Earl of Caithness
Main Page: Earl of Caithness (Conservative - Excepted Hereditary)
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)
My Lords, I thank all noble Lords for this short debate, and I thank my noble friend Lord Jenkin for his amendment. Amendment 53BA proposes that payments under capacity agreements should be commenced by the settlement body within six months after the national system operator has run a capacity auction. The Government have confirmed their intention of running the first capacity market for delivery of capacity in 2018-19, subject to state aid approval. Capacity auctions will take place four years and one year ahead of the delivery year. For example, for the delivery year 2018-19, capacity auctions will be held in 2014 and 2017. Successful bidders at auction will be awarded capacity agreements which provide a steady payment for capacity in return for a commitment to deliver electricity when required in a delivery year or face a penalty.
Payment under capacity agreements will not occur until the delivery year. This is because we believe that payment should not occur until the plant is providing capacity. We do not want consumers to pay in advance for a service that they have not yet received. In addition, providing payment in the delivery year means that plant performance can be tested and, if necessary, penalties can be applied if performance is not as promised. If payments were made ahead of the delivery year, that would be impossible and might provide an incentive to game the system. Our position is therefore that capacity providers should be rewarded for delivery in a delivery year only, rather than in advance.
My noble friend questioned whether the capacity market’s first delivery year could be brought forward, and I suspect that that is likely to be the aim behind his amendment—in fact, he made it clear that it is. However, we have chosen a four-year gap for a good reason. If we do not have such a gap—for example, if we run a capacity audience in 2014 for delivery in 2015-16—new plant would not be able to participate, given the time required to build the plant, which was the point made by the noble Lord, Lord O’Neill. This would mean we would risk an uncompetitive auction with only existing plant competing in what could be a tight market. We believe that this would lead to a potentially inefficient auction and would risk consumers’ value for money, a point raised by my noble friend Lord Ridley.
We are not complacent about the security of supply. We recognise that Ofgem’s 2013 capacity assessment suggested that there may be a capacity problem in the middle of the decade. That is why we support National Grid and Ofgem’s current consultation on the need for and the design of a new balancing service for this period. If needed, this would keep existing plant on the system or get it back on if it had been mothballed for the period before the capacity market was in operation. This would be limited intervention and would mean that we do not have to run a full capacity auction with only existing plant competing. As such, the proposed measures offer a cost-effective means to ensure security of supply in the middle of the decade before the capacity market starts to deliver capacity in 2018-19.
I hope that I have reassured my noble friend that the measures we are taking are short-term interventions and, on that basis, I hope he will withdraw his amendment.
The Earl of Caithness
Should the situation be even more dire than my noble friend Lord Jenkin suggested, presumably there is nothing to stop the Government running a capacity auction just for the existing plant as a short-term measure. I know the Minister said she does not like it, but should the situation be very bad, or be forecast to become very bad, and the proposals for Ofgem and National Grid are not going to meet the requirement, surely it is perfectly possible to run a capacity auction in which existing plant holders could take part.
Baroness Verma
My Lords, I referred to that in my speaking notes. We are keen not to cause an imbalance in competition between new and existing plant. The proposal of my noble friend Lord Jenkin—and yourself—is that that is what would happen. It would generate an uneven competition.
Baroness Worthington
I thank the noble Lord for his intervention. I want to clarify that I am not in any way saying that we should keep coal out of the capacity mechanism. I am stressing that we need to think very carefully about the design of the capacity mechanism so that it does not produce unintended consequences. I am also suggesting, as I have done in previous discussions, that there should be a back-stop measure to prevent the base-loading of coal should all the extra scenarios line up to make that the thing that they economically choose to do.
This is not about saying no to the capacity mechanism or to coal within that and I would not want to see coal closing unnecessarily. I want to see its role constrained to providing peaking and backup power rather than base-loading as it is today because it is so profitable.
The Earl of Caithness
My Lords, I could not help but smile when I heard my noble friend Lord Deben start his peroration to us because my mind went back to the 1980s when House of Lords Committees were doing exactly the same as they are doing today in a very effective way. My noble friend happened to be a joint Minister with me on a couple of Bills. He did not like what we did then I seem to recall. I am very glad now that he thinks we were right all along and doing a very good job in the 1980s as well as in 2013.
Turning to the amendment, I was interested by what the noble Baroness said because that was not how I read her amendment at all. She said, particularly when she intervened just now, that she did not want to drive coal out. But the effect of her amendment would be to drive coal and gas out and rely solely on renewables. The way that she phrased things at the end was much more balanced. She is a great crusader for renewable energy, but having read her amendment, I thought, “Well that’s great: the nuclear industry has the best advantage now. We can build a whole lot of nuclear plants because they have no carbon and that would be extremely good”.
