Infrastructure Bill [HL]
Debate between Baroness Worthington and Lord Jenkin of Roding(10 years ago)
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Baroness Worthington (Lab)
My Lords, I begin by apologising to noble Lords for the late tabling of this amendment. It was down to a misunderstanding as to when this group of amendments would be taken.
We now turn to Part 4 of the Bill, concerning energy, and to the community electricity right specifically. Although we discussed this in Committee, the purpose of tabling the amendment is to press the Government again on it. We were not satisfied with the response in Committee and we feel that this needs a considerable rethink in terms of how it is presented in the Bill. I also look forward to debating the amendments that we will come to later today.
The clause heading is “The community electricity right” but it quickly becomes clear from subsection (1) of the clause that this is about not electricity but a subset of electricity that is defined as renewable. That is the point we want to probe. We live in a world where energy markets and the energy system are changing and we are seeing a higher degree of decentralisation of energy, not just in renewable energy but also potentially in gas, both in terms of generation and the extraction of local sources of fossil fuels. Our main concern is that we should not single out a particular group of technologies for what is, in effect, an inflexible proposal from the Government when a much more holistic approach to the issue of community involvement in these projects is needed. There have been examples of local communities being unhappy with proposals for their localities, but there have been many more examples of communities embracing proposals and finding great benefit from the jobs and income that flow to those communities from development in their area.
Although we are fully supportive of the idea of community involvement, we are not necessarily persuaded that a single approach should be applied when considering how to engage communities or help them to benefit from development. The Government’s proposals are restrictive in that sense. Our main concern is that we do not make presumptions about what is going to work in every part of the country. In some parts of the country, rights to buy and ownership stakes will be the interesting issues; in other parts, there may be a simpler formula that enables people to have lower bills for electricity in their local area. We all know that a voluntary approach is being explored to try to identify the best way forward. We will come on to debate the need to allow for a good process and for enough time to come to conclusions before rushing into regulation.
This amendment is not about that but it tries to explore why it is necessary to qualify electricity generation with the word “renewable”. It is defined in law but covers a subset of all types of electricity generation that might attract community involvement and interest. We have seen under the capacity mechanism new development coming forward involving capacity market payments, such as in the small-scale, sub-20 megawatt gas generators that are bidding for 15-year contracts. They may well be located close to communities, which may feel that they would like to have a stake in those projects.
There is an issue here. We fully support more community involvement and better community integration in order to produce much more positive engagement with decentralised electricity production. However, I do not see why the Government have come forward at this time with a narrow proposal applying to a subset of technologies. What is the rationale for this provision relating only to renewables and not to a broader range of technologies that communities might be interested in being involved in or having a stake in? I beg to move.
Lord Jenkin of Roding (Con)
My Lords, I very much share the concern of the noble Baroness. I have an example that I raised at a meeting with the Minister. I am grateful for the trouble she has taken to allow us to engage with her and her officials. I made the point, as the noble Baroness, Lady Worthington, has done, that there are many other worthy forms of community involvement in energy.
The example that I gave at the time was the Plymouth Ovo Energy project—the Plymouth Energy Community, which even contains the word “community”. I was struck by the reply I received from one of the Minister’s officials. Both my noble friend and the official realised that perhaps I deserved a rather fuller reply. I am pleased to say that I received one in a letter from the official, written on the same day. Perhaps I may quote from it because it begins to give an explanation regarding the question that the noble Baroness has just asked. The letter states that there are,
“strong examples of ways in which the community energy sector is innovating, growing and maturing. However, I would say that they focus on different areas of community energy. The Community Electricity Right concentrates on new renewable electricity generation schemes and involves communities as investors”.
Never let us forget that we are talking about the statutory scheme, not the current voluntary arrangements. It is the statutory scheme that is in the Bill. The letter continues:
“On the other hand, Plymouth Energy Community mainly focuses on the supply of electricity from existing schemes and principally involves communities as energy consumers”.
