Electricity: Cost-competitiveness

Lord Callanan Excerpts

Thursday 16th May 2024 Lords Chamber

[Lord Frost (Con)]

My Lords, I beg leave to ask the Question standing in my name on the Order Paper, and I draw attention to my relevant unpaid interests in the register.

[The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)]

My Lords, offshore wind is one of the cheapest generating technologies in the UK and is comparable to or cheaper in cost than fossil-fuel based alternatives. It is a vital technology that will allow us to decarbonise the power sector by 2035 and enhance the UK’s energy independence. The department publishes its cost estimates in the generation costs report.

[Lord Frost (Con)]

My Lords, I thank the Minister for that response, but I gently suggest that perhaps he needs to look more carefully at the plausibility of the assessment he has just given. If renewables were as cheap as he asserts, it is hard to understand why bill payers and taxpayers are having to pay about £12 billion per year in subsidy, which is £600 for every family in the country. If offshore wind can be produced for £50 per megawatt hour, as his department asserts, it is hard to understand why the Government have had to offer twice that this year to get anyone to take up a contract. Would the Minister agree that it is better to be honest and that pushing out these fantasy figures just makes it easier for the proponents of net zero and the party opposite to indulge in fantasy politics that the whole energy sector can be decarbonised in just six years?

[Lord Callanan (Con)]

I certainly agree that the Opposition’s policy is fantasy politics. However, I will give the noble Lord the costs in the latest published analysis, which show that electricity from offshore wind is 60% cheaper to build and operate than gas-fired power. The levelised costs are £44 per megawatt hour for offshore wind, versus £114 per megawatt hour for closed-cycle gas turbines. The other key point is energy security. As the noble Lord is well aware, the amount of gas coming from the North Sea is declining year on year, and therefore we have to import increasing amounts of gas. It makes no sense to make us dependent on imported gas for the years to come. We can see the effects of the Russian invasion of Ukraine on gas prices. With the current turmoil in the Middle East, it makes even less sense.

[Lord Watts (Lab)]

My Lords, is it not the case that the only way we will address this is by building new nuclear plants? The last Labour Government identified sites and were developing a planning system that would have pushed them through. Over nearly 14 years, what have the Government been doing to create opportunities for more nuclear power?

[Lord Callanan (Con)]

The noble Lord is right and wrong at the same time. Of course, it makes absolute sense to build more nuclear power, and we are doing that. However, his reference to the last Labour Government gives me the opportunity to state that, when they came to power in 1997, they cancelled all our new nuclear generation.

[Earl Russell (LD)]

My Lords, the UK green economy grew by 9% last year, delivering much needed green growth and green jobs for UK workers. Does the Minister agree that investment in our world-leading offshore wind capacity not only provides the UK with the long-term energy security we require but is also good for UK energy bill payers and our environmental futures? Will the Government consider increasing the funding for AR6 to secure the future energy capacity and security we require?

[Lord Callanan (Con)]

We have allocated over £1 billion for AR6, and it is important to procure newer capacity. It is also worth saying that we cannot rely on offshore wind alone: we need to consider the whole system. That is why we need nuclear, storage and technologies such as tidal, which my noble friend is always asking me about. We need a range of technologies, including interconnectors with other parts of the world, because that is the best way to secure a levelised grid that is secure and provides our energy independence in the future.

[Baroness Blake of Leeds (Lab)]

My Lords, the UK is well placed to become a global leader in offshore wind, as we have heard, but a lack of capacity at UK ports is limiting our potential and, therefore, the economic growth, energy security and jobs that come with it. The chief executive of RenewableUK said that

“to maximise investment in offshore wind manufacturing and assembly facilities in the UK, the public and private sector are going to have to come together to invest in our ports”.

What steps are the Government taking to bring relevant parties together towards this end?

[Lord Callanan (Con)]

My Lords, we are already a leader in the offshore wind sector: we had the largest amount of offshore wind production in the world, although we have now been overtaken by China. We have the first, second, third and fourth-largest wind farms in the world already operating in UK waters—but we have ambitions to go even further. That includes investing in ports, and we have the offshore wind manufacturing investment scheme and the floating offshore wind investment scheme, bringing together government and business to make sure that we develop these new technologies and, more importantly, locate the supply chains for them in the United Kingdom.

[Lord Tyrie (Non-Afl)]

My Lords, the leading expert in the field is probably Professor Dieter Helm of the University of Oxford, who has been arguing for a long time that the true cost of wind power has been greatly understated in government publications, not least because they do not take full account of the intermittency of wind power and its effects on gas generation, which in turn has to be turned on and off at considerable extra cost. As he has identified, this is one of the major hidden costs of net zero. Can the Government now review their estimates of intermittency thoroughly and fundamentally, using some of Professor Helm’s work, and come back to us with what they think are the most considered estimates?

[Lord Callanan (Con)]

We already have considered estimates—work on this is going on all the time. It is a constantly evolving picture, and we take into account the views of all experts. It is undoubtedly true that renewables are intermittent: we had huge amounts of solar earlier this week, but, looking at the weather outside, I think we will not have quite so much today. That is why we need a diversified supply—nuclear, long-term storage and intermittent storage—to take account of the fact, which we know is true, that renewables are cheap, effective and quick to deploy, but they are intermittent, which is why we need a variety of technologies.

[Lord Howell of Guildford (Con)]

My Lords, following that last question, do the costs that the Minister gave include all the grid and system costs, as well as everything that has been referred to? Will the Minister agree that it is important to get these different costs right if we are going to gain public consent for the various incentives, taxes and charges that will be necessary to guide the system forward? As for gas, which is also mentioned in the Question, is it not the position that, in the long term, it will continue to have a substantial place, particularly in generating electricity? Is it the position that we need to ensure that its carbon emissions are handled by carbon capture and storage schemes, two of which are currently beginning? Should we not be giving a lot more attention to this area if we want a net-zero world?

[Lord Callanan (Con)]

The costs that I quoted are what are called the levelised costs, which are an industry standard, and they take account of other system costs. But, as I said, we will of course need back-up and storage. What the noble Lord said is true: gas will play an increasingly marginal role, but it will play a role in ensuring that we have energy security going forward. The estimates are that we will have about 7% of gas generation by about 2035.

[Baroness Fox of Buckley (Non-Afl)]

My Lords—

--- Later in debate ---

[Lord Fox (LD)]

My Lords, a battery plant is being built in Somerset and electric arc steel is being put into Wales. It would benefit the country if offshore wind were built on the west side of it as well as the east. So can the Government explain what is happening to encourage offshore wind in the Celtic Sea and its environs?

[Lord Callanan (Con)]

There is already some wind generation, but of course the waters are deeper, which is one reason why we are developing floating offshore wind, which I referred to earlier.

[Baroness Fox of Buckley (Non-Afl)]

On the hidