Baroness Worthington
Main Page: Baroness Worthington (Crossbench - Life peer)Energy Bill
Baroness Worthington Excerpts
Lord Roper
My Lords, my name is attached to this amendment but I shall be very brief because my noble friend Lord Jenkin has made the case for this amendment very strongly.
We are considering here electricity market reform, and we are very anxious to ensure that, in spite of fairly substantial interventions both through the contracts for difference and through the capacity mechanism and in other ways, competition will be maintained and increased.
We have had an opportunity over the past few months to talk to the independent generators and independent suppliers. In both cases, they see that there are aspects of the changes in the structure which could in some circumstances be disadvantageous to them and significantly advantageous to the larger players in this field. In that circumstance, it seemed to me—and as my noble friend Lord Jenkin said—imperative that we should make it explicit that it is a duty of the Secretary of State to take these actions to promote effective competition between all those involved in these areas.
Baroness Worthington
My Lords, I thank the noble Lords, Lord Jenkin of Roding and Lord Roper, for tabling their amendment. We have tabled a very similar amendment—great minds must think alike.
Our Amendment 52A seeks to do almost exactly the same as Amendment 52, which is to make it a requirement for the Secretary of State to have the same duties as under the Electricity Act 1989, in which the protection of “existing and future consumers” is enshrined through the advancement of competition. We will discuss this in more detail when we come to the amendment in the name of the noble Lord, Lord Berkeley, who has come up with a much more precise way of tackling this problem.
These amendments seek to ensure that the Secretary of State has a duty to advance competition. Much has been said, very eloquently, about the need for that and how, if we are going to rely on a truly competitive market, that needs to be enshrined in this Bill. So much of this Bill relies on competition to deliver efficiency. There are many complexities in many aspects of this Bill, particularly in Part 2, where you have contracts for difference and capacity mechanisms, the interplay between them and the effect that that has on investment decisions, all of which is very complicated. The more transparent the market is, the less opportunity there is for gaming and the more successful this Bill will be in meeting its objectives. I fully support the amendment tabled by the noble Lords on the other side, and our own amendment seeks to do something similar.
Lord O'Neill of Clackmannan
I remember the birth of the 1989 legislation. At that time, due to what were deemed to be the fundamentals of competition, generation was split from distribution in England and Wales. In Scotland, the companies were vertically integrated. Throughout the 1990s it became a kind of adventure playground for takeovers. We are where we are now in large measure because a number of interested foreign companies, usually American, took over the distribution companies; they subsequently sold them and they were picked up by various people at different times. So we have six players, which by and large are vertically integrated, as well as Centrica.
A lot of wise words are being spoken about competition but I am not sure if these amendments go far enough. As soon as a company becomes big enough to be a threat or to be of interest to the large players, the oligopolists of the present structure, they are gobbled up. We have seen this fairly recently with the takeover of Ecotricity, a very interesting, predominantly Irish company that engages in renewable generation. I am not sure that these amendments are going to make an awful lot of difference.
When we go further and look at the break-up of the vertically integrated companies, there is the likelihood of the two remaining companies being taken over by other foreign players that have money that they wish to expend in the United Kingdom. Therefore, I am very sceptical about how we are going to achieve anything meaningful in the way of competition.
We have at the moment six players—seven if you include First Utility, but that is rather special because it is exclusively in the retail market—and by and large they do the same as each other. They confuse the tariffs, introduce difficult pricing schemes that we do not always understand—
Baroness Verma
My Lords, I thank my noble friend Lord Jenkin and the noble Baroness, Lady Worthington, for their amendments and for the opportunity to debate some of the important issues that they have raised. In relation to Amendment 52, Clause 5 sets out the matters to which the Secretary of State will have regard when carrying out specific EMR functions to meet the objectives of EMR. Effective competition is fundamental to delivering the Government’s energy policy objectives of having energy security, keeping consumers’ bills affordable and decarbonising our energy sector. EMR will deliver the greener energy and reliable supplies that the country needs at the lowest possible cost, which is good news for the consumer, by reducing exposure to volatile and rising fossil fuel prices and securing electricity supply.
