Electricity System Resilience (S&T Committee Report)

Baroness Worthington Excerpts

Tuesday 3rd November 2015 Lords Chamber

[Baroness Worthington (Lab)]

My Lords, it is a pleasure to speak in this debate. I thank the noble Earl for his excellent chairmanship of the committee which prepared the report. I also thank the committee members, many of whom have spoken today, and the committee staff, who worked incredibly diligently to prepare an excellent report.

This has been a characteristically deep and wide debate on a topic of particular significance. As has been said, the timing of the debate comes when we expect to see from the media the characteristic response that the lights are going out and woe is upon us. Perhaps this report has helped to calm some nerves and to demonstrate that, although there are issues in front of us in the short term, we have a resilient electricity system. That is the overriding point that I take away from the report. However, there are some challenges, some of which have been raised today.

I start by referring to my noble friend Lord Harris and the noble Lord, Lord Rees, who expertly drew our attention to the fact that we should not be complacent. Rare events which might have catastrophic impacts should be part of our planning, and we need to bear them in mind as we also try to grapple with the more mundane issues of maintaining a resilient system, keeping the lights on and maintaining the power supply to our essential services in a day-to-day sense. I am grateful that those perspectives have been highlighted this evening.

A number of noble Lords talked about the trilemma. The noble Viscount, Lord Ridley, coined a new, delightful phrase: “the trisaster”. Energy policy is complex and there are always competing tensions, and it is definitely necessary for Governments of any colour or description to produce clarity and clear strategies. A number of noble Lords, including the noble Earl who began this debate so expertly, referenced the fact that we seem to lack a long-term strategy at the moment. I hope that everybody will agree that we are waiting for the Government to produce a document that sets out a new approach to a long-term energy strategy. I believe that there has been a shift since the coalition Government and we now need to see a restatement from the Government. We look forward to that. I suspect that we will hear it in the autumn. Perhaps it will coincide with the comprehensive spending review or another such convenient juncture at which the Government can clarify their position.

A number of noble Lords touched on different technologies. In particular, this evening we had quite a detailed debate about the role of nuclear, which is often the case when we debate this issue in this House. Clearly, there is more that the Government could do in setting out their strategy beyond the immediate concern of trying to get Hinkley off the ground. There needs to be a much more comprehensive look at the role that nuclear can play in providing resilience. There may well be a much scaled-down version of nuclear that helps to replace, in more bite-sized chunks, capacity that is being lost. By that, I mean that we will be losing Magnoxes and will eventually lose the AGRs. Those could be replaced by similarly scaled capacity, rather than the huge 3.X gigawatt projects that we seem to be struggling to get away on time. We also need to look at the slightly medium-scale and smaller-scale options for nuclear—a point raised by a number of noble Lords.

Whenever we talk about the resilience of our electricity system, we should look not only at supply; we must also look at the demand side, as has been raised by a number of noble Lords. I thought that the report was excellent in highlighting that the demand curve has changed. It is now in decline, and that is not simply as a result of the recent financial crisis and recession. It looks as though our demand for electricity peaked in around 2005 and it has been coming down steadily since then. The right reverend Prelate the Bishop of Sheffield highlighted one aspect of this—our continued deindustrialisation, which has obviously been picking up pace, or at least has hit the headlines, in recent weeks, but it is not a new phenomenon; we have been seeing the loss of industrial capacity over decades. That has been one contributing factor.

On the more positive side, we have seen big advances in energy efficiency and demand reduction. Some of that has come about as a result of policy; some of it has come about simply through technological improvements. One of the most notable successes that we have seen has been the revolution in lighting in recent years. The use of LED lighting for street lights and all over the place has happened almost invisibly, almost without government involvement. In response to energy pricing and the availability of new technology, we have seen a significant shift in demand, and those sorts of advances are likely to continue. The same can be said for flat-screen televisions and computer screens. There has been an awful lot of change, including in refrigeration motors. I could continue with the list of areas where we have seen progress in the more efficient use of energy, which has helped to soften the demand curve.

