, there was a 35% increase. That is because the US has shale and we do not yet. US emissions went sharply down. It is a delightful irony that just as the US Administration were angrily rejecting the Kyoto targets, the USA’s emissions were peaking. The US has easily met the targets that it rejected—because it has got shale. Therefore, it is burning less coal.
The US will export. I predict that the US chemical industries’ efforts to prevent exports will not succeed. The LNG price at European ports will therefore fall. Already, the Nigerian, Angolan and Qatari LNG intended for the United States is coming here because our price is three times the US price, or heading for Japan, Korea and China, where it is six times the US price. Clearly, these disparities will not last. World prices will fall.
Already, the Nigerians and the Dutch have had to give up pipeline gas prices linked to the oil price. The Russians are being forced to follow.
Lord Gardiner of Kimble
My Lords, I apologise to the noble Lord and I am very conscious that he has had to deal with some interventions. But we are getting to a point where he is receiving the amount of time that is for openers and winders. The Companion refers to 15 minutes for other speakers and 20 minutes for openers and winders. I apologise to him but I thought that it was only courteous to the rest of the Committee.
Lord Kerr of Kinlochard
I apologise to the noble Lord. I did not see on the Order Paper any reference to a time limit.
Lord Gardiner of Kimble
That is precisely why I have referred to the Companion for those timings for those debates that are not subject to a time limit.
Lord Kerr of Kinlochard
Very good. I have a paragraph to go. May I complete my speech? I bow to the opinion of the Committee.
Lord Kerr of Kinlochard
Thank you. The Russians are being forced to reduce their prices too. Shale is extremely bad news for Gazprom, which is why Mr Putin plays up the environmental fears. The intriguing table at appendix 7, which shows that gas and nuclear are already the best buy, underestimates the extent to which gas will be the best buy. The data are DECC data, and therefore probably reflect the Government’s view that in the medium term gas prices are likely to remain at about their present level. I am pretty sure that they are actually going to fall, and therefore I think that the advantage of gas is understated in that fascinating table. I do not think it is just a transition fuel; it is a destination fuel. It is transformational, as was said by the noble Lord, Lord Giddens.
I am glad that the Commission is producing its framework proposal or communication, because I understand from the Commission that the purpose is to encourage the member states to get on with shale. That is a good idea, although I am sure that we will get on much more slowly than the Americans have done. I hope that the Government will give full support to the Commission. I am a little surprised that the committee was so cagey about shale gas, which seems to me to be a real game-changer.
The Earl of Caithness
I thank the noble Lord, Lord Carter of Coles, for his excellent chairmanship of the committee. I also thank our clerk, special adviser and secretary for all their hard work and for the mounds of paper that they got to us in good order and on time.
Decarbonisation is hugely important. The most effective areas in which we can decarbonise are electricity, heat and transport. We looked at one of those, electricity, which is important in its own right and increasingly so because more and more heat and transport are becoming electrified, so we were quite right to look at that market. The committee spent a lot of time looking at the common agricultural policy. When we turned to energy we faced a very different scenario, because there was the inherent problem of the single market and member states deciding the energy mix. I agree with the noble Lord, Lord Giddens, who said that that will hamper investment because there is an inherent clash. As the noble Lord, Lord Kerr, just pointed out, there is a limit to what the EU can do—or indeed, in his view, what it should do.
When we looked at the evidence and interviewed witnesses, one thing that struck all of us on the committee was how wrong all the forecasters had been in the previous 10 years. I would put my money on the current forecasters being equally wrong, which makes it a much harder report to write. It also makes it very much harder for the Government and the EU to get it right for the future. The situation is extremely difficult but I firmly believe that the Government are right in going for the broadest possible energy mix. That is the safest way of getting at least some of the right solutions.
Thankfully, much of what I wanted to say has already been said, which will be a relief to the Committee. Yes, the ETS needs an overhaul. Backloading is a short-term sticking plaster, not a solution.
The CCS is a continual problem and I fear that I am very pessimistic about it. I look forward to seeing the results of the research that we are doing, but there should be far more concrete examples of the commercial viability of CCS if it is going to be a power in the future. That is a problem for much of the EU because countries have built CCS into their estimates for meeting their climate change figures, and the UK is particularly noticeable on this. If we do not get CCS, the figures that we are talking about will not be met. There is of course the problem that the powerhouse of Germany is against CCS.
It is important that we have a decarbonisation target for 2030. I ask my noble friend what progress has been made towards the 40%. My niggle and my concern is that if we in Europe go too hard on such targets and growth begins again, what is going to happen to our heavy CO2 users such as steel and cement producers? Are we just going to import those products? In which case, we will have carbon leakage: we will not be producing it here, but they will be producing it elsewhere in the world and we will just be buying the finished product.