Increasing competition in the electricity market drives down prices and promotes innovation—hence competition will be considered in the context of the requirement at Clause 5(2)(d) to consider the likely cost to the consumer. For example, we are designing the capacity market in a way that promotes competition —in particular, between incumbents and the new entrants that my noble friend Lord Jenkin is anxious to see. By providing a steady revenue stream in place of dependence on volatile scarcity prices, the capacity market will help to ensure that we can enable broad participation. Furthermore, we are incentivising new investment in plants by offering longer-term contracts to new plants, which will enable the costs of capital to be spread over longer periods. This will be important in ensuring that new independent entrants can compete with incumbents, as they would be likely to find it difficult to access finance with a short-term contract.
However, it is important to note that independent generators are a broad mix. They are not just medium or small-scale firms. Some are large European or international utilities, such as GDF Suez, which do not currently have a major presence in the UK wholesale or retail market. To ensure that we capture the interests of this broad group, we have been working, and will continue to work, with the independent generators’ group on the design of the capacity market.
The Government are also addressing problems affecting competition within the market. This includes poor liquidity in the wholesale electricity market and tariff complexity in the retail energy market. We are working with Ofgem to tackle these now, and have taken back-stop powers in relation to both areas in this Bill to ensure that reforms can still be driven forward if Ofgem’s proposals are either frustrated or delayed.
We recognise that it is important to help independent generators to secure access to the market. We are aware of their concerns that it is becoming more difficult to secure a power purchase agreement and that terms have declined. We have been working to gain a better understanding of the complex PPA market and the investment issues for independents. Since last year’s call for evidence on access to markets, we have undertaken analysis of the issues and the potential options for addressing them. I hope to provide further information to the Committee on this very shortly.
The ultimate aim of electricity market reform is to allow all forms of electricity generation to compete fairly, and therefore to enable the least-cost mix of generation and demand-side measures necessary to meet our decarbonisation targets, ensure security of electricity supply and keep costs to consumers as low as possible. I hope that noble Lords will be reassured that competition is therefore at the heart of the design of all EMR functions. Consequently, it is the Government’s view that my noble friend’s amendment to Clause 5 is unnecessary.
Turning to Amendment 52A, throughout the development of EMR we have been clear on the objectives of these reforms. They have been set out in our published documents, from the EMR White Paper of July 2011 onwards, and the objectives set out in Clause 5 reflect these. The amendment would add the duties set out in Sections 3A to 3D of the Electricity Act 1989 to these objectives in Clause 5. However, the Electricity Act 1989 relates to the operation and regulation of the market, which is a different purpose from the new mechanisms that we are introducing through EMR. Contracts for difference and the capacity market are designed to complement the existing market structure and have been developed with the specific objective of moving to a secure, low-carbon energy mix at least cost to the consumer.
Furthermore, the amendment would risk causing duplication. For example, Section 3A(2)(a) of the Electricity Act 1989 relates to ensuring that electricity demands are met, and this would duplicate Clause 5(2)(c) of the Bill. We have made clear the importance of considering the cost to consumers at Clause 5(2)(d).
I turn now to Amendments 54 and 55, linking the principal objectives and duties in Clause 33 to the Secretary of State in relation to the capacity market. The purpose of this clause is to align the principal objective and general duties of the authority, in carrying out functions in the capacity market, with its principal objective and duties in the current electricity market. The reason this clause does not apply to the Secretary of State is that Clause 5(2) in Chapter 1 sets out what the Secretary of State must have regard to in relation to making capacity market regulations, as well as other EMR functions.
As I have already indicated, encouraging competition will be central to the way that the Secretary of State makes capacity market regulations. Promoting competition will be an effective way of achieving the aims of having regard to ensuring security of supply to electricity consumers and having regard to the likely cost to electricity consumers. We feel that it is impractical to require the Secretary of State to have regard to two separate lists of matters: those in Clause 5 as well as the principal objective and general duties in the Electricity Act 1989.
I hope that I have been able to reassure my noble friend and the noble Baroness, Lady Worthington, with my explanations and that my noble friend will feel content to withdraw his amendment.
Baroness Worthington
My Lords, perhaps I may ask for clarification before the noble Baroness sits down. I accept her comments about the potential duplication involved in having two lists. However, subsection (2)(d), on the likely cost to consumers of electricity, does not include future consumers of electricity. People involved in the discussion about Ofgem’s duties will know that that innocuous-sounding difference is actually a big difference. Perhaps she will reassure us that she might consider changes to subsection (2)(d) to better reflect the duties in the Electricity Act.
Baroness Verma
I have been informed that it does take into consideration the points that the noble Baroness has just raised.
Viscount Hanworth
Perhaps I may make a few more comments, some of them addressed to things that have just been said. A great deal of negative propaganda accompanied the privatisation of the electricity industry in the UK, but many studies indicate that the industry was far more efficient than another national industry with which we should compare it, the American industry. There is no question about that. Yet many people tendentiously denied these realities.
If we are to have a nuclear industry, it will be in the hands of a state-owned foreign monopoly. That is a reality that sits very ill beside the fantasy of perfect competition. If we are to have a competitive environment or, indeed, any competition in this environment, perhaps the competition should come from a British state-owned nuclear industry. We have to think somewhat outside the box and not revert to the paradigms of perfect competition versus state industry, which seems still to dominate people’s thinking in this respect. The only countervailing force that I can imagine that could really survive in the British electricity industry to induce competition is if a fraction of it lay in the hands of the state.
Baroness Worthington
My Lords, like the noble Lord, Lord Deben, when I read this I thought that it was a very elegantly phrased and simple set of provisions that are very easy to understand and could go a long way to sorting things out. Having thought about it a bit more, I am still quite attracted to it, but that is not to say that it is necessarily the only way in which the problem could be solved—or, indeed, the right way. What we really want is an acknowledgement from the Government that, rather than thinking about the past— sadly I do not have the benefit of those many years of pre-privatisation—we should really be thinking about the future and acknowledging that the Bill signifies a massive change of direction. As a result of that, it is appropriate that we think again about our competitiveness regime. It will come as no surprise that, from our side, we believe that we need a new regulator to do that—one with real teeth and independence, and one which is not scared to hear from the incumbent, saying, “You don’t like that? We’ll change it for you”. That is the modus operandi of Ofgem, I am sad to say. There are many ways in which we can address the issue.
In answer to the question from the noble Lord, Lord Oxburgh, about how much competition is competition, six companies might be appropriate if it were not for the fact that the vertical integration of generation and supply gives them an enormous advantage in this market. That is what needs to be looked at—and that is why the noble Lord, Lord Berkeley, can be congratulated on his precise and laser-like vision in getting to the nub of it. It is possible to force the integrated companies to operate in a less integrated way, but it is what they do with the DNOs, as my noble friend pointed out. Many of the big six are owners of DNOs. But there are regulations and laws that mean that they have to have a very firm Chinese wall between those parts of their industry, which is precisely because they are natural monopolies and will gain enormous advantage by knowing what is going on in the other parts of the business. So there is a precedent for keeping the corporate structure the same but having clear delineations between the different parts of the business.
Why is this more important in future? One reason that has been oft-cited for allowing vertical integration to continue is that it keeps the cost of capital low. If you are a vertically integrated company and you have a supply base of millions of customers, you can borrow against it very easily and get nice low-cost capital. That was true until this Bill, which completely removes the risk of new generation and potentially gives companies a many decades-long contract against which they can borrow. So the old arguments for vertical integration are falling away, and we should now be reconsidering the logic of allowing it to continue. There are many examples where vertical integration can act against the interests of consumers and of more plurality, competition and lower costs in the market. I shall choose just two.
Baroness Verma
My Lords, I am grateful to the noble Lord, Lord Berkeley, for his amendment. Amendment 53 is aimed at the abolition of the vertically integrated business model in the energy industry. I have listened carefully to noble Lords and I have some comments to make after I have gone through my speaking notes, which I hope will address some of the issues the noble Lord has raised. I reassure him that the coalition is committed to driving competition and choice in the energy market.
In considering the merits of this amendment, we must be guided by what will most benefit consumers, deliver competition, affordable energy and better customer service, and secure the investment we need for the future. We must acknowledge that the vertically integrated business model delivers a range of benefits for consumers through lower capital costs, efficient risk management and economies of scale. Simple prohibition of certain business models could lead to higher prices for consumers and trigger lower investment in the market.
The Government believe that consumers will get the best deals when suppliers face much tougher competition. Wider competition and more diversity are key to a competitive market and securing investment. We must ensure that the market is open to all business models to provide them with the ability to compete on a fair basis. That is what the Government and the regulator are working to achieve. It is why we have made concessions on the threshold for the small-scale feed-in tariffs and the route to market for independent renewables generators. These will help to open the market to community energy projects and smaller independent renewables developers.
Liquidity in the wholesale market remains a key barrier to entry for independent players and Ofgem has recently announced a package of reforms to address the low levels of liquidity in the wholesale electricity markets. This is a positive step forward and the Government welcome Ofgem’s announcement. We want to see swift and effective implementation of its reform package. However, we are seeking back-stop powers in Clause 43 to address low liquidity should Ofgem’s reforms be delayed or frustrated.
The Government are also looking at other barriers, including independent generators’ ability to secure bankable long-term contracts that will allow them to finance their projects. The Government are taking back-stop powers in Clause 44 to enable them to act quickly to address this issue if necessary. I know that this will be of particular interest to the noble Lord, Lord Berkeley.
Finally, Clauses 127 to 131 will give statutory backing to Ofgem’s retail market review proposals. This will ensure that energy companies place consumers on the cheapest tariff that meets their preferences, thus simplifying the market and enabling consumers to shop around for the best deals. Bringing greater transparency to the retail market will also make it easier for innovative small suppliers to compete with larger established players in the market.
We share the desire of the noble Lord, Lord Berkeley, to ensure that consumers get the best deal in a fair, affordable and competitive energy market. However, requiring the energy companies to divest and reorganise is not the most effective way of delivering the outcomes that I know we both desire. It is likely to create unnecessary disruption at a time when we need significant investment in our energy infrastructure, and we are making real progress in introducing greater competition in the energy markets.
I query also whether this would improve liquidity in wholesale markets, at least to the degree suggested. Poor liquidity relates to a lack of availability of products or buyers for products, and poor transparency of prices. Removing vertical integration will not necessarily address these issues fully, whereas Ofgem’s reforms to the wholesale electricity market are focused on making more power available to buyers while ensuring that generators can sell their electricity, and on increasing price transparency. We therefore believe that reforms by government and Ofgem offer the quickest, most effective and most reliable way to increase competition and boost consumer confidence in the energy markets.
We have a real opportunity through the reforms we are making in the Bill to see the way opened for greater competition, greater transparency and harsher penalties if generators and suppliers do not provide the choice and value for money we all want to see for customers. Decades of missed opportunities cannot be allowed to continue.
Perhaps I may pick up on a couple of the points that the noble Lord, Lord O’Neill, made about the flaws in the amendment of the noble Lord, Lord Berkeley. I refer back to what the noble Lord and the noble Baroness, Lady Worthington, said about Ofgem. When he was Energy Secretary, Ed Miliband said that Ofgem was a regulator fit for purpose. Through supporting Ofgem and strengthening its powers, we are trying to deal with the fears that the noble Lord, Lord Berkeley, and the noble Baroness, Lady Worthington, have. It is not about creating another new body but about ensuring that the body we have has the powers to be able to deliver what a regulator is supposed to be delivering; that is, to be quite tough on energy suppliers. We have seen examples of that. Between April 2011 and March 2012, Ofgem set fines of more than £19 million for licence breaches and anti-competitive behaviour. It imposed fines of more than £500,000 and £4.5 million in redress.
It is not about change but about ensuring that we empower a body. It would be really interesting to know what sort of body the noble Baroness, Lady Worthington, would put into place and what it would do that Ofgem is not doing. It is not clear to me that banning vertical integration would in fact improve liquidity in the wholesale markets, at least not to the degree suggested. A lack of available products and poor transparency is what needs to be addressed and on that basis, I hope that the noble Lord will see that what the Government are doing in the Bill is right, and withdraw his amendment.
Baroness Worthington
In response to the Minister’s direct question, we would have a regulator which, when it is asked, “Why can’t you split vertical integration?” answers, “That is a good idea and we will look at it in more detail”, instead of “Because the industry doesn’t like it”. Quite frankly, as I said earlier, when it did a review into liquidity and competition in the market, eight recommendations were made but I think six of them were dropped and the two that were moved forward were watered down. As soon as Ofgem goes and consults its friends in the industry, it gets told, “That’s too difficult—we couldn’t do that”, so things get watered down. That is what we have to break.
For example, the noble Baroness quoted the suggestions that Ofgem has come up with for solving this problem. The market-maker proposals are frankly ludicrous. They are so complex and so against a normal, natural market that I really cannot believe that that is our solution to this issue—actually, I can believe it since it is Ofgem—when the real solution is staring us in the face: no more vertical integration. However, I will sit down.
Lord Berkeley
I am very grateful to all noble Lords who have spoken in this debate. We have had a very wide-ranging debate with a wide range of opinion. It is really good that we have been able to air it. We have not all agreed but at least we have discussed it. I will not respond to every noble Lord who has spoken—to whom, many thanks—but the noble Lord, Lord Oxburgh, asked particularly how one decides whether six generators are sufficient for competition. There is no number bigger than three where it matters very much, in my experience. The key is that they are all able to act fairly, simply and transparently.
We have six at the moment, and whether they are in a cartel is not for discussion tonight. That is something for the regulators and the Competition Commission, if there is a complaint. However, what motivated me to put down this amendment is the problem of having a complaint from some of the other generators, which do not have retail outlets, that the system is not fair. They have to be convinced that it is fair because otherwise they will not invest. The proof of the pudding will be in the eating, but will the lights have gone out before we see the answer? On competition generally, my belief is that it is much better to have a simple structure than devising all kinds of rules and regulations to make sure that a mixed structure will work.
My noble friend Lady Worthington suggested Chinese walls as an alternative to complete separation. Chinese walls work if they are properly policed, so that may be another answer which we should discuss later on. To me, the key is to have a strong and effective regulator that is not captured by the industry. I am not saying that the present one is captured, but the key will be whether we end up with a system where all the independent and other new generators that do not have retail outlets feel so comfortable that they will continue to invest. I hope that they will also multiply rather than what happens on the other side, when they all get bought up by one or two big ones and there is no actual competition. I shall read the Minister’s response with great interest.
Lord Deben
I thank my noble friend for explaining what it was that I said that was so damaging.
I would like the Minister to be concerned not merely with the commercial activities, although they are very important, but with what most of us think ought to be the way in which we develop housing in future, rather than across green fields. That means that we have to make it possible to develop on once-used land. One problem that is always brought to me when this comes up is the availability of utilities in general and, of course, electricity in particular.
Secondly, when we decarbonise our electricity system, the availability of electricity becomes even more important, as someone said earlier, because that is what we are trying to shift to. Unless we can put in place what is needed in advance, we will not be able to carry through the whole purpose of decarbonisation. When one looks at the present circumstances, we really are an 11th hour nation. We really do things at the very last moment. I have every sympathy with those who object to the present circumstances, in which nobody does anything until the situation is so disastrous that something has to be done or the whole thing will collapse. That is not a way to plan anywhere. Although no doubt my noble friend will tell me that it will all be dealt with—and here I declare an interest in that the consultancy I chair gives advice on sustainable development—my experience is that is not always like that. It is not always easy to have ready access to electricity supplies, in particular.
I commend my noble friend’s comments, but I hope that they will be taken in a wider sense—this is not just about London, there are other great cities where similar circumstances exist. We do not want people to build, develop and grow in places which are much less suitable simply because the electricity supply is not immediately available. That is a mistake that we have made in the past; I hope that we will not make it again.
Baroness Worthington
My Lords, I shall speak briefly to the amendment moved by the noble Lord, Lord Jenkin, on the future capacity question, because it is the first to address that. This may be a good opportunity for the Minister to provide us with some detail about the capacity mechanism and how it will operate, and to address the important issue raised by the noble Lord of the need to have a long-term view.
Perhaps this is the time to say that this part of the Bill seems to be lacking an awful lot of detail. We have tabled some amendments later which respond to the Delegated Powers and Regulatory Reform Committee’s comments, which were quite damning on this aspect of the Bill. It is lacking a huge amount of detail; a lot of questions still need to be answered.