My immediate reaction is: why is this so narrow? The letter goes on to explain:
“Energy supply and generation are dealt with quite differently within the regulatory and policy framework. As such, it would not be appropriate to include the Plymouth Energy Community directly within the scope of the Community Electricity Right”’
The letter then makes what is really the most important point:
“I would just like to add that DECC is taking separate measures to promote local supply. For example, we have formed a dedicated Local Supply Working Group formed of DECC officials, Ofgem, Academics, Local Authorities and community energy groups to explore the regulatory barriers limiting local supply. They will be reporting to the Secretary of State in March next year”.
As I said a moment ago, that goes some way to meet the concern that I expressed. However, I then have to go on and ask my noble friend the Minister this question. What other forms of community involvement are being considered? Here I refer to the task force’s report, which we had only on Monday. On another occasion I expressed my displeasure that it had all come so late, two days before we have to debate the whole subject. That report has a lot to say about various forms of community sharing. They are described in annex A of the report, although at this hour of the night I would not dream of reading it all out.
We must remember that we are at this stage, and the task force is concerned solely with the voluntary system. It had nothing to say—I suspect because it felt that it was outside its terms of reference—about the statutory power for which power is being taken in this Bill. The main point on this amendment is: what other forms are being considered? Yes, the letter is referring to the supply side. The noble Baroness asked about cheaper electricity. When winding up the debate in Committee, I referred to the McAlpine schemes and their proposals to offer cheaper electricity to communities within the reach of the particular scheme that was being developed. It is a very familiar concept in many other areas of the world—notably, nuclear power stations in France. They gained popular consent by being generous with the prices that they charged.
That leads me to my final point. There is no doubt that large parts of the renewable energy industry are dead against any form of statutory straitjacket being imposed on them. They would much rather continue with and demonstrate the success of the voluntary scheme with which they are engaging. I had a very strong statement from the Solar Trade Association. It says that the task force report is an interesting starting point but that,
“it must be given time to be put into practice”.
I think later on we shall say that we have won that argument—we have got more time. Secondly, it says that,
“Government and the community energy sector need to be flexible and proactive in supporting this and in establishing an evidence base”.
Thirdly, it says that,
“no evidence has been provided by the Government that the extensive yet unspecified powers within the proposed Bill are needed or will lead to increased investment”.
Similar points have been made by other parties that have been advising me.
Echoing the noble Baroness, one has to say: what other forms of community involvement are being considered? Will the Government recognise that what they have said is intended to be a backstop provision only if the voluntary system is seen not to be working? Is that still very much their approach on all this? There is no doubt that the provisions of the Bill have worried the industry.
Lord Jenkin of Roding
My Lords, we can deal with this much more briefly. My amendments in this group address when regulations might be introduced. From Second Reading onwards, I was asking for two years. The government amendment has now suggested what is, in effect, 18 months. I have already given a message to the Minister through her department that I am extremely pleased with that. I feel that the argument has been worth while. We now have time to make sure that the reviews really can be reviews of the way in which the voluntary system is working, without the immediate threat of legislation.
The Government have made it clear that this is a backstop power. Sometimes I get the impression from the way in which Ministers speak that they regard the introduction of regulations as inevitable. I certainly do not. The industry certainly hopes not. It hopes that it can satisfy the Government that progress is being properly made, that it can be extended much more flexibly through the voluntary system and that regulations may in fact be unnecessary. Therefore, when Ministers refer to introducing regulations, they should always say “if necessary”, not “automatically”.
I thank my noble friend again, who has brought a substantial concession in answer to the question of when. I beg to move.
Baroness Worthington
My Lords, briefly, I again support the noble Lord’s amendment and welcome the government amendment which will indeed delay the “when” aspect of this question. There remain considerable questions about why these provisions have been brought forward, given that the voluntary approach is moving forward. I still think that we are unfairly singling out two technologies relative to other forms of electricity generation. However, I am happy that we now have more time to think. I absolutely echo the words of the noble Lord, Lord Jenkin, that this should be seen as a backstop power, which we hope should not need to be enforced.
