Lord Frost (Non-Afl)
My Lords, it is a pleasure to follow the noble Lord, Lord Lilley, but also a problem, as he has said almost everything that needs to be said on this subject already, and in a style that few of us can imitate.
In the time available, I want to critique one particular argument that we hear quite a lot nowadays: that we just need energy abundance. The argument runs: “We just need more of everything—nuclear, gas, wind and solar. Let’s just get building—it doesn’t really matter what. Let’s just get on with it”. In a way, it is a good thing that we hear this argument. I think it is put forward precisely because people sense that there is something awry with the arguments for renewables but do not want to follow the logic through to its conclusion. Indeed, the argument sounds superficially logical: let us maximise our ability to use everything—the wind is free, so let us use that when we can, and use other things when we cannot. It is said that building lots of everything makes sure we can do that.
There are two problems with this. The first is the best-known one: intermittency. You cannot control when the wind blows, so you have to have enough capacity to replace all your renewables capacity when there is zero wind and zero sun. The more renewables you have on the system, the more back-up you need and the bigger your problem is. Having more renewables requires even more capacity overall, and that brings more cost.
The second problem is perhaps less intuitively obvious but still crucial. It does not matter that the marginal cost of wind is free; it still needs a system to deliver it. After all, rain is free, but we still pay for our water because we need a system to get it to us. It is the nature of this system, and the cost that goes with it, that is the problem. Renewables are a low-density inefficient system; they require a grid that is fundamentally different in nature to the grid that conventional generation needs. It is much more diffuse, much less efficient and much more difficult to get the power to where it is needed, even when it is being generated.
To illustrate the point briefly, compare Hinkley Point to same electricity generated via wind. Hinkley Point C will generate 7% to 10% of the country’s electricity demand on a site roughly the size of Regent’s Park—reliably, all day and all night. To generate the same amount with renewables requires an area half the size of a county such as Nottinghamshire or Leicestershire. In practice, of course, it is much more spread out and much greedier in terms of land use than that.
Such a diffuse and intermittent system requires extra engineering to provide capacities that come automatically with a conventional grid: inertia, voltage support and system strength. All this comes with cost: grid balancing, vast transmission costs, curtailment and, as the noble Lord, Lord Lilley, said, subsidy and price support. Optimising a grid to do these things is difficult and expensive—that is just the physical reality of these things.
This is why “just build more of everything” is a fallacy. You cannot lower electricity prices by adding more of the very technology that increases the costs. “More of everything” just multiplies the most expensive and complicated part of the overall bill. That is why “build more of everything” is not a strategy; it is a refusal to be intellectually honest and a reluctance to face up to what is necessary if we are to get costs and prices down. What is necessary is not layering renewables on top of gas or nuclear but halting renewables expansion altogether, before any more damage is done.
The Minister of State, Department for Energy Security and Net Zero (Lord Whitehead) (Lab)
My Lords, I congratulate the noble Lord, Lord Lilley, on securing this debate. It is a very important debate not just on our present energy crisis as a result of events in the Middle East but to review, among other things, how the energy market has developed in the UK over a long time and what has gone into it.
I, maybe naively, constructed my remarks on the basis of the Question, which addresses why the UK has among the highest energy electricity costs in the OECD area. That is undoubtedly true, although we need to make a number of caveats about how different countries manage their energy markets. Looking at other countries is significant in that respect.
However, I am sorry, but not surprised, that the debate this afternoon has been on a much wider basis. It would require all of us to get around the table for about three hours to talk all these things out, and it would certainly take me more than the 10 minutes that I have this afternoon to remotely address all the points that have been made.
As a general point, I had wanted with my closing speech to address what is being done now about a number of things which I think between us we can agree have been problems and distortions in the UK energy market over a number of years, which need rectifying in the future. But—this is where we come to fairy tales—we know that climate change is real and not a fairy tale. We cannot address the problems and difficulties of the UK energy market and its prices without factoring in what we are doing about climate change. Otherwise, the best thing to do would presumably be to dig a whole load more coal mines and start coal mining again. In our situation, we have to deal with climate change as a central part of our energy economy.
We do that on the basis of a UK energy system in which, for example, more than half of the CCGTs presently in operation are likely to go out of commission within the next few years—a maximum of 10 years, because they are beyond their lives. That is real; it is not a fairy tale. As the noble Lord, Lord Moynihan of Chelsea, informed us, we have a grid system that is completely clapped out and was originally built for an entirely different energy system—not a modern energy system based on climate change and delivering things where they need to go. Whatever the situation, we would have put a great deal of effort in replacing the grid, so that it is up to modern standards and purposes, particularly as far as digitalisation is concern. That is not a fairy tale either.
