Energy Bill
Baroness Verma
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma) (Con)
My Lords, I shall speak also to the other government amendments in this group. These changes provide important clarifications to the implementation of contracts for difference and in addition respond to a number of recommendations made by the Delegated Powers and Regulatory Reform Committee, for which the Government are very grateful. This group also contains a number of minor but essential and consequential amendments.
Amendments 16 and 38 on contracts for difference give the Secretary of State the power to issue and revise standard terms for contracts for difference, subject to consultation and under an explicit duty to consider the matters listed in Clause 5(2), and to publish those standard terms. Amendments 17 and 19 enable provision to be made for how the system operator will notify the CFD counterparty that an eligible generator has been allocated a CFD and, in turn, how the CFD counterparty is to offer a contract to an eligible generator.
Amendment 18 provides for the Secretary of State to set out how the system operator will run the allocation process, in particular through an allocation framework, which will cover such areas as: the process to be used, such as the competitive process in the event of a constraint; the timing of allocation rounds; and any targets, such as minima and maxima, which the system operator will need to consider. The Government are seeking to include this sort of provision in an allocation framework, as opposed to in a statutory instrument, because these are issues that might need to change at short notice in order to manage costs and to ensure value for money along with the smooth functioning of the allocation process. However, it is important to note that the allocation framework will not be free-standing. Provision for an allocation framework will need to be set out through regulations, which will be subject to the affirmative procedure.
Amendment 20 gives the CFD counterparty the power to agree minor and necessary modifications to the standard terms, prior to contract signature. This ensures that the CFD regime is open to the widest possible range of eligible generators, while maintaining a level playing field. Amendments 13, 14 and 15 are consequential amendments, recognising that Clause 10 now refers only to contracts for difference that result from bespoke negotiations with the Secretary of State. This is because powers for contracts for difference that result from allocation by the system operator now have their own clause.
Amendment 21 enables provision to be made in regulations to enable calculations or determinations required by the regulations. Such calculations or determinations are to be made by specified persons—for example, the CFD counterparty. Amendments 6, 10, 26 to 37 and 39 are all consequential to the principal amendments that I have set out.
Amendments 8, 56 and 44 move most secondary legislation relating to contracts for difference, investment contracts and the capacity market to the affirmative resolution procedure, increasing parliamentary oversight in accordance with the recommendations of the Delegated Powers and Regulatory Reform Committee. Amendment 56 also goes beyond the committee’s recommendations by making all secondary legislation in Parts 1 and 3 of Schedule 2 subject to the affirmative procedure. This ensures that the provisions in Schedule 2 are consistent with the equivalent provisions in Chapter 2 on contracts for difference.
Amendment 40 also responds to the committee’s recommendations by preventing the authority—Ofgem—from conferring additional functions on itself when exercising the powers under Clause 28(3) to make capacity market rules, except with the consent of the Secretary of State. However, since tabling this amendment, the DPRRC has provided a further report and makes a recommendation in relation to this, which I will be considering carefully ahead of Third Reading.
Amendments 9, 45 and 57 make explicit provision that regulations made under contracts for difference, the capacity market and investment contract powers will not be treated as hybrid. I have tabled these amendments because the secondary legislation implementing EMR may specify determinations made by Elexon for the purposes of settlement of payments under these powers. As such, the regulations may potentially be considered hybrid and subject to investigation by the Hybrid Instruments Committee. The Government do not think that this is necessary or appropriate, as the existing duty to consult before making regulations will ensure that Elexon’s private interests are fully considered. My department is already working closely with Elexon, which has also confirmed that it has no objections to these amendments. To avoid the risk of delay to the programme and the investment that it will bring forward, I have tabled these amendments to make it clear that no hybridity will arise.
Amendments 11, 12 and 58 are minor drafting amendments with no impact on the substantial legal effect. They have been tabled in order to avoid any perception that we are giving the counterparty new powers to recover moneys owed to it. Amendment 46 is another minor change to make it clear that the duty to consult before making capacity market rules can be satisfied by consultation undertaken before Royal Assent. This aligns Clause 35 with other provisions of the Bill, such as Clause 18(2) and Clause 34(3).
Finally, Amendments 52 to 55 are minor and technical drafting amendments to clarify that an investment contract will continue to be an investment contract even where a party ceases to be an “electricity generator”, and that the definition of an “investment contract” is satisfied if at least one generator is under an obligation to make payments under the contract. I hope that noble Lords find that a helpful explanation of the government amendments and I beg to move.
Lord Roper (LD)
My Lords, I have tabled Amendment 41 in this group to give the Minister an opportunity, to which she has already referred, to respond to the 11th report of the Delegated Powers and Regulatory Reform Committee. The committee felt that the proposal in Amendment 40 was not satisfactory as it would still give the authority power to confer functions on itself without the consent of the Secretary of State, even though the proposed new subsection would allow for such consent to be given generally in relation to the capacity market rules of a particular kind. In its report, the committee did not find that a totally satisfactory response. I ask my noble friend whether she will be able to give some consideration to this point and perhaps bring back at Third Reading an amendment to Amendment 40, which will go some way to respond to the committee’s report.
Baroness Worthington (Lab)
My Lords, I am grateful to the Minister for introducing this group of amendments. This goes to show that the Government are listening—at least to the Delegated Powers and Regulatory Reform Committee if not, perhaps, to all sides of the House. It has obviously had more success in amending the Bill than some of us in our many days in Committee over the summer. There are a number of amendments here, many of which implement the recommendations.
To strike a serious note, it is important that the Government have listened and accepted the advice of the Delegated Powers Committee. This is quite an extraordinary Bill. It is quite an extraordinary intervention into the market and it carries with it quite considerable enabling powers that give the Secretary of State a huge amount of discretion in how he or she will intervene in the electricity market. It is only right and proper that those powers are subject to the affirmative resolution procedure in as many places as possible, so there can be a degree of parliamentary oversight in what is going to be a hugely significant intervention into the market.
The noble Baroness spoke to some of the amendments which relate to the allocation of contracts for difference under the levy control framework. I seek some form of comfort, and confirmation from the Minister that we will not descend into a system of micromanagement, trying to split up the pot of money into ever smaller, more precise groupings of technologies. We have seen this happen with other DECC policies; with the renewable heat incentive, for example, and the banding of FITs. This temptation to micromanage, to carve up the market and pick winners to make sure that we have control over what comes forward can make for a regrettable situation. It is regressive because it does not allow the market to demonstrate where there is a success. It does not allow the market to find solutions.
I find it quite odd that I am here on the Labour Benches chastising the Conservative Government for not allowing the market to deliver. However, it is clear that this is the current thinking: that we should not allow the market and competition to dictate but somehow try to use the powers in the Bill to organise and plan everything from the top down. That is a recipe for disaster. I am sure that others will agree with me that where we have already seen that in operation, with FITs and RHI, it has been shown to be really sub-optimal. I only say that as an illustration of why it is so important that the many regulations which will flow from the Bill are subject to full and proper parliamentary scrutiny, so that we can try to prevent some of those worst examples being repeated on a much larger scale.
I am grateful to the noble Lord, Lord Roper, for tabling his amendment, which is intended to correct one of the few issues which the Government have not conceded in response to the Delegated Powers and Regulatory Reform Committee. I look forward to the noble Baroness’s response to that, because it is evidently important that it has been raised here.
Baroness Verma
My Lords, I thank my noble friend Lord Roper for Amendment 41, which would remove paragraph (b). I am aware that this is in line with the recommendation of the Delegated Powers and Regulatory Reform Committee.
Before concluding on my noble friend’s amendment, I will respond to the noble Baroness, Lady Worthington, on splitting and micromanagement of the levy control framework. We are not looking to pick winners, but to ensure that costs can be controlled and that new technologies can come to the market. Like the noble Baroness, we want to see greater competition and new entrants. The last thing that we would want to do is to micromanage that and pick winners and losers. However, as with all things, there needs to be some management of ensuring that costs do not overrun or become artificially maintained.
I say to my noble friend Lord Roper and other noble Lords that I will consider carefully the committee’s recommendation and my noble friend’s amendment to the proposed powers in Clause 28 with a view to addressing them at Third Reading.
Baroness Worthington
“(2A) The Secretary of State shall as soon as reasonably practicable, and no later than five years from enactment of this section, by regulations provide that contracts for difference are subject to a competitive tendering process.