A lot has been said about interconnectivity; indeed, my noble friend Lady Parminter raised it last week. We looked at it but perhaps not in detail, given the time. More could be done with community schemes to try to ease the problem of interconnectivity. Interconnectivity is not the be-all and end-all; far more can be done locally that would reduce the necessity for it.
It is clear that invention and research are the way forward and will help us to sort out the problems. One thing that I think struck all of us was that if someone could invent a sensible, economic way to store electricity, there would be real hope because we could start to manage the problem. I would love to be the person who did that because one would have a worldwide market for that. We need new investment but, again, that is not the only way to tackle this. We need to reduce demand and keep up energy efficiency. Energy efficiency in houses is the best way of reducing one’s energy bill.
New products have been talked about quite a lot today. Have the UK Government or the EU looked into their viability? By that I mean—I am looking at it from a different point of view from most other people—the cost of a new energy as a proportion of the value that we derive from it. It is called the economic return on energy invested. Much depends on where the resource is but, in simple terms, there is no point in producing 100 barrels of oil, or its equivalent in other forms of energy, if 100 barrels or more are consumed in the extraction process. That would not make sense.
Let us stick with oil. Oil was extracted in the 1930s at a rate of more than 100:1, so for one barrel of oil you could produce 100 barrels. That was a very good return and oil companies were very profitable. By the 1970s, that had reduced to 30:1. The new wells today are about 10:1. In stark contrast, nuclear is estimated to be more than 60:1, so on that basis it looks a much better source of energy.
I turn to shale gas. Yes, we might have written the report somewhat differently had we known of the massive reserves just referred to by the noble Lord, Lord Kerr, but we did not have that information when we wrote it. The estimation of the economic return on energy invested for shale gas is only 5:1. That just does not make it economic in Europe. It will not be the quick fix that some of us hope. At a 5:1 ratio, it would absorb one-sixth of GDP, which would make for a very different future. That would have huge implications for the consumer. It is important that the Government and the EU look at the figures. The figures I have been quoting came from a Tullett Prebon report called Perfect Storm: Energy, Finance and the End of Growth.
On the efficiency of existing reserves and how they are utilised, I was interested to read in the newspaper today as I came down on the plane from Scotland that the oil rigs in the North Sea are now standing idle for more than 140 days a year, which is a substantial increase on what was happening 10 years ago. It just goes to prove that, although you can have huge reserves, there remains the question whether you can get those reserves out economically.
Any new development needs public support—the noble Lord, Lord Whitty, touched on this and was absolutely right—and we mention it in paragraphs 176 to178 of our report. Everybody knows that there is a problem, but a lot of people are against every solution that comes forward. We might have shale gas at Balcombe, but it saddened me to see children on the front line with banners. It is their future that we are talking about. We will all be pushing up daisies pretty soon—well, within reason; I still think that I am one of the youngest in the committee—but if young children are protesting against even research into what could be under the ground, let alone the extraction, there could be a problem. We had problems in Scotland where the new transmission lines are going across some lovely country; we have problems with PV panels in Suffolk. It is a huge problem that the whole of Europe has got to get to grips with. The noble Lord, Lord Carter of Coles, reminded us of Germany. It solved the problem; it did not put a high-power transmission system down the centre of its country; it just exported the system through its neighbours to get it from the north into the south. That might work for Germany but it does not work for everyone, and it certainly upset the markets in those countries through which the pylons went.
We now have a constant clash between the generators, people and the environment. It was interesting to read that, after all the windmills that have been built in Scotland, despoiling quite a lot of lovely countryside, the Scottish Government have announced that there will not be any windmills in national parks. Those in Scottish renewables say, “Oh! This could be the end of the renewables era; this is going to set us all back”. You have the big six companies exploiting the situation that we find ourselves in to get the maximum benefit for future contracts. It is not easy for any Government to be in that position where there is so much lobbying and we know that, as we move from one system to another, everyone will try to exploit it.
I move back to the UK to put two concluding questions to my noble friend. First, I heard on the radio this morning that a deal has been struck between the EU and China on PV. Can she say anything to us about that? What implications might it have for the manufacturing of PV in Europe? No one seemed to have an answer or to quite know the figures, so any further information might be helpful.
My second question, again relating to the UK, came from the Energy and Climate Change Committee report, which indicates that £112 goes on our energy bills for social and environmental problems. That is about 9%, and the figure is going to go up to 33% in 2020. In view of the concern of the noble Baroness, Lady Worthington, for the environment and her interest in climate change, and of what she did for climate change, I now call that bit on my energy bill the “Worthington whack”. Now I have personalised it for her, and I can pay it much more happily when I know that. Does the Minister agree with the committee that this should be a tax rather than going on energy bills?