Energy Bill
Debate between Baroness Worthington and Lord Jenkin of Roding
Lord Jenkin of Roding
My Lords, one of the themes running through our debates on the Bill has been the need to ensure that the UK has sufficient generating capacity to meet likely demands and to avoid power cuts. It is what is meant by security of supply. This concern has been sharpened by last month’s worrying 2013 report from Ofgem on electricity capacity and the forecast of margins falling perhaps even by the middle of this decade to dangerously low levels. The central purpose of this Bill, through EMR, which is at its heart, is to address this issue, and the capacity market is one of its principal instruments.
I must say at the outset that in the circumstances in which the nation finds itself Ministers have been quite right to identify this as a solution to the capacity problem—or at any rate to try to find a solution. They were right, too, to bring forward the first auction for the capacity market to 2014. But to retain 2018-19 as the earliest date for any payment under the capacity market is a serious mistake. What matters to potential investors is not the date of the auction, but the date on which they can be sure of the first payment if they are successful in the auction.
What I suspect lies behind this four-year gap between the auction and the payment is an idée fixe—an idea somehow firmly held within the corridors of DECC that what it is addressing is really confined to building new plant, for instance to commissioning new generating plant such as a combined cycle gas-fired plant. Yet what we are faced with now is that the problem is on us sooner than anyone had anticipated. The Ofgem report has aroused a great deal of concern, which is not unjustified. The National Grid, supported as one might expect by Ofgem, has reacted by suggesting what I can only describe as a couple of temporary expedients, aiming to tide the system over until the EMR really begins to bite towards the end of the decade. My impression from the welcome briefings we have had, not least that of yesterday, is that these temporary expedients are what DECC is really basing its hopes on: that we shall not in fact have any power cuts. What is strange is that these temporary expedients had previously been rejected by DECC because of their potential adverse impact.
Ofgem’s electricity capacity assessment concludes that risks to security of supply are likely as early as 2014-15, driven by further reductions in electricity supplies from the withdrawal of installed generation capacity. The report also highlights that future policy and price uncertainty are continuing to limit investment in thermal generation. The assessment bolsters the case for bringing forward a mechanism to deal with the underlying issues contributing to generation inadequacy, which some commentators have described as the “missing money” as in a world of high renewables, thermal plant will run less and less often at suppressed prices. There is also the uncertain economic viability of conventional generation going forward.
Yet against that background, the grid launched what it called an informal consultation last month on two new temporary expedients. I think I need read only the title:
“Demand Side Balancing Reserve and Supplemental Balancing Reserve: Informal Consultation on the Development and Procurement of two new Balancing Services”.
What is needed is new capacity, not temporary sticking plaster. If the required plant is not in the system, it simply is not available for balancing anything. However, it is actually worse than that. The consultation document acknowledges in paragraph 32 on page 9—I have it here if necessary—that,
“security of supply is a function of the market which is underpinned by the energy policies under which the industry operates”.
It also says that it is not National Grid’s role,
“to ensure there is sufficient generation capacity available to meet demand”.
Yet the proposals aim to ask National Grid to do precisely this, by procuring capacity through the supplemental balancing reserve and demand-side balancing reserve.
The SBR is essentially a form of strategic reserve with last-resort despatch. As I intimated earlier, the strategic reserve was rejected by DECC, while acknowledging that such a mechanism does not address the missing money in the energy market but could even make the problem worse, in that investors might fear that the strategic reserve will be deployed before it is envisaged it would be—that is, when other capacity is available, albeit at very high prices. This would dampen the investment signal for players outside the strategic reserve, leading to what one might describe as a slippery-slope effect whereby no new investment is viable without an SBR contract. More and more capacity would then have to be procured within the strategic reserve. The result is that it simply displaces the ever-dwindling part of the market, with no intervention. What is needed is to bring forward not only the auction date under the capacity market but the date on which payments under the capacity market will be received. That is the purpose of my amendment.