As the noble Earl, Lord Russell, mentioned, it is also not a fairy tale that, as it works at the moment, the system is based on marginal cost pricing. That means that whatever you do in terms of cheaper power in the system, the most expensive element of the system when the bidding process comes in is the one that sets the marginal cost for the entire system. That marginal cost price is still dominated by gas—marginally less so than previously, but it is still a very long way from being resolved.
None of these is a fairy tale. These are things we have to address now with the energy system that we have. I think it was again the noble Lord, Lord Moynihan of Chelsea, who mentioned that one of the early mistakes that the previous Government made was to generate low-carbon power on the basis of the renewable obligation system, which gives rewards to the 30% of the system still run by renewable obligation-based energy over and above what you would expect it to get because of the volatile price of gas going into the system. But we have it in the system and we have to deal with it. What do we do about it? How do we get those elements out of the system and get a system that really reflects the cheapness of the power coming out of it for the future?
When we look at other energy markets, one answer to these questions is that various other countries are not exposed to those marginal prices and the gas input of 30% or so into the UK system that we are. In France and Canada, for example, it is only a few per cent based on gas. Even in Germany, there is a higher proportion but it is still much lower than us. People may like to say that this is what I would say this afternoon, but it is overwhelmingly the case that the present high electricity prices in the UK market are based on our being very high users of gas in the system to create electricity, and therefore our costs in the system go along with the volatility and changing prices of gas.
There are two more non-fairy tales, of course: the invasion of Ukraine and the situation in the Middle East at the moment. It is true that gas prices have come down a little since the peaks during the invasion of Ukraine, but they are still considerably higher than they were before it. That is the system we are dealing with at the moment.
What are we trying to do to deal with that? First, we have to make sure we get off gas in the system. Part of the mission to achieve clean power by 2030 and accelerate net zero is to place gas on the margins of the system so that it produces a relatively small amount, as has been stated, backing up the system rather than being a central part of it as a whole.
We have indeed brought in price caps, as noble Lords will know, to ensure that price rises are kept in check over a period. The Government never said that energy bills would all come down as a result of price caps or as a result of the transfer of some of the legacy things, such as the renewables obligation or the energy company obligation, away from levies and into the Exchequer. We did not say that would necessarily bring down bills; we said it would make sure those bills would go up rather less than they would otherwise. That is not a fairy tale but an actual fact—that is what has happened with, for example, the reduction in the Ofgem April price cap and the effect on the price cap coming up fairly shortly.
As noble Lords have mentioned, the Government are trying to make sure that prices come down for the industry. Mention has been made of the supercharger, which will cut businesses’ electricity costs by up to £420 million per year, which particularly relates to discounts on electricity network charges for businesses in sectors such as steel, cement and chemicals from 60% to 90%. That will make a real difference.
The Chancellor also announced in April that the Government will cut electricity bills by up to 25% for over 10,000 manufacturers from April 2027 through the British industrial competitiveness scheme. We are working hard to make sure that there is downward pressure on those bills, both domestic and industrial, through the moves that we are making against the background of the electricity system we have at the moment. At the same time, we have to tackle the structural problems that we have in the electricity system for the longer term. It is not just a question of putting more renewables on to the system; it is a question of revising the whole system so that the benefits of those renewables and low carbons come through and that the things that are a cost to the system go to the margins. That is why we are seeking to delink the cost of electricity from management by gas, particularly by taking action against the renewable obligation bodies that still make up quite a considerable portion of the energy market. We think that will produce a considerable reduction in the hold that gas has over the market over the next period. There will be fixed-price contracts for eligible generators, and we will be delinking from gas prices and protecting consumers from future crises.
I am aware that, as I had predicted, I have not been able to take in the entire sweep of this afternoon’s debate in one go. I warmly hope that the noble Lord, Lord Lilley, will secure a further two or three debates so that we can debate a number of the other issues.
To conclude, the Government are determined that families and businesses cannot be left at the mercy of volatile fossil fuel markets on an international basis. That is why we must press on with the transition not just for climate change purposes but for the good management purposes of having secure, homegrown power that will ultimately bring bills down for good.