Baroness Howarth of Breckland
My Lords, as the system that takes names for debates failed to capture my name, it can be no surprise that I have some scepticism about carbon capture, which seems to be rather more complex. I apologise for speaking in the gap but thought that I would be speaking on the list. By this point, of course, many of the points that I would have made have been made.
I am not a technician in this area but wanted to say a bit about the behavioural issues that, with all the complications that we have and the formidably intricate interrelationships between the hard sciences of energy, profoundly difficult economics and the uncertainties of Europe, may well be seriously compounded just by simple, human behaviour. The straightforward need for consumers to heat their homes and for energy to be available for all the other activities that make for civilised living, including employment, recreation and, as the noble Lord, Lord Whitty, was pointing out, producing more food, will become more politicised as prices increase, particularly if supplies become uncertain. During our considerations I heard more than one sceptic express the view that the lights might go out by 2017 and I have heard it said again in this debate.
The Government acknowledged in their response to our report that the EU must urgently implement its third internal market package in order to reduce prices to consumers, promote cross-border trade and provide incentives for efficient investment. However, the language—I come back to this as a social scientist—is that of uncertainty, “may” and “believe”. For example, they say:
“The Government believes that the 2030 framework—properly designed and implemented—can”,
drive choices in EU economies. The Government may well engage with others to ensure that the 2030 framework provides the right environment to secure investment, but what happens if that investment is not forthcoming? Is there another plan to secure supply?
Faced with consequential climate change, it has become necessary to engage the public in a debate about changing their lifestyles. Changing human behaviour is not easy, especially when understanding is limited. In our report we acknowledge that public concerns can be a significant obstacle to development. We heard on a number of occasions about Germany, where the issue was that there was a need to put a grid from north Germany to south Germany. It is public opposition that has delayed that, and that is the key point about that example.
A similar reaction is building up to the possible development in the north of England and some EU countries of the extraction of gas from shale, even before plans have been considered. There is a real need for urgent communications to show the benefits of some of these developments if they are not to be frustrated before they are even formulated.
There is a similar reaction in renewable energy, where significant growth rates are bringing down costs. We understood from witnesses that a number of onshore renewable resources, including wind, could be close to competitive but public opposition and strategic uncertainties impeded this. I am having to truncate my speech because of the time constraint.
It is not only attitudes among the general public that impede innovation. We were concerned that the SET plan is at risk of failing due to inadequate funding and a lack of clear strategy. It is understood that the Commission intended to progress this through an integrated road map and action plan. The committee was pleased to hear that DECC was already working closely with other member states to inform the development of these and seeking to align member states’ programmes more closely to delivering the SET plan objectives.
The fact, however, is that real progress has “remained elusive”. We note that the Government were hopeful—another “hope” word—that a new EU-level research programme and development funding would provide momentum in the SET plan implementation. Is there a clear timetable for this? Again, what will happen if significant private sector investment does not materialise?
My own learning has increased substantially due to my involvement in this work, including the complexities of the science of fuels. Throughout, it has been clear to me that the social science, the public acceptance of change, the way in which the media handle these issues, the communication of complex concepts in a comprehensible form and overall transparency are what will make plans succeed or fail in the long run. Does the Minister agree that without public acceptance we will simply not keep the lights on, and that that would lead to public disturbance?
Baroness Worthington
My Lords, I am delighted to be able to wind up this debate for the Opposition. I also extend my congratulations to my noble friend Lord Carter and to the many members of EU Sub-Committee D who participated today and who contributed to this excellent and very timely report. As has been mentioned, we have been locked in committee for weeks—we have our ninth session tomorrow—and it is quite nice to have a slight change of perspective and to look at things from an EU angle.
Many noble Lords have mentioned the energy trilemma and the challenges that it poses. It is even more of a complicated puzzle when you add the EU dimension. A number of noble Lords spoke very eloquently about the particular challenges of trying to achieve any degree of coherence across 28 member states. What struck me in this debate was the paradox between the current set of member state-driven policies, which resulted in a huge diversity of energy policy and an apparent lack of cohesion, and a much more aspirational vision, which was set out very eloquently by the noble Lord, Lord Cameron, of a much more integrated Europe—a Europe that can capitalise on and exploit all its natural advantages in order to create a security of supply that is affordable and low-carbon. We have a vision of how it could work but we are also very well aware of the limitations of how it is currently working.
How can we progress towards that vision and try to alleviate some of the inherent difficulties? It is absolutely clear from the contributions we have heard today that there is a strong sense that we need a clear plan and that we should stick to it; that this should not be subject to the winds of fortune, to the degree that is feared at the moment; and that there should be a long-term vision.
