Baroness Verma
Main Page: Baroness Verma (Conservative - Life peer)Energy Bill
Baroness Verma Excerpts
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)
My Lords, this Energy Bill comes at a critical time for the country. Electricity demand is expected to double over the next 40 years, but around a fifth of the generation capacity that was available to us in 2011 is set to close over the coming decade, because power plants are either too old or too polluting. At the same time, we need to meet our obligations to reduce carbon emissions, as agreed in the ground-breaking, cross-party Climate Change Act 2008.
To achieve both security of supply and decarbonisation, we need to attract substantial investment in our energy infrastructure, particularly in low-carbon technology such as renewables, nuclear and low-carbon fossil fuels such as gas. We need to do this at a price that consumers can afford by helping to keep costs as low as practical and making sure that the market works for the people who pay the bills.
The Energy Bill will enable us to do this. It is a Bill for growth, and one that will support as many as 250,000 jobs in the energy sector alone. It will provide the security of energy supply that British consumers need. It will help to reduce electricity demand and to deliver affordable energy for consumers, with fewer, simpler domestic tariffs. It will ensure that we meet the ambitious climate and renewable targets set out in the Climate Change Act 2008, enabling the Government to set the world’s first legally binding target range for power-sector decarbonisation.
The Bill received strong support at Third Reading in the other place, commanding the largest majority in a vote at Commons Third Readings since the coalition came to power. This sends a clear message to investors, building confidence in the financial, legal and, importantly, political frameworks of electricity market reform. I hope that we can express an equally strong consensus in this House, sending the message that the whole of Parliament is united behind the Bill.
I extend my gratitude to the noble Lord, Lord Oxburgh, for his expert chairmanship of the Lords informal scrutiny group, which reconvened this year. I am extremely grateful to noble Lords who have attended the group’s meetings and contributed so eloquently, and to other noble Lords who met me separately. I look forward to their continued engagement in debates over the course of the Bill.
Let me turn to some key provisions in the Bill. Today, I want to set out the main proposals in the following areas. First, on decarbonisation, we are bound by law to cut emissions across the whole UK economy by 50% by 2025. The Energy Bill will help us to achieve this. The contracts for difference framework will offer long-term contracts for low-carbon technologies, giving investors confidence, and will enable renewables, nuclear and carbon capture and storage the chance to compete against conventional power stations. Importantly, this will be backed by the tripling in support for clean energy technologies by 2020.
We know that there are differing views in the setting of a 2030 decarbonisation target range for the power sector, and I would like to explain the Government’s position. By legislating now to enable us to set a decarbonisation target in 2016, we will be able to take into account the level of economy-wide emissions reductions that will have to be achieved by 2030 under the fifth carbon budget. We want to ensure that we are considering the pathway of the whole economy towards our 2050 target, rather than setting a sector-specific target in isolation, making sure that we minimise costs to both the economy as a whole and the bill payer.
We have also committed to providing further clarity up to 2030 by issuing guidance to National Grid on an indicative range of decarbonisation scenarios for the power sector to 2030, consistent with the least- cost approach to achieving our overall 2050 carbon target. No other country has yet set a power-sector decarbonisation target for 2030; the UK is the world leader.
This is not the only way in which we are leading. The Government’s decision on the UK’s position for the EU’s 2030 greenhouse gas target is another good example of our strong position. In arguing for a 50% reduction target in the EU, the UK has taken the most ambitious position of any member state. It is therefore important that we consider the wider European context as well as the level of UK economy-wide emission reductions to ensure that we do not pre-empt decision-making and agreements in the EU. However, it is important that we continue to take a leading role in that process and push for change, which we are doing. This Government are leading the way on climate change action.
Let me turn now to the proposals for electricity market reform. Electricity market reform is not a permanent intervention in the market. It is designed as the first step on the path towards sustainable and competitive low-carbon electricity generation in the UK. It will help to limit, and in the long term break, our dependency on rising gas prices globally, the main driver of increases in electricity bills.