I have always supported the nuclear industry. It is a pity that the previous Government did not support it more fully. We might not now be in the potential difficulties that we face, which my noble friend Lord Jenkin outlined in his amendment. Given what the noble Baroness said later in her intervention, I look forward to what the Minister has to say.
Lord Berkeley
My Lords, I support my noble friend. The amendment only says “prioritise”: it does not say only lowest-carbon providers should be involved. She has a very good point. The amendment, as other noble Lords said, is not the answer, but it does enable us to have a debate. Since most of the low-carbon providers are probably the independents, which are not part of the big six, this rather confirms the argument that I put in an earlier debate on Amendment 55, I think, that it would be fairer if there was a separation. There is a wonderful potential for the big six to keep many of the low-carbon providers out that they do not own. I look forward to hearing a little more from the Minister about how this can be resolved.
The Lord Bishop of Chester
My Lords, when I am in a really tedious meeting I sometimes flick to my iPhone if I succumb to the temptation. The Energywatch organisation has a splendid app which tells you exactly what electricity generation is going on at any particular moment. I can tell your Lordships that at this moment we are depending upon supplies from overseas of 7%, or 3 gigawatts. Wind is producing at the moment less than one sixth of that. Over time, I am struck by just what a significant proportion of our electricity already comes in that way. Three gigawatts is not nothing; it is a very significant amount.
When the Minister responds, it would be helpful if she could give some indication as to what security there is. I belong to those who have some anxieties that in three or four years’ time, if economic activity picks up and some outages occur at a couple of big stations that we are not expecting, and if the weather is very cold and the wind is not blowing, we are going to depend upon electricity coming from these interconnectors. We can depend on it only if we know that they will be available. If the weather is also inadvertent in other countries, what security do we have that the electricity will be available from other places? I am entirely with the view that we should have a European electricity market. That is absolutely right but it has to be with certain guarantees for supply in this country, especially when supply gets tight in a few years’ time.
The Earl of Caithness
My Lords, I support in principle what my noble friend Lady Parminter is proposing in this amendment. The evidence that we got in Sub-Committee D was that interconnection throughout Europe needed a great deal more money spent on it, as the noble Lord, Lord Cameron, has told us. It needs to be improved, but that is a two-way process. The noble Lord, Lord Cameron, referred to some of the difficulties and I recall those being adduced to the committee.
My concern with this is therefore: what is the point of the UK producing a strategy when nobody else is producing one? We can produce a strategy and the Government can be questioned in the House about it, but if the French are not altering their system so that we are compatible and one can move the electricity to and fro, or if the problems have not been resolved with Norway—as was highlighted, there was a problem getting a connection with Norway or with the Danes—it seems a little pointless us having a strategy. Surely this ought to be done within the EU context. However, my noble friend Lady Parminter and the noble Lords, Lord Cameron and Lord Whitty, have the advantage that since I have left Sub-Committee D, they interviewed the Secretary of State. Although I have read the transcript, I would hope that they can enlighten us on what the Secretary of State had to say on our report, which we will discuss in more detail on Monday.
In some ways, I support the principle of great interconnection, although there will be problems from time to time. I know that the noble Lord, Lord O’Neill of Clackmannan, is more secure about the vote in September next year than I am. I wonder whether there is a way of preventing nuclear energy getting into Scotland because Scotland will not want nuclear energy from England. Can we adapt the grid so that one cannot get nuclear energy; it would only upset the Scots?
Lord Teverson
I rise to speak to my Amendments 55AA and 55AD, as part of this group, but perhaps I can come to the interconnection amendment of my noble friend Lady Parminter first. It seems to me to be blindingly obvious that this is something that we should do. I note the comments of the noble Lord, Lord O’Neill, who may be asking the right questions but he is being slightly too negative. A strategy does not cost billions; implementing it costs billions. When talking about investment in electricity generation, network costs, and so on of potentially £200 billion, looking sensibly at a major part of the jigsaw of interconnection is very important. We should remember that this amendment refers to the capacity payment part of the Bill, so this bit is not saying that we should run UK base load and rely all the time on interconnection. It is a common-sense look at the fact that European energy markets and individual national markets operate at different times, have their own characteristics and different peaks. Therefore, it makes a huge amount of sense to try to benefit from the synergies of capacity, weave them together and make the system work better. There are all sorts of problems with the energy market, but it does not stop the UK trying to make the best out of it, and then fit that within a broader EU strategy. I, too, look forward to the debate on Monday evening.