That has been both a blessing and a curse. It has certainly helped to make sure that the margins are not tighter than they would otherwise have been. However, it also makes investors rather lack confidence. It is quite easy to build into a market where the demand is growing. Where demand is shrinking, it starts to look a little harder to justify the spending of billions of capital. That is the nub of our problem at the moment. We have recognised that we have a low-carbon agenda which is delivering capacity, but fast deployment in that category is intermittent or varying and therefore is not providing firm power. The slower versions—CCS and nuclear—will eventually help us but we have no confidence that they will be available in the near term. As a result, we have a low-carbon agenda which is certainly helping to build capacity but it will not be firm capacity unless we ramp up our use of energy from waste, which of course is firm and classed as a renewable.

We have had another intervention—the capacity mechanism. I hope that noble Lords will forgive me if I dwell on this because it is a crucial issue and was referenced by the noble Earl. We have a capacity mechanism that is currently in conflict with our low-carbon agenda. The right reverend Prelate the Bishop of Sheffield also mentioned this, as did others. It is a curiosity that we have this mechanism, which was intended to bring forward investment in new gas generation. If the Treasury’s or DECC’s gas strategy is to be believed, this was the policy that was going to bring forward investment in replacement capacity for our CCGTs, which are both efficient and relatively clean compared with our ageing coal fleet. However, the first capacity market auction did not deliver anything like what we expected.

The noble Lord, Lord Howell, and others referenced the fact that we are not seeing the volumes of new capacity in the capacity market that we might have expected. That is despite the fact that a 15-year contract was made available to encourage such investment. The problem is that, in addition to the 15-year contract, one-year and three-year capacity market contracts were given for existing capacity. Of course, if you had existing capacity, your capital costs would have been amortised decades ago and you could bid in at very low prices, and those in that position have taken the lion’s share of the capacity auction contracts. Of the £11 that DECC’s capacity market is expected to add to the average consumer bill, just 53p has been spent on new infrastructure and £7.50 will go to the big six for their existing capacity. When we need to see new capacity being built, you have to ask whether this policy is calibrated in the wrong way. This has been an ongoing discussion and we have certainly raised the perverse effect that it has had in making old coal stations last potentially longer than need be the case, giving coal an advantage over gas. In a market where there are already problems with the relative prices of coal and gas, is that sensible?

I turn to the latest problem that seems to have emerged in the capacity market. Page 3 of tomorrow’s FT carries a story about the rather odd fact that we are now funding distributed diesel generators, a huge number of which will be relied on to keep the lights on under certain circumstances. We raised this at the Report stage of the Energy Bill and the Minister was kind enough to acknowledge it. He knows that there is an issue but, as yet, we do not seem to have had a response. Given that no carbon price is paid by these diesel generators, that they have almost no air-quality restrictions and that they were going to be subject to tax breaks, one can see why the market has flooded into this new loophole. In the first auction, we saw 2 gigawatts of small-scale generators coming forward—around 700 megawatts was successful; in this auction, which is scheduled for this December, the number has risen to 3 gigawatts pre-qualifying, half of which we think are diesel. We can only speculate as to how many of those will be successful.

In the context of the UK not being compliant with our air quality standards and of the VW scandal, which has highlighted the damaging effect that diesel has on our human health, is it sensible that our capacity market should be about to flood our electricity market with a whole host of distributed diesel generators? It does not feel like the energy policy of a modern, industrial, rich country; it feels as if we are looking at a policy that you might deploy in a developing country such as India or even an island state. We can do better than this. I think that it was the noble Lord, Lord Hennessy, who said that we seemed to be muddling through. I could not agree more. In this case, we are muddling through, relying on a quasi-market system that is delivering the worst of all answers—which is distributed diesel—to keep the lights on. The Government must act on this. The FT article quotes Tim Emrich, the CEO of UK Power Reserve, as saying that the only answer is to pause this year’s auction. Will the Minister respond to this? What is the Government’s plan? How will we prevent the opportunity cost of having a capacity market that simply delivers us massive amounts of distributed diesel as the answer to our capacity problems, when it should deliver sound investment in future-proofed, firm, low-carbon power? That is what we would expect the capacity mechanism to deliver. I look forward to the Minister’s response.

It was the noble Lord, Lord O’Neill, who pinpointed with most clarity the blackouts problem. We have this cycle of debate that takes place in the media. Often, it is filled with rather more sound and fury and not too much sense or fact. What the report and this debate have shown is that, when we look at the facts and present them properly, it brings a lot of light to the subject. I wonder whether the time has come for us to consider whether we need a permanent body of people to oversee energy security questions. When we look at the trilemma or trisaster or whatever one wants to call it, we see the climate change element taken care of by and large through the Committee on Climate Change, which does an excellent job of taking into account a whole host of factors and making recommendations about the pace and nature of our decarbonisation efforts. When it comes to costs, we have Ofgem, which perhaps does not have the teeth that it should have but is certainly set up to protect consumers. That is a price regulator; it is a very clear role. But who is responsible for that security of supply? It is often a ball that gets passed between National Grid, Ofgem, DECC and assorted other people, including now noble Lords, who have done a valiant job in trying to bring some sense to this question. However, the committee will move on to other topics, and that three-way tug of war between DECC, National Grid and Ofgem may just continue, with the media throwing in their own interpretation of the facts.

Is it not time that the Government got a grip and created some body of experts that could oversee this issue? We know that a body of experts was recruited to help DECC with the Energy Act 2013 and presumably they still exist. What has happened to them? Are we going back to them to ask for progress reports on how things have turned out since the passing of that Act? A number of noble Lords from all sides of the House have raised concerns that the EMR may not be delivering as expected for various reasons, the change of Government also having had an impact on that. We need to continue to create important frameworks that can help government to navigate this issue of how to make energy affordable, reliable and low-carbon. It is that security-of- supply aspect that lacks an overseeing body at the moment.

I shall not detain the House any further. It has been an excellent debate. The report is incredibly illuminating, thoughtful and well written. We need more of this sort of analysis and I do not think that the committee can be relied on to do it. It is incumbent on the Government to set out their long-term strategy and, within that, to tell us how they propose to manage this situation going forward.

[The Parliamentary Under-Secretary of State, Department of Energy and Climate Change and Wales Office (Lord Bourne of Aberystwyth) (Con)]

My Lords, I thank the noble Earl, Lord Selborne, for this important discussion, for the excellent way in which he has obviously chaired the committee and for the report. I also thank noble Lords for their contributions to this first-class debate—it has been a debate of extraordinarily high quality.

I start by saying how much I agreed with the comments of my noble friend Lord Howell about the excellence of the national grid. My first ministerial visit was to National Grid at Wokingham to see the excellent work that it is doing, which is really reassuring.

There is no silver bullet. If one thing has been clear in this debate, it is that there is no single source of energy to solve the trilemma. If there were, I am sure that somebody would have come forward with it by now and we would not be debating these issues. It is a very complex matter.

Just to illustrate the point, the right reverend Prelate the Bishop of Sheffield—with whom I remember sharing an introduction day; we came in at the same time—in an extraordinarily profound and well-thought out contribution talked about the importance of the Paris COP negotiations at the end of the year. Indeed, they are important, they are vital and we are playing a leading part in them. That negotiation is centred on decarbonisation.

The right reverend Prelate spoke also, quite rightly, about the need to do something for the steel industry, which we are doing. What we are doing is what we are being pressed to do by people of all political persuasions and none, which is to provide some sort of subsidy, payment or compensation in relation to carbon emissions. Nothing could better illustrate the nature of the problems that we have to address as a Government, as a country and as a department. They are unchanging, whoever that Government are.

I will not ramp up this debate by making it a party- political knock-out issue. I share many of the views put forward by the noble Baroness, Lady Worthington, which I think she knows, and I think that there is broad agreement in this House about many issues. I regret that that is not the case in the Commons. If we are able to get to a position where it is, we will benefit from it. I think that is a view broadly shared.

The committee’s report was a wide-ranging and important contribution to this vital debate. I will try to touch on a few of the main themes discussed, picking up points made by noble Lords, and then I will go back and perhaps pick up one or two points that are broader than the committee’s report.

It has been rightly identified that we are wedded as a Government—again, there is a consensus on this—to the trilemma to ensure security of supply. I share the view put forward, for example, by the noble Lord, Lord Hennessy, and my noble friend Lord Howell and all others that this is central. We have recently published the Statutory Security of Supply Report 2015 to Parliament.