I will not ask all of them here, but this discussion may be an opportunity for the noble Baroness to talk about how long the review of the capacity market is. The implementation plan is pretty useless when it comes to providing detail on this part, but if anyone is interested, I have discovered that it is all in the June document, Electricity Market Reform: Capacity Market—Design and Implementation Update. If noble Lords want even more detail, I suggest that they read the memorandum submitted to the Delegated Powers and Regulatory Reform Committee, because that has even more detail. Why that is not in the implementation plan I do not know, but we are where we are, we have to gather all this information and try to make the best of it.
It would be helpful if the Minister described the length of time for which the Government consider that the capacity market needs to operate and precisely how it will enable new investment. One of the key challenges is that the capacity market means everything to everyone. If you are an owner of an existing power station, you see it as your opportunity to keep that station open. If you own a mothballed gas plant, it will be the opportunity to get that back on the system. If you want to build new CCGTs, it is your opportunity to get those built. If you are a demand-side response producer, it is your opportunity to get that done. It is not clear how this broad set of measures will manage that conflict between existing owners, owners of mothballed plant, new owners and demand reducers. We as a Committee, representing the wider two Houses, deserve more information. I look forward to the Minister’s response.
Baroness Verma
My Lords, I thank my noble friend Lord Jenkin for his amendment. Amendment 53ZA proposes that providing capacity should take account of projected growth over a 10-year period. I understand that he has proposed it because of concerns about the long-term capacity of electricity networks and the ability of distributive network operators to make strategic, long-term investment decisions. I should make it clear from the outset that the capacity market is not intended to drive investment in network capacity. Rather, it is designed to ensure that there is sufficient longer-term investment in electricity capacity, including generation and other forms of capacity, such as demand-side response.
In March, Ofgem published its strategy decision for electricity distribution network price control. That explained that price control had been designed to encourage distribution network operators to provide a high level of service for connections while maintaining a reliable network and delivering value for money for existing and future customers. The decision also explained that flexibility has been provided for DNOs to submit a case for strategic investment in their business plans on a project-by-project basis. Similarly, the Electricity Act 1989 already provides some flexibility for early investment—for example, the distribution network operator and its customer can make an agreement that allows an upfront user commitment agreement between the DNO and a customer who wants strategic investment. I understand that, in the case of UK Power Networks and its customers in the City of London, this is already happening.
It is vital that investment in our networks continues at a pace that supports our future energy needs. None the less, we must be mindful that there will be a balance to be struck to ensure that consumers do not pick up the costs of unused or underused assets. For this reason, it is right that Ofgem and the network companies continue to consider carefully where investment ahead of need is proposed.
My noble friend also makes an important point about ensuring that decisions on capacity of electricity supply are made with due regard to the long-term outlook. As such, for the capacity market, the Government have committed to publishing a delivery plan every five years and producing annual updates to that plan. These plans will include long-term forecasts of electricity demand and supply, and will inform the amount of capacity contracted through the capacity market.
I hope that my noble friend finds my explanation reassuring. Before I ask him to withdraw his amendment, I shall respond to the noble Baroness, Lady Worthington, on her questions about how the capacity market works and how it is envisaged. A forecast of future peak demand will be made for four and a half years ahead of the delivery year in which it must be available. The amount of capacity needed to ensure security of electricity supply will be acquired through a competitive central auction four years ahead of the delivery year. Generation and non-generation approaches such as demand-side response will be able to participate in the capacity auction. All generation plant, including existing plant, will be eligible to participate in this auction, with some exceptions such as low-carbon plant receiving CFDs.
Providers of capacity successful in the auction will enter into capacity agreements committing to providing electricity when given notice in the delivery year in return for steady capacity payments or will face financial penalties. The costs of the capacity payments will be shared between electricity suppliers in the delivery year. That is a brief outlook of how it will work but I hope that the noble Baroness is reassured that there is plenty of detail. She also referred to the Delegated Powers Committee. As she is aware, we have submitted extra information to the committee and it is now looking at that. We will then look at its recommendations but until that point it would not be right for me to comment on them. With that, I hope that my noble friend will withdraw his amendment.