That brings me on to one of the key recommendations the committee made: that targets should be set for 2030. In a very welcome contribution to the debate, the report is quite clear in stating that there ought to be a 2030 target for emissions. Indeed, I am sure that the Government would say that they support that. Where there is a difference between the committee’s recommendations and the Government’s current policy is on any sub-targets that relate to that time period. We have heard quite strong arguments for why targets at a lower or subdivided level are important to give investment signals.
I have looked in detail at the Government’s response to the committee’s recommendations and I am slightly disappointed that, while the Government provide quite a lengthy description of why a renewable target might not be necessary—indeed, similarly, they are not persuaded by an energy-efficiency or demand target—the committee’s recommendation that a decarbonisation target should be considered is not really addressed. Perhaps the Minister can say a few words about why, having rejected the need for a renewables target for 2030—many people would perhaps challenge the rationale for that but let us accept it on its surface merits for the moment—there is not more about the alternative of a decarbonisation target for the electricity sector for 2030. I do not want to rake over old arguments, but it is quite clear that in the UK we are very strongly supportive of the setting of a decarbonisation target for 2030 and we would like to see it—or at least a commitment to it—in the Bill.
I do not think that the Government are quite as supportive. I found this sentence in their response, in relation to paragraphs 121 and 138, quite interesting. The assertion is that,
“in the UK Contracts for Difference will provide individual power sector investors with high levels of long-term certainty and we plan to have the option to introduce a decarbonisation target for the power sector for 2030 if additional certainty is needed”.
That is quite weak. The words are far less emphatic than those of the Secretary of State in person. He stated that the Energy Bill would set a decarbonisation target and that there was no need for additional criteria to be met. However, here we have a qualification being added. I would like some clarity from the Minister on that. It seems to be a step backward.
I will take this opportunity to try to elicit a response from the Secretary of State. I wrote to him on 3 June and congratulated him on announcing targets for 2030. I also asked a few questions: not least, whether he would clarify some of the detail in relation to that announcement. I have not yet had a response. Perhaps a message could go out that it would be very good to have a response to my letter.
Many topics have been covered and I am conscious that we have had a very full debate. I do not wish to detain the Committee much longer. However, I will say a few words on some of the topics that have been covered. When we discuss EU policy on energy, the Emissions Trading Scheme cannot be ignored. It was introduced as the flagship climate-change policy of the European Union. Considering the widely different policies across Europe on energy, it was something of a success to introduce a single policy, accepted by all 27 member states and adopted also by Norway and Switzerland. It is currently functioning. It has had its teething troubles—let us not be shy about admitting it—but it is a very harmonising policy.
It is a matter of regret that the scheme has been hit by a number of problems associated with its inherent lack of ambition. The targets were set far too generously. This was severely compounded by the recession, and the fact that emissions have fallen far faster than anyone could have predicted. A number of noble Lords have said that predictions about energy tend to be wrong. This is an example of where they were very wrong. Unfortunately we did not have a response mechanism built into the policy that enabled policymakers to take swift action to correct it. We have very low prices and we do not have a carbon floor price or a carbon ceiling price. That was a decision that was taken.
As was mentioned in the debate today, other emissions trading schemes are choosing different routes. It is notable that the Californian scheme, perhaps recognising one of the failings of our system, put in a strategic reserve to enable prices to be kept in a corridor, with a cap and a collar. It is perhaps time for the EU to swallow a bit of pride and accept that the scheme was not perfect the first time around and that we could do with some reform. I note that the UK Government are committed to trying to achieve that reform and have stated that they want proposals to come forward from Brussels by the end of the year. That is very welcome. We hope to see them passed into law as soon as possible. However, there is still a question on timing. We might get proposals from Brussels in 2013, but it is unlikely that they will be legally signed off before the elections in 2014. Then it will be for the new Commission and Parliament to debate this once more. I share the Government’s passion for this but I do not fully support their optimism that it will be as easy as we have been led to believe by the answers we have been given.
There is an added complication for the UK. We have a system of carbon budgets introduced by the Climate Change Act. I am grateful to the noble Earl, Lord Caithness, for attributing all the costs associated with a low-carbon economy to me. I am afraid that I cannot and will not take credit for that. The Government have done a fair amount themselves, in particular by introducing the carbon floor price, which I never recommended and about which I have serious questions. However, I go back to carbon budgets. As the noble Earl said, I was involved in passing the Climate Change Act, which was based on the concept of carbon budgets. We proposed that they should be least-cost and flexible. The idea was to get the Treasury involved in managing them, and to create assets and liabilities out of emissions and emissions reductions. We are not there yet, but that is the philosophy.