At Second Reading, noble Lords may well remember that I drew attention to the substantial amount of mothballed plant held by some of the larger generators. They were mothballed because it is simply not economic to run them at current prices and in the light of uncertain futures. Some of this capacity could well be brought into production over the next six to 18 months, provided—this is what has to be hoisted on board—that capacity market payments can be made as soon as the plant is available and commissioned. That would happen if this amendment were to be accepted; both Ofgem and the grid recognise that the immediate problem is about capacity, not balancing. If my noble friend is unable to accept the amendment as it stands, perhaps she would agree to reflect on the situation I have described over the recess and consult further with those who are trying to help the Government to avoid the risk of serious interruptions of supply. The mechanism would be there but the implementation dates need to recognise the growing immediacy of the problem we face.
I make just one final point. This is not primarily about improving access to the market—other amendments will address that—but about reducing the risk of blackouts. I repeat what I have said previously; if the country faces interruptions in electricity supply, it is Ministers and the Government who will be held responsible. I, like everyone else, wish to avoid that. I beg to move.
Baroness Worthington
My Lords, I am extremely grateful to the noble Lord, Lord Jenkin of Roding, for tabling his amendment. We discussed the capacity mechanism in the previous session, when our focus was on the interplay between existing generation, more supply coming on and the demand side of the capacity mechanism. This amendment gets to the heart of how the capacity mechanism is proposed to work. One of my major concerns about the Bill relates to this mechanism because it is quite a dramatic intervention into the market, yet we still have very little in the way of detail as to how it is proposed to operate. I urge the Minister to give us some reassurances that we will see the draft statutory instruments pertaining to this part of the Bill as early as possible. It is one of the most unworked-through parts of the Bill and it is only when the SIs are drafted that we will be able to answer some of these important questions raised by the noble Lord, Lord Jenkin of Roding. Can we therefore have some reassurances about the timetable for publishing the draft SIs for this part of the Bill?
Energy Bill
Debate between Baroness Worthington and Lord Jenkin of Roding
Lord Jenkin of Roding
My Lords, I was happy to add my name to the amendment. I see it more as a vehicle for promoting a short discussion, which I think we shall have, rather than something that ought to be added to the Bill; I think the noble Lord, Lord Oxburgh, has made that clear.
I have in the past debated in successive energy Bills the need for the United Kingdom to increase its storage capacity. We have far less than other countries. I have always been met with the argument, to which the noble Lord, Lord Oxburgh, referred, that we have so many different sources of supply that we do not need the same levels of storage as other countries. The mistake that we have been making, and I certainly plead guilty to this, is that we have seen it in terms of security of supply, whereas—as I think the noble Lord, Lord Oxburgh, makes clear and I would argue—we are really arguing about price, not supply.
If one looks at the UK gas market over the past two years, 2011-12 and 2012-13, it is pretty level for most of the season. The price rises slightly towards the autumn, and then in December, February and March there are sudden spikes and it goes up to sometimes two and a half times the normal rate. That is what happens to world gas markets during the winter: the demand substantially exceeds the supply and the result is that the price goes shooting up—not for long but it does—and the companies have no option but to pay it and immediately pass it on to the consumers in higher prices.
If you had a level of storage whereby you could build up the supplies during the summer and release them during the winter so that you are not dependent on the huge spikes in world gas prices, it would protect consumers. I see this whole question of storage as being much more about protecting the consumer market against sudden spikes in prices, rather than any shortage of supply. I do not see any risk of there being a shortage of supply but it is perfectly clear that we have had very substantial spikes in prices.
I took the advice of somebody who is very much involved in all this. I will quote what he said to me:
“If we had had sufficient gas storage last winter to maintain gas prices close to average winter prices (~70p/therm) rather than seeing prices spike to over £1.50/therm it would have saved costs to the UK economy of between £300-400 million. This is the sort of saving/protection that should be foremost in the Government’s mind”.
This is something that should not be ignored. I am not suggesting that there is any particular solution to this. If the market could be persuaded that this is a proper thing to do—I have heard of a project involving storage in a depleted offshore gas field; I think it is called Deborah—that could provide the vehicle for the kind of storage that we are talking about, which would save consumers the kind of price hikes that they have had to face in the past.