(2B) These regulations shall be subject to the affirmative resolution of both Houses of Parliament.”
Baroness Worthington
My Lords, briefly, we had a good and thorough discussion about the need for greater competition in the Bill; I do not intend to fully rehearse all the earlier comments. The amendment is intended to ask the Government when we will move away from an administrated, bilateral negotiation of CFDs to a more competitive tendering process. It seems that the entire Bill is subject to state aid approvals from the EU. I am sure that one of the main tenets of the argument being put to the EU will be that we are treating all technologies equally—that there is element of competition and a proper tendering process. That is not currently the case as the Bill is drafted at the moment. There is no indication in the legislation of a timeline to which the Government are working. There is no hint at when we will be moving to this competitive process. We hear that that is the intention but there is nothing in the Bill that compels it to be the case.
The reason for this amendment is to ask, if this amendment were accepted, that within five years of enactment the process of bilateral negotiation would cease and we would move to a competitive tendering process. Five years is perhaps too long or too short; I am not saying that it is a precise number. The point is that we cannot carry on for very long in this bilaterally negotiated world, where there is really no transparency at the moment and we do not see technologies being treated equally.
These are my two questions. What is the timeline to which the Government are working to get to this more competitive process? Can the Minister comment on any feedback that she has had from the EU on the need to get to this state and to move away from the bilateral negotiations?
Baroness Verma
My Lords, I thank the noble Baroness, Lady Worthington, for this amendment. It offers us another opportunity to debate the important matter of competition within EMR. Amendment 7 relates to the competitive allocation of CFDs. I begin by reassuring the noble Baroness and noble Lords that we have carefully considered competition throughout the design of EMR. Of course, CFDs themselves will enable new low-carbon generation to compete in the market.
We recognise the role that the competitive allocation process, including auctions, can play in ensuring least-cost decarbonisation for consumers. Indeed, the Secretary of State has stated that the reforms in the Energy Bill are specifically designed to,
“blaze a trail towards competition”.
However, we view the competitive allocation of CFDs as a means to ensure low costs to the electricity consumer rather than as an end in itself. Competitive allocation can help drive value for money only when market conditions allow. Key tests of the market conditions include the supply of new low-carbon generation exceeding the amount we need to meet our decarbonisation commitments, and there being enough potential players to ensure sufficient competitive tension.
Moving to competitive allocation before these conditions are met may increase risks to developers and costs to the consumer, without necessarily bringing the benefits of a competitive allocation. Of course, it is possible that the conditions for competitive allocation may be met relatively soon. In respect of most renewable technologies, we have said that we will consider moving immediately to allocation rounds and introducing constraints for certain technologies or groups of technologies, which might have the effect of triggering auctions for those technologies. In respect of nuclear and carbon capture and storage technologies, our officials are already working with stakeholders to explore how competitive tenders could work for those technologies. Where competitive allocation processes are not feasible or effective, I can reassure noble Lords that any final allocation decision will still be subject to strict value-for-money considerations and an assessment of an overall budget constraint.
Therefore, I say to the noble Baroness and to noble Lords who have expressed the concerns behind this amendment that we do care about value for money, but I do not think that a requirement to run competitive allocation processes within five years of enactment of the Bill is the right way to ensure value for money. Instead, we should focus on the action that we are taking to improve underlying conditions for new low-carbon generation and reduce barriers to entry, which may enable a faster move to competitive allocation processes. As I set out in an earlier debate, these include Ofgem’s ambitious package of reforms to improve market liquidity and meet the needs of independent generators, and our amendment to the Energy Bill to allow for the establishment of a power purchase agreement scheme, which will bring greater competition to the PPA and generation market.
The noble Baroness asked for an update about state aid. As she knows, we do not comment on discussions that we have with the Commission on state aid. As noble Lords might expect, it is likely to place importance on competition, as we do. However, I assure the noble Baroness that those conversations on state aid are taking place.
The noble Baroness also asked about the timescale for moving. Throughout my speaking notes I have tried to reassure the noble Baroness that we move as fast as we can. I therefore urge the noble Baroness to withdraw her amendment and be reassured that the Government take her concerns very seriously.
Baroness Worthington
I thank the Minister for her response. I am not fully reassured by her comments, but I am grateful for them. There is a bit of a problem here. The basic premise is to try to get to a point where all technologies can be treated equally. However, as the noble Baroness points out, not all technologies are at the same stage of development, so we find ourselves in quite an odd situation. We cannot allow this to persist. We must apply a discipline and a timetable to ourselves to ensure that when we move to the next decade, we will arrive at a point where we are able to compare apples and pears more adequately. We want to get to a position where, for the sake of the consumer, we fund only technologies that can deliver cost-effectively.
It is very good to hear the Minister mention value for money, as that is at the heart of my concern. At the moment we have strike prices here and there, and different contract lengths. We must seek to simplify this so that the best technologies can come forward. That will obviously take time. I hope that we can move swiftly to a much clearer and more competitive process, and I hope that time will achieve that. I beg leave to withdraw the amendment.
Baroness Verma
“(8) An instrument containing regulations of any of the following kinds may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament (in each case, whether or not the regulations also make other provision)—
(a) the first regulations which make provision falling within each of the following—(i) section (CFD notification: offer to contract on standard terms);(ii) section (Modification of standard terms);(iii) section 13;(iv) section 14;(b) regulations which make provision falling within—(i) section 9;(ii) section 10;(iii) section (CFD notifications);(iv) section (Allocation of CFDs);(v) section 11;(vi) section 12;(vii) section 15;(viii) section 16;(ix) section 17.”
“( ) If, but for this subsection, an instrument containing regulations would be treated for the purposes of the standing orders of either House of Parliament as a hybrid instrument, it is to proceed in that House as if it were not a hybrid instrument.”
Baroness Verma
Baroness Verma
“( ) Any sum which—
(a) an electricity supplier is required by virtue of regulations to pay to a”
(none0) “may be recovered from the electricity supplier by the CFD counterparty as a civil debt due to it.”
Baroness Verma
Baroness Verma
“Standard terms
(1) The Secretary of State may issue standard terms and conditions of CFDs (“standard terms”).
(2) The Secretary of State may from time to time revise standard terms.
(3) Standard terms issued or revised under this section must be in accordance with provision made in regulations.
(4) In issuing or revising standard terms the Secretary of State must have regard to the matters mentioned in section 5(2).
(5) The Secretary of State must publish standard terms as issued or revised under this section.
(6) In publishing standard terms the Secretary of State may designate particular standard terms as terms that may not be modified under section (Modification of standard terms).
(7) Different standard terms may be issued for different categories of CFD.”
“CFD notifications
(1) The national system operator may, in accordance with provision made by regulations, give a notification to a CFD counterparty (a “CFD notification”) specifying—
(a) an eligible generator, and(b) such other information as may be required for the purpose of making an offer under section (CFD notification: offer to contract) to contract with that generator.(2) A CFD notification must not be given if regulations made by virtue of section 17 prevent the giving of the notification.
(3) Regulations may make further provision about CFD notifications and in particular provision about—
(a) the circumstances in which a CFD notification may or must be given;(b) the kinds of information mentioned in subsection (1)(b) that must be specified in a CFD notification;(c) appeals against decisions not to give CFD notifications.(4) A CFD notification may not be given by virtue of regulations under this section in relation to an electricity generating station in Northern Ireland unless the Department of Enterprise, Trade and Investment consent to the CFD notification.
(5) But regulations may, with the consent of that Department, include provision for circumstances in which consent under subsection (4) is not required.
(6) In subsection (4) “Northern Ireland” includes so much of the internal waters and territorial sea of the United Kingdom as are adjacent to Northern Ireland.”
“Allocation of CFDs
(1) Provision that may be included in regulations by virtue of section (CFD notifications) includes in particular provision about how CFDs are to be allocated to eligible generators (and for this purpose a CFD is “allocated” to a generator if the generator is specified in a CFD notification).