Anyway, we have what I hope is a robust system that is intended to give investor confidence, but it is subject to a review. That review was never part of the plan—it crept in when the third carbon budget was accepted—but is timed for 2014. The reason why I am dwelling on this point is that, as we have mentioned, the EU reform of the ETS is not likely to be agreed until 2015, so to have our review a year before Europe has agreed its plan seems to be out of kilter. That will just add further complexity and confusion. If I have a question, it is really this: could we hear more about the rationale for reviewing our system of carbon budgets in 2014, when it is widely accepted that Europe will not have its plans sorted out until 2015 regarding both the energy and climate package and the reform of the ETS, which I am sure will form a part of that?
I turn to CCS, which naturally leads on from the ETS because the ETS was supposed to be the Europe-wide policy for supporting CCS. I am quite sad that I was not able to attend any of the committee’s evidence sessions because I am sure that it received many interesting contributions. I know CCS from a UK perspective but I am equally troubled by the fact that it has not taken off at the EU level. I was grateful to the report for trying to identify some of the reasons why that is so, the failure of the ETS to provide funding being the primary one. I do not think it is as simple as that, though; as the report alluded to, Germany’s opposition to it and the lack of public support have also dented its progress.
A number of things are being considered in the EU right now regarding the ETS directive. They include the application of an energy performance standard similar to the product standard that the EU has shown that it can manage quite effectively for vehicles, the idea being that perhaps now the time has come for product standards for power stations as well. There is even talk of a new form of support for CCS in the form of mandatory CCS certificate trading as a potential additional support mechanism. It would be interesting to hear what the Government’s thinking is on the potential for additional measures for CCS at the EU level.
The noble Lords, Lord Giddens and Lord Kerr, have alluded to the claim that the failure of CCS and the ETS has led to a return to a quite substantial reliance on coal. It will come as no surprise that this is an issue that I care about, as it affects not just Germany and indeed Poland, which has always been and continues to be heavily reliant on coal, but the UK. Policies are in place in the UK to try to ensure that we do not see a continued long-lasting reliance on coal. I hope that that will continue to be monitored carefully to see that there is no swing back to more coal, mothballing of more gas or life extensions being applied to our existing coal stations. This is a gap in our policy at UK level and indeed at European level, and it needs careful monitoring.
There are many other topics, not least shale gas, that I think we will have a chance to debate tomorrow on the Floor of the House, with a topical Question tabled for then. It is clear to me that sometimes people and mining do not mix, and we might be about to discover quite how they do not mix in parts of England. I do not think that anyone can know for certain whether shale gas is the nirvana that is claimed and can provide the low-cost, affordable, low-carbon energy that we all hope that it can, or whether it will be held up even almost before it gets to start by a lack of public support. It is another of the great uncertainties of energy policy, and it is one that will no doubt develop over time—probably quite quickly, knowing how these things tend to operate.
My final thought—I notice that I am slightly over time, so apologies for that—is that if I could politely ask the committee to consider a future topic, it would be that environmental regulation carried out by the EU has been shown to be successful. The large combustion plant directive and the industrial emissions directive are worthy of further study. That could be tied in with the CCS directive currently being discussed, along with a look at the non-market regulatory interventions into the energy market that are having a big impact. They tend not to be really dealt with or understood in great detail. I must confess that trying to get to grips with the IED and all its details and flexibilities is quite a task.
Perhaps the committee might consider taking some evidence on those important energy-related regulatory instruments, to complement the work it has done on the ETS and other policies in this report. I for one would find that incredibly helpful. That is no reason to do it, but I think that there are some good cases for seeing what Europe has done in a regulatory way. This could be compared with what has happened with vehicles, vehicle standards and product standards, and then seeing how that could translate across to energy. We have had a fantastic debate. I apologise for speaking slightly over time. I very much look forward to hearing from the Minister.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)
My Lords, I thank the noble Lord, Lord Carter of Coles, for enabling this debate, and I thank all noble Lords for their well thought-out and measured debate, which has been really informed. The Government very much welcome the committee’s report, which was well informed and laid out. The noble Lord, Lord Carter of Coles, asked me to pass on my appreciation to the Secretary of State for giving evidence to the committee, which of course I will happily do.
The report represents an important contribution to the debate on EU energy policy. It does a valuable service in raising the central challenge of ensuring that our future supplies of energy are low-carbon but also secure and affordable. There are a number of questions that I need to respond to. In advance of running out of time, I hope that noble Lords will accept that I will write on any outstanding questions that I fail to answer today. The report rightly asserts that investment in our future low-carbon energy infrastructure,
“could make a material and enduring contribution to European economic recovery”,
enabling our economies to take advantage of opportunities for green growth and maintaining our competitiveness.