Secondly, we are determined to ensure that energy is sustainable. The Government have recently responded to the Committee on Climate Change’s annual progress report on meeting the carbon budgets. I would mention the key role that we are playing in the climate negotiations: my right honourable friend Amber Rudd has played a leading part on the finance and the Prime Minister has made a powerful statement about the Government’s commitment to helping developing states. That, too, has been widely welcomed, and I know that it has from speaking to representatives of other countries.

Thirdly—these are not in any significant order; they are the trilemma in whatever order we address them—there is the issue of affordability. Many people, including my noble friend Lord Ridley, have stressed the importance of this and quite rightly so, because this is central: we have to ensure that electricity is affordable for consumers, both for domestic consumers and for industry. Points were made about the position in Germany in relation to the steel industry. It is true that electricity prices are cheaper for industry, but domestic bills are far higher, so again there is no silver bullet in this.

Perhaps I may say something about the Government’s report to Parliament Statutory Security of Supply Report 2015. This fulfils our statutory duty and obligations, and we take this very seriously. I thank the noble Lord, Lord O’Neill, for much of what he said about nuclear and the consensus, but I disagree with him when he suggests that this report, as far as the Government are concerned, is ignorable and being ignored. Let me reassure noble Lords that that is not the case. The department takes the report very seriously, and rightly so. At the same time as our report was made to Parliament, National Grid published its winter outlook, setting out its view of the electricity and gas supply and demand situation for the winter ahead. It shows a margin of 5.1%, which is well within the Government’s reliability standard and gives us confidence that there is enough spare capacity to meet demand even in tough system conditions such as cold weather. We are confident that the capacity margin is manageable this winter and we have the right tools in place to address the immediate future.

Points were rightly made in the debate about the long-term future, and this relates to the vision behind the energy policy of the Government that many people have talked about. I think that we have made some things very clear, and no doubt other points will be made clearer this autumn. As the noble Baroness, Lady Worthington, suggested, we are in the middle of a spending review. Some things are clear, one of which is the importance of nuclear. We have made headway with Hinkley Point, we are making headway with Sizewell, and after that comes Bradwell, although that is in its early stages at the moment. It is not limited to that type of reactor because we are also bringing on Wylfa B.

Mention has been made of small modular reactors, and many noble Lords who took part in the recent debate on nuclear power will recall the issue coming up then. I responded by saying that there is going to be a progress report on it in March of next year. I will make sure that the letter I wrote to noble Lords on that occasion is also sent to those who have participated in this debate because there is a read-across, certainly on the nuclear issue and possibly on one or two other things that were touched upon in that debate as well.

I shall move on to say something about the capacity market. I may possibly disappoint the noble Baroness when I say that it would not be responsible to cancel or defer the capacity market auction this winter. Although she did not ask for the latter, there is the demand-side response option which comes in in January of next year. We have a trilemma, and if we were to do that, I think it would prejudice things. I have to say that that will not be happening. We believe that the capacity market is the right tool for incentivising long-term investment and we need to deliver security of electricity supply. There is an issue that the noble Baroness has touched upon. I rightly acknowledge that and we are looking at it. This was also touched upon by my noble friend Lord Howell. We have to refine the capacity market and see how we can deliver capacity while ensuring that it is new capacity and that it is not from diesel and so on. I accept that these are things that we will have to address, but at the moment there is no evidence to suggest that it is going to be purely or substantially diesel.

[Baroness Worthington]

I understand that it will not all be diesel, but my point is that each successive auction diminishes the pot for future auctions because we sign 15-year contracts. Once those 15-year contracts are signed, they cannot be repealed or changed; they are simply granted. Every time we build a diesel generator, we are not building something that could be cleaner, more sustainable and more efficient.

[Lord Bourne of Aberystwyth]

That is a point well made, as I have indicated, but I do not think the right answer is to cancel the auction for this winter. I hope that the noble Baroness will accept that that would not be the right approach at all.

--- Later in debate ---

[Baroness Worthington]

But there needs to be a response because this is a loophole that is being exploited. It started last year and it is now building up into a worse problem. As I understand it, the Secretary of State has quite significant powers under the electricity market reform to shape that auction. Now that this has come to light, what are the Government going to do about it? Are they simply going to let things go on as they are now, which will see 15-year contracts granted to large numbers of diesel generators?