(2) Provision made by virtue of subsection (1) may include provision—
(a) conferring power on the Secretary of State to make rules (an “allocation framework”) about how CFDs are to be allocated;(b) for different periods within which CFDs are to be allocated (“allocation rounds”);(c) for different allocation frameworks to apply in respect of different allocation rounds;(d) for the publication of allocation frameworks;(e) about matters in relation to which provision may or must be made in an allocation framework.(3) Provision made by regulations by virtue of subsection (2) may impose requirements on the Secretary of State, including in particular—
(a) requirements as to the giving of notice before an allocation round is commenced;(b) restrictions on the circumstances in which amendments may be made during an allocation round to an allocation framework or to any other matter relevant to an allocation round (including any amount by reference to which a limit on the CFDs allocated during the round is to be determined).(4) An allocation framework may—
(a) confer functions on the national system operator with respect to the allocation of CFDs;(b) specify targets to be met or taken into account by the national system operator in giving CFD notifications by virtue of section (CFD notifications), including targets relating to—(i) the means by which electricity is generated;(ii) the generating capacity of electricity generating stations;(iii) the geographical location of electricity generating stations;(c) make any provision that may be made by regulations by virtue of subsection (3).(5) An allocation framework may include provision for—
(a) the determination of a matter on a competitive basis;(b) calculations or determinations to be made under the framework, including by such persons, in accordance with such procedure and by reference to such matters and to the opinion of such persons, as may be specified in the framework.(6) An allocation framework may—
(a) include incidental, supplementary and consequential provision;(b) make transitory or transitional provision and savings;(c) make different provision for different cases or circumstances or for different purposes;(d) make provision subject to exceptions.(7) Any power conferred by virtue of subsection (2) to make an allocation framework includes a power to amend, add to or remove an allocation framework.
(8) Subsections (4) to (7) are subject to any provision contained in regulations.”
“CFD notification: offer to contract on standard terms
(1) Where a CFD notification is given to a CFD counterparty under section (CFD notifications), the CFD counterparty must, in accordance with provision made by regulations, offer to contract with the eligible generator specified in the notification on—
(a) standard terms, or(b) standard terms as modified in accordance with any modification agreement entered into between the CFD counterparty and the eligible generator for the purposes of the CFD notification (see section (Modification of standard terms)).(2) Regulations may make further provision about an offer to contract made under this section, including provision about—
(a) how a CFD counterparty is to apply or complete standard terms in relation to the offer in accordance with information specified in a CFD notification;(b) the time within which the offer must be made;(c) how the eligible generator to whom it is made may enter into a CFD as a result of the offer;(d) what is to happen if the eligible generator does not enter into a CFD as a result of it.(3) In this section, “standard terms”, in relation to a CFD notification, means standard terms published under section (Standard terms), determined in accordance with regulations as the standard terms that are to apply in relation to the CFD notification.”
“Modification of standard terms
(1) This section applies where a person wishes to be specified as an eligible generator in a CFD notification (“the potential CFD notification”).
(2) A CFD counterparty and the person may, in accordance with provision made by regulations, agree to modify standard terms for the purposes of any offer that would be required under section (CFD notification: offer to contract on standard terms) if the potential CFD notification is given (a “modification agreement”).
(3) A CFD counterparty may enter into a modification agreement providing for the modification of any particular standard term only if—
(a) the CFD counterparty is satisfied that—(i) the effect of the modification is minor, and(ii) the modification is necessary; and(b) the standard term has not been designated under section (Standard terms) as a term that may not be modified under this section.(4) Regulations may make further provision about modification agreements, including—
(a) the circumstances in which a person may make an application for a modification agreement;(b) the time by which an application must be made;(c) the procedure to be followed, and the information to be given, by the person in making an application;(d) how a CFD counterparty is to determine an application (including how it is to determine whether the effect of a modification is minor and whether it is necessary);(e) the time by which determinations must be made;(f) the form of modification agreements.(5) Provision made by virtue of subsection (4)(d) may include provision under which the CFD counterparty may make alternative proposals for modifications in response to an application.
(6) In this section “modify” includes add to, alter or omit, and “modification” is to be read accordingly.”
“Sections (CFD notifications) to (Modification of standard terms): further provision
Provision made by regulations by virtue of any of sections (CFD notifications) to (Modification of standard terms) may include provision for—(a) the determination of a matter on a competitive basis;(b) calculations or determinations to be made under the regulations, including by such persons, in accordance with such procedure and by reference to such matters and to the opinion of such persons, as may be specified in the regulations.”
Baroness Worthington
Baroness Worthington
In moving Amendment 22, I will speak to Amendments 23 and 24 in the same group. I will not detain the House any longer than is needed.
This amendment raises a very important issue that should be at the heart of the Energy Bill, and which the legislation is not sufficiently clear on at the moment—the nature of the contracts for difference. Noble Lords may remember that in a very early draft of the Bill—the one that went into pre-legislative scrutiny—there was a hint that it might be possible to sign a one-way contract for difference. That underscores any potential profit for a contract holder, but completely removes the downside risk. That means that if the contract holder was due to pay money back because the wholesale price was higher than the strike price, they could keep that money. The wording has now been changed sufficiently for that not to be in the current Bill, but there is still a question mark over the degree of latitude that the Secretary of State has over these contracts for difference.
I seek a strong reassurance on behalf of consumers and bill payers that we will not sign contracts in cases where, if the strike price is below the wholesale price, that money will simply end up in the profits of the company that holds the contract. It must flow back to the consumer. For this to be a fair system, we want to see contracts for difference that provide a stable price for the holders, but they should not be completely guaranteed profits over and above that. That is an important concept. I look forward to hearing the noble Baroness reassure me that one-way contracts will not be signed, and that all contracts for difference will be two-way.
Baroness Verma
My Lords, I thank the noble Baroness for her amendments and for prompting the debate on the matter of payments to suppliers. I am pleased to reassure her that the intention of her amendment is already delivered in the Bill. The purpose of Clause 11 is to allow the Secretary of State to make regulations to ensure that the counter party can pass payments from generators under the CFD on to suppliers and, furthermore, that the regulations we are consulting on specify that this must happen.
Amendment 22 provides that the regulations must set out the amounts to be paid to suppliers. I want to be clear why some flexibility is needed here and therefore why there is not already such a duty within the Bill. It is indeed the Government’s intention that surpluses will be returned to suppliers. A duty would, however, fix that this happened by way of a repayment of sums. The Bill as drafted allows us instead to use payments from CFD generators to offset future supplier payments. Offsetting such payments could be more efficient than making payments out to suppliers and then asking for payments back in again. This could provide more value for money for consumers and greater transparency of costs and savings.
Amendment 23 states that sums passing to suppliers must be rated at zero. I want to reassure noble Lords that if it is appropriate for sums to be paid back to suppliers—for instance when, as the noble Baroness has said, under a CFD the reference price is above the strike price—then the counter party is required to do so through draft regulations. However, sometimes the reference price will not be above the strike price and the sums to pay back would be zero. This amendment could lead to unintended consequences where the counter party has to pay suppliers money it does not have. This would then need to be recovered from suppliers, and this uncertainty is likely to be passed through to consumers and ultimately lead to increased consumer bills.
I turn now to Amendment 24. Clause 11(2) allows for regulations to include provision for the counter party to calculate any amounts it might owe to suppliers against specific criteria. It also enables regulations to allow for such calculations to be carried out on behalf of the counter party. Although we expect a settlement agent to carry out such calculations on behalf of the counter party, this amendment would impose a duty which would remove the long-term flexibility to consider how to carry out the calculations, whether in-house or otherwise, in the most cost-effective way. I hope that the noble Baroness has found my explanation reassuring.
Baroness Worthington
I am grateful for the reply. It does obviously reassure me that if something is paid back to suppliers it will be done in a sensible way, and indeed offsetting might be the most sensible way. How will the regulator ensure that the sums paid back are then handed on to consumers? Will there be regulations to that effect?
Baroness Verma
My Lords, as I said earlier, I think there needs to be some flexibility. Where money is returned to suppliers they have a choice between paying it out as dividends and salaries or using it to reduce costs to consumers. We believe that, as we have a competitive market, benefits should be passed on to consumers. It would be in the interests of suppliers to pass the money on to consumers. I suspect that as the market becomes far more competitive it will be in their interest to try to vie for as many consumers as they possibly can. I think we need to be able to allow that flexibility and not constrain it. On that basis, I hope that the noble Baroness will withdraw her amendment.
Baroness Worthington
I am grateful to the noble Baroness for bearing with me in answering my subsequent question and for her response. I am not fully reassured that this whole system is going to be very transparent or beneficial for the consumer. I do not want to rehearse the arguments we had earlier about the lack of competition, but we have seen previous examples of this. If there had been a truly competitive market and proper downward pressure on prices, would we have seen the large big six companies using their capital to buy back shares? I do not think so. Also, we have seen it with the introduction of the EU emissions trading scheme in which generators all opted to take a massive windfall by passing on the full costs of the ETS, even though they were not being incurred because all the allocations were free.