I move on to my own amendments and apologise to the Grand Committee for using a double negative. It is a probing amendment, trying to find out the Government’s thinking. I am trying to determine what is known as an eligible supplier in terms of the CFD market—someone who has a generating capacity outside the United Kingdom. I am not at all clear about this. I know that the Government have had discussions. We have mentioned Iceland and Ireland before but it would be useful to understand generating plants outside the United Kingdom. I am especially thinking about those that are dedicated to the UK, but there is a broader issue, which is maybe more difficult, on whether they can enter into contracts for difference.
I was struck by the Minister’s comments on the importance of price to the consumer. If we looked at it on that basis, clearly we should be buying internationally as much as we could in terms of bringing extra competition into the market and trying to bring prices down. Clearly we would not entertain CFD contracts that were more than that. Of course, there is the strike price. I would hope that with that extra competition there would be pressure on bringing the strike price down over time.
My second amendment, Amendment 55AD, would put a timeframe on the Government for making arrangements for such extraterritorial generation in order for CFDs to come on board. We often talk about offshore wind generation. This is perhaps the ultimate in offshore wind generation and other forms of low-carbon electricity. I look forward to the Minister’s response.
Lord Jenkin of Roding
My Lords, my mind goes back to the group set up last year under the chairmanship of the noble Lord, Lord Oxburgh, to look at the draft Energy Bill. My recollection is that as a result of the evidence we received, which was very good and knowledgeable, our main worry about the contents of the draft Bill was the huge powers being given to Ministers. Some of that has now been modified. For instance, there is now an infinitely better counterparty arrangement than existed previously in the draft Bill, in which there was almost nothing. There have also been other changes.
However, certainly in the initial stages of the operation of this contract for difference, one is going to be almost entirely in the hands of Ministers. They are of course accountable to Parliament, and I entirely accept the point made by my noble friend Lord Ridley that that is the main avenue of accountability. What worries me is the question of whether the panel that has been proposed by the noble Lord, Lord Whitty, would actually make any difference. When you have so much power concentrated in the hands of Ministers—and one has to say that there is not all that much public faith in Parliament at the moment or in whether parliamentary accountability would be effective—one is running the risk of endless cases of judicial review. The growth of judicial review in our system over the past 20 years has been absolutely colossal. Everyone finds it possible in some way or another to take a complaint against authority to judicial review. Some of it has no merit at all but is enormously time consuming, very expensive for those who have to defend it, and a great absorber of the judicial power of the courts. I worry, given all these powers in the Bill, whether accountability to Parliament will be enough.
I listened carefully to the noble Lord, Lord Whitty, and there are obviously some attractions in what he was saying. On the other hand, the point made by my noble friend Lord Ridley about the way that any panel such as this could be got at is not without substance. We are all familiar with situations of that sort. In relation to another amendment, which I may not be here to move because I shall not be here in August and we will not reach it tonight, the power of very large corporations such as the big six generators and distributors, when contrasted with the power of very much smaller bodies that might be affected by their activities, is something of which people are very well aware. What is your remedy? You can go for judicial review, and a panel of the sort suggested may be subject to the same pressures.
All this is inherent in the nature of the new electricity market reform, which is the main purpose of this Bill. I agree with those who say that there is a great deal of hope about it on the part of the Government that it will work. I studied the paper sent to the Delegated Powers Committee of this House, in response to its request for more information, and wondered how anybody could make that system work. That is my great anxiety on this issue—and I am not sure that a panel would have any impact.
For the remainder of the time we have to scrutinise the Bill, we must do as much as we can to try to get the regulations in a form in which the authorities can be made accountable to Parliament as to whether they are in breach of regulations or not. Everybody has to do their best to make it work, but I shall listen with great interest to what my noble friend the Minister says in answer to the suggestion of a panel. I think that we shall hear what we heard before—that there are a great many advisers already in the department and they do not want any more, thank you very much. I understand that argument. But the more I hear about how the system is intended to work, the more we have these huge volumes of paper that are churned out by the department, which is doing its best to keep us informed. It fills me with great foreboding. I hope that I am wrong, but I have a horrid suspicion that things are not going to turn out quite as has been hoped for by everybody who has expressed themselves, as I have, in favour of this Bill.
I shall listen to my noble friend on the question of whether a panel would help or not. At the moment, my mind is not yet clear on this.
The Earl of Caithness
Given that the noble Lord, Lord Whitty, wants to formalise this proposal and put it in the Bill, does he anticipate that members of the panel, and the staff, should be paid? If so, is that going to be pensionable? If that is the case, where is the money coming from?
Lord Berkeley
My Lords, I would like to speak briefly in support of the amendment. I see it as a way of advising the parties on the details in the contracts, which are quite often unclear or not there at all. As we have debated before, and many noble Lords have said, we are dealing with some very large companies and very large amounts of money are at stake. So I think there is a comfort in having something like this, but the key is probably who will be on the expert panel and what their background, experience and history will be.