Domestically, we are enacting the Energy Bill to ensure that the conditions are right for investment in infrastructure and technologies for both the low-carbon transition and security of supply, while delivering this at the lowest cost to the consumer. The Energy Bill sees the biggest reforms to the electricity market since privatisation. As we move to more and more sections of our infrastructure being electrified, the mechanisms that we are introducing will ensure that we remain leaders in an increasingly competitive global market.
The Treasury estimates that the level of capital investment in the energy sector this financial year will exceed £16.5 billion, and our low-carbon sector has seen significant growth in recent years. As the Secretary of State recently told the committee when speaking about the Government’s position on the EU’s 2030 framework:
“one reason that we wanted to come out early was to encourage others to be equally ambitious. If we had held back, we could not be an influencer”.
The Government are working with our European partners on a wide range of issues in pursuit of our long-term energy goals, but at the heart of our strategy is a clear and consistent call for action on two fronts: first, full implementation of the internal energy market, delivering well functioning gas and electricity markets that will contribute to EU growth and competitiveness; and secondly, a clear and credible long-term vision for EU energy and climate policy, providing predictability for investors and setting out how Europe will meet the challenges of decarbonisation while maintaining competitiveness and security of supply.
The Government are acutely aware of the challenge but also of the opportunity, and we are taking the lead in Europe. This was demonstrated recently by the Secretary of State’s work with his green growth group, which led to the joint statement by EU Ministers in support of backloading measures for the Emissions Trading Scheme. At the May European Council, the Prime Minister played a key role in ensuring the agreement of heads of government to a package of actions to facilitate investment in energy infrastructure. We support the implementation of the EU’s third energy package, and the closer integration of European electricity and gas markets.
We were the first member state to set out our vision for the EU’s long-term energy and climate policy in the Secretary of State’s speech in Brussels on 18 June, and in our response to the European Commission’s Green Paper on the 2030 framework for climate and energy policies. Our vision is for an ambitious emissions reduction target for 2030. We will argue for the EU to set a 50% target for greenhouse gas emissions reductions in the context of a global deal, with a 40% unilateral target for the EU, a point made by the noble Lord, Lord Carter, in his opening remarks. Equally importantly, this must be delivered in a flexible, technology-neutral way, supported by a robust and reformed emissions trading system, so that the EU can decarbonise in the most cost-effective way possible.
An EU-wide framework for 2030 will be essential in creating investor certainty and setting the right conditions to attract the unprecedented sums needed. The framework should be designed to achieve the most cost-effective emissions reductions, allowing member states to decarbonise in a way that best befits their national circumstances, providing flexibility to respond to technological change and encouraging the development of a full range of low-carbon technologies. This includes nuclear and CCS, which could make a significant contribution to reducing greenhouse gas emissions. I recognise the committee’s strong support for this technology, which matches the Government’s own commitment.
Energy policy inevitably involves a trade-off between decarbonisation, security of supply and affordability. A fundamental priority for the Government is to ensure that the UK continues to benefit from secure energy supplies. To this end, we are implementing the capacity mechanism to bring forward investment in gas generation, which will continue to contribute to our electricity mix over the coming decades.
The capacity market will cost-effectively ensure security of supply by competitively establishing a price for capacity and allowing the market to bring forward the right mix of reliable and flexible capacity. The market is not expected to change the general picture that we see of a move away from coal. Coal plants will continue to close because of old age and environmental legislation, and we do not expect any unabated coal to remain operational by 2030. The Government are firmly focused on delivering the policies and frameworks, at both domestic and European levels, that will unlock the investment that we need in our energy infrastructure.
I turn to the points raised during the debate. As I have said, if I cannot answer them, I shall write to noble Lords. The noble Lord, Lord Carter of Coles, and a number of other noble Lords asked how the Government’s EU policy would attract investment. An ambitious greenhouse gas target for 2030 combined with a functioning Emissions Trading Scheme will give a very strong signal to investors. This approach is echoed in the response of the Institutional Investors Group on Climate Change to the Commission’s Green Paper on a 2030 framework. The noble Lord, Lord Carter, and others also asked what the Government’s position was on structural reform of the EU ETS. As I have said, we need urgent reform of the EU ETS to reduce the surplus of allowances in the system. We are analysing detailed options for structural reform and are working towards a more detailed government position, which I hope to bring forward in the autumn.
The noble Lord, Lord Carter, and others asked whether we supported the idea of an EU-wide carbon price floor. The UK carbon price floor is the first step in our electricity market reforms. It does not cover every sector in the EU ETS and is a separate, UK-only tax. There needs to be a clear justification for taking fiscal action at EU level rather than national or local level, but the UK is not alone in pursuing wider decarbonisation policies beyond the EU ETS, with the majority of EU countries pursuing policies to encourage investment in low-carbon generation.