I say this only because these are recent examples of the regulatory system failing consumers and not being sufficiently strong and firm with the big six in ensuring that they make the right decisions. In this day and age, with pressures on the cost of living being so acute, these companies have to avoid a form of corporate overconfidence which does not put the consumer first, as the noble Lord, Lord Teverson, said. I am sure that we will come back to this again, but I am happy to beg leave to withdraw the amendment.
Lord Jenkin of Roding
“(d) conferring on the Secretary of State further powers to require operators of generating stations which use woody biomass fuel to commit to a binding agreement to source no more than a specified amount of woody biomass fuel that is grown in the UK”
Lord Jenkin of Roding
I beg to move the amendment standing in my name and that of my noble friend Lord Roper. My noble friend the Minister will recognise that this is the same amendment which my noble friend Lord Roper moved in my absence in Committee. We have tabled it again to see whether the Minister has had any further thoughts about how she can best protect those wood manufacturers who depend on the same source of wood as that used for biomass by generators. That is what they are frightened of. Indeed, they go so far as to say that if there is no certainty that they will be able to source their raw material in this country, or from the same sources from which they have had it in the past, we will lose the industry. It will no longer invest here because it cannot be sure of getting its raw material. That was the case which my noble friend made in Committee.
I have reread the reply which the Minister gave on that occasion. It is not too strong to say that she dismissed the fear as unreasonable and the measure as one which would cause unnecessary bureaucracy. However, the Scottish authorities have decided that there should be a requirement on those intending to burn biomass as a fuel to make a statement of their sources, quantities and sustainability. I know that there is a voluntary scheme. Indeed, my noble friend made that point in Grand Committee. However, the fact of the matter is that this does not give the wood panel and other wood-using industries the confidence that they need. In those circumstances, have the Government had further thoughts as to whether there might be an advantage in preserving an important industry in this country in terms of the number of people it employs and the fact that it is a UK-based manufacturing industry? Will they give it the confidence to enable it to continue in business? I look forward to hearing my noble friend’s reply. Has there been any change in the Government’s attitude since we debated this in July? I beg to move.
Lord Roper
My Lords, as my noble friend Lord Jenkin has said, I moved a similar amendment in Grand Committee. As he has also said, we felt that the Minister’s reply on that occasion was not as helpful as it could have been. Although the wood panel industry is not large, it has a significant annual turnover and employs both directly and indirectly a significant number of people. If it is possible for appropriate guidelines to be issued in Scotland, it is not totally clear to me why it is not possible to have them here. Obviously, it is a good thing that a voluntary disclosure agreement now exists, but I think that the industry would prefer there to be a requirement regarding disclosure rather than this voluntary agreement. Like my noble friend Lord Jenkin, I shall be interested to hear the Minister’s reply.
Lord Cameron of Dillington (CB)
My Lords, I hesitate to speak to the amendment because I am not against it and I sympathise with the intentions of the noble Lords who are proposing it, particularly if it affected the price of construction timber and made housing more expensive, which would not be good. However, I advocate a bit of caution. I have recently come across a company which is trying to build four medium-sized biomass-powered electricity generating stations using brash, tops, coppice, sawmill offcuts and other non-value timber. They are putting them at different ends of the United Kingdom so they have good local sources for the timber. Each power station will be producing between 12 and 25 megawatts and will cost about £60 million. The material is sustainably sourced and will encourage the use of thinnings. For those noble Lords who do not know, thinnings are quite often not taken out because it costs more to do so than to leave them. If you could take more thinnings out it would create more high-value timber for construction or other uses.
I sympathise with the amendment but if it were applied across the board, with a generalised percentage, it would cripple a highly sustainable, beneficial biomass-generating business before it got off the ground. Before an amendment of this nature is enacted, it either needs to be reworded or we need a statement from DECC guaranteeing a flexible interpretation.
Lord Berkeley (Lab)
I support the amendment in principle, but I am concerned. The noble Lord, Lord Cameron, has made some interesting points. I have been told that the biomass market, as we see it today, probably has a life of about 10 years. Investment is going into ports at both ends for the wood, as well as in shipping lines and transport from the ports. I declare an interest as chair of the Rail Freight Group. A lot of investment is going into new wagons or converting coal wagons to keep this stuff dry, because if it gets wet it is not very nice. The message in the industry is that they have got 10 years and then the nuclear power station at Hinkley point, and perhaps others, will be on stream, after which there is no guarantee of what will happen.
If that is the case and if, in the interim, the furniture industry of which the noble Lord, Lord Jenkin, spoke, is decimated, that will not be very good. We will have had 10 years of biomass but no furniture industry after that. I do not know whether that is the case. There are clearly many millions of tonnes of biomass in other parts of the world, but there are problems certifying where it comes from. Also, I am told that if it comes in pellets you cannot convert it to woodchips and vice versa. I would hate to see an industry like that decimated just for 10 years of using local biomass which then proves to be uneconomic and where the plant closes down.
Viscount Ridley (Con)
My Lords, I wish to speak briefly in support of the amendment. I think I am right in saying that the Secretary of State has expressed a view similar to that of the amendment. Speaking to the BBC on 18 July, he said:
“Making electricity from biomass based on imported wood is not a long-term answer to our energy needs—I am quite clear about that.”
We are in a bit of a bind here, because the Department of Energy and Climate Change has said it expects about 90% of the biomass that will be burned in power stations to be imported. However, the wood panel industry is clear in saying that even if 10% of what is going to be burnt is produced domestically, it will have a devastating effect and could displace a lot of the wood panel industry, which it estimates would increase carbon emissions by about 6 million tonnes, because if you are burning something today instead of incorporating it into a piece of furniture, you are turning it into CO2 much sooner. Making furniture also produces carbon emissions, but considerably less—about one-quarter or one-fifth of the amount.
Perhaps I may also take this opportunity to ask the Minister for clarification on my Written Question earlier this year about carbon dioxide emissions from burning biomass. It is clear that in the short term, biomass is about the highest carbon dioxide-emitting fuel there is. If you recapture that over a period of 35 or 40 years for softwood, and rather longer for hardwood, one can in the long run perhaps make the case that biomass is carbon neutral. However, all the calculations that I have seen show that because of the need to drive off water, and due to its chemical composition—there is a difference between cellulose which has hydrated hydrogen in it as opposed to coal which does not—the use of biomass will increase our carbon emissions over several decades. I thought that that was the period we are most worried about, so I am a little puzzled about the current dash for wood, as I call it.
Baroness Verma
My Lords, I am grateful to my noble friends Lord Jenkin and Lord Roper for tabling the amendment and prompting debate on the issue of using UK-sourced woody biomass for electricity.
The amendment would give the Government powers to set limits on the amount of UK-sourced wood used by each biomass power plant. As I outlined in Committee, one of the aims of the Government’s bioenergy strategy is that any support should consider the consequences of policy interventions on the wider energy system and economy, including non-energy industries. It is the Government’s view that where this and the other aims listed in the UK Bioenergy Strategy are met, bioenergy can make a significant contribution to meeting our renewable energy, energy security and emissions-reduction needs at low cost.
We have taken a number of measures that we believe are sufficient to ensure that the biomass policy meets this aim. The department made an assessment of the amount of woody biomass that may be available to the UK without significant impacts on other sectors. We then made an assessment of the amount of UK woody biomass that is likely to be used by electricity companies, which was well within the forecast availability. We have since then put in place measures to monitor these forecasts and their level of accuracy. We asked large-scale electricity generators using woody biomass to disclose to us on a voluntary basis the amount of UK wood that they estimate they will procure and use over the next five years, and we require this information to be signed off by the company’s board. We are pleased to say that all the operators responded to our request for information on their wood procurement. The department has now aggregated and published this data, and we will undertake to do this annually. The data provided by the operators supports the original forecast of wood use for electricity. Domestic wood supplies will not be their target.
In addition, we have aggregated the results of the sustainability reports that generators are required to provide to Ofgem. We have also now published on the website this aggregated data for the years 2009 to 2012. They also support the original departmental estimates of wood use for electricity and show that wood demand has remained within, rather than risen above, the 1.3 to 1.6 million oven-dried tonnes per annum. As well as these specific measures covering UK wood, the Government have made a number of proposals to limit the amount of biomass power that will be brought forward. We have limited the government support that can be claimed by former coal plants until 2027 under the contracts for difference.
Lord Jenkin of Roding
My Lords, I am very grateful to all the noble Lords who have taken part in this short debate. Clearly this is a subject of some interest around the House. I can cap the story of the noble Lord, Lord Cameron, because I saw some people who build very small generators entirely fired by what is left over in a forest after the useable timber is all taken away. They are apparently making quite a good living out of that. Individual factories and distilleries may be fired in that way so there must be an enormous amount of that sort of thing going on.
There is this bit in the middle where, as other noble Lords have said, there is a competition between the biomass burners and those who hope to have wood for their furniture making and panelling and so on. The noble Baroness has answered my question. There is no change from what she told the Committee in the summer. In these circumstances, there is not much point in pressing the case. I therefore beg leave to withdraw the amendment.
Amendment 25 withdrawn.
Amendment 26
Baroness Verma
“( ) the determination of an application for a modification agreement under section (Modification of standard terms);”
Baroness Verma
Baroness Verma
“( ) Before publishing standard terms under section (Standard terms) the Secretary of State must consult such persons as the Secretary of State considers it appropriate to consult.”
Baroness Verma
“(4A) Provision made by virtue of subsection (3)—
(a) must secure that capacity market rules made by the Authority may not confer functions on the Authority except with the consent of the Secretary of State;(b) may permit any such consent to be given either in relation to particular capacity market rules or generally in relation to capacity market rules of a particular kind.”
Baroness Verma
“(5) Subject to subsection (6), an instrument containing (whether alone or with other provision) regulations under this Chapter may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.
“(6) An instrument containing only regulations within subsection (7) is subject to annulment in pursuance of a resolution of either House of Parliament.
(7) The regulations within this subsection are—
(a) electricity capacity regulations which—(i) only make provision within section 27, and(ii) are not the first set of electricity capacity regulations to make such provision;(b) regulations under section 32 which do not make provision amending or repealing a provision of an enactment contained in primary legislation.”
“( ) If, but for this subsection, an instrument containing electricity capacity regulations would be treated for the purposes of the standing orders of either House of Parliament as a hybrid instrument, it is to proceed in that House as if it were not a hybrid instrument.”
Baroness Verma
“( ) Subsection (7) may be satisfied by consultation before, as well as consultation after, the passing of this Act.”
Baroness Verma
“and such arrangements are referred to in this section as “a pilot scheme”.
(2) The Secretary of State must review the operation and effectiveness of any pilot scheme.
(3) The Secretary of State must set out the results and conclusions of the review in a report to Parliament—
(a) by laying a copy of the report before each House of Parliament, or(b) if the Secretary of State determines that the report should be made orally, by making a statement to the House of Parliament of which that Secretary of State is a member.(4) A report under subsection (3) must be made as soon as reasonably practicable after the conclusion of the pilot scheme to which the report relates.”
Baroness Verma
My Lords, In Committee, a desire was shown for more detail on the pilot: when it will happen, how long it will last and when the results will be reported. A demand-side response—short-term load shifting—is already part of our plans for a capacity market. The Government’s preference is that electricity demand reduction—permanent reductions in demand through the efficient use of electricity—can also join the capacity market in the future. However, given the uncertainties around a financial incentive for efficiency and its operation in the capacity market, we intend to pilot this approach before drawing conclusions. This work is a priority and, since Committee, the Secretary of State has announced the availability of at least £20 million for the pilot, which is expected to start in summer 2014 and run for around two years.
There have been calls to provide assurances that information on the outcome of any electricity demand reduction pilot would be provided to Parliament. In line with best practice, it was already the Government’s intention to report the results of the pilot. However, in order to reassure the House, I am moving this amendment so that reporting the results of the pilot to Parliament becomes a statutory requirement. That will be done as soon as practicable after the results of the pilot are available. I beg to move.
Lord Roper
My Lords, the noble Lord, Lord Jenkin, and I have Amendment 48 in this group. The group also includes Amendment 51, tabled by the right reverend Prelate the Bishop of London, which would insert a new clause.
When the draft Energy Bill was published in May 2012, a number of people were concerned that there was not sufficient indication of measures to reduce electricity demand, which is obviously the most satisfactory way of avoiding having to build further power stations. Both in the pre-legislative scrutiny in another place and in the informal committee chaired by the noble Lord, Lord Oxburgh, the question of demand-side measures was discussed. As a result of that, the Government launched a consultation in November last year and suggested a number of options for electricity demand reduction. Interestingly enough, out of the options on offer, a majority of the respondents favoured a system of electricity efficiency premium payments, which would provide electricity users with a payment on top of the savings that result from reduced use of electricity.
However, when DECC published its consultation response in May this year, it suggested that its preferred route to delivering permanent reductions in electricity demand was via a capacity market. That was of course contrary to the majority of the views expressed in the consultation. Similarly, the response dismissed the idea of introducing a premium payment without adequate explanation. None the less, on Report in another place, the Government introduced Clause 37, allowing the Government to run a pilot scheme for electricity demand reduction. The clause does not explicitly limit the Government to a single pilot or specify the mechanism that they might use. However, given what the Government said in their response to the consultation, there is a pretty clear indication that they wish to look at the capacity market only.
There are a number of uncertainties about the appropriateness of the capacity market, particularly for small and even medium-sized consumers. I am not sure what the right reverend Prelate might say about churches which are considering reducing their electricity demand and whether they would be large enough consumers to go into such a capacity market. None the less, there was a discussion in Grand Committee on an amendment that I tabled suggesting that there should be more than one pilot so that various methods could be explored as ways of dealing with this question of electricity demand reduction. Amendment 48, which I and the noble Lord, Lord Jenkin, have tabled, requires the Government to bring forward multiple pilot schemes so that not just the capacity market but premium payments and perhaps some other form of incentive could be considered. That would demonstrate which scheme or schemes might be most effective in delivering permanent demand reductions and scale.
I very much hope that the Government will give serious consideration to this proposal because I believe it will give us rather more information as a result of the pilot in order to make decisions as to what can be done. I should say that I have a good deal of sympathy with the new clause tabled by the right reverend Prelate which calls on the Government to prepare and implement a strategy for delivering further reductions in demand which the Government themselves say is achievable.
Lord Grantchester (Lab)
My Lords, I rise to speak to Amendment 50 in this group. In our Committee proceedings, we looked at the demand side response clauses introduced at the late stage of Report in the other place. We noticed that they were late additions to the Bill, yet they cannot be underestimated as there can be no simpler way to reduce the pressures on the capacity market, increase resilience, improve decarbonisation, and enhance efficiency and security of supply. Reducing energy demand is much cheaper than building new generating capacity. It is also the cheapest way to protect households from rising bills and cut carbon emissions.
Clause 37 introduced a spending power to authorise the spending of money to fund a pilot or pilots, yet concern was expressed about whether sufficient funds were being made available. Anxiety was also expressed that pilot schemes were proposed to take place in the capacity market, as the response to the consultation in May this year made clear that this was the Government’s preferred way forward.
Difficulties were expressed that the capacity market is designed primarily to ensure capacity during potential shortages or troughs in supply. In these circumstances, it will only reward demand reduction projects that reduce the amount of generating capacity needed at such times, and not reward projects that reduce demand more generally. The capacity market, therefore, only rewards energy efficiency for its security benefits and not its much larger benefits such as emissions reductions and affordability, as well as behavioural change policies.
Many submissions that we received wished to see multiple pilot schemes to include premium payments as well as capacity markets and other innovative incentive schemes. This was proposed to enable small businesses and generators to be able to access payments and to press the Government that demand reduction is not simply an afterthought to bolt onto the capacity market, designed around the provision of supply by large-scale plant prioritised through the workings of the capacity auction.
There is also the question of determining what capacity is required once demand has been reduced. These thoughts led us to consider that the Government need to set a coherent strategy about delivering permanent demand reduction and is the purpose of Amendment 50. The amendment adds to the Government’s own Amendment 47 and the amendment in the name of the noble Lord, Lord Jenkin. These only refer to pilot schemes and the Government’s Amendment 47 is eminently sensible. However, my amendment proposes that the Government must think further and more deeply and place demand reduction in a wider strategic context.
I also tabled it as an alternative to Amendment 51, proposed by the right reverend Prelate the Bishop of London, that seeks to place a numerical target for demand reduction. The difficulty here is that I have seen three different figures from three different methodologies. First, in November 2012, the McKinsey final report identified 92 terawatt hours of potential savings not covered by existing policy by 2030. Alternatively, the energy efficiency strategy, also in November 2012, used a different method and identified 69 terawatt hours of savings by 2020, based on existing and future policy. Yet in May this year, the Government used yet another method in response to the electricity demand reduction consultation where the figure of 32 terawatt hours saving was identified.
Will the Minister clarify which method and which figures her department recognise as correct and the most appropriate? My amendment avoids this difficulty being placed on the face of the Bill and seems an eminently sensible concession that the Government should agree to.
The Lord Bishop of London
My Lords, biblical studies teach me that when you have two amendments that look as much alike as my amendment and that of the noble Lord, Lord Grantchester, you must look for an Ur-text. Indeed, there is an Ur-text, as we all know, and the figures in my amendment are simply the latest figures available from the Government. This is intended to be a constructive and supportive amendment, which also reflects the concern mentioned by the noble Lord, Lord Roper, about the sole emphasis on the capacity market not really catching the full subject here.
According to the Secretary of State in his own foreword to the response to the consultation, which was published in May of this year, a 9% reduction in overall demand could save electricity equivalent to the output of four power stations in one year. I do not want to pose as an expert, of which there are many in this House, but I have been trying in my own diocese of London to improve energy efficiency. I have taken a keen personal interest in the various efforts and our churches have actually achieved a 22% saving in energy consumption between 2005 and 2011.
I represent the voice of the consumer—a rather small consumer. Nationally, through the environment campaign of the Church of England, which I chair, we have invested in a mixture of retrofit measures to address the heating and lighting of a stock of buildings that were not originally built with energy efficiency in mind. Renewable technology and behavioural change have helped an institution such as ours, which emits as much carbon as a large supermarket chain, to use energy more efficiently while maintaining open buildings at the heart of the local community countrywide. I am particularly proud of the fact that our new vicarage at St John’s, Wembley, was awarded the highest score ever under the code for sustainable homes at the 2012 awards.
We are not great experts on the general theme but we represent people who are seriously anxious to support the government policy and to operate in the most efficient way possible. We have learnt from colleagues in other European countries. In Sweden, which faces greater climatic challenges, the building code for new constructions has been strengthened; smart meters have been installed in almost all households—I understand that this is proposed for the UK but not yet implemented; public funding for research and innovation has been increased; and a new incentive programme has been launched.
Of course, these and other ideas were set out in the 2012 consultation, and the Green Deal is addressing the fact that in developed western countries the built environment uses half of all energy and generates half of all greenhouse gases, and there is very substantial wastage through walls, et cetera. But even the chief executive of the Green Deal Finance Company, Mark Bayley, has admitted that complexity is one reason why the take-up has been so disappointing. Many of those in fuel poverty, a substantial percentage of whom live in London, pay inflated prices through meters in their homes, and the current position whereby the more energy you use, the more likely it is that the tariff will be reduced, is surely unsustainable as well as unfair. This Bill, which I heartily support in the main, provides an opportunity to reflect on the wider costs of our energy habits and how to make the best use of our resources without penalising the poorest in our society. In the UK 6.5% of households say that they cannot keep their homes warm, as against 1.5% in Sweden. The figures for children living in fuel poverty, at 1.6 million, are especially alarming.
The amendment relies on the Government’s own latest estimates of the potential for demand reduction. It would seem obvious that a strategy setting out cost-effective policy options that go beyond what is currently being proposed by the Government should be published to show how these reductions can be achieved.
Lord Teverson (LD)
My Lords, I will speak briefly on Amendments 50 and 51. My heart is with them completely, and I congratulate the right reverend Prelate on his award. I am sometimes involved in green awards and energy efficiency—an area that has often been left out of these debates—and it is great to have someone who has been a recipient of one of those.
The difficulty with these two amendments is that they target a specific reduction in electricity. Coming back to the decarbonisation debate that we had earlier on today, better decarbonisation can, of course, actually be achieved by having an increase in electricity. One of the big challenges of decarbonisation is moving the transport sector from fossil fuels either into biofuels or, particularly, into electricity, using electric vehicles. We also eventually want to move home heating from gas into electric—non-carbon-generated electricity. It therefore makes it very difficult in these areas to have targets on terawatt-hours or proportions or whatever; you have to take it back to exactly what the right revered Prelate said, which is energy efficiency. I am a great advocate of the green deal, and it certainly has its issues at the moment and I hope it succeeds, though perhaps it needs a number of changes to do that. At the end of the day, however, the real thing we have to do is just to go out there and, perhaps rather brutally—whether it is street by street or village by village—ensure that we upgrade domestic and industrial premises so that they are energy efficient. Going down the route of specific electricity-target reductions could actually work against decarbonisation and the way in which we are trying to reduce carbon emissions in this country. I am absolutely with the intent, but I think the method in this case has great difficulty.
Lord Berkeley
My Lords, the noble Lord, Lord Teverson, has some very good points there. If, as I do quite often, you go around properties in different parts of the continent, you find that the energy usage and consumption and insulation are generally a lot better than many of our buildings here. I have a feeling, having talked to a few people in the building trade, that it is because the standards to which we build our properties actually require less insulation and draught-proofing than those of many other countries. It may be because we think that the temperature is always the same here, so it does not really matter.
Another problem that we have to sort out soon is the greater use of air conditioning in buildings, because in some countries—I do not think it is the case here—the current use of energy for air conditioning is a great deal more than that for heating. It is possible to design buildings which need much less air conditioning. Noble Lords will have seen them in the architectural press at some time. I do not know why we do not encourage more of this in this country; it has been an issue for years.
However, I am still not convinced that the energy suppliers have any incentive to sell less electricity or gas. It is a bit like the water companies: they love having leakages and no meters, because they sell more water and seem to think that is a good idea in places or times where there is a shortage. We are stuck with some perverse incentives. I agree that these are probably not the right amendments to achieve what we want, but it is something that we need to do to get the incentives, insulation and building regulations right, and look at the air conditioning and the design of our buildings so that they are fit for purpose in the time of global warming, as we debated earlier.
Baroness Verma
My Lords, I welcome the continuing interest shown in electricity-demand reduction. My noble friend Lord Roper’s Amendment 48 raises an issue that came up a number of times at both Second Reading and Committee—namely, that multiple pilots are necessary in order to test a variety of approaches. One of the pilot’s key aims is to test the Government’s preferred approach of delivering electricity demand reduction through the capacity market. That said, from a legal viewpoint the amendment is unnecessary as the Secretary of State is already able to design and run a pilot, or pilots, to test different approaches if this is necessary.
Before I move on, I, too, add my congratulations to the right reverend Prelate the Bishop of London on the great energy reductions he has achieved, which just shows that behaviour change towards energy usage can make a huge amount of difference. I commend what the right reverend Prelate has done. He also mentioned the very important Green Deal and smart meters. These measures will help to revolutionise the way we approach energy usage. It is about being able to ensure that consumers understand the usage of energy, which is why I listened very keenly to what the right reverend Prelate said. Where the Green Deal is concerned, 80,000 assessments have been carried out. Under ECO, many tens of thousands of homes have already benefited from the Green Deal. Like my noble friend Lord Teverson, I think the Green Deal is an excellent vehicle for being able to bring greater efficiency towards homes.
My noble friend Lord Roper and the noble Lord, Lord Grantchester, spoke about there being more than one pilot. We would rather start with what we consider the preferred option but we do not rule out there being multiple approaches simultaneously. If we have too many, it will be difficult to evaluate. We want to be sensible and see a range, if that is what is needed, but we have a preferred approach. It would be better for us as a Government to see that preferred approach dealt with first. There is nothing in the Bill to stop us having more than one approach.
I reiterate that Clause 37 is simply a spending power, required to authorise the spending of Government money. I appreciate the concern to ensure sufficient funds are available for piloting. We considered raising funds for the pilot using the capacity market powers but rejected this approach because it would delay the start of the pilot, which we announced is expected to start next summer.