[Lord Bourne of Aberystwyth]

As I have indicated to the noble Baroness, what I will not do is make policy on the hoof and I certainly will not recommend that we cancel the auctions this winter. But as I say, it is an issue that we will look at.

Let me move on to say something about the reliability standard, which was mentioned by the noble Lord, Lord O’Neill, among others. The committee recommended further research into the true costs of electricity shortfalls to set the reliability standard. We agree entirely that an understanding of the costs of shortfalls is crucial to an assessment of the measures taken to prevent them. They are difficult to assess given that, I am pleased to say, there is a lack of much historic evidence domestically in relation to this issue because we have not had shortfalls. In 2013, a comprehensive study was jointly commissioned by Ofgem and DECC that resulted in the current figure of £17,000 per megawatt hour, which we use for the purposes of our reliability standard. The research looked at the position overseas in a thoroughgoing and exhaustive exercise, and it was as evidence based as possible. We are working with National Grid and the independent panel of technical experts to investigate further the costs of dealing with electricity shortfalls, and we will take action accordingly.

Let me say something about resilience. The major contributor on this issue was the noble Lord, Lord Harris, who spoke with some passion, and spine-chilling it was, too. In preparing for this debate and looking at the issue more broadly, I asked many of these questions as well; that is, what do we do if the following happens? The noble Lord suggested that there are things that perhaps we cannot foresee happening, and I seem to recall that a similar exercise was undertaken after 2011 in which there was a review of procedures. I think he will understand when I say that detailed information cannot be given out on something like this. If it was something in the nature of a terrorist attack, obviously we would not want to publish any detailed blueprint about what we would do in particular situations. But what I will try to do is ensure that we get a response around to noble Lords to set out the position in broad outline. There are plans in place to take the necessary action in so far as we can. But as the noble Lord rightly said, there are situations which we probably have not foreseen. Again, I will ensure that noble Lords are given a response on this matter in whatever detail is possible, although I think that it will be broad in nature.

The noble Lord also mentioned the three-digit number and rightly said that it was not going to be a silver bullet. It will help in some situations but not in the most dire ones. Noble Lords will be aware that this is due to be implemented in April 2016, so for those situations that fall short of the catastrophic, obviously it is still important that there is a three-digit number that people are able to use to ensure that they know what is happening in their locality and what the advice is in a particular situation.

Perhaps I could say something in relation to demand-side response and on storage, which was rightly brought up in the debate. The report stresses the potentially important role of newer technologies such as demand-side response management and storage. Demand-side response could mean industrial customers shifting the timing of their electricity-intensive processes away from peak times, for example. We will ensure that an auction will take place for demand-side response in January 2016, with the first capacity payments for those who are successful following in 2017. An analysis of the currently available evidence indicates that demand-side response in existing generation does not generally require as significant up-front capital investment as new-build plant and therefore does not require as long-term capacity agreements as new-build plants do, and that is the reason for the shorter period in relation to that auction. On 15 October, we published an assessment of this issue which shows the diverse nature of the demand-side response, and one or two noble Lords raised questions about that report.

On storage, we very much share the view put forward in the report of the potential role that energy storage could play and the flexibility that storage offers as a balancing solution. While we are not currently planning to introduce a framework of incentives specifically for energy storage, we are encouraged that in the recent pre-qualification for the next capacity market auction, which is to take place this December, the majority of existing pump storage sites have pre-qualified this year, bringing a potential 2.7 gigawatts de-rated capacity of storage into the capacity market.

Some noble Lords also mentioned battery storage in the context of zero-carbon cars and the noble Lord, Lord Teverson, referred to Tesla. Work on this is, as yet, at a relatively early stage but we are the second largest producer of zero-carbon cars and the Government are determined that we do not lose our market edge.

Smart metering is clearly important and work is progressing on it. We have around 1.7 million meters already installed. I had a meeting about smart meters this morning and, as one would expect, it is beginning to ramp up. This will make a difference to demand, which is welcome.