The noble Lords, Lord Cameron and Lord Whitty, and others asked how the Government were supporting interconnection at EU level. The Government fully support greater levels of interconnection, as my noble friend Lady Parminter said—we debated this heavily in last week’s Committee on the Energy Bill. We are working in the EU to support a number of new interconnection projects of common interest. These projects will have access to favourable planning and regulatory treatment. We continue to discuss projects with other Governments as appropriate.
My noble friend Lord Maclennan asked whether the Government should consider a standing committee of the Council to exchange views and update member states on domestic issues affecting energy policy. That is an interesting suggestion which is worthy of further consideration, but such mechanisms already exist at working level—for example, the electricity and gas co-ordination group. There are usually around five Energy Council Ministers meetings each year, so a number of things are already going on. Still, I will take that matter back and give it further thought.
The noble Lords, Lord Carter and Lord Whitty, my noble friends Lady Byford, Lady Rawlings and Lord Caithness, and others asked how we could support the development of CCS at European level. The Government believe that the priority for CCS is for the European Commission to work with member states and industry to deliver the first full-chain European projects. In our response to the Commission’s recent communication on CCS we advocated that there should be reform of the ETS and an ambitious 2030 greenhouse gas target; that existing funding should be made available to CCS; and that there should be support for CCS research, innovation and development. It is true that there has been a recent increase in coal and lignite generation. However, a study commissioned by the Government has shown that the economic outlook for coal is poor. For example, in Germany three major energy companies have announced an end to new coal.
The noble Lord, Lord Cameron, asked what the EU is doing to support research and innovation. Total spending on energy research and innovation is likely to exceed €6 billion between 2014 and 2020 under the Horizon 2020 programme. The programme will bring all EU research and innovation funding into one place for the first time, with a focus on turning scientific breakthroughs into innovative products and services. The programme’s total budget of €71 billion will support research across every sector, not just energy. Energy spending under the programme will be more than double that in the previous period.
The noble Lords, Lord Giddens and Lord Kerr, and others have said that the EU ETS has not worked. Of course, we understand that there needs to be real structural reform to drive investment in low carbon. We are analysing options put forward by the Commission to this effect and aim to reach a firm position. As I have said, I hope to bring back the results of the analysis later in the year. We have called on the Commission to produce legislative proposals by the end of the year.
My noble friends Lady Byford, Lady Rawlings and Lady Parminter, and the noble Lord, Lord Giddens, and others mentioned shale gas. There is of course great potential in UK shale gas and we are keen to see if it can be commercially produced. Existing EU legal frameworks are adequate to ensure environmental protection. There is a need to ensure that we do not unnecessarily restrict sustainable development of shale but I agree with noble Lords that it is really important that we have public consent and that local communities are properly informed, and that they are able to see the benefits of the exploration. However, that is at its very early stages and, therefore, it is right that we continue to be fully engaged with local communities and understand the concerns that they will raise.
The noble Lord, Lord Giddens, asked about the Government’s views on Germany, to which I think I alluded briefly. It is not for our Government to comment on other country’s reforms, although it is clear that the UK and Germany are facing similar challenges in reforming their energy systems. The UK’s priorities are to provide secure and affordable energy as we decarbonise, which our electricity market reforms aim to ensure.
I should like to inform the Committee that I have been given figures which indicate that new coal projects in Germany face a difficult set of political and economic conditions. While there are six coal and lignite projects currently in planning, two have already been abandoned. An additional 15 large coal and lignite generation projects have been put on hold, postponed or abandoned over the past five years as a result of steeply rising capital costs and fierce local and environmental opposition to coal. Sometimes, having to look at it in greater detail gives a more informed picture of what is going on in member states.
My noble friend Lord Caithness asked what progress the Government had made in Europe towards a 40% greenhouse gas target. One of the reasons that the Government set out our position on a 2030 greenhouse gas target was to encourage others to be equally ambitious. The Secretary of State has set up the Green Growth Group of like-minded member states that are ambitious on climate change. Most member states are still considering their positions and we expect to have a clearer picture in the coming months. In the mean time, the Government are working hard to make the case for 40%.
My noble friend also asked whether extra money for environmental and social policies would go on to consumer bills or be a tax. Of course, as my noble friend knows, taxation is a matter for the Chancellor and his question is way above my pay grade. But we are focused on policies to deliver a low-carbon transition and security of supply at the lowest possible cost to the consumer.
My noble friend also asked about PV in China. I think I need to write to him on that because the response needs to be a little more detailed than I am possibly able to give to the Committee today. But he is right to raise the point about support for particular technologies. Since we remain uncertain about future costs and prices, we need to be flexible to allow the markets to pursue the full range of low-carbon technologies.