Amendments 50 and 51, from the noble Lord, Lord Grantchester, and the right reverend Prelate the Bishop of London, would require the Secretary of State to publish a strategy to reduce a stated amount of electricity demand by 2020 and 2030. While I welcome the principle behind these proposals, the Government have already published a number of documents, including on how we will meet our existing energy efficiency commitments. That is through the energy efficiency strategy which will be updated later this year, the DECC energy and emissions projections, and the Government’s response to the EDR consultation. These documents already provide a comprehensive view of Government strategy. As the pilot is designed to improve our understanding of the cost-effectiveness of EDR in relation to that of a variety of supply-side and demand-side measures, we do not consider it appropriate to set a specific EDR target.
The noble Lord, Lord Grantchester, asked about the difference in the estimates that the department has given out. The estimate of the untapped potential was revised from 92 terawatt hours to around 32 terawatt hours by 2030 because there is considerable uncertainty as to the exact level of potential for electricity demand reduction. We believe that this figure represents a much more sensible picture of what can be achieved. That analysis has also been subject to external peer review.
In conclusion, we have listened to concerns about reporting the results of the pilot and have introduced an amendment on this. Our existing legal powers already allow us to test other approaches if it becomes necessary. We believe the minimum £20 million allocated to the pilot is sufficient to support a range of projects in different sectors in these difficult times. We already have an energy efficiency strategy, which will be updated shortly. I hope that my noble friend Lord Roper, the noble Lord, Lord Grantchester, and the right reverend Prelate the Bishop of London will agree to withdraw their amendments. I beg to move the amendment that stands in my name.
Lord Oxburgh
“Capacity payments: gas
The Secretary of State shall have the power to make such arrangements as are necessary for capacity payments to be made for the supply of gas if it is deemed likely that this could allow gas to be supplied to consumers at lower prices or more securely than otherwise.”
Lord Oxburgh (CB)
My Lords, this, too, is intended to be a helpful and supportive amendment. During the various clauses that we have debated today, the costs of natural gas to consumers and the effect on their prices have come up time and again. As we go forward into the coming decades, gas from the North Sea will get progressively less, and we shall be more dependent on imported liquefied natural gas, or LNG. The market shows strong seasonal spikes already, with the winter price significantly higher than that in the summer.
This amendment offers the Secretary of State an extra tool in his tool box for controlling gas prices that are paid. It allows the Secretary of State to invite bids from anyone who supplies gas to undertake to make available to the market an agreed amount of gas over an agreed period at not more than a particular price. It is not clear that this will be necessary, but it could be. I beg to move.
Baroness Worthington
My Lords, I support Amendment 49 of the noble Lord, Lord Oxburgh. Throughout the evening and the passage of this Bill we have discussed the need for competition and for keeping downward pressure on price a great deal. It is clear, as the noble Lord, Lord Oxburgh, has pointed out, that the majority of the increases in consumer and business bills in recent years have been down to the increase in gas prices.
It is regrettable that we heard recently from British Gas that it had decided to withdraw a project to enhance and expand its gas storage capabilities. This is another sign that there is insufficient downward pressure on prices. It probably suits British Gas quite well to have prices rising, because that leads to higher profits. It is probably the wrong body to make any kind of economic assessment on whether it makes sense for them to invest in gas storage. There has to be some form of intervention from government to ensure that there is timely investment in gas capacity.
Gas prices fluctuate between the summer, when demand is low, and winter, when it is high. If we can smooth that out and provide a more stable price throughout the year, it makes sense to have a tool in the armoury, as the noble Lord, Lord Oxburgh, has said, to facilitate this. I am sure that the Minister will come back with some thoughts on this. It is quite a new element to introduce to the Bill at this late stage and perhaps an amendment of this kind is not the way to deliver it, but I strongly support the sentiment behind it. As the noble Lord, Lord Oxburgh, has pointed out, we are seeing our North Sea gas reserves diminish and we are moving into a more international situation in which we rely on gas from many different parts of the world. Much of it is being delivered by ship. Ships can change course in the middle of the ocean if they see fit, if offered a better price. Our reliance on gas needs to be underpinned and secured through greater capacity and gas storage.
I hope that the Minister can say something about how the Government intend to bring more of this to ensure that we are not facing a situation where it is in everyone’s interest apart from the consumer to have gas prices rising continually, and that there is some way in which they can intervene to bring investment to this important aspect of energy security and affordability.
Baroness Verma
My Lords, I am grateful to the noble Lord, Lord Oxburgh, for his amendment, which returns to the matter of gas storage that he raised in Committee. My department published analysis and made a Statement in the other place on 4 September on precisely this issue and I am glad to discuss it today.
The amendment is intended to enable the Secretary of State to make arrangements to provide capacity payments in exchange for the supply of gas more securely, or at lower prices, than would otherwise be possible. I should make it clear from the outset that the capacity market is not intended to support the gas market. Rather, the capacity market is an integral part of our electricity market reform programme.
On the face of it, this amendment aims to facilitate a simple and attractive concept: cheaper and more secure gas for consumers. While the Government recognise that rising energy bills are a worry for many households and businesses, this amendment is not the solution. It is difficult to imagine that any supplier of gas would sign a contract to sell gas at a future date at a discount to the prevailing market price. The capacity payment is required to offset the risk to the supplier of being out of pocket and it would need to top up any shortfall to the point where there would be no net benefit to consumers.
Specifically, it has been argued that capacity payments may facilitate the construction of additional gas storage capacity, which offers the potential to buy cheaply in summer and store the gas until it can be sold when prices are higher in winter, as the noble Baroness, Lady Worthington, pointed out. This is a service that the market currently provides. Storage capacity is currently increasing, with two facilities having been completed in the past 18 months and two more facilities under construction. There are 10 more projects with major planning consents in place, which are awaiting the right commercial signals to invest. Where the market is not already providing this signal, supporting a storage project through subsidy, whether by a capacity payment or other means, would just transfer the risk currently faced by the market to the Government. In other words, it would be passed on to consumers and taxpayers.
DECC considered in detail the case for supporting gas storage. Analysis shows that, although there are interventions that could enhance our gas security, under most scenarios they would not do so cost-effectively. All options risk adding disproportionate costs to energy bills and risk distorting a well functioning GB gas market. We will not be taking these interventions forward and do not envisage needing the powers that these amendments propose.
As I explained earlier, we are introducing a capacity market to provide for capacity payments to ensure security of our electricity supplies. This is because the electricity market faces new challenges. These include the planned closure of a large proportion of our existing generating capacity and an increased amount of low-carbon generation. That means that there is an increased need for additional reliable capacity. The capacity market is specifically designed to address this.
These issues do not translate to the gas market. The security of gas supply outlook is robust. There is spare supply capacity: the available capacity of nearly 700 million cubic metres a day is far in excess of even the highest recorded daily demand of 465 million cubic metres. The gas system also has greater flexibility to rectify demand/supply imbalances within the balancing period and, for gas, unlike electricity, there are readily available means for storage which the market is currently expanding. The Government therefore do not consider this amendment to be necessary. I hope that the noble Lord, Lord Oxburgh, has found my explanation reassuring and on that basis will withdraw his amendment.
Lord Oxburgh
My Lords, I have to confess that I did not find the Minister’s reply at all reassuring. The fact that existing capacity meets the maximum plausible demand is not quite the point. The Minister might be aware—or perhaps would remember if she had been in her post a year or two back—that all we need is a major fire at one of our terminals or a catastrophe of some kind and we would be in very severe difficulties. In drafting this amendment, I deliberately did not specify the means—I did not specify gas storage. All I specified was the end. Whether someone is willing to provide gas at a fixed price for a fixed period and how they do it were deliberately not specified. For that reason, some of these arguments are a little wide of the mark.
I am not as convinced as the Minister that the existing gas market works at all well. It is in the interests of the major gas suppliers to hold supply back and then to dribble it in at times of high demand. That is when they make a lot of money. There is no one in the loop at present who protects the interests of the consumer. It is certainly not in the interests of the gas supply companies to do so. I am disappointed that the Government are not taking a more active position on this matter. However, if they are determined to turn their back on this, there is nothing more to be done today and I beg leave to withdraw the amendment.
Baroness Verma
(a) a person who at the time the contract is entered into”
“( ) In the case of a contract entered into with more than one person, the reference in sub-paragraph (1)(c) to the parties is a reference to the Secretary of State and any of those persons who is an electricity generator.”