We will send out a clear signal to investors that the UK is open for business, attracting the £110 billion investment that we need in this decade alone to replace our ageing energy infrastructure with a more diverse and low-carbon energy mix. The levy-controlled framework will provide £7.6 billion a year by 2020 to support low-carbon technologies, including infrastructure projects that are ready to go now.
The introduction of provisions for contracts for difference and a capacity market will transform the energy market to give investors the certainty they need. I will therefore spend a little time outlining how these important mechanisms will operate. First, the contracts for difference—CFDs—will give long-term electricity price stability, providing developers and investors with increased revenue certainty. Generators will receive a fixed price level—or strike price—for the low-carbon electricity they produce. When the market reference price is below the strike price, the generator will receive a top-up payment from suppliers. When it is above the strike price, the generator must pay back the difference, meaning that consumers are protected.
The Government listened to points made in Commons Committee regarding the nature of the CFD counterparty and in response clarified the drafting of the Bill at the Commons Report stage, making the policy intention of creating a single counterparty more explicit. The government-appointed single counterparty to these contracts will sign and manage the contracts over their lifetime and collect money from suppliers to meet the payments due to generators under the contract. Subject to Royal Assent, we intend to publish final strike prices for renewable projects in December 2013 and to issue the first contracts for difference in 2014. I know there have been calls to see the draft strike prices sooner and I am pleased to say that the Government intend to publish the draft EMR delivery plan in July.
The Bill also introduces provisions for a capacity market to ensure that there is sufficient reliable electricity capacity to meet peak demand. This will provide all capacity providers with an upfront steady payment to ensure that demand is met. Operators will not be dependent on volatile revenue from the energy-only market and consumers will be safe in the knowledge that there is a secure energy supply. At the Report stage in the Commons, we introduced provisions to enable electricity demand reduction to be part of the proposed capacity market, as well as the powers to take forward a pilot. Greater energy efficiency will help to reduce our carbon emissions, help to reduce demand at peak times—bolstering our security of supply —and help to reduce consumer bills.
The electricity demand reduction provisions in this Bill will incentivise the industry to deliver these benefits. Working through the capacity market will allow energy-saving projects to compete with power stations for new investment for the very first time. The Bill can incentivise permanent reductions when demand is at its peak, allowing for a more direct trade-off between generation capacity and demand reduction. It will also bring permanent demand-reduction projects into the same mechanism as shorter-term demand-side response measures to enable more effective, joined-up delivery.
In order to guarantee certainty for investors and industry, these new EMR mechanisms—contracts for difference and the capacity market—will be supported by a clear institutional framework. The Government will maintain responsibility for key policy decisions on contracts for difference, such as strike prices and on the capacity market, taking wider economic and sustainability impacts into account. We believe that the system operator, National Grid, is best placed to administer the capacity market and allocate contracts for difference, given its existing role and expertise in the UK energy market.
In response to stakeholder concerns, last year we worked with Ofgem to assess any potential conflicts of interest and published our findings in April. The report sets out that the risk of any conflicts of interest arising is low, but we have proposed a package of proportionate measures to ensure stakeholder confidence in the EMR delivery body. Ofgem will oversee the performance of the system operator and will continue its independent regulation of the market to protect the interests of consumers.
We are committed to helping independent generators secure a bankable route to market for their power as part of our wider goal of increasing competition in the electricity market. We understand that lack of liquidity is an issue for independent generators and suppliers, particularly in the forward markets. We recognise that improving liquidity would reduce barriers to entry, aid security of supply and increase the robustness of the reference price for CFDs. We support Ofgem’s objectives for reforms to the wholesale electricity market and we welcome the announcement last week of the measures it intends to pursue. However, given the importance of the issue and in the absence of significant improvements, government intervention may be necessary, and accordingly, we are proposing backstop powers in the Energy Bill to promote market liquidity. The Bill also includes powers to intervene to support investment by improving the route to market for independent generators for the sale of electricity. Although the CFD will reduce the risk for independent generators, we believe that it is important to be able to act if necessary.
We remain committed to encouraging a more diverse and competitive energy market and there are a number of related areas within the Bill that we will hope to consider further. They include giving greater certainty to independent renewable generators and, as indicated at Commons Report, we will continue actively to consider raising the threshold for the small-scale feed-in tariff scheme from 5 megawatts to 10 megawatts.
The support for electricity market reform seen at Commons Third Reading has been echoed by industry and the investment community. While we are advancing our reforms, we want to ensure that investment decisions are not postponed in the mean time. The Bill enables the Government to enter into investment contracts—an early form of contract for difference—with developers of low-carbon generation. These will be transferred to the CFD counterparty once it is established and regulations to collect payments from suppliers are in force.
The Bill also includes transitional arrangements for renewables as we introduce the contracts for difference in 2014. During the transition period between the introduction of the CFD and the closure of the renewables obligation, we will allow new generation to make a one-off choice between the two mechanisms in order to minimise any hiatus in renewables investment. For existing generation, the Bill contains measures to give confidence to generators during the final years of the renewables obligation. Fixed-price certificates will be issued in place of the current renewables obligation certificates and there will be an obligation on the purchasing body to purchase those certificates at a fixed price.
The emissions performance standard is an important supporting measure of EMR, providing a regulatory backstop on the amount of emissions that new fossil fuel power stations are allowed. The EPS reinforces our planning policy that any new coal-fired power station must be equipped with carbon capture and storage. The Bill sets out the statutory emissions limit at 450 grams of carbon dioxide per kilowatt hour—about half the level of emissions from unabated coal plant. The level is above that associated with new gas plant, as we recognise the role that it will have in providing reliable and flexible back-up generation as we transition to a low-carbon electricity system. Further certainty for new investors in gas is also given through the grandfathering of the limit to 2045.
In the light of our review of the role of Ofgem, the independent regulator, we are introducing a statutory strategy and policy statement. This will provide greater clarity and certainty about the strategic context of Ofgem’s role and clarify the demarcations between the roles of the Government, the regulator and other bodies. The Bill will further empower Ofgem to require energy companies to compensate consumers who suffer a loss as a result of a company’s breach of regulatory requirements. At present, Ofgem has the power to fine companies, but these fines are paid into the Consolidated Fund, so the consumer will not directly benefit unless the company offers redress of its own volition. Currently, Ofgem has no power to compel energy companies to compensate consumers. We are rectifying this situation through the Bill and securing a fairer deal for customers with provisions for a new enforcement power for Ofgem to require energy companies to provide redress.
We are also giving legal backing to Ofgem’s plans to ensure that consumers get the best deal by making the tariff system simpler and clearer for consumers. Our measures will help customers get the best deal by cutting the confusing array of tariffs by limiting suppliers to offering customers four core tariffs for each fuel and meter type, providing them with clear information about their tariffs to help them to make a more informed choice, putting them on the cheapest tariff in line with their preferences, and promoting competition by creating a market where suppliers are working hard to attract and keep their customers.
A range of other measures in the Bill deserve more attention than I can give them in the time available. Notably, they include measures to establish the Office for Nuclear Regulation as an independent statutory body with financial and organisational flexibility. There are also measures to allow the sale of the government pipeline and storage system and to enable offshore generators to build and test transmission assets for exporting their power with confidence that they are acting within the law. The Bill also contains two minor provisions regarding fees.
As I stated at the beginning of my address, this Bill arrives from the other place with overwhelming cross-party support. I look forward to a swift passage through this House to enable these important and urgent measures to pass into law and bring about a transformation of our electricity market. We are charged with a great responsibility to ensure the security and affordability of energy for many generations to come. Nevertheless, we are also presented with a significant opportunity to help Britain’s economic recovery through the creation of jobs and the delivery of a more stable and predictable energy market, as well as reinforcing our position as a world leader in tackling climate change. With that in mind, I commend this Bill to the House.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)
My Lords, I start by thanking all noble Lords for their contributions in this debate. They have been wide-ranging but very informative. I particularly thank noble Lords who worked with me through the informal scrutiny group. Overall, I agree with the noble Lord, Lord Whitty, that there seems to be an overall sense of support for the Bill. Of course, there will be plenty of opportunity to scrutinise it thoroughly in Committee.