The significant issue of interconnection was raised by many noble Lords, including my noble friends Lord Selborne and Lord Howell. We are committed to increasing Britain’s interconnection capacity, which can help to lower consumer bills and meet decarbonisation objectives. Great Britain currently has 4 gigawatts of interconnection, across four interconnectors, to France, the Netherlands, Ireland and Northern Ireland. Earlier this year, financial investment decisions were reached on two new interconnectors—one to Belgium and one to Norway. Denmark and Iceland are also being talked about but they are not yet at the decision stage. Interconnectors will bring additional security of supply benefits by giving access to generation beyond our national borders when it is needed. I stress that connection to neighbouring countries with different sources of generation increases the resilience of our electricity system.

Cybersecurity is one of the Government’s top national security priorities. I welcome the supportive comments made by the noble Lord, Lord O’Neill. This is taken seriously across government and certainly within DECC, which is working with government departments and agencies, as well as with industry partners, to ensure that the risks to the energy sector are understood and that appropriate mitigations are established. This includes ensuring that cybersecurity factors are considered, where possible, at the early design stages of future systems, as they have been at Hinkley C, for example. Smart meter security has been a key consideration at every stage of system development.

At the outset, my noble friend Lord Selborne rightly talked of the importance of looking at the whole-system impact. The committee’s report recommends the Government take a look at the whole-system costs of low-carbon technologies. The report on the Energy Systems Catapult is due to be published early in 2016—I think that the noble Earl raised a question about that—and DECC has also commissioned Frontier Economics to examine the whole-system impacts of electricity generation. Its report will be published in March 2016. These points were also raised by the right reverend Prelate the Bishop of Sheffield and my noble friend Lord Ridley. The Frontier Economics review aims to systematise DECC’s understanding of the impacts of electricity technologies, system balancing, overall capacity adequacy and networks.

My noble friend Lord Selborne, and other noble Lords, mentioned energy efficiency. I agree that it is vital and we are committed to insulating 1 million homes in this Parliament.

The noble Lord, Lord Dixon-Smith, talked about the importance of the planning system. I agree that it is central to this issue. He also mentioned the loss of heat from the production of electricity. DECC takes this very seriously, too.

This has been a high-quality debate, to which noble Lords have brought different perspectives. However, it has demonstrated, once again, that there is no silver bullet. There is a diversity of energy supply. Renewables and CCS—to which the noble Baroness, Lady Worthington, referred—are in the Energy Bill and are central to what the Government are doing and were mentioned in the manifesto, and there are the two projects at White Rose and at Peterhead.

[Baroness Worthington]

Can the Minister respond on the structural question of how we govern the security aspect of the trilemma, compared to the other two, given that Ofgem looks after costs and the CCC looks after climate change? Who do we rely on to get expert, apolitical advice on security of supply? Should we not be thinking of creating something that helps us to bring this kind of analysis to the table more regularly and with a similar degree of rigour?

[Lord Bourne of Aberystwyth]

I will ponder on what the noble Baroness has said. As she knows, I was very responsive to the committee in looking at the CCS policy across parties: I was very willing to take it forward and it will be covered in tomorrow’s Third Reading debate. I will look at it—at present it is the responsibility of DECC, within government, and I do not want to say that we will have another committee just for the sake of it. However, I will consider what the noble Baroness has said because she has put it forward in a very constructive way.

I thank the noble Lord, Lord Broers, for what he said about the substantive reply I gave him. I am pleased about that—we do not often get complimented on our parliamentary responses. He is right about the importance of capacity factors, nuclear and so on and about the fact that solar and wind costs are coming down. At the outset, the noble Earl said that we did not want a system on subsidies. We need them to get things moving initially and there are subsidies that remain, but, ideally, we do not want a system driven by them.

My noble friend Lord Howell mentioned fusion. That will be covered in the letter on nuclear that I will ensure goes to noble Lords. Work is being done by the Government, a lot of it at the excellent Culham centre in Oxfordshire, and it is certainly part of the mix. The noble Lord, Lord Rees, talked about support for battery storage and other methods of storage. The Government are looking at that.

I apologise for going over time, but I thank noble Lords for a very high-quality debate. We will ensure that any points that I have missed are picked up and covered in correspondence. I have undertaken to consider some points and will do so, but without commitment.