Energy Bill

Lord Browne of Madingley Excerpts

Tuesday 18th June 2013 Lords Chamber

[Lord Browne of Madingley]

My Lords, I declare my very extensive financial and non-financial interests in the energy sector, which are all set out in the Register of Lords’ Interests. I particularly draw your Lordships’ attention to my position as partner and managing director at Riverstone Holdings, which manages several energy-focused private investment funds with stakes in a range of UK-based and international companies. Those companies operate at all stages of the supply chain and in almost all energy markets.

When the Bill was first published, I wrote that it was complex and that it introduced a range of new risks into the market, threatening to deter planned investment. Since then, some of my concerns have been satisfied. For example, the move to a single counterparty CFD is particularly welcome, and lends the financial instrument at the heart of the Bill a creditworthiness that it was lacking. There remain risks in the Bill, such as the danger that the new regime will make it more difficult for smaller, independent generators to sell their power in a market dominated by large, vertically integrated utilities. Risks such as that must be assessed carefully and adjustments made if necessary.

I want to make two further points about the Bill. The first concerns any amendment to add a decarbonisation target. In my experience as a businessman and investor, a decarbonisation target for 2030 would have little impact. Decarbonisation is just a means to the essential and, indeed, existentially important end of reducing carbon dioxide emissions. Companies do not listen or react to long-term political aspirations, because there are too many technological, economic and political unknowns for them to be taken seriously.

The incentive structures contained in the Bill are far more important than targets or aspirations, because they are the mechanism for action. Only credible, consistent and creditworthy incentive structures can unlock the investment needed. Take carbon capture and storage, for example. CCS is a young technology which requires the state to underwrite some risk so that it is developed here in Britain. That will enable us to benefit in an even more environmentally sustainable way from our abundant domestic gas reserves, which, in any case, have a lower carbon footprint than imported gas.

However, investment in CCS, gas or renewables will not come from a decarbonisation target. It will come from simple incentive structures which allow different energy technologies to compete on a level playing field, with their full set of externalities taken into account, and which are implemented reliably, transparently and quickly. It is therefore critical that the Bill is not subject to yet more delay from wrangling over a decarbonisation target. Uncertainty about the direction and speed of travel has been far more damaging to investment than questions about the detail of policy.

My second point concerns the broader strategic framework within which the Bill sits. Decisions on energy policy and public investment in energy infrastructure are based on criteria which change frequently, depending on the people in charge and the priorities they decide to pursue. That has proven to be inefficient and damaging to investment in the North Sea, for example, which has seen cycles of windfall taxes followed by tax breaks followed by more windfall taxes. There is no need to reinvent the context every time an investment or policy decision is made. It would be sensible to set an overall strategy just once and then make subsequent decisions with those long-term strategic goals in mind.

The London School of Economics Growth Commission, of which I was a member with the noble Lord, Lord Stern, proposed an infrastructure strategy board to provide independent advice to policy-makers about strategic priorities. That would not be a radical innovation. It is the model followed by NICE, the healthcare body, and the Monetary Policy Committee. A panel of independent experts with knowledge, expertise and experience of the industry could consistently check everyday decisions against the long-term strategy set by the Government. That would be enormously helpful in the energy sector, where different technologies and fuels cannot be assessed in isolation. They are part of a system. Independent and expert advice could help to turn a set of disparate and often conflicting energy policy decisions into a real energy strategy. In this regard, I support the comments of the noble Lord, Lord Oxburgh, and I hope that the Minister will consider in her response whether that will deliver strategy.

We must judge the efficacy of the Bill by its results. Success will come from higher quality investment from a diverse set of investors; investment in a greater range of energy sources, including hydrocarbons used for power, such as gas and the encouragement of CCS; respecting existing commitments, such as the phasing out of coal; and an electricity price that maintains the competitive nature of British industry. Those are the tests against which the Bill should be judged. We have spent almost three years debating the structure of this reform package. I believe that it is now time for implementation and action.