At the start of this debate, I emphasised how vital this Bill is, not just for the UK’s growth and jobs but, as noble Lords have said, for consumers across the country. This legislation marks a significant reform of the electricity market and it is important for industry, investors and consumers that we get it right. With that in mind, I look forward to debating the Bill in the spirit of collaboration. A large number of questions have been raised today and I will cover as many as I can in the time given, but I am sure that in the coming days I will have many opportunities to answer in more detail the questions that may not be answered today.
I thank the noble Baroness, Lady Worthington, for her overall support for the Bill, but I was slightly surprised and perhaps a little disappointed that she made a political point and overlooked the absence of investment and forward planning under the previous Government. The noble Lord, Lord Redesdale, made the point that the Bill is not a panacea but goes a long way to building long-term certainty for investment and energy security. As I listened to the noble Lord, Lord Prescott, I thought that this was perhaps the only Bill on which he and I will have so much in common. He is absolutely right. Without political will we cannot build political consensus. Globally, we have become the leaders in this area because we have gone out to build political consensus.
Beginning with the decarbonisation target range, a number of noble Lords asked why we do not set it now. As I said in my opening speech, the Bill enables the Secretary of State to set a legally binding decarbonisation target range for the power sector in Great Britain. This should be in 2016, when we are due to set in law the level of our economy-wide fifth carbon budget, covering the corresponding period. At that point, we will receive advice from the Committee on Climate Change on the level of the fifth carbon budget.
However, it is important that we do not set a target range in isolation. It must be done in the context of considering the pathway of the whole economy towards our 2050 target. It will also make sure that we do it in a way that minimises costs both to the economy and to taxpayers as a whole. Noble Lords said that it would be detrimental to investor certainty. I agree that investor certainty is absolutely essential to delivering our energy and climate goals at least cost, and considering investor certainty must be a fundamental part of our policy. We will continue to take practical steps to decarbonise the economy, while ensuring security of supply at the least cost to the consumer.
Investors recognise and welcome this. John Cridland, the director-general of the CBI, said that the Energy Bill,
“will send a strong signal to investors that the Government is serious about providing firms with the certainty they need to invest in affordable secure low-carbon energy”.
I am grateful to the noble Lord, Lord Browne, and others for explaining why setting the target in isolation would be unwise.
Turning to electricity demand reduction, the right reverend Prelate the Bishop of London and others asked about the prepayment schemes. I want to put on record that both prepayment and a capacity market approach are similar, in that they provide a payment for proving efficiency savings and are agnostic about where those savings are delivered. However, on balance, a capacity market was preferred, as it enables you to target reduction during valuable peak periods, and allows electricity demand reduction to compete against supply, ensuring that EDR is rewarded for the value that it provides to the system. It also avoids the need to create an additional delivery mechanism for electricity demand reduction.
The right reverend Prelate the Bishop of London and others asked about the flexibility to run more than one type of pilot for EDR. The spending power set out in Clause 37 allows the Government flexibility to run a pilot to test different approaches to incentivise electricity demand reduction. The Government will provide further detail on the pilot proposals as soon as possible.
Many noble Lords are concerned about putting the interests of consumers at the heart of what we are doing, and I agree completely that it is crucially important. That is why we have other measures alongside the Energy Bill that put consumers at the heart of being able to control their energy usage. That is why we are rolling out the smart meter programme alongside other measures such as the Green Deal, enabling people to change behaviour, which will assist in ensuring that we reduce our energy use. We have to inform consumers about how their energy is being utilised.
I turn to climate change, and noble Lords who are slightly sceptical about global warming and climate change. I am not a scientist, and I suspect that many in this Chamber today are not scientists, but renowned scientists are showing us that much is going on that is evidence of climate change. The summer extent of Arctic sea ice has declined by a staggering 40%. The Antarctic peninsula has warmed by more than 3 degrees centigrade. Glaciers in the high Canadian Arctic lost 580 gigatons of ice between 2004 and 2011 alone. These are serious figures, and we need to ensure that we take seriously climate science and the evidence and advice from climate scientists.