The Minister said in her response to the last amendment that the Government took independent advice on the strike price and scrutiny from technical experts. I would like to ask who they work for, or have worked for, because I am afraid that that sometimes colours how one thinks about these things and how they might like to think. If they are seconded from the big six, as consultants or something, how independent are they? It would be very helpful if the Minister could write to me and say who these people are, and who they work for or have worked for. At this stage, it would give people a lot of comfort to know that there was something like this—an expert panel to look at these things and form an independent view on things such as strike prices and all the other things in Clause 2. I do not think that Members of either House, in the Chambers or the committees, will want to look at those things in too much detail.
Baroness Liddell of Coatdyke
I should remind your Lordships of my registered interest as a director of the Offshore Renewable Energy Catapult. I am not going to debate with the noble Lord the benefits or otherwise of offshore wind, other than to say that it is not a brand-new technology. I can remember something like 20 years ago inaugurating the first offshore wind farm at Blyth in Northumberland. The technology in its basic form is tried and tested, and is another bit of our armoury. Those of us who, like me, are in our prime, remember the six-day war and the consequences of not having a wide basket of energy sources available to us.
I am not 100% certain that I agree with my noble friend that we should be talking about contracts of a length of 30 years. However, we are talking here about a probing amendment and the uncertainties. We are coming into a big part of the Bill, where we are going to talk about uncertainty for investors. It is about how you secure a rate of return and mitigate risk. That is what was in my noble friend’s mind when he tabled his amendment, and on Thursday we will come to an amendment from the noble Lord, Lord Roper, which also brings us back to the issue of uncertainty.
I support what my noble friend is trying to do. There is a bit of a debate on the length of time, but the key to this aspect of the debate is to remove uncertainty. When the noble Lord, Lord Jenkin, was speaking, I came across a good analogy. When you get on a plane, after take-off the pilot comes on and says, “Don’t worry, I’ve never flown this plane before, but I’ll have read the manual before it’s time to land”. We have a wee bit of a feeling like that about this Bill.
The Earl of Caithness
I hope that my noble friend will not be lured by the special pleading of the noble Lord, Lord Berkeley, on this issue. I particularly thought that the noble Lord was wrong to say that it was unhelpful for anyone to say that they disliked windmills. I dislike windmills; I happen to be able to count 11 wind farms out of my window, which is probably more than anyone else can in the Committee, and I would be very pleased if they were not there for 25 years. It does not do tourism much good and, as a countryman, I think that it spoils the country. If there were modern, different technologies that could replace wind farms, which I agree are at the moment essential, although perhaps not in that quantity and dispersal that I can see, I would be only too pleased if they were removed.
One of the most interesting bits of evidence that we got in European Sub-Committee D was how wrong everybody has been on energy in the past. I see that the noble Lord, Lord Whitty, is in agreement with me. For those of us who were relatively new to this subject, it is fascinating how wrong the forecasters have been time and again in the past 15 years. So for goodness’ sake let us not fall into the same mistake of tying the Government down to a 25-year timescale when things could change. I have absolutely no doubt that they will—and do not let us give too much security to the producers of electricity. Capitalism is about taking risks. In the past, people have taken enormous risks. Some have fallen flat on their face and some have been hugely successful. However, it should not be for us as the consumer or the taxpayer to featherbed them; they must take a fair share of the risk. It is a very difficult balance that the Government are trying to get right, so please let us not make it more complicated by tying them to a 25-year timescale.
Viscount Ridley
My Lords, I quickly intervene because I failed to declare an interest. The noble Baroness, Lady Liddell, mentioned Blyth, which reminded me that one of the turbines at Blyth turned out to have been built on land on which, although I do not own it, the mineral rights were reserved by my grandfather. Therefore, I discovered that I was unwittingly receiving money from a wind turbine. I shall give that money away so that I do not feel sullied by it—but anyway, I feel that I should declare it.
Lord Berkeley
My Lords, I thank the Minister for her reply and am grateful to all noble Lords who have spoken on the amendment. I did not expect that it would be accepted but we have had a good debate. The noble Earl, Lord Caithness, indicated that I had a go at him for not liking windmills, which is not true; I did not mention his name.
The Earl of Caithness
You commented that you did not like people who said that they did not like windmills; I just fall into that category and am happy to be there.
Lord Berkeley
Perhaps I may suggest that if the cap fits, wear it. More seriously, as regards whether the specified period is 30 years, 20 years or whatever, I worked briefly on North Sea oil projects 30 years ago, some of which did not last that long. My noble friend declared her interest and I am sure that windmills will need regular servicing in that time. The key question after they are built is whether they will continue to operate, produce good electricity when we want it and make a good return for their investors. We have had a useful debate and I shall mull over what noble Lords have said. I beg leave to withdraw the amendment.