There is another interesting point. A very interesting study was published this morning—there may have been reference to it in the press—by a very well known academic, Nick Pidgeon at Cardiff University, who looked at public attitudes to all this. His synthesis report is called Transforming the UK Energy System: Public Values, Attitudes and Acceptability. It is a long report and I do not propose to read more than one sentence of the executive summary—well, two sentences—but it has relevance to the discussion we are having. The report says:
“While ‘energy security’ as a term was not salient to people, the range of concerns that it encompassed (geopolitical issues, energy shortages, black outs, unaffordable prices) did evoke strong reactions. Energy security is particularly closely linked in public perceptions to affordability because it relates to concerns about personally not being able to access energy services, while concern about national level insecurity in supplies of fossil fuels was seen as a symptom of the problems of fossil fuel dependency”.
In other words, security is not seen primarily as “We are going to run out” but as an issue of affordability. This is spelt out at some length in Nick Pidgeon’s report. It is the product of more than a year’s work by him and a team of academics, and it is something to which we should give some attention.
So, in addition to the general point that the question of storage relates to price rather than to capacity or the question of running out, so it is also associated in the public mind with affordability. That is why, if we can level out the prices by encouraging the industry to invest in more storage, we would find it valuable on both accounts: it would be valuable in terms of reducing cost but also in reconciling public opinion to some of the difficulties that we have faced in the past of sudden spikes in energy prices.
Baroness Worthington
My Lords, I am grateful to the noble Lords, Lord Oxburgh and Lord Jenkin, for tabling this amendment. I confess that this is not an area where I have a great deal of expertise, so really I just have some questions to add to the debate. I am sympathetic to the desire for government oversight to ensure that gas prices can be levelled out. Demand seems to be very seasonal and storage is an obvious way of helping to smooth out prices. I suppose my question is: to what extent has the department done any analysis of why the private sector is not doing this? It should be in its interests to secure cheaper prices, so you would expect there to be an incentive to invest in more storage.
My second question, which is related to that, is: to what degree do the powers of the regulator—our party’s views on the regulator are well known, but this is a genuine question—extend upstream? Does Ofgem have a power to look at fairness of pricing in the supply of gas, meaning before it reaches the distribution network? There is a high degree of vertical integration in the energy sector, and there are some companies that control the extractive processes, the distribution and then the use of the product. When you have that degree of vertical integration, there is the potential for unfair pricing, or self-serving that could lead to less transparent pricing. That is a genuine question. Does the regulator consider the potential for those vertically integrated companies, right the way up to extractive? Does it cover that? If it does not, it should. I look forward to the answer on that.
I am increasingly being exposed to ideas around renewable gas, by which I mean syngas, which is generated from other carbon sources than the hydrocarbons found in natural gas. This area seems to have been overlooked by successive Governments. It would be helpful to hear the latest thinking on renewable gas, particularly its role in helping to hedge against high natural gas prices. My understanding is that gasification technology and pyrolysis in particular are now maturing as technologies and helping to deliver alternative sources of heating gases for the variety of uses that you can use gas for. Those are my questions.
Energy Bill
Debate between Baroness Worthington and Lord Jenkin of Roding
Baroness Worthington
My Lords, I have proposed that this clause should not stand part, partly because this is a very odd part of the Bill. I read it and then read it again. Then I thought that I would go to the Explanatory Notes as they would help explain what it is all about. However, the Explanatory Notes simply repeated what was written in the clauses in the same language but with the numbers taken out. So that was absolutely hopeless. I then turned to the debate in the Commons when this clause was introduced. I was seeking some sense of why this was needed, how it was going to operate and what it was for. My colleagues in the other place pressed the Minister quite hard but, I am sad to say, I am still a little confused as to why this power is being taken.