The noble Lord, Lord Stern, made a compelling argument on China’s commitment to act, and his expert opinion is recognised globally. We welcome the commitment that China is making and we are working closely with China to ensure that we are part of the process of assisting that country. That gives us a very good negotiating and bargaining position in the world, as the noble Lord, Lord Prescott, said.
A number of noble Lords talked about fuel poverty, among them my noble friend Lord Cathcart, the noble Baroness, Lady Liddell, and my noble friend Lady Maddock. The coalition is committed to doing all that is reasonably practical to end fuel poverty in England by 2016 and to helping people, especially low-income, vulnerable households, to heat their homes more affordably. The number of households in fuel poverty reduced in 2010 and again in 2011, although fuel poverty remains a huge challenge. A combination of rising wholesale energy prices and poor quality housing stock in Britain has meant that, despite significant investment, a large number of households are still in fuel poverty. I congratulate the previous Government on trying very hard to tackle that issue, and we are working and building on that. However, with energy prices projected to continue to rise, improving the thermal efficiency of Britain’s housing stock is key to addressing that urgent issue. That is why the Green Deal and the energy company obligation are flagship policies for improving the energy efficiency of our nation’s housing stock. In addition, the Government have a range of policies to address other contributing factors of fuel poverty, including the one-house discount, which helps around 2 million households per year, as well as winter fuel payments and cold weather payments.
I will also touch on domestic tariffs, which a number of noble Lords talked about. The proposals are to deliver the Prime Minister’s commitment and ensure that customers are offered the cheapest tariff. They will ensure that customers are on the cheapest tariff in line with their preference, the payment method that they have chosen and whether they have opted for standard variable rate tariffs, or a fixed-term or fixed-price tariff. The power in the Bill will allow us to require customers on poor, value-dead tariffs to be moved on to the cheapest standard variable rate tariff that the supplier offers. It will also require customers on fixed-price tariffs to be moved to the cheapest standard variable rate tariff that the supplier offers if they do not opt for another fixed-price tariff.
We are also capping the number of live tariffs that suppliers can offer. This package of measures means that consumers will be on the cheapest tariff that is in line with their preferences, but noble Lords are right; there is much more that energy companies can do and should be doing, and we will work with them to ensure that they are able to provide the best possible value for money for consumers.
The EMR part of the Bill will be the substantial part of it after decarbonisation. The noble Baroness, Lady Worthington, the noble Lord, Lord Roper, and other noble Lords asked whether we would commit to publishing the delivery plan ahead of the Committee scrutiny of EMR. We intend to publish the draft delivery plan before the Committee scrutiny of the contracts for difference provisions. We are working through the usual channels to agree a satisfactory order of consideration on this basis. However, as noble Lords know, it is critical that this Bill progresses as swiftly as possible.
We will have the opportunity to scrutinise the detail when secondary legislation comes before the House. Although further detail in the delivery plan will no doubt be helpful for informing consideration of the plan, it is important that we do not delay the Bill. That would risk investment, jobs and the security of the electricity supply. I encourage responsible debate that balances the detailed scrutiny, for which this House is renowned, with the need to get this legislation on the statute book.
The noble Lord, Lord Oxburgh, and other noble Lords questioned the Government’s expertise to undertake electricity market reform. I can reassure the noble Lord that we are not undertaking this singlehandedly. The department has established expert groups for the three main policy areas of the CFDs, capacity market and institutions. A panel of technical experts will scrutinise the analysis informing government decisions before they are made. National Grid will be the delivery body for EMR and is providing expert advice to the department. That does not stop noble Lords from contributing and giving advice to the department.
My noble friend Lord Cathcart asked about the cost of EMR to business. We have said that we will exempt the most energy-intensive industries from the costs of electricity market reform to ensure UK business can remain competitive. The Government will publish shortly a consultation on the scope of the exemption.
