Electricity Market (EAC Report)
Lord Hollick
That this House takes note of the Report from the Economic Affairs Committee The Price of Power: Reforming the Electricity Market (2nd Report, Session 2016-17, HL Paper 113).
Lord Hollick (Lab)
My Lords, it is a pleasure to introduce the Economic Affairs Committee’s report on the electricity market, entitled The Price of Power: Reforming the Electricity Market. I thank all members of the committee for their sterling contribution to this far-ranging inquiry, our excellent committee staff Ayeesha Waller, Ben McNamee and Oswin Taylor, and our excellent specialist adviser, Professor Nick Butler.
Security and affordability have been the long-standing objectives of energy policy. From the 1950s to the 1980s, the provision of electricity was the domain of the state-owned Central Electricity Generating Board. Then in the 1990s, at the instigation of Energy Minister Nigel Lawson—now the noble Lord, Lord Lawson—the energy market was opened up to competition, liberalised and subsequently privatised. Tony Blair’s Government strongly supported those measures and the open market, and were able to announce that between 1991 and 2003, annual domestic bills declined by £150 in real terms while supply remained secure.
The Climate Change Act added decarbonisation as a third objective and, in the 2000s, the liberalised market of the previous 20 years gave way to one where the Government introduced a succession of policies to subsidise renewable electrical generation. Oxford economist Dieter Helm describes the degree of state intervention now as,
“more akin to a nationalised model than it is to an open and transparent market process”.
A succession of Ministers has recognised this, lamented the state of affairs and resolved to reverse it, bring back some element of competition and reduce the role of government, particularly in choosing new technologies. The capacity market to provide back-up baseload to intermittent renewable generation is indeed a step in the right direction, but it is essentially a short-term mechanism biased towards short-term fixes. It is not and cannot be a substitute for long-term policy.
The disappearance of the competitive and open market model has led to marked increases in the price of electricity. For much of the first decade of the 2000s, domestic energy bills in Britain were 25% below the EU median. Today, they are only 4% below. As the Government themselves admit—while acknowledging that their data are frustrating opaque—electricity prices for high energy-intensive industry in the UK are now among the highest in Europe. This places UK industry at a significant competitive disadvantage.
The Government are committed to an industrial policy, which is welcome. But industry, in common with individual households, needs energy supplied at a competitive cost. Costs seem to have been an afterthought in the making of policy in recent years. The previous Government stressed the importance of cost but did little to change policy. There was talk before the election of a freeze on certain consumer prices, but that has been watered down to a review by Ofgem. The committee did not advocate a freeze, but we advocate a coherent policy, and that should include the proper regulation of prices by a strong and effective regulator. That is the only way in which trust can be re-established between suppliers and consumers. Will the Minister spell out the remit of Ofgem’s review: does it cover both domestic consumers and industry and will its overall powers be beefed up to allow it to intervene, to ensure that affordability has a consistent champion in the inevitable trade-offs with security and decarbonisation?
The Government’s industrial strategy announced their intention to commission an independent review looking at the cost of energy for households and business and, in particular, the opportunity to reduce the cost of achieving the decarbonisation goals. It was reported last week that Dieter Helm will be appointed to lead that review. We welcome the review and the report that Professor Helm is to head it up. Can the Minister confirm the appointment of Professor Helm and tell us the remit of the review and how it chimes with the Ofgem review?
We recommend that if the Government are to get a better a grip on energy policy, an energy commission be established to act as an independent advisory body tasked with advising on the best way for all objectives of energy policy to be delivered, taking into account changing technologies. It would work with existing institutions such as the climate change committee and would be responsible for managing the open, transparent auctions to generate electricity that we propose in some detail in our report. It would also provide welcome continuity of policy in a department which has had five different Ministers in charge in the past five years. The Government’s decision to have an independent review acknowledges the need for an independent advisory body—a recommendation of the committee—and it could and should be seen as a precursor to an energy commission, as we recommend.
I turn to the security of supply. As unplanned maintenance increases, there are all the signs that our 40-year-old nuclear reactors are reaching the end of their lives. The Government’s plan to replace them through its new nuclear programme is in trouble. Our report was strongly critical of the high cost of Hinkley Point C and the risks and delays in its delivery, and we called for a robust plan B to cope with delays and inevitable gaps in supply. The Government’s complacent response to our concerns border on the negligent. Our concerns were then echoed in the NAO’s devastating critique of Hinkley Point C, which noted that the Government had,
“locked consumers into a risky and expensive project with uncertain strategic and economic benefits. They did not consider sufficiently the risks and costs to customers”.
The NAO also criticised the absence of contingency planning.
Since the publication of our report, the prospects for the new nuclear programme have further deteriorated. Shortly after the surprise departure of EDF’s CEO, Vincent de Rivaz, who appeared before the committee and who is a man who has few doubts, EDF announced that Hinkley Point C would be delayed by a further 15 months and costs would increase by £1.5 billion. The delay over the original timetable is now 10 years; the cost of the project has doubled; and the technology is not yet proven.
EDF is 84%-owned by the French state, and President Macron is likely to take a dim view of French government funds being poured in ever-increasing amounts into an unproven technology to benefit another country. At best, the project will arrive in 2027, just 10 years late. The other main new nuclear supplier, Toshiba, is in grave financial difficulties and is hell-bent on exiting nuclear generation. In these circumstances, it is unclear how the plant at Moorside can be financed.
The Government’s new nuclear programme was planned to deliver 16 gigawatts, or approximately 20% of total electricity usage, by the 2030s. Meanwhile, demand for electricity is now expected to rise above predicted level because of the rapid changeover to electric vehicles. Can the Minister update the House on the problems at Hinkley Point and at Moorside and explain the contingency plans to address the looming gap in the security of supply? Can he also tell us about the negotiations with the Chinese in respect of financing at Bradwell? Are discussions going on with the Chinese with a view to deploying their smaller, modular reactors, dubbed “the nimble dragon”, which use proven technology and can be installed relatively quickly at a fraction of the cost of Hinkley Point C?
Over the past decade, the Government have mandated that billions of pounds be used to subsidise the installation of renewable generation. Much of this funding has been targeted at inefficient, high-cost, first-generation solar panels and wind turbines, to the great benefit of overseas manufacturers, landowners and householders, who then benefit from the very generous feed-in tariffs, for which a large bill will have to be picked up by consumers over the next two or three decades. The committee preferred an approach which prioritised investment in research and development of new technologies to help to promote a UK-based renewables manufacturing sector utilising our considerable research strengths. The committee believes that science and engineering holds the key to developing energy sources which are both clean and competitive.
The Government made a good step forward by announcing the Faraday initiative on the development of research into energy storage, a key technology, in which the UK research community is one of the global leaders. Improved energy storage technologies will make renewables much cheaper and more reliable by reducing or possibly eliminating intermittency of supply and by spreading the demand for electricity generation more efficiently across the day and night. But what has happened to that initiative since the election? There has been no announcement on how the funds will be allocated, or when. This could and should be a source of competitive advantage for the UK. Our universities have some great academic research skills, and we could acquire more as President Trump runs down US research. What are the Government doing to push this forward? Can the Minister tell us what has happened to the Faraday initiative?
The energy market is a hybrid, a combination of public policy and private money that needs careful, thoughtful and consistent management. If there is uncertainty, and if investors are confused by current policy and do not know if today’s approach will last beyond the next Minister, they will turn away. That would leave us with an ageing and sub-optimal system that is vulnerable, insecure and increasingly expensive to maintain, which in turn will do great damage to the whole economy.
I look forward to a lively and well-informed debate and to the Minister’s response to my questions and, I am sure, the questions of others.
Lord Forsyth of Drumlean (Con)
My Lords, it is a pleasure to follow the noble Lord, Lord Hollick, who sadly, under our rules, has had to vacate the chairmanship of our Economic Affairs Committee and who has led us with great distinction. Only this week, yet another report appeared to become government policy, on making tax digital—and, of course, the housing and various other reports have made a fundamental change to government policy. The noble Lord’s leadership and the support of a very strong committee have been something that I have been proud to take part in. On taking over as chairman, I said to the committee that I felt that I had just passed my driving test and been given a Ferrari—and, at the first committee meeting, it became pretty clear to me that I was not going to be allowed out of the car park.
It is a strong committee, and this is a vital issue of great importance to the country, which is why the Press Gallery is full to overflowing, and why it will form an important part of our national debate, I am sure, in next Sunday’s newspapers, rather than the tittle tattle that seems to be the stuff of daily politics. The hour is late; my Whip told me that the House would be getting up round about now, but there are quite a number of contributions to be made. The noble Lord has covered the report pretty fully, but you need read only one page of it—the conclusions—to realise the seriousness of this matter.
I am sorry that my noble friend Lord Lawson, is not in his place. The reforms that he carried out resulted in a revolution in the electricity industry and in a better service and lower costs for consumers. Sadly, that good work is being undone, because of the overemphasis on carbon emission reduction at the expense of security of supply, competitiveness and costs to the consumer. As the noble Lord, Lord Hollick, hinted, we are seeing the virtual nationalisation of electricity production in this country. It is almost impossible, as the report points out, for anyone now to build a power station without getting some kind of subsidy or guarantee from the Government.
We have reached a moment of high farce when we are closing down coal-fired power stations so rapidly that we have to pay consumers and industries not to take the product—the electricity—and, even worse, to turn on diesel generators to supplement the national supply. That is a parody that not even “Yes Minister” would have thought credible. Prices have soared nearly two-thirds in 13 years, in contrast to the fall of £150 which followed the 13 years of my noble friend’s reforms.
The Committee on Climate Change is by no means an objective source, but I take it that it will provide a reasonable estimate; it reckons that one-quarter of electricity bills will be needed to provide funding for a low-carbon policy by 2020. That is a triumph for Sir Humphrey—the idea that you should pass the bill on to the householder and businesses in a hidden form and then mass up against the electricity companies, demand to know why prices are rising and say that they need to cap them.
The committee heard evidence of jobs being exported around the world to lower energy cost countries—the most dramatic example being China. There is absolutely no point, and no methodology that is going to save the planet that consists of importing carbon from your competitors and driving your own industries out of business. As the noble Lord, Lord Hollick, pointed out, we have long since lost our place as the lowest cost electricity producer in Europe, and therefore our competiveness.
A classic case that illustrates the difficulties of the current energy policy is that of Hinkley C, which shows how the taxpayer and consumer are being short-changed. As the noble Lord, Lord Hollick, pointed out, the NAO report simply echoes, in perhaps more vigorous language, the findings of our own report on value for money and costs to the taxpayer. But the concern surely must be with the risks of the supply. When the chief executive of EDF, which is to build this nuclear plant, came before the committee, the noble Lord, Lord Turnbull, questioned him about whether the technology worked, and I asked him why his finance director, who had resigned in March, told a parliamentary committee in France:
“Who would bet 60 to 70 percent of his equity on a technology that has not yet proven that it can work and which takes 10 years to build?”.
That seemed to me a remarkable thing for the finance director to say. Mr Vincent de Rivaz said:
“The CFO of EDF is fully supportive of this project”.
We were a little puzzled, because he seemed to have resigned, but it turned out that this was the new CFO. He said:
“The individual whom you mentioned has left the company. It is his choice to talk down the company that he has just left. I will not comment further. He was replaced the day after his resignation by a CFO of high quality, who is highly respected and fully supportive of the project”.
I just wonder how safe the Government’s idea is that the risk will be borne by EDF. This is a nationalised business which has an unproven product that is not working in France or Finland. Who actually believes, if the project runs awry or the French Government refuse to bail out EDF, that the British taxpayer will not actually have to move in and rescue the situation?
The deal that has been struck on Hinkley C is quite extraordinary. My latest grandson was born in October last year; he will be 44 by the time he finishes paying for the guaranteed prices given to EDF. That is not a small matter; we are talking about 7% of the UK’s use of electricity. That is before we begin to question matters such as where, if we are all driving around in electric cars, the increased supply will come from to meet that—which the committee did not look at. The truth is that Hinkley C represents a severe risk to security of supply and a possible shock to future generations, especially if new technology, perhaps fracking or other processes, reduces the costs of energy.
The 2008 Act provided a very important recommendation—the Secretary of State gave the impression that he would look at it when we interviewed him—which enables the Government to alter the pace at which they implement emissions restrictions. This could provide the Government with a lifeline to help customers and take account of new technology. We understand the need to meet the climate change targets, but there is a period of time to do this. It is not necessary to do it in a linear way. It is surely possible to take account of the fact that if the economy has turned down or if new batteries or other kinds of technology are available in future, they might take a view which will lessen the pressure on consumers. Consumers are finding things getting pretty tight. If there is pay restraint in the public sector and the end of the business cycle, it could only help if Government were to look at the cost of electricity in the context of their other objectives.
This is another outstanding report from the committee and I hope the Government will consider it carefully. Their response showed that more work was, perhaps, needed on that matter. It is a big, red warning light. If the Government ignore that, they may find that all the lights have gone out and they might even face being asked by Her Majesty the Queen why no one saw this coming. This report does.
Lord Darling of Roulanish (Lab)
My Lords, it is a pleasure to follow the noble Lord, Lord Forsyth: I agree with just about everything he said. I look forward to him chairing the Economic Affairs Committee and embarking on his new career as a bipartisan politician. I also pay tribute to my noble friend Lord Hollick, who chaired the committee for some time, long before I was appointed to it. This is the latest in a succession of excellent reports produced under his leadership. I am sorry that he has to stand down because of the rules of this House. He has given a comprehensive view of the report’s recommendations: I do not need to go into them all but will refer to one or two.
I refer the House to my entry in the Register of Lords’ Interests. I also remind the House that 10 years ago I was Secretary of State for Trade and Industry—the last one I think—and had responsibility for energy policy for all of 13 months before the banking crisis and other matters diverted my attention. At that time, I produced a White Paper which identified the need for a mix in electricity generation, including nuclear. There is now a big question mark over the future of nuclear power, partly for the reasons stated in our report. My preliminary observation is that there may have been a rationale for a functioning electricity market from 1982 when the noble Lord, Lord Lawson, was Secretary of State for Energy. It worked for many years: as noble Lords have said, electricity prices fell. However, the electricity market today is not a market in any normal sense of the word. Because the Government have, quite rightly, intervened, most notably in the demand to decarbonise the generation of electricity, this is not a market that one would expect to see functioning and where the state has pretty much stood aside. The state is rightly concerned about green energy and the security of supply, to which the committee referred. It is not nationalisation, but it is part of the way there. The policy is nationalised, for understandable reasons, but the operation and the day-to-day sale of electricity is still in a sort of market, but one where there is increasing concern about its costs and regulation.
The committee came to the conclusion that you cannot have a joint priority of affordability, decarbonisation and security: you have to rank them. Security has, quite rightly, to be the number one priority and the White Paper I published came to a similar conclusion. That is one of the reasons why I want to talk about Hinkley. I expect the House will gather that Hinkley C had very few fans on the committee—quite the opposite. It seems a classic case of the Government being desperate to get a joint public-private sector initiative, with the result that the public have been short changed. It is not just that the grandson of the noble Lord, Lord Forsyth, will be paying for this until he is 44 or 45. The British Government have potentially underwritten an awful lot of this power station and British consumers will do so very directly for years to come.
That is one of the reasons why we were concerned but when we look at where this power station actually is—or is not—alarm bells ought to be ringing. I know that the Minister will reply and say that it is all under control and that they are looking at it closely, but this power station is 10 years late; the costs are going up, even since the committee heard evidence; and EDF itself is now embarking on a review of the project’s viability. Mr de Rivaz, who has been referred to, is standing down as the CEO. His successor is bound to look at this project and, if he has any sense, he will do what you do when you get a new job: make sure that if there is any trouble you can pin it on your predecessor and get rid of it. We are told that President Macron is looking at this and no wonder; EDF is the French state. What is it doing building a power station in Somerset, in a country that is soon to become very foreign indeed to France, when we leave the European Union? It is not beyond the bounds of possibility—indeed, it is now highly likely—that EDF and/or the French Government will come back to the British Government and say, “Sorry, we can’t do it”, or, “We can do it only if you step up and contribute more to it”. For those who say that we can stand by the contract, what happens if EDF goes into liquidation, as it could quite easily do, depending on how the decommissioning costs are accounted for? No British Government can simply stand by with a half-built power station in Somerset. The British public would not stand for it. This is not something where you can just say, “It is all up to the private sector and nothing to do with us”. This is always going to be on the British Government’s balance sheet, both politically and economically.
So I hope the Government will tell us what plan B is, but that begs the second question. If Hinkley C is not to be built, even on the very generous terms to the industry and to the disadvantage of British consumers, what about the nuclear programme in the future? The White Paper I published said that nuclear was very much part of the mix. We said that deliberately because there was a feeling at one point during the term of the Government in which I served that perhaps nuclear would not be built again. The noble Lord, Lord Hollick, mentioned Toshiba’s problems. As far as I can see, nobody is queuing up to build nuclear power stations anywhere at the moment. If we want to build them, perhaps the state will have to do it. There is nothing wrong with that: perhaps the state ought to be building things that the market is not best designed to do. What exactly is the Government’s position? I hope we will not just be told that it is all under control, because the more people look at it, whether the NAO or anyone else, the more out of control it seems to be.
Allied to the question of security is something the committee touched on rather than emphasised. As a back-up for our electricity supplies, we have, quite sensibly, four interconnectors connecting us with parts of Europe, as often as not through France. There are about seven more under review. These interconnectors provide us with energy as part of the European Union’s internal energy market. Now, we are about to leave the European Union. I am sure Mr Davis has had a very successful day in Brussels negotiating our departure, but he will have to add to his list what we do about these interconnectors. Another committee of this House looked at the agreements and concluded that they were rather unsatisfactory because they were opaque. I remember that, when I had responsibility for this area, the winter of 2006 was colder than expected. There was meant to be electricity coming through these interconnectors but, surprisingly, it did not; it got siphoned off somewhere along the line. That is not a satisfactory position to be in. If we are not getting the nuclear capacity, if the capacity margins are as close as we are told, and if there is a bad winter—these bad winters have an awful habit of spreading across the Channel, so other countries will be affected as well—the interconnector safeguard falls away.
This report is clearly about electricity but I mention in passing that I read the other day that it has now been decided that it is too expensive and difficult to maintain the Rough field in the North Sea, the only place where we store gas in large quantities. Therefore, we are pushing things right to the margin. In a country that depends so much on electricity and other energy to look after its citizens and build the goods and services that we need, that is very important indeed.
That brings me to my last point, which concerns costs. As my noble friend Lord Hollick and the noble Lord, Lord Forsyth, have said, electricity prices fell in the 20 years after the introduction of the market in the 1980s but are now rising again. At the last general election, and, indeed, in the general election before that in 2015, this was a political hot topic and we were promised all sorts of things by this Government. However, I assume this promise is like every other manifesto promise that was made and, following the election result, is dead in the water. We are entitled to know what the Government’s policy is on this. It is a matter of concern that our prices are going up and it affects our manufacturers and consumers. It is not at all clear to me what the Government’s policy is. We have a situation where we do not have the sort of market that was envisaged 30 years ago for perfectly understandable reasons. We are now in a situation where the Government, who ultimately have a responsibility to make sure that we have secure and green supplies and electricity and energy that we can afford, cannot hide behind the idea that somehow the market will fix this. The majority of us—certainly on this committee—came to the view that it is not fixed and that there is an increasing need for it to be fixed as quickly as possible.
Baroness Bowles of Berkhamsted (LD)
My Lords, I too am a member of the committee. I thank the noble Lord, Lord Hollick, for his chairmanship during this inquiry.
We have many committee members rich in UK energy policy and experience. I can only claim an upbringing at Harwell, surrounded by energy research, doing my own small bit on solar energy materials in the mid-1970s, and my former career as a patent attorney covering some of the technology, so I am more technology than policy on this.
My more recent experience with financial markets means that looking at thin capacity margins, spoken about with confidence, gives me a sense of déjà vu in relation to thin bank capital. It works until something big happens. It is not clear that we are out of the shadow of something big with an ageing nuclear fleet and uncertainty over timely delivery of its replacements.
The electricity market is changed from when it was set up. It is easy to point to subsidies, targets and mechanisms used to incentivise low-carbon energy production and say that it has distorted the market, but there were always constraints on what was achievable at the time, and it had to be done.
We have also done better than predicted with some renewable technology: solar generation boomed, now with 11 rather than the projected 3 gigawatts of generation. Offshore wind has developed, in the words of Hugh McNeal of RenewableUK, in a way that you associate more with TVs and computers than major infrastructure, with turbines doubling in size and costs coming down 40%. Now the future does not necessarily look like it belongs to large inflexible generation such as big nuclear, although the realisation of that is perhaps only just dawning. That takes me to Hinkley Point C. I agree with the noble Lords who have already spoken on that issue. Perhaps it behoves us ill to criticise commissioning major generating capacity when the report itself elevates security of supply to the primary consideration. There are many lessons of the Hinkley process, including lack of transparency, the need for independent scrutiny and exaggerated claims about delivery, but foremost has to be, “Do not get into a capacity mess, it does not lead to value”, and delays in the operation of the capacity market mean that we may not be out of the mess. Therefore, it is not surprising that the committee put security of supply as the foremost requirement. However, in security of supply I include self-sufficiency. Wind and sun may be intermittent but they remain available without importation or interconnectors.
I too welcome the Faraday initiative for research on energy storage to complement renewables. This should press ahead with vigour, so an update would be welcome to me too. The capacity market is also making changes to how markets operate. If the truth is told, we do not have a market in price, only a market in capacity and subsidies. Flexible generation is squeezed between nuclear and renewables and ultimately that must carry a price. Presently, the price is paid by the environment with extension of old generation and standby diesel generators. I was somewhat alarmed by the statement from the director-general for energy security at BEIS that appears in paragraph 71 of the report:
“We don’t want to use the capacity market to bring forward new investment before it is needed”.
Planning a just-in-time strategy does not fit with a high level of security of supply and I query what value it will deliver.
The capacity market means that a plan B for delayed nuclear is not needed, according to the Government’s response, so how and when would need for new investment be recognised and brought forward through the capacity market or otherwise? Are the Government confident that their current criteria are not supressing investment? These are all issues where having an energy commission and greater transparency would help.
We heard evidence from various sources that renewables should bear the cost of their intermittency, mainly heard from rival generators, but it is just as reasonable to recognise a cost that is imposed by the inflexibility of nuclear, and, indeed, getting it on the grid if it is turned off. It was pointed out in evidence from Bloomberg Energy Finance that every form of generation has times when it does not generate. We should not introduce disincentives for renewable energy that are not fairly based, not least when the whole understanding of energy delivery is changing away from centralisation and fixed modes of delivery, a point explained in the evidence of Professor Peter Littlewood. He also said that those countries that invest in energy sustainability will harvest the benefits of technology adoption. That is where we should be.
The report explains that the development of cheap electricity through privatisation and a market was seen as a triumph that other subsequent criteria have since disturbed, but it was also a period that saw the demise of research and development, as elaborated in the evidence of Professor Sir Richard Friend of the University of Cambridge and Professor Richard Jones of the University of Sheffield. We may have got cheap electricity but we also sowed the seeds of what we reap today, including a lack of skills and engineering base. We do not have, as the professors pointed out, national laboratories of scale that fill the gap between work that universities do and the point at which industry can take over and engineer at scale. The Energy Technologies Institute and catapult centres are small measured against international comparators, and nearer-term focused too, so there is work to do to invest in the UK’s own R&D. This is an issue that needs to be widely addressed through the promised industrial strategy, but in terms of picking sectors one thing that is never going out of fashion is energy, with electricity becoming an increasing part of that through electric vehicles and, quite likely, some heating. The report suggests using flexibility to allow for new technology. Here I disagree slightly with the noble Lord, Lord Forsyth. It should not be to do with economic downturn, as that puts you on the never-never. The new technologies would need to be genuine, not overoptimistic, and, I hope that they would use some of our own developments.
Finally, the report touches upon the Competition and Markets Authority investigation and the totally disappointing recommendation that customers should be urged to switch. The constant refrain that switching is the answer to everything is overrated. Is it realistic for hard-pressed people, especially families and the elderly, to repeatedly spend time surfing the net and switching electricity, gas, telecoms, data providers, bank accounts and just about everything else? It condones the idea that you have to keep on doing it if you do not want to be funnelled off into a bad deal. Time absorbed in switching does nothing for productivity and would be better spent helping children with their education, homework or on other ways of building the economy. Making people the regulators of decency and aggressive marketing policies is a shameful failure of good governance. There might be opportunity for technology to create gig switching, but is that really making us more productive, improving quality of life or teaching trust and decency? No—it is saying to business, “Grab what you can until you’re rumbled”. It is all in the same boat with the other things that have bred lack of trust in business, and I hope that the Secretary of State can see the pattern and will back the recommendation for a strong and effective regulator.
Lord Turnbull (CB)
My Lords, energy and climate policy displays a great deal of groupthink and a reluctance to challenge long-held assumptions, even when the evidence changes. So it was refreshing to work on this report, which questions many of those assumptions.
As has been pointed out, the report identified two main failings in current energy policy. First, we have moved rapidly from a framework which allowed market forces to shape the energy market to one where virtually every major investment decision is taken bureaucratically. In the process, we have lost almost completely the idea of a merit order in which different technologies can compete.
Secondly, successive Governments have paid lip service to the trilemma of three objectives: security, affordability and carbon reduction. But in the Miliband/Huhne/Davey—and even Clark—era, one of those objectives consistently trumped the other two. Whenever there was a conflict, carbon reduction, in particular through the promotion of renewables, has prevailed. Other objectives, such as security and affordability, but also air quality and land use, have taken a back seat. The promotion of renewables has been accorded not one but two major privileges: not just subsidies of many billions of pounds but the first right of dispatch, so that, if at any time there is surplus supply of electricity, other fuel sources must yield. As a result, the economics of gas-fired capacity has been shot to pieces, and very little such capacity has been created, at a time when coal and nuclear output will be declining. While some premium can be justified for renewables on account of their low carbon intensity, inadequate account has been taken of the cost to the system of providing back-up capacity to cover intermittency.
As a result, the margin of spare capacity has been severely eroded. I do not, however, believe that the lights will actually go out. The risk will manifest itself in a different way. In response to this situation, the Government have cobbled together a range of measures, including the capacity mechanism. The criticism is that they will prove costly; have unwanted consequences, such as the promotion of diesel generation; and will encourage old fossil-fuelled stations to remain on the grid rather than encourage investment in new, efficient gas-fired stations.
The report recommended that the top priority should always be security of supply, with the best achievable balance between affordability and carbon reduction being sought subject to that. It is clear, however, that affordability too has taken a back seat. The report demonstrates that in the past decade, compared with the rest of Europe, energy costs in the UK, for both households and businesses, have gone from being relatively competitive to relatively expensive. The environmental add-ons have played a significant part in this and are projected to increase. The precise figures, however, are unclear, with what are really environmental taxes being disguised by being routed through the accounts of the energy companies, thereby evading parliamentary accountability.
There is a further dimension in which decisions on energy are being distorted. Surrounding the whole debate is a synthetic urgency—“100 months to save the planet”, and all that. Under the Climate Change Act, the Committee on Climate Change sets a forward trajectory for CO2 emissions, currently extending into the 2030s, which the Government have invariably adopted. But given the small and declining size of UK emissions in the world, a less ambitious target or a slower path towards it is, quite frankly, immaterial. Instead, the Government have allowed themselves to be hustled into decisions rather than taking the time to invest in the search for new technologies. Peter Atherton of Cornwall Energy told the committee that,
“a lot of our really poor policy decisions have been driven by the fact that we set very hard timetables in law—that we have to hit certain targets by 2020, 2030 and, subsequently, 2050”.
Nowhere has this unnecessary haste been more damaging than in the nuclear sector. It has been glaringly obvious that EDF has been struggling to build a reactor to a new and much more complex design, anywhere near the original cost and time estimates. In the light of the latest announcement from EDF on cost and time overruns, the response we received from the Secretary of State was utterly complacent. It is a mistake, as other noble Lords have pointed out, to take comfort in the fact that cost overruns fall to the constructor. If costs were to rise too far, the project could be abandoned, with the risk being handed back. Therefore, it is essential that a comprehensive plan B is acted on.
As the recent NAO report revealed, the emphasis on getting an early deal on Hinkley Point ruled out several options—for example, waiting until construction risk was reduced, establishing a competition with other bidders or the exploration of other financing models. In my view, at the heart of all this is a flaw in the design of policy-making. One objective—rapid decarbonisation—is well entrenched and has a whole apparatus of support and defence. It is the only objective to have statutory backing and the only objective with a dedicated watchdog, the Committee on Climate Change, which is guaranteed access to Parliament. Indeed, there has always been cross-membership between this House and the committee. The committee is not just a consultative body; it has the right of first proposal.
I also discovered that the four strategic objectives listed in the committee’s annual report make no mention of security of supply or affordability. By comparison, the objectives of security of supply and affordability have no equivalent protections or advocacy. Therefore, it is not surprising that decision-making has been unbalanced. Instead of optimising between three conflicting objectives, we have seen the maximum pursuit of one of them at the expense of the other two.
There is one other mantra in the Committee on Climate Change theology—sadly, repeated by the Secretary of State in his response to the EAC—and that is the claim that, as a result of the Government’s policies, energy costs will be reduced. This is achieved only by claiming that increased energy efficiency will offset the various environmental levies. However, that is a fallacy because the pursuit of energy efficiency could be undertaken independently from decisions on energy costs.
However, there are one or two hopeful signs in this rather depressing story. The Conservative manifesto was a curious document—not a curate’s egg but a curate’s daughter’s egg. One of the better passages in it was that on energy, where the language was more balanced. For example, it said:
“Our ambition is that the UK should have the lowest energy costs in Europe, both for households and businesses”,
and that,
“after we have left the European Union, we will form our energy policy based not on the way energy is generated but on the ends we desire—reliable and affordable energy, seizing the industrial opportunity that new technology presents and meeting our global commitments on climate change”.
That appears to acknowledge the trilemma and an end to the automatic primacy of the renewables objective.
The other ray of hope is the promise of an independent review into the cost of energy. Better still is the appointment of Professor Dieter Helm as the review’s chairman. He has been a severe and clear-sighted critic of current energy policy. This review is important and it should be wide ranging. Since the gestation of the Climate Change Act a decade ago, much has changed, although the thinking behind it has not. Global temperatures have risen but on a track well below the range of most climate change models. Incidentally, can anyone tell me where I can find the scientific basis for regarding an extra 1.5 degrees centigrade as a tipping point, or is it just a nice line in a communiqué? Many of the predictions about the harmful effects of climate change have been exaggerated.
Fossil fuel prices, which were assumed to continue rising in real terms from the $100 a barrel mark to the point where renewables reached “grid parity”, have instead fallen. With extensive use being made of contracts for difference, the effect has been to raise the cost of the subsidies required. Only last week, Bob Dudley, the CEO of BP, said:
“I think we’ll all look back in history and think the period of three years at $100 per barrel or above was an aberration”.
There are other reasons for looking again. No other country has followed us down such an extreme unilateralist and legislated path. Severe damage has been done to our energy-intensive industries, and money has been transferred from the pockets of poor families to those lucky enough to be able to install solar panels or wind turbines. For two of the technologies which were thought essential to achieve the CO2 target at reasonable cost, one—nuclear power—is struggling and, in the case of carbon capture and storage, research has been abandoned.
Therefore, there is a lot to revisit, but if the EAC’s report and this debate contribute to this rethink of policy, they may well have proved worth while.
The Lord Bishop of Chester
My Lords, as one of the few non-members of the committee speaking in the debate, I gladly pay tribute to its report, although it is not for our comfort. I think it makes it clear that the supply of electricity has become a very complex matter. For me, the central question is whether this complexity provides a richer range of policy options in relation to our electricity supply or whether it points to a rising level of confusion and risk.
Why is a bishop—I say to the noble Lord, Lord Turnbull, that bishops are always curates at heart—interested in this area? I have a scientific background and have always been drawn to issues where science and public policy interact. Thirty years ago, I was concerned that the then “dash for gas”, as it was called, in electricity generation on the back of new supplies from the North Sea was a poor and profligate use of a flexible fuel and chemical feedstock that would be available for only a limited duration. All sorts of estimates were being made about when “peak oil” would be reached and about the ever-escalating price of oil and gas. But how wrong I was, and indeed how wrong most—I might almost suggest all—forecasts were. The world is now awash with cheap oil and gas for the foreseeable future. The unimaginable has come to pass.
Subsequently, and especially in my years as a bishop, I have become concerned about the rising cost of electricity and its differential impact upon those who, by a socioeconomic judgment, are among the poorest in our society. Levels of fuel poverty have been stubbornly high, underpinned by rises in the cost of electricity. The report describes how the cost of electricity in the UK has risen over the past decade, from being among the cheapest in Europe to much higher comparative levels for everybody. The figures given in the report are stark. In the first half of 2016, for the most energy-intensive industries in Britain, electricity costs were no less than 86% higher than the median in the EU. This has stimulated various government measures to compensate the energy-intensive industries and stem their movement abroad. These are set out in paragraph 102. Will the Minister please tell us what the overall costs are of these schemes and confirm that these costs are met from general taxation and not by distribution to other consumers?
The report is right to call for greater transparency in bills for domestic consumers, especially as the various carbon and climate-related costs will rise sharply in the coming years. In their response, the Government state:
“Adding further information to consumer bills would run counter to Ofgem’s ambition to simplify bills”.
But is there not a confusion between the proper desire to simplify the range of tariffs that are available and the need for transparency around the costs that are being incurred by consumers?
Scottish Power has supplied me with electricity for a number of years, and the transparency has decreased. I compared my four-page bill from 2010 with a bill received in 2017. In 2010, I was told that 62% of my bill comprised wholesale costs, which is rather more than is the case today: 18% transmission, 9% administration and profit, and 11% VAT and government obligations, including 6% green levies. My latest bill runs to six pages and includes various advice and information about saving energy. It tells me, for example, that it will cost me 1p to run my laptop for two hours. But it contains no information whatever on the breakdown of the bill and what proportions are attributable to the different components, including green taxes, which are rising year by year. Does the Minister seriously defend this lack of transparency?
The cost of the new contracts for difference will add to the green levies, and here Hinkley Point takes star billing. I will not repeat all that has been said but the headline figure from the NAO is £30 billion—from one power plant, in a time of austerity and cuts in public expenditure. Think what £30 billion could do. It is a huge amount of money. If we are to have further nuclear plants, will we have the same strike price of £92 a megawatt? We need some assurances, because £30 billion—even spread over the lifetime of the heir and successor to the noble Lord, Lord Forsyth—is a huge amount of money.
These costs, and others that come with current climate change policies, are recouped through the electricity bills of consumers. That is weighted towards domestic consumers because of the subsidies for big industrial consumers. This is a very regressive form of taxation and attributing the costs; that point has not been made clearly enough. At the very least, all this surely demands the maximum transparency rather than the obfuscation that the report reveals.
I would like to make some comments about the capacity market, which the Government have stated is at the heart of their plans to maintain security of supply, at least in the immediate future. What assumptions are being made about the interconnector capacity, to which the noble Lord, Lord Darling, and others have referred? By 2022, the interconnector capacity will have almost tripled, from the present 4 gigawatts to almost 11 gigawatts. Is supply delivered through the interconnectors to be permitted to enter the capacity market? If so, the important question is: what legal and contractual guarantee of supply will exist? I underline the words “legal” and “contractual”. My understanding is that, at the moment, the supply comes and goes according to who is willing to pay most—it is purely economics. If that 11 gigawatts is to be brought into play for security of supply, what security is really there? We need some answers.
If Hinkley Point falls further behind schedule—which seems an odds-on certainty, although we hope not—the capacity market auctions will be very important. That is true not least if an additional pressure on the capacity margin arises due to the switch to electric cars, as the national grid warned only last week in the Financial Times, which I happened to pick up.
Finally, I will refer briefly to what I call the two elephants in the report. The simpler one, to which the noble Lord, Lord Turnbull, alluded in passing, is carbon capture and storage. It seems to have all but disappeared from current planning, but not long ago it was all the rage in these debates. All around the House people were saying this was the future and now it is not mentioned at all. I am not surprised because I was a chemist in a previous incarnation. The chemistry is not difficult but the cost of doing it on a big scale will be huge. It is a cost issue. With CCS it is not a technical problem but a cost problem. Adding those costs now, on top of everything else, has surely made it a political no-chancer. However, it would be good for the Minister to state a suitable epitaph for CCS, or otherwise bring us up to date about what its place is in government planning.
The second pachyderm in the room—again the noble Lord, Lord Turnbull, identified it—is the large and diffused one of current climate polices and the Climate Change Act. It was outside the scope of the report—I understand why—but its influence runs through the report and we should acknowledge that.
Along with the noble Lord, Lord Turnbull, I must declare my interest as a founder trustee of the Global Warming Policy Foundation, which is committed to open debate on these matters. I share the view that it is unfortunate that the noble Lord, Lord Lawson, who chairs the foundation and comes out well from the report, is not able to be here. Only time will provide the empirical evidence to justify or otherwise current climate theories and predictions, but the practical impact in the present is huge—and not only on electricity. Let me doff my cap in two other directions. I do not know whether any other noble Lords saw “Newsnight”, last Thursday, when Professor Richard Hull, professor of chemistry and fire science, summed up the cause of the Grenfell Tower tragedy as follows:
“The Government has prioritised insulation over fire safety”.
It will be interesting to see how the judicial inquiry looks at that.
One could also refer to the complete reversal of government policy on diesel cars as the serious impact on public health became apparent. All that was driven by the same decarbonisation agenda.
These matters are obviously beyond the current report but the common factor is the practical impact of current climate policies. Perhaps time will justify these policies. I cannot rule that out as a possibility, although my judgment is to doubt this. What is certain is that the price to be paid for current policies, in all sorts of ways, is very high and typically falls disproportionately on the poorest and most vulnerable in our society. Will it all have been worth it? My only hope is that I will live long enough to find out.
Lord Burns (CB)
My Lords, I also thank the noble Lord, Lord Hollick, for his outstanding period of service as chairman of the Economic Affairs Committee. He had a happy knack of being able to take on timely subjects for investigation and completing reports that are relevant and make an important contribution to policy debates. That is a great ability. This report certainly falls into the category of relevance.
I was pleased to be part of the inquiry. It is not a subject that I have had much to do with in recent years, but I learned a great deal in the process. For many years, I have been puzzled by a number of things. Why was it that industry, particularly the large users of electricity, was being so vocal about the prices it was being charged relative to competitor countries? I really wondered whether that could be true. Similarly, there were extraordinary concerns about rising prices to retail users that became an election issue. How could we suddenly find ourselves in an election where issues of price capping should become a significant question? How is it that we came to be paying all this money for Hinkley Point when it is shrouded in so much uncertainty? Why has it become so difficult for any outsiders—I count myself as an outsider—remotely to understand the mechanisms of the present system for electricity supply, particularly with regard to competition? That was my starting point. As I read the report again over the weekend, I found that it went some way to help us understand these developments.
As the noble Lord, Lord Hollick, set out in his introduction, at the outset there are two important milestones. The first is the remarkable 1982 energy policy introduced by the noble Lord, Lord Lawson, when he was the Energy Secretary—during the very brief period in the 1980s when I was not working for him—and the second is the early 2000s when the policy evolved to include concerns about climate change and capacity margins as the older power stations came to the end of their life. It is important to note that the report does not question the need to reduce emissions and to ensure a sufficient level of excess capacity; rather what it does quite effectively is to question whether that needed to involve as much government intervention as has taken place and whether that intervention could have been done in a more effective way, with less distortion.
The fundamental question is whether the recent policy has delivered an answer to the trilemma, as it has come to be known, of security, affordability and emissions control. As the debate has developed today, we can see that the scorecard is pretty uneven. We have ended up in a situation where we still have a rather slim capacity margin. We are told that this has been handled well in the short term but that there are still questions about the longer term. There is some acceptance that capacity auctions mark a step forward, but the report makes clear the danger that it is biased towards solutions which can be brought forward quickly rather than solutions for the longer term.
As we have also heard, average domestic bills have risen sharply, mainly because of the international prices of fossil fuels but also because of the cost of low-carbon policies. In total, UK prices have risen faster than they have in other EU countries. The committee is worried that the costs of low-carbon policies are not transparent and difficult to scrutinise. The position is even more striking with regard to industrial energy prices when compared with other EU countries. We received a lot of evidence about the extent to which these were moving industrial activity from Britain to other countries, and again the issue of transparency was raised strongly by the right reverend Prelate, and rightly so. On compensation schemes, in terms of how the trilemma is working it is important that there should be complete transparency about costs and on giving priority to certain objectives.
In fact, the reality is that the present approach can be summarised as follows: ensuring that security of supply is a political necessity, that decarbonisation has been determined by legislation, and that affordability is the residual which is determined by the costs of the first two.
The committee spent a lot of time trying to understand how it might be possible to restore a greater degree of competition. As has been mentioned, we concluded that we had to move away from the idea of the trilemma and place security of supply firmly at the top of the priorities. Once that has been done, the next question to arise is that of the correct balance between decarbonisation and affordability. For myself, I am persuaded that having decarbonisation as a statutory target is a severe complication in the balancing process, in particular as it is tested by the five-year objectives of decarbonisation which are also prescribed. Even more important is the fact that these objectives do not take account of the targets reached in other competitor economies, and so it is by this route that we end up in a remarkable situation where we have higher electricity prices for high electricity-using industries than elsewhere and an incentive for them to move some of their output overseas. As the noble Lord, Lord Forsyth, mentioned earlier, the consequence is that we have been more successful in decarbonising production than in decarbonising consumption. By exporting some of our carbon, we flatter ourselves about the progress that we have made at the expense, of course, of the industries involved in the UK. Again, the committee argued that there should be much more transparency about what is happening in this area. The report acknowledges that some offsetting compensatory measures have been taken, but with them we see even greater complexity in understanding just what the costs involved are.
It is a similar position with retail consumer prices, which are no longer as low as they were compared with other countries. As a result, we have seen a lot of dissatisfaction and loss of trust between customers and suppliers. Some talk about excess profits and politicians are tempted to reach for price controls, which might reduce competition if some potential participants withdraw. The evidence for neither conclusion is robust and is no substitute for well-thought out regulation of prices by a strong and effective regulator.
Undue complexity is often the consequence of poorly chosen objectives and a reliance on short-term responses rather than a carefully designed long-term response. Complexity and uncertainty are not cost-free. As pointed out by our witnesses, the energy market is a delicate combination of public policy and private money; investors do not appreciate uncertainty and their presence in this market is essential.
Like the noble Lord, Lord Turnbull, I am persuaded that we must try harder to keep our ambitions for decarbonisation more closely in line with achievements in other countries. There is little to be said for being out of step. To achieve this, the committee was agreed that the Government should be prepared to use their powers to vary the pace of emission reductions in electricity supply and not be bound by a strict programme regardless of what is happening elsewhere.
Following the noble Baroness, Lady Bowles, I want to finish with a few words about competition and switching. Not surprisingly, in the search for more competition, attention has landed on encouraging switching by consumers as a way of increasing competition in electricity supply. I have no issue with this as far as it applies to consumer pressure on firms to offer better standard rate tariffs than other suppliers. However, there is a real trap if all that happens is that new and potentially switching customers are offered better deals than existing customers, and that such better terms last for only a relatively short time. It would not be unusual if those short-term switching incentives were funded by the subsequent inertia of those same customers, but it can also be the case that existing customers contribute to restoring margins. Alert customers have to switch again to maintain their advantage and go through the process regularly. It produces behaviours and responses that have plagued financial services, and its use carries some responsibility for the deterioration in the relationship between providers and customers in that sector. As special “teaser” deals often expire after one or two years, customers are forced into making an annual selection of the best provider. This is not a good way of encouraging trust and respect with suppliers. Rather than benefiting all customers, it can become little more than an exercise in cross-subsidy between switchers and non-switchers which damages the reputation of providers, particularly with their loyal customers.
I struggle to see how this behaviour can be in the interest of those who do not participate in switching and, if anything, it is likely to damage their interests. I emphasise that this is not an attack on switching, which is a critical aspect of competition between suppliers, but on this particular type of short-term pressure to switch. With financial services, I came to the view that the real benefit of competition comes where switchers not only help themselves but help the community at large to get better terms. Switching as we have it with some utilities often gives more of the appearance than the reality of competition. The only successful long-term switching policy is when the benefits go to loyal customers rather than to short-term switchers and where the deal is as straightforward as possible.
Real competition is where suppliers compete on grounds of efficiency and service, and not by putting one type of customer in competition with another. I hope that, as a result of the pressures that we have spoken about this evening, we will not end up believing that the type of switching now encouraged is somehow the solution to this problem.
Lord Howell of Guildford (Con)
My Lords, I declare an interest as chairman of Windsor Energy Group, as an adviser to Crystol Energy and Mitsubishi Electric and as a former president of the British Institute of Energy Economics. As the other non-member of the committee in this debate, I have no hesitation in dubbing it an excellent report, a first-class production. I strongly congratulate the noble Lord, Lord Hollick, both on his report and on his speech presenting it, and other noble Lords, particularly my noble friend Lord Forsyth and the noble Lord, Lord Darling. This is the kind of report of which, frankly, we need many more if we are to successfully unravel the absolutely disastrous energy policies of the last two decades that have caused so much suffering and difficulty, and set back this country decisively in international competition.
I will focus purely and simply on Hinkley Point C, which other noble Lords spoke about in detail as well. In a way, it is symptomatic and emblematic of the whole hideous mess into which our energy policy has fallen. The National Audit Office did a very telling and highly critical review which the noble Lord, Lord Hollick, mentioned. I gave evidence to that inquiry. Of course, much has been said about that this evening but I can bring a few more new items to the debate.
I was always worried about the Hinkley project, long before it had final approval here—indeed, I wrote a whole book about it a year or two ago—for the reasons we have heard this evening. I am even more worried now that it has been approved and is under way. I was worried before, as we have heard repeated again and again, because the design does not work and is unproven, the delays have been colossal, Flamanville is full of difficulties, there are vast cost overruns, Areva—the supplier of equipment to EDF—went bankrupt and had to be taken over, and much of the equipment is questioned. As we have heard, even since this report appeared and since the main concrete has begun to be poured, the budget estimates have started rising again by enormous sums. The delay projections have continued and of course will continue. Above all that, there is the eye-watering cost to consumers for decades ahead. We heard all about the grandchild of my noble friend Lord Forsyth. My grandchildren are in the same position. Of course, in 10, 15 or 20 years’ time, this cost will be well above what is likely to be the cost from renewables, even offshore renewables and without storage. If storage technologies develop at the pace they are now, the cost of renewables offshore and onshore for wind and solar will come down vastly. This £92.50 or maybe £89.50 strike price for Hinkley Point will be miles above that of electricity from renewables, let alone from conventional sources.
Why am I even more worried now than I was when it was being discussed and proposed, after the decision last summer that it should go ahead? There are two primary reasons. First, any failure, setback or major faltering would now threaten thousands of jobs and careers which have all been committed to this. There are enormous developments in West Somerset, with hundreds of new schools and houses being built. A vast new social project has come up and thousands of people have committed their lives to this going forward. That is the danger when you get into a project like this. It becomes almost impossible to see how you will escape from it if it goes wrong.
Secondly, we have heard this evening all sorts of reasons why there might be a failure at Hinkley Point C. The Government in their reply even have a section on a contingency—it is in an annexe—so they are presumably aware of the dangers as well. Any failure would do huge damage to UK-China relations. Our relationship for trade, business and security with China over the next 20 or 30 years is absolutely vital and has been built up very successfully. That would be damaged if this goes wrong and there would be, rightfully, feelings among both the 25,000 in West Somerset and our Chinese allies that they had been betrayed. Those are two worries that we cannot just brush aside. In particular, the Chinese have seen their one-third investment in Hinkley Point C as the way to further investment and development of their nuclear building capacities in Europe. Of course, they have fixed their eyes on building, with the Hualong technology, a nuclear power station at Bradwell in Essex.
So what do we do? I think there are two options. One is to stand here and all shake our heads and wring our hands, but I am afraid the milk has been spilled; the thing is committed and we now have to think of how we can move out of the very dangerous and immensely damaging situation into which policy-makers have allowed us to drift. Of course, the answer is that there has to be a plan B at Hinkley Point: something else has to be built there. I suggested this some months ago, amid some cries of dismay, but that is what I believe is going to happen. That is better than just wringing our hands.
Fortunately, the plan B that I think is beginning to take shape is being led by the Chinese themselves, who appear to recognise the sorts of difficulties we have discussed this evening. I think they see shrewdly that this cannot continue on the present path because it will lead to disaster. Incidentally, they have not paid their contribution yet to the project. The cheque has not yet been written—probably quite cannily.
What is the way forward? I think it lies in the direction of what the Chinese authorities are now calling the “nimble dragon” technology. This is the very rapid development—much more rapid than over here or in America—of small, modular reactors, which the noble Lords, Lord Darling and Lord Hollick, mentioned. The Chinese have installed a working one, I think, on the island of Hainan, and are developing this whole concept very rapidly indeed. This is the Linglong technology, as opposed to the Hualong technology, which they were talking about for Bradwell. They are also developing, as are other countries, technologies for using the molten salt methods, which provide much more passive cooling and much less radioactive and much safer forms of nuclear energy generation. They are safer and quicker and they may be, although this is yet to be proven, cheaper.
What we are talking about are rows of smaller, 300 megawatt plants—so you would need six, seven, eight, nine or even 10 of those to match the gigantic 3.2 gigawatt plant that was planned for Hinkley. But I would not be surprised if the Chinese begin to see these smaller, modular reactors as an alternative to the whole EDF Hinkley project, in which obviously they have declining confidence. As I say, there would need to be a series of them. They can be built in the factory. A learning curve takes place but this is now well within reach, and certainly within reach in the timescale of between now and 2027.
That is the new point which I thought I would add to our discussion: we may yet be saved by the farsightedness and perception of the Chinese, whom we must not let down and we must work with to develop an alternative to the Hinkley dinosaur. Nuclear power, which I have always been very supportive of, offers two prizes: security of supply and low-carbon electricity, which is good; as well as, of course, the supply of non-intermittent electricity. The question is: how much should we pay for it? At Hinkley the question was never properly asked and has certainly never been answered. It should be, rather quickly.
Lord Layard (Lab)
My Lords, like other members of the committee, I add my thanks to the noble Lord in front of me for the excellent way in which he has led our committee over the years. I thank him very much.
I will speak about only one recommendation in our report: the last recommendation, about research and development, which I think is one of the most important. It is important for one very simple reason: if we are to prevent disastrous climate change, we have to make clean energy cheaper to produce and to distribute than dirty energy, and the only way to make clean energy cheaper is through research and development.
That is why in 2015 Sir David King and six Members of this House, of whom I was one, proposed what we called the global Apollo programme. The idea was adopted by President Obama under the title Mission Innovation, and in December 2015 in Paris the 22 leading countries in the world other than Russia joined this Mission Innovation consortium. In doing so, they pledged to double their public expenditure on clean energy research and development by 2020. Over the 18 months since Paris, these countries have developed a structure of working parties in which different countries lead on the research areas, which include solar and wind generation, electricity storage, electric vehicles, smart grids, heating and cooling.
The issue for our committee was how the UK could best spend the extra £200 million a year which the Government, in their spending review, have pledged to energy reserves and development by 2020. Our committee recommended a specific approach: that much of the extra money should be devoted to a national energy research centre—a dedicated energy research laboratory. This idea was based on the evidence, which has been referred to, from Sir Richard Friend, the Cavendish professor of physics at Cambridge, and Professor Peter Littlewood, formerly of Cambridge and now head of the Argonne National Laboratory in the United States. The proposal was in fact heavily influenced by the American experience and the fact that they have 15 national energy laboratories, largely financed from public funds and promoting new, disruptive energy technologies.
There are five main arguments for having a new energy research lab, rather than spreading all the money around in many smaller packets. The first is the argument of critical mass, since progress is much more likely when many researchers are tackling the same problem in close contact with each other than when they are scattered abroad. The second argument is passion, since a whole organisation that is determined to solve a problem is more likely to do so than scattered individuals, most of whose colleagues work on other problems.
The third is leadership. The Government, as we have been told, have established an Energy Innovation Board, chaired by the Government Chief Scientific Adviser, to co-ordinate research in the field of clean energy—and spend the extra money. But the chief scientist has lots of concerns, while the additional element of a focused laboratory with a committed leader would add greatly to the chances of progress.
The fourth is training. The laboratory would train up the large research workforce that will be needed in the new energy industries of the future. This proposal could make clean energy research the career of choice for many of our brightest young scientists. If we want to establish the UK as a leader in this huge and rising industry, a dedicated national laboratory would be a key ingredient. It really is in the national interest.
Finally, however, it would work only if it maintains the strongest possible links with business. This is one of the advantages of a national laboratory: it can have sufficient infrastructure to bridge what is commonly called the valley of death—that is, the valley where great ideas die without being translated into operation. This laboratory would have to be a public/private partnership, with both elements being crucial. The public element is crucial, since it is a fallacy to suppose that the private sector will undertake the basic research needed for the breakthroughs that can save our climate. Such research is just too risky for the private sector to finance. That is much recognised by, for example, Bill Gates, who has offered private money to come in behind the public money, a lot of which fails and some of which makes staggering contributions.
At the moment, we find that even in the major international companies which manufacture solar and wind equipment, the ratio of R&D to sales is under 2% compared with, say, 5% in consumer electronics. We know that even in electronics public sector research has played a major role. As is well known, publicly funded R&D has been central to the development of the computer, semiconductors, the internet, broadband and satellite communications. Equally important are the strong links to industry. The steady fall in the price of semi-conductors, known as Moore’s law, has been largely due to the International Technology Roadmap for Semiconductors, which is a public/private partnership using mainly public money, so the concept for a national energy research lab has to be a public/private partnership with mainly public money.
We are not talking about big money. The £200 million—an extraordinary figure to me—which we now spend on clean energy research is 2% of publicly funded R&D in this country, yet clean energy is surely one of the highest-priority areas for research. There is something very self-regarding in the way that research money is spent and fails to be spent on a matter of such incredible consequence for the future of mankind. I believe the committee’s proposal for a national energy research centre is an exciting and inspiring way to spend the money. Surprisingly, the proposal was not mentioned in the Government’s response to our report, but I very much hope the Government will come around to the huge importance of the idea.
Lord Kerr of Kinlochard (CB)
My Lords, I need to declare an interest as a director of a power company. I also need to join the declarations of respect for the noble Lord, Lord Hollick, for his admirable chairmanship of the committee and of loyalty to the Jacobite takeover by the noble Lord, Lord Forsyth.
I had intended to make a number of extremely important and useful points, principally about Hinkley Point and capacity margins, but they have all been made already, so I will make a smaller number of probably less interesting points. Why did we get into this mess? When, in 2013, Mr Cameron agreed the strike price deal for Hinkley Point, the expected lifetime subsidy cost to the consumer was £6 billion. Since then, forecast wholesale power prices have come down and therefore the subsidy has risen to the number that astonished the right reverend Prelate and astonishes us all—£30 billion—and that is not the end. It will go on going up because the wholesale price of energy in the European market is set to go on going down. There is absolutely no doubt about that. The United States is now exporting shale gas LNG to Europe. There will be a Nord Stream pipeline across the Baltic bringing more Russian pipeline gas. There will be Yamal LNG from Siberia. There will probably be Iranian Pars LNG from the Gulf as well as Qatari LNG. The US is already the largest producer of natural gas in the world, and it will shortly be the second-largest exporter, following only Qatar. That is bound to drive down the price of gas in Europe. Already we can see that the cheapest way of meeting the trilemma would be combined cycle gas turbine gas plus wind power. We can already see that the price of wind is coming down, as the noble Lord, Lord Howell, said. The next auction for offshore wind will probably settle at a price lower than the Hinkley Point price, and that price will go on going down.
I do not know why Whitehall has assumed throughout the last 50 years that the price of natural gas in the world will go up. It seems that Whitehall still does, judging by the response to the report. I do not understand that; perhaps the Minister can explain. I share the right reverend Prelate’s feeling, and indeed the feeling of a number of noble Lords, that it cannot be right that future consumers—my grandchildren and those of the noble Lord, Lord Forsyth—should be forced to take on the ever-escalating cost of this project. There must be something that we can do. If we are seriously concerned about intergenerational fairness, or the unfairness of regressively recovering costs from the consumer, we have to do something.
I take the points made by the noble Lord, Lord Howell, that thousands of people now have their lives tied up in this project and that the Chinese dimension is important. Actually, my reading of the Chinese dimension is slightly different: I believe that the Prime Minister’s instincts were correct and that she would have cancelled this project last September but for people persuading her that it would be very upsetting to the Chinese if we did so. I did not feel that at the time. I thought that if the Chinese had been told we were cancelling for political or security reasons—that we did not want Chinese involvement, therefore we were cancelling—they would indeed have taken serious umbrage. However, if we had gone to the Chinese and said, “We are cancelling because the economics of this project make no sense at all”, I think the Chinese, who are hard-headed about these things, would have agreed. I ended up being very encouraged by what the noble Lord, Lord Howell, had to say: maybe the Chinese have recognised the point and are already thinking of a possible answer. However, we cannot just do nothing; we cannot let the juggernaut run ahead.
It may be that the EDF dimension of the problem will solve itself for us. If we do nothing, the project may well implode anyway. Of the four current EPR projects that EDF is running, the two in China are a couple of years late, Flamanville is six years late and the Finnish one is now nine years late and three times over budget. This year, Piquemal of EDF has gone, as the noble Lord, Lord Forsyth, reminded us. EDF’s share price was €80 a decade ago; it is €9 today. President Macron’s Government have just told EDF that 17 of its fleet of 58 nuclear stations in France must be closed. The noble Lord, Lord Hollick, mentioned the most recent escalation, and it will not be the last. He mentioned the latest delay, which is another 15 months out to 2027, and only an incurable optimist would expect no further delay.
This brings us to the capacity margin. National Grid tells us that it is running at about 4%, which is very tight. National Grid also tells us that it expects to see 9 million electric vehicles on UK roads by 2030 and, by 2050, a peak demand of 18 gigawatts—that is, six times Hinkley Point. Yes, we can expect problems of peak demand to be evened out by then due to improvements in battery technology and storage, smart charging and smarter domestic use, but the margin of supply over demand is really tight and we are already resorting, as the noble Lord, Lord Forsyth, said, to some extremely suboptimal ways of dealing with it. Paying heavy industry to switch off at peak times really does not help with the national productivity problem. Encouraging the resort to small, mobile, diesel-fired generators in large numbers outside hospitals and factories is good for neither environmental nor economic policy.
We all know that Brexit—if it happens—will deter inward investment. Being unable to guarantee secure power supply 24/7 all year round is a further disincentive that we do not need. Yes, there is ongoing investment in interconnection but, as the noble Lord, Lord Darling, hinted, talking of 2006, interconnection can be a bit unreliable. My cynical answer to the right reverend Prelate’s question about how good a guarantee would be is that I cannot see EDF switching off the lights of Paris to keep those of London burning. That seems to me unlikely. Leaving the emerging EU energy market will mean that we lose reassurance that we might have got that way—although I do not think that we would have got much.
The noble Lord, Lord Hollick, has drawn attention to the increasing age of the nuclear fleet, which is important. Of the 15 stations that produce 20% of our power, all but one will have reached the end of its design life by 2023. Yes, life extensions have been agreed, and no doubt all the right checks were done, but there will inevitably be more temporary shutdowns of the kind that plagued EDF’s French operations last year.
Looking at the capacity margin and those uncertainties ahead, I find the Government’s response to our report’s arguments disconcertingly complacent. I was a civil servant myself, so I recognise tosh when I see it, but I find it astonishing that Mr Jesse Norman, who has a reputation as an intellectual, should have put his name to this stuff.
My last point is more genial. We need a plan B—not just a Hinkley Point plan B, where I very much agree with the noble Lord, Lord Howell—but for what we do if there is delay or cancellation by someone else. We need a national plan B. Last month’s NAO report provides ample reason, if our report did not, for the Treasury to look again.
What happens if there is a similar problem in Cumbria at Moorside? It looks to me very much as if there is—for totally different reasons. The problems of Toshiba and NuGen suggest that one must, at the minimum, expect major delay in that project. That is also 7% of our expected electricity production: 7% from Hinkley point and 7% from Moorside. We need to know what the Government intend to do if these risks arise. It is not good enough to say, as the response to the committee’s report does, that all we do now is nothing: “We wait until late 2021 and then, if any gap in capacity is emerging, we can have a quick auction and, in four years’ time, fill the gap—no problem”.
Short-term, piecemeal policy-making precludes batch orders, prevents sustained production runs and leads to grossly uneconomic procurement. It is a crazy way to approach these risks—to say, “Let’s do nothing and, if there’s a gap, okay, we can have an auction in four years’ time to fill the gap that would have arisen in 2025”. It usually makes better sense to have a plan, so the committee’s first recommendation—for a plan B for what we will do if there is a gap as a consequence of Hinkley Point—deserves a proper answer. It has not had a proper answer from the Government so far. The House and the country deserve an answer, and I look forward to hearing from the Minister.
Lord Grantchester (Lab)
My Lords, this has been a very interesting debate on an important report from your Lordships’ Economic Affairs Committee, which makes powerful reports and has a very strong membership. I congratulate the chairman, my noble friend Lord Hollick, on his excellent stewardship of the committee. The report has taken the long perspective of Britain’s energy policy and examined it, posing some fundamental questions and approaches. This highlights two clear areas of focus where it has expressed key concerns. The first relates to security of supply and the second to the cost of energy policies for consumers and businesses. The debate has benefited from so many committee members’ strong contributions, and it is wonderful that the report has brought forward other Members of the House to speak tonight.
In its rather more long-term view of the objectives of energy policy, the report could have drawn more attention to the fundamental shift in paradigms over recent decades; we now live and operate in a more global context, which signifies transnational interdependences. The report takes it as a given that the UK is committed to reducing carbon emissions, when it might have shown more support and recognised the global challenge of climate change. This has reframed the debate over the energy trilemma of security, affordability and clean energy. Most speakers tonight have examined that trilemma, whose three objectives can perhaps be brought together into one outcome, or even market—strange as it may seem—as expressed by my noble friend Lord Darling.
The Government must ensure that the UK has secure energy supplies that are consistently reliable, affordable to the lowest cost and clean from global warming emissions. This inevitably means that there will be trade-offs on the balance, while the UK has to manage the fundamental transition to a low-carbon economy. The committee is right to examine that in detail.
The Government have to maintain a consistency of approach, a stability in policy framework and a compatibility of policy goals. The answers need to recognise the imperative need to tackle climate change, maintaining investor confidence to support the massive task ahead, and phasing out old technologies as new, innovative, low-carbon industries emerge.