The noble Baroness, Lady Howarth, asked if other countries were looking at our electricity market reforms and adopting them. Of course, different circumstances apply to different countries. However, lots of countries have shown an interest in what we are doing here. We are of course influencing them by taking a lead in many of the areas that I know the committee is very interested in, and I am sure that they will take a keen interest in the committee’s report, which is very informative.
The noble Baroness, Lady Worthington, asked about the decarbonisation target. We had a lengthy debate on this in Committee. As I said then, and will say again today for the benefit of the members of the committee, the noble Baroness is right that we need to look at decarbonisation and how we do it. The Government are setting a target range in 2016 in the context of the fifth carbon budget, but I know that we will have further debates on this and it would be wise to allow those debates to happen during the passage of the Energy Bill.
The noble Baroness also asked why we were reviewing our carbon budgets in 2014 when EU decisions are not going to be made until 2015. The European Council is scheduled to consider proposals on EU climate and energy packages for 2030 in March 2014. It is crucial that the EU takes a position on this in 2014 in advance of the global climate talks in 2015. The EU’s long-term trajectory is also indicated in the Commission’s low-carbon road map to 2050, but the noble Baroness is right that there is a need to set carbon budgets with a view to what other economies are committed to.
I have been told that I need to wind up. In conclusion, the Government will continue to work with investors, stakeholders and our EU partners to drive the low-carbon transition and deliver secure, sustainable and affordable energy. This has been a most illuminating and informative debate. I will read Hansard very carefully and if I have missed anything in responding to noble Lords, I will undertake to write. I look forward to the committee’s continued valuable contributions to the debate on the future of our energy policy.
Lord Carter of Coles
My Lords, I conclude by thanking all noble Lords for their very eloquent and extremely well informed contributions. The debate demonstrated the breadth of issues within the policy area. It touches all levels of government and every single individual.
The contributions got off to a cracking start when the noble Baroness, Lady Rawlings, took us straight to fracking. I am in the camp that rather approves of the word “fracking”. However, “subsidiarity” is a separate matter to which we should return. My noble friend Lord Whitty commented on the failure of the single market and the fact that too many changes in policy were detrimental to investment going forward. The noble Lord, Lord Maclennan, made some very telling points, but the one which stuck with me was that the EU had not made a good fist of its energy policy. He put it very simply, and it points to the fact that we need to do something about this.
The noble Lord, Lord Cameron, made several very powerful and well informed points. I will take away his image of the grid in Europe becoming like the cell phone. I fervently hope that it will happen. It was a wonderful analogy and we must do everything we can to make it happen. As always, I learnt something from the noble Baroness, Lady Byford. She found that the US data put us at third in energy security, and I am going to scurry off immediately and read that report. She also made a very telling point about information on the return on investment in renewables, which we should have looked at sooner.
The noble Lord, Lord Giddens, made the point very powerfully that the EU needs to do something at this time of economic chaos, and this should be one area of it. I was very taken with the Minister’s point that we should look to Germany because there are things to learn. We must learn from every place we can. The noble Baroness, Lady Parminter, with her usual clinical focus went straight for the regulatory framework for shale gas and she made a very important contribution.
The noble Lord, Lord Kerr, landed a characteristically elegant punch on the matter of oil, which is absolutely right, as is his knowledge of the treaty. I disagree with him about two things. The whole concept of state aid seems to me to need examining. The idea that a state in a market can subsidise one generator of power to the disadvantage of the nation seems rather strange. The whole idea that we should not have consumption targets seems to be something that we could debate another time.
The noble Earl, Lord Caithness, always finds a good point. He made a point about forecasts, and one thing is very clear. All the evidence we have had over time suggests that forecasting is incredibly difficult. Even in the life of our inquiry, and subsequent to it, the shale gas forecasts were revealed to be incredibly wrong. The noble Baroness, Lady Howarth, made a point about human behaviour. Her distinction between the need for pure science and social science was incredibly well made, and is something that all politicians seeking to drive change must pay attention to. How do we carry people with us? How do we balance popular accord with the need to go forward?
Very importantly, my noble friend Lady Worthington brought her experience in this whole area, particularly her understanding of CCS. Her suggestion of further inquiry for the committee obviously will be taken away. Above all, I thank the Minister for setting out the views of the Government. It was most helpful. I return to our thanks for the response to that report. I also thank everybody who gave evidence.
I thank our specialist adviser Professor Michael Grubb, the two clerks to our committee, Aaron Speer and Kate Chapman, and Alistair Dillon, our researcher. They all displayed great humour, skill and diligence in helping us with this report. This debate on EU energy and climate change is a critical point, and I am sure noble Lords will agree that the delay and the failure to do things now will cost us dearly in the future. At the risk of parodying John Donne, I hope that when the energy bell tolls it does not toll for us.