It did not appear in the draft Bill, so it was not subject to any pre-legislative scrutiny. There is very little background information on it and there seems to have been no consultation. It introduces quite extraordinarily wide-ranging powers with almost no definitions at all. It allows the Treasury and the Government to raise money, but the amounts that are allowed to be raised do not even need to pass before Parliament; they can simply be determined by the direction of the Secretary of State. It is quite a profound, if small, piece of legislation. I was curious to know what it was for and I still am. Perhaps the noble Lord can provide us with his account. Is the noble Lord, Lord Jenkin, going to tell me that there is lots of background information that I have not read?
Baroness Worthington
In the other place, the Minister did try to give some explanation as to what these fees for energy resilience might be. My colleagues in the other place did press him quite hard, because one reading could see it as a way to discourage strike action in those sectors that deliver fuel or are connected with the energy sector. We were pleased to receive quite emphatic reassurances that these fees would not be applied to unions that sought to take strike action.
What seemed to emerge was that the fees are going to be levied on business in response to extreme events that it was almost impossible to predict. That could be anything but some examples were given. The Government might need to step in and provide personnel to companies in the event of an outbreak of a flu pandemic and would want to recover the cost in fees. Then there was the potential for equipment or vehicles that the Government own to be deployed in the event of extreme weather or of a clean-up. Then there are the unspecified assets that might need to be provided in the short term to business. Really, this is the Treasury seeking a power to regain costs for that. What have we come to? Is the government budget so tight that we are introducing powers to claw back money for disaster situations? In reality, if a disaster strikes you want the Government to be able to respond. You do not want there to be any quibbling about costs being passed on or who will pay for what. Why do we—and companies—pay taxes? The Government are there to provide a service in the event of national security issues.
Maybe I am wrong and there are plenty of precedents for the Treasury introducing specific powers to recover money for specific unintended events. If there are, I stand corrected. However, my reading of this is that it is an extraordinarily broad power with almost no definition and very little accountability. For that reason, it does not have a place in this Bill. Obviously, as we go forward we know that there will be an increase in natural disasters that could potentially interrupt energy supply. In fact, we have quite a resilient system for dealing with that. The power companies and National Grid are on the front line. Their licence requirements mean that they have to reconnect customers as soon as they can. When the large storms hit the Isle of Arran, SSE men in vans were out there fixing that problem. The Government were not involved. I suspect that the Government do not have the skills to address these issues.
It strikes me that this must be about military personnel. It can only be about military deployment because the department certainly does not have skilled engineers who can go and fix transmission lines. That is all done in the private sector. If it is about concerns about the military and the budget, this is quite a strange precedent to set, that there will somehow be fees applied to businesses. Are those fees voluntary or mandatory? How will they work? Does a company have to pay? As I said, when will all this be negotiated? If there is a natural disaster I would hope that we got on with fixing the problem and that the Government would be sufficiently robust and well resourced to do that, not that we would be quibbling about collecting these fees.
As I said, we are going into a world where there are likely to be more natural disasters. We should not shy away from that, but the Treasury would better spend its time getting to grips with climate change rather than preventing us from tackling it and introducing apparently innocuous but quite powerful bits of legislation that enable it to collect costs. It should be thinking about how it can act to stop the excessive increase of natural disasters and it should start taking climate change seriously.
Lord Jenkin of Roding
I apologise for appearing to interrupt the noble Baroness in mid-flow. I just have one question. I had the same problem as the noble Baroness did. I thought, “Why has this clause stand part question been put down and what does the clause say?”. I turned up the Ofgem consultation letter published on the same day as its recent capacity assessment report, which has of course shown that the margins will, by the middle of this decade, become very much smaller. It goes on making hopeful remarks that perhaps there will not be interruptions but an increasing number of people think that there might be. The letter consults on additional balancing measures for the grid. It proposes two of them. I will not go into this in great detail at this hour of the night—we are due to rise in two minutes—but does that have anything to do with this clause? There is nothing in the letter about fees so there may be no connection, but it proposes new methods to achieve resilience to avoid power cuts. It seemed that there might be a connection. The noble Baroness, Lady Worthington, seems not to think so. We will listen to my noble friend replying in due course.