In sharing the two key challenges in the report—security of supply and the cost on consumers and businesses—I would like to raise some inconsistencies of approach, not in the report but in government policy, which could result in contradictions.
The report mentions development of interconnectors, and several noble Lords have asked questions on the security of interconnector supply. At the moment, there are five interconnectors able to supply up to 4% of capacity, and additional ones could double this over the foreseeable future. Interconnectors can obviously act as an insurance regarding supply. On EU insistence, they are included in the capacity market, but the energy exchanges of these interconnectors are not calculated or included in monitoring supply margins. What interpretations need to be given to the narrowing of supply margins if interconnectors are not included? If supply through interconnectors is not included in the critical margins, should we be less concerned at the tightening of supply? How secure can they be in the context of being available, not necessarily at times of peak demand but, more importantly, at critical capacity margins? What will be the position and costs regarding access to international supplies on Brexit should the UK leave the internal energy market? What assurances can the Minister give that reliable access will be not only maintained but increased further?
The challenge of leaving the EU will impact on the energy market, as it will on others. To foreshadow the debate in your Lordships’ House later this week, Britain’s membership of Euratom is also crucial, with Britain’s wider civil nuclear strategy unclear. Putting aside the reasons, and their validity, for leaving Euratom, leaving will have three key consequences. First, it will be more difficult to ensure a long-term supply of nuclear fuel, of which the UK has no domestic sources. In concluding that Britain must leave Euratom, can the Minister be confident that this will not reduce access to nuclear fuel? Secondly, leaving Euratom risks the timely supply and supply chains of isotopes used in nuclear medicines. Thirdly, leaving Euratom risks access to nuclear research funds, scientific programmes and scientists. Are the Government being consistent in their reasoning regarding energy policy?
Regarding nuclear power and its supply to Hinkley Point C, the report has highlighted issues around the cost, value for money and when it is likely to be redundant. Can the Minister answer the critics who argue that a gap in supply could open up in the mid-2020s? My noble friend Lord Hollick underlined the growing difficulties with Hinkley Point C in his opening remarks and several noble Lords have spoken passionately on its finances. The noble Lords, Lord Howell and Lord Kerr, devoted their speeches to the risks of this undertaking.
Onshore wind also reveals an air of inconsistency in government policy. It is the cheapest form of renewable energy, yet it is not allowed to compete in the latest round of contracts for difference. The recent Policy Exchange report showed that repowering old wind farms could be eminently sensible as they would be relatively cheap to rebuild and have existing connections. Can the Minister justify why onshore wind, the cheapest form of energy to the consumer, is not allowed to compete, even at zero levels of support? In contradiction, capacity payments have been made available to diesel generators and to coal. Yet, at the same time, coal is being asked to pay the carbon price support, with a view to being phased out over time. In effect, we pay coal to stay open and then impose a charge on it so that it closes down. Both costs get passed on to the consumer. The noble Lord, Lord Forsyth, highlighted this nonsense.
The committee’s report highlights the present intermittency of supplies of renewables—solar and wind—both of which have been instrumental in powering the increase in renewable generation. This precariousness of supply would be transformed by battery storage development. As this technology develops, is the Minister confident that the regulatory framework is ready to implement this innovation? Does he agree that a new definition of storage is needed to reflect its roles in the three areas of generation, demand and network balance? A new licensing scheme could recognise the flexible use of battery storage. The long-term strategy must be to develop storage, not only to augment the security of supply from day to day but to provide interseasonal balance to the winter, when renewable power is often limited to wind generation.
The committee’s report also calls for the Government to be technology neutral and to allow an open auction. While the Government would agree that they will not pick winners and losers, they should perhaps be prepared to support what I shall call late developers rather than losers. I note in this regard that tidal lagoon technologies could be supported in this present round of CfDs. This highlights the cost of capital in the development of new technologies. If the Government were to take a stake in technology investments, the costs to the consumer would be greatly reduced. One of the criticisms in the NAO’s report on Hinkley Point was that the Government could have reduced costs to the consumer if they had taken a stake. In the light of tonight’s debate, others may argue that that would have posed even more risk to the UK. In the transformation of the UK’s power supplies, would the Government be willing to review this policy in the interests of future customer bills?
Although this was not mentioned by other speakers tonight, the report is also right to mention the Government’s introduction in 2013 of the levy control framework that sets the budget cap for expenditure on renewal, low-carbon generation which is added to consumer bills. This has resulted in several peculiarities and inconsistencies. Reducing fuel prices have pushed up the costs through the payment of CfDs. This rapid rise and exceeding of the cap has prompted widespread changes to framework schemes. The National Audit Office highlighted that the capacity market is not included in the LCF and that it produces a cost to the consumer. The Committee on Climate Change has also recommended that the Government should report regularly on the full costs and impact of all their levy-funded schemes, recognising that framework schemes can reduce energy costs as well as add to them. Furthermore, the rapid reversal of policy has severely impacted on investor confidence to participate. Can the Minister confirm that a full review of the LCF is ongoing and will assess all the concerns regarding this policy instrument?
The noble Baroness, Lady Bowles, made an important and powerful speech on the governance of energy policies. I hope that the Minister will reflect on her comments and those of the noble Lord, Lord Burns, on switching, especially in relation to the capping of the standard variable charge, on which there was a special ministerial Statement the week before last.
I would like to ask the Minister about the fifth carbon budget and the decarbonisation target for 2030. Under the last Energy Act, the Government have the power to set a decarbonisation target for the power sector for 2030. Will the Government now come forward and set such a target?
In conclusion, taking the report of the committee and the speeches of noble Lords tonight as my text, this report has raised challenges that need to be addressed if we are to have a successful outcome for the UK’s future energy policies.
Viscount Younger of Leckie (Con)
My Lords, I thank the noble Lord, Lord Hollick, for his work as chairman of the Economic Affairs Committee, a position he stepped down from at the end of the last Parliament. This report of the last inquiry of his tenure gives much food for thought. It also provides evidence, should it be needed, of the value that your Lordships bring by providing a long-term perspective on the policy decisions of successive Governments. I also congratulate my noble friend Lord Forsyth on his appointment in taking over as the new chairman.
Many questions have been raised during this interesting debate, particularly from the noble Lord, Lord Grantchester. On the assumption that I cannot answer every question, I will certainly write to all noble Lords who have participated in the debate.
In January this year, the Government published the industrial strategy Green Paper, which identified three major challenges for energy policy. The first is to ensure that the shift to a low carbon economy is effected in a way that minimises the cost to UK businesses, taxpayers and consumers. The second is for the Government, working with the energy industries and regulators, to deliver the changes to energy infrastructure required in the transition to a low-carbon economy. The third challenge is to make sure that the UK capitalises on its strengths in the energy industries to win a substantial share of global markets.
The forthcoming emissions reduction plan, or clean growth plan, as it is also known, will set out how government will reduce emissions through the 2020s. We intend to publish that plan when Parliament sits again after the Summer Recess. The noble Lord, Lord Hollick, pushed me on who might lead the energy review, and Dieter Helm was mentioned. I understand that this was the result of a leak in the Guardian last week. The announcement is yet to be made, and it is with the Secretary of State at the moment.
On the debate at hand, we understand the concerns that the committee expresses, and the Government agree at least in part with a number of the solutions proposed. However, some important differences remain. To start, I will focus on some points where we agree. The committee agrees with the Government about the previous objectives of UK energy policy—namely, that we need secure energy supplies that are reliable, affordable and clean. The committee also recognises that these objectives are shared by many countries around the globe.
At this point I will say a word about Paris. I am sure many noble Lords will share the Prime Minister’s disappointment that the US Government have decided to pull out of the Paris agreement. Even so, following the G20 summit she reiterated that,
“The UK’s … commitment to the Paris agreement and tackling global climate change is as strong as ever”.
However, decarbonisation is only one consideration. The Government made clear in their Green Paper on industrial strategy the importance of security of supply. They also emphasised affordability for households and businesses and the need to secure the industrial opportunities of energy innovation. However, my right honourable friend Greg Clark, in the other place, in his oral evidence to the committee, said that getting the right balance between all the objectives can be like trying to solve simultaneous equations. The right reverend Prelate the Bishop of Chester conceded that the supply of electricity is a complex matter. How right he is. On the subject of complexity, I will comment on Hinkley Point C later on in my remarks, as that was a central theme that came out of this debate.
The committee thinks that successive Governments have not struck the right balance, and says this has led to two problems: insecurity of supply and high energy costs. First, I will give a short reflection on some history—I note that the noble Lord, Lord Hollick, eloquently set the scene in greater detail on this.
The committee’s report looks back to the liberalisation of the energy market, driven forward by my noble friend Lord Lawson of Blaby. It is argued that this change, with other factors, led to significant reductions in energy prices in the UK. However, old generating capacity was wearing out and not being replaced, and the world became increasingly concerned about the emissions of greenhouse gases. This led Governments to intervene in the market in the early 21st century, to bring forward new low-carbon plant and to address capacity concerns. The committee accepts that intervention in the liberalised market was necessary to address these issues—I hope that my noble friend Lord Forsyth recognises this, given his strong criticisms in his speech which centred on too much intervention in the energy sector. However, the committee thinks that the way in which Governments intervened was unhelpful. To address this situation, the report proposes five reforms. I will briefly comment on each in turn.
First, the committee proposes that we should reconsider the relative priorities of the three objectives of energy policy. Its report is concerned that the legally binding decarbonisation target for 2050 trumps the other two objectives. In its opinion,
“Security of supply should be the first and most important consideration in energy policy”,
and it says that,
“affordability should not be neglected in the pursuit of decarbonisation”.
Keeping the lights on is an extremely important issue, and the committee is absolutely right to raise it. But the Government do not agree that security of supply has fallen down their list of priorities. When appearing in front of the committee, the Secretary of State for BEIS said that security of supply is the “sine qua non”.
The committee argues forcefully that the lack of a long-term energy strategy over previous decades saw the planned closure of energy-generating capacity without its adequate replacement being secured. However, the Government are addressing that through the successful launch and operation of capacity auctions, as well as contracts for difference, which have brought renewable capacity at a lower cost. Over the past decade, we have seen renewables grow to provide nearly a quarter of the UK’s electricity generation, but the system has remained consistently reliable. National Grid has the tools it needs to manage the system and meet the highest reliability standard in Europe.
The capacity market is already securing the country’s electricity from 2017-18 through to 2020-21. Many noble Lords this evening have acknowledged the value of the capacity market. The noble Lord, Lord Burns, thought that it did not deliver long-term solutions, but we disagree with him. The capacity market auction in December 2016 saw around 3.4 gigawatts of new capacity, of which 1.5 gigawatts was new gas—for example, a new CCGT plant in King’s Lynn and a new OCGT plant in Spalding help to emphasise that.