“(5) An instrument containing regulations of any of the following kinds may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament (in each case, whether or not the regulations also make any other provision)—
(a) the first regulations which make provision falling within paragraph 10,(b) the first regulations which make provision falling within paragraph 11, or(c) regulations which make provision falling within any other paragraph of Parts 1 to 3 of this Schedule.”
“( ) If, but for this sub-paragraph, an instrument containing regulations would be treated for the purposes of the standing orders of either House of Parliament as a hybrid instrument, it is to proceed in that House as if it were not a hybrid instrument.”
“(10) Any sum which—
(a) an electricity supplier is required by virtue of regulations to pay to the Secretary of State, an investment contract counterparty or a CFD counterparty, and(b) has not been paid by the date on which it is required by virtue of regulations to be paid,may be recovered from the electricity supplier by the Secretary of State, the investment contract counterparty or the CFD counterparty (as the case may be) as a civil debt due to that person.”
Baroness Parminter
“Strategy on interconnection
Within 12 months of this Act coming into force, the Secretary of State shall bring forward a strategy for the UK to increase its interconnection links with other European countries, in order to support the continued development of a European internal electricity market.”
Baroness Parminter (LD)
My Lords, this is the same amendment I moved in Committee, where I spoke of the benefits of greater interconnection across Europe. Given the lateness of the hour and the unanimity around the Committee at that time, I do not intend to repeat those arguments, but it is important to remember that if we are to deliver that greater level of interconnection we are going to need more investment in infrastructure. That means that the Government need to make quite clear their commitment to prioritising interconnection in the same way that they have with the capacity market and demand side reduction measures in this Bill.
I was grateful for the warm words from the Minister about the Government’s commitment to interconnection when I moved this amendment in Committee, as I said at the time. Therefore, I hope this evening that over the summer, those warm words have translated into a rather firmer commitment to action.
Lord Teverson
My Lords, I want to reinforce the comments of my noble friend Lady Parminter. One of the great challenges of the electricity supply industry is to de-peak its supply. One of those is demand side, but the other is very much around alternative sources of supply. Energy storage is not really where it needs to be at the minute, but interconnection is a technology that has been around for decades. It works and we should multiply it. I know that the Government have a number of schemes that they are looking at currently. I welcome those and congratulate them on being so proactive in this area. I hope that the Government and the Minister will be able to propel this even faster and further by taking notice of my noble friend’s amendment.
The Earl of Caithness (Con)
My Lords, while I support in principle what my noble friend Lady Parminter is trying to do, I am concerned about her wording. The idea that a Government should prepare a strategy, and then that is it, leaves a lot of questions begging. I suppose the Government would have to implement that strategy, but the amendment does not specify that.
My noble friend Lady Parminter will recall the evidence we heard when we were on Sub-Committee D together. Therefore, perhaps this is a good opportunity to ask my noble friend the Minister a couple of questions regarding what progress has been made with the energy infrastructure regulation, in particular the PCIs, so that that can be implemented. It is no good, we discovered, having one side that was keen to do an interconnection if the other side was not.
That leads me on to the seemingly constant battles between the regulators in each country. We had evidence from the Agency for the Cooperation of Energy Regulators and the European Network of Transmission System Operators for Electricity about that. Has there been any progress between the regulators? If there has, that would make future interconnection much easier.
Lord Cameron of Dillington
My Lords, I support the amendment. I, too, served on Sub-Committee D and this was a major part of the message in our report No Country is an Energy Island—a very apt name.
The joy of a pan-European grid—or even an intercontinental grid, because the geothermal springs of Iceland could bring electricity down to the industrial heartlands of the UK—and interconnection would be to allow intermittent renewables to complement each other. When it is not windy in Germany, for instance, it might be sunny in Italy; when it is windy in Portugal in the middle of the night, that power can go to Poland where they are just waking up, and so on. Such interconnection could bring a whole new justification to the renewables yet to be built. Intermittency could become an issue of the past and our energy security would be greatly enhanced.
Furthermore, if this interconnection were to grow, it would not only help to keep the lights on but should ensure that we could get the cheapest and most economic electricity available for both domestic and industrial uses. It is obviously going to cost a lot of money and will take a lot of planning. There are many regulatory and political obstacles to be overcome, not least the public acceptance of more pylons. However, as with everything else in the electricity industry, we must start planning now—that is where I am at odds with the noble Earl, Lord Caithness—in order to get these long-term gains. That is why I strongly support the amendment.
Lord Whitty (Lab)
My Lords, I register our support on these Benches for the amendment, although the Minister will already have detected that this is a big conspiracy by Sub-Committee D to get its report discussed again at this late stage. I was party to that. However, as the noble Lord, Lord Cameron, has said, there is enormous possibility here.
I will make only two points. First, as long as there is a sniffy attitude towards interconnectors in any of the European energy markets, we are all going to be operating at higher cost than we need, with greater misery for consumers and, eventually, higher cost to the taxpayer. Secondly, this matter is not separate from the rest of the Bill. When asked earlier in the proceedings where their CFDs could apply in relation to supply from French nuclear power stations or Irish wind farms, the Minister said that in certain circumstances they probably could. That is important. It is not tomorrow’s solution, but it could be quite important as long as they were connected with projects here. The same question arises with the capacity market. This is potentially a hugely important way in which we maximise our capacity, and therefore the report to which the noble Baroness, Lady Parminter, refers is important. Whether the Government want to put it in the Bill or not, they really ought to be looking at the strategy for interconnectors as an integral part of overall energy policy.
Baroness Verma
My Lords, I am grateful to my noble friend Lady Parminter for raising the matter of electricity interconnection, which the Government agree is an important area given the range of potential benefits. Through my notes I will also be able to answer my noble friend Lord Caithness’s two questions.
We have previously considered the amendment in Committee. The Government considered the arguments made and, earlier this month, committed to publishing a policy statement on electricity interconnection by the end of 2013, well in advance of the date which my noble friend’s amendment would require. This will set out our support for increased interconnection that is appropriate and economic. My noble friend will be aware that the Government also recently supported a number of interconnection projects to become projects of common interest under the EU regulation on guidelines for trans-European energy infrastructure. The UK Government support that regulation and its intention to accelerate completion of the internal energy market by facilitating cross-border energy infrastructure. Five GB electricity interconnection projects have been selected as projects of common interest under the regulation, including with France, Belgium and Norway. They will enjoy streamlined planning procedures and, where appropriate, a mechanism to agree cross-border cost allocation. They will also be eligible to access financial instruments such as loan finance, grants for feasibility studies and, potentially, grants for work under the Connecting Europe Facility, which has a pot of €5.1 billion over seven years. Four renewable generation projects located in Ireland, with potential to develop into interconnection, were also selected as projects of common interest. This brings the combined capacity of all potential interconnection projects currently in the pipeline to more than 12 gigawatts. My noble friend will also have seen our proposals for how interconnected capacity may be able to participate in the capacity market from 2015. We are currently working proactively on the details of this proposal and we will welcome further engagement with stakeholders to try to make this possible.
I also highlight work being undertaken by Ofgem to develop a supportive approach to interconnection. Ofgem is developing a new cap and floor regulatory approach for interconnection for application to the proposed Project NEMO between GB and Belgium. The Government are confident that this approach, if extended, will promote investment in interconnection. However, as the cap and floor approach looks to consumers potentially to take on some risk, it is important that careful consideration is given to its application. We are working closely with Ofgem as it takes forward its wider Integrated Transmission Planning and Regulation project, considering the need for enhanced planning or strategic evaluation of future interconnection. Ofgem is also working to ensure that GB electricity prices reflect scarcity to a greater extent. As interconnection developers invest on the basis of price differentials on either side of the link, this is likely to make investment more attractive.
I hope noble Lords will appreciate that, following Committee, the Government have made a public commitment that will satisfy the intention behind this amendment, and do so sooner than the amendment itself would require. I therefore hope that my noble friend will be reassured and will feel content to withdraw her amendment.
Baroness Parminter
I thank my noble friend the Minister for that very fulsome reply, for the way in which she has outlined the Government’s commitment to interconnection and, in particular, for the policy statement—which is probably civil servant speak for “strategy”—or as near as we are going to get it. I thank all my colleagues around the House for their support. I think they have done a great job in actually persuading the Government to move a bit on an issue in this Bill. I am grateful to the Minister for having an open-door policy and for having listened to us on this important issue, which will make our approach to the Energy Bill and how we secure energy in the future better. On that basis, I beg leave to withdraw the amendment.