The noble Lord, Lord Davies, my noble friend Lord Ridley and other noble Lords mentioned shale gas. They asked whether this will reduce gas prices and whether government modelling of gas price rises is realistic. We expect electricity bills to rise as a result of rises in global gas prices. The potential impact of shale gas on gas prices is still uncertain. It is unclear how easy or cost effective it may be to extract shale gas or what will be available globally.
The noble Lord, Lord Grantchester, and other noble Lords asked about the emissions performance standard and grandfathering. The level of the EPS will be maintained until 2045 for plant consented under the 450 gram per kilowatt base level. It is essential to provide sufficient certainty to those investing in gas-fired generation that we will need over the coming years to maintain security of supply. Grandfathering will not prevent us meeting our objectives.
Turning to the capacity market, my noble friend Lord Jenkin and other noble Lords asked about proposals for a new clause to encourage competition. I agree with my noble friend that the capacity market should encourage competition between incumbents and new entrants, between technologies, including generation and demand-side response, and between new and existing plant. I look forward to discussing this in detail in Committee with him and other noble Lords.
The noble Lord, Lord Kerr, and others asked about the capacity market timings. The Government are minded to run the first capacity auction in 2014 for the delivery year of 2018-19. This is to allow new plant to compete alongside existing capacity to enable a competitive auction.
Noble Lords raised the question of interconnection. The Government are fully supportive of increased interconnection and are working with Ofgem to ensure that we have the right conditions to bring forward the planned significant increase. We do not think that a financial incentive is needed to bring forward this already-planned investment. It is very important that the Bill does not adversely impact on interconnection, and this is a key requirement in designing electricity market reform.
I shall touch very quickly on nuclear. My noble friends Lord Cathcart and Lord Ridley and other noble Lords asked about plan B if there is no new nuclear. The aim of EMR is to bring forward a diverse mix of low-carbon generation, including renewables, nuclear, CCS and demand-side measures. We can meet climate goals without new nuclear, and we have been clear that we will reach an agreement on a contract only if it provides value for money and is affordable.
The noble Lord, Lord Judd, asked about GDF. I know that the noble Lord takes a keen interest in this and we have had many conversations about it over recent months. The Government remain committed to the policy of geological disposal. Following their reflections and the continuing “lessons learnt” exercise, the Government have confirmed that they believe that the site selection process can be improved on. On 13 May this year we announced a call for evidence, which ran until 10 June. That will be followed by a public consultation later in the year, and I hope very much that the noble Lord will take part in that. However, GDF will be the Government’s preferred option in dealing with long-term nuclear waste.
In reference to the ONR, the noble Lord, Lord Whitty, asked why the Government are creating quangos when their intention is to do away with them. The ONR currently exists as an agency of the Health and Safety Executive, and the Energy Bill will establish it, rightly, as a stand-alone body outside the Civil Service. I think that the noble Lord himself agreed that that is the right place for the body. In that way, the expertise of those who serve in the ONR will be reflected in financial packages suitable to a body that has to deliver world-leading advice to a sector that requires that advice. The noble Lord asked why we had so many clauses in the Bill. It is absolutely right that the ONR should be a stand-alone body and that it goes through a full scrutiny process. That will give it a full mandate as a stand-alone body. He also asked about the feed-in tariffs from five megawatts to 10 megawatts. I am currently looking at that and I hope to have some further details to impart in Committee.
I am being told that I have only a minute to speak, so I will very quickly close. Once again, I commit to having further discussions inside and outside the Chamber on the concerns that noble Lords have raised. There have been many excellent contributions today. I look forward very much to the debates that are going to follow. In the mean time, I hope that the Lords’ informal scrutiny committee continues to work closely with me, and if any other noble Lord wishes to raise a concern, my doors are always open. I encourage noble Lords to use either or both of these avenues in order that the Bill might make progress to Royal Assent without delay. I am sure that noble Lords will concur with the statement that I have made, and on that note I urge the House to support this Bill and give it a Second Reading.