National Grid’s winter outlook consultation, published on 15 June, gave an initial forecast that next winter’s derated electricity margin range would be an increase on previous years. The noble Lord, Lord Darling, raised a point about capacity margins being rather narrow, particularly on a cold winter’s day. However, National Grid’s latest winter outlook consultation, with next winter’s margin assessed at between 7.2% and 9.9%, is much higher than the low point of 5.1% for 2015-16. We believe that this shows the effectiveness of the capacity market mechanism.
The noble Baroness, Lady Bowles, asked how new capacity will come through the capacity market. She may know this, but I reassure her that new capacity is already coming forward through the capacity market in a variety of gas generators and other types of new capacity, including innovative new smart technologies, such as demand-side response and storage. This bears out our belief that the capacity market is the appropriate mechanism to ensure security of supply for this country.
If the Government are taking security of supply seriously, do we need to give affordability a higher priority? Like the committee, the Government believe strongly that energy should be affordable for both households and businesses. We have cut the cost of our green policies. For example, measures that we have taken to reduce the cost of the feed-in tariff will save between £380 million and £430 million a year by 2020. We are also helping industry to offset the costs of climate change and energy policies, with a substantial relief package in place for eligible energy-intensive industries.
Domestic and industrial efficiency is important as well, both to reduce costs and to decarbonise. A recent report from the independent Committee on Climate Change shows that energy-efficiency policies have offset the cost of energy policies and resulted in lower energy bills. The Government have a number of schemes to encourage energy efficiency in industry and business. For example, the climate change agreements scheme allows energy-intensive businesses to pay reduced rates of the climate change levy tax in exchange for signing up to energy efficiency or carbon reduction targets. We are working to implement regulations that will require all residential properties let from April 2018 to meet a minimum energy efficiency standard, helping keep energy costs lower for tenants.
The second proposed reform—recommendation 12 in the report—is that the Government should allow time for the development of innovative and more cost-effective technologies that will provide security and help us decarbonise by varying the required pace of emissions reductions. My noble friend Lord Forsyth asked whether the Government will alter the pace of decarbonisation targets. He may know that the Climate Change Act allows flexibilities to meet a carbon budget, including using international carbon credits or banking overachievement from one carbon budget to the next. The Government will set out in the forthcoming clean growth plan how they will decarbonise the UK economy in the 2020s.
Innovation will be a crucial part of bringing down the cost of clean technologies and maximising benefits for the UK. As well as the £500 million for low-carbon innovation announced at the spending review, last November the Prime Minister announced £4.7 billion of additional R&D funding, some of which will support our clean growth objectives.
The third proposed reform is that a neutral, fully competitive supply auction should be held for the supply of electricity. The noble Lords, Lord Darling and Lord Burns, and the right reverend Prelate the Bishop of Chester asked what the Government were doing about prices. I reassure the House that the Government are focused on reducing costs for consumers, and that is why we have announced a cost of energy review. We have reduced subsidies for renewals, and, for example, action has been taken to reduce the feed-in tariff, representing a saving of £5 on the average household electricity bill. The Committee on Climate Change has said that energy efficiency measures have more than offset the cost of energy policies.
The right reverend Prelate the Bishop of Chester and the noble Lord, Lord Burns, asked whether I lamented the lack of transparency in bills—I think that was the gist of the question. The Government recognise the importance for consumers of having regular, reliable data on the impact of policies on bills. The department will publish its latest estimates of the impacts on domestic bills in the near future.
There was a discussion on switching, involving the noble Lord, Lord Burns, and others, but I do not entirely agree with the comments made by the noble Baroness, Lady Bowles. Switching is an important mechanism to allow consumers greater choice and prices to come down. I agree that some fine-tuning is needed, because I understand the concept of somebody switching and then—funnily enough—the prices seem to change a short time after the switch. There are some issues that need to be addressed. This House has taken through a number of consumer initiatives in recent years, but I hope that a review of that side will continue.
The principle of using competitive processes to cut energy costs is one the Government and the committee agree upon. I understand the attractions of a technology-neutral approach to auctions, if the judicious use of research and development funding could level the playing field for innovative technologies. But this proposal would represent a big upheaval for the industry and for investors. We would need a strong reason to take such action, since we often hear that change creates investor uncertainty.
We have already discussed security of supply. The Government believe we have the right tools available to address the issue. The current “contracts for difference” system is driving down the costs of low-carbon generation. The 2015 allocation round saw cost reductions of around 20%, compared with the levels of support under the renewables obligation. The current and future rounds are expected to deliver even lower prices. The arguments that the committee made in relation to this proposed reform are thought-provoking. However, while we agree with the committee that the Government should facilitate the operation of a competitive market that cost-effectively delivers secure supplies of power and carbon reduction, we do not see that the case has yet been made to replace the current arrangements with something new and untried.
I recognise the passionate views that many noble Lords expressed about the Hinkley Point project, and I will do my best to answer their questions. However, I am sure the House will realise that that is a debate in itself, so I will not be able to answer them all. We are putting in place robust technical advice, monitoring, assurance and governance arrangements to track the progress of Hinkley, and are working closely with EDF to secure the benefit of such projects. The nuclear power sector has a most important role in decarbonising our society. The House will be aware that EDF is the lead investor in the Hinkley project and responsible for its funding and construction programme. We remain committed to providing secure, clean and affordable energy for the UK, and will consider advice and funding models for future nuclear projects, including Moorside.
The noble Lords, Lord Darling and Lord Kerr of Kinlochard, and my noble friend Lord Howell, among others, raised concerns about Hinkley and asked about a so-called plan B. If Hinkley is delayed the capacity market would be the primary mechanism to procure alternative capacity if it is required.
I have made some overarching comments about having robust arrangements in place for Hinkley but I would like to go further. My noble friend Lord Howell alluded to information being available to explain further secure arrangements for Hinkley. We believe there are good reasons to be confident about Hinkley’s delivery timescales but, as I said, the Government will ensure that the project is closely monitored and the capacity market provides a mechanism to make good any delays in Hinkley delivering its capacity, just as it does with other capacity risks.
The House will know that there are three other nuclear projects based on the same reactor technology as Hinkley Point C and currently subject to delays. However, there are good reasons to be more optimistic about the prospects for delivery of Hinkley Point C on schedule—that is, by 2025 and not 2027. Hinkley Point C is a different proposition. Lessons have been learned and many of the causes of delay to the earlier projects do not apply to Hinkley Point C. For example, much of the delay at Flamanville is due to changes in regulation and design during the construction phase, whereas Hinkley Point C has already gone through the UK regulator’s generic design assessment, which helps to minimise this risk.
There are also provisions within the contracts for difference that incentivise delivery. EDF will receive payment under the contract only once the plant begins generating. If commissioning takes longer than four years—that is, beyond 2029—the delay will start to eat into EDF’s 35-year contracts for difference. There is a long-stop date of 2033, after which the Government can choose to terminate contracts for difference. However, I say again that robust technical advice, monitoring and assurance in the governance arrangements are being put in place to give an early warning of any problems that may arise during the construction. I hope that helps. One could say more but we are short of time in this debate.
The fourth proposed reform is to establish a new independent body with a wide-ranging remit to monitor and advise on energy policy. The body would also have oversight of the technology-neutral auctions just mentioned. The committee’s rationale is in part based on the recommendation by the Competition and Markets Authority that Ofgem should have a formal route for commenting on government policy. The Government will be setting out our response to the CMA recommendations in due course. However, I know that the CMA does not recommend the establishment of a new body. The Government welcome advice from regulators and other bodies, including this committee, and always take their views into account. However, we are not convinced that a new energy commission is necessary to provide further advice.
The noble Lord, Lord Hollick, stated that we need a proper regulation of prices and a strong regulator in Ofgem. I can reassure him that Ofgem is already able, under its current powers, to comment on government policy, and Ofgem responded to the CMA that it will use those powers when appropriate. Given that we do not believe a new system of technology-neutral auctions is necessary, nor do we believe a new body is needed to provide oversight. There is no agreement there.
The fifth and final proposed reform is that there should be more and better co-ordinated funding for research and development. The committee proposed that funding should be directed to enable new technologies to deploy on a commercial scale and that a new national energy research centre should be established, and that proposal was raised this evening. We understand the committee’s argument in this regard. The UK’s research and innovation system is world-leading. The Government are funding a number of programmes in energy R&D. Organisations such as the catapults, including the energy systems and offshore renewable energy catapults, are working closely with industry to make a real difference to developing critical innovations in the energy sector.
However, we are in the process of making it even better. On 1 April 2018 we are establishing a single strategic research and innovation funding body called UKRI—UK Research and Innovation. As I said in winding up on the Second Reading of the Higher Education and Research Bill, we should be proud of the UK’s standing as a world leader in R&I. I believe R&I will provide the cohesive and cross-disciplinary leadership needed to maximise international collaboration through the research system.
Beyond the co-ordination of strategic oversight, the committee wanted more money spent on R&D. To remind your Lordships, in the 2016 Autumn Statement we announcement the investment of an extra £4.7 billion a year in R&D by 2021. An example of a new initiative created through this uplift is the Industrial Strategy Challenge Fund, a new challenge-led fund to support collaborations between business and the UK’s science base. The first wave of this fund’s investment will be spent across six key challenge areas, including £246 million for clean energy in 2017-18. This will include a Faraday challenge to develop world-leading batteries that are designed and manufactured in the UK to exploit the industrial opportunity of vehicle electrification. I know Faraday was raised by a number of speakers and I hope that answers some questions.
I realise that time is running out. I conclude by paying tribute once again to the work undertaken by the committee and its advisers. We have read the report thoroughly and taken careful note of it. A number of areas, such as the importance of security of supply and the value of better co-ordinated research and development, show that there is much common ground between the committee and the Government. We are committed to tackling climate change, but I assure the House that we are taking steps to bring down costs, to capitalise on industrial opportunities and, as I said, the sine qua non of continuing to secure our energy supplies.
Lord Hollick
As the Minister has said, the hour is late but before the lights go out, to coin a phrase, I thank all noble Lords for their interesting, passionate, well-informed and forensic contributions. As the Minister acknowledged, many questions have been asked, of which some have been answered and some will be answered in future publications. However, it would be helpful if the Minister could send a detailed response to all those questions.
I think it was the Prime Minister who said recently that she wanted to reach out to different parts of Parliament, different parties and different groups, to try to get the best ideas and analysis. I suggest that the work of the Economic Affairs Committee, which is in excellent hands, will meet that request both carefully and precisely. A lot of detailed work is done in the committee. It draws strength from right across the House and its reports set out not only detailed analyses but important recommendations. If she has time to read the report, the Prime Minister will see that it answers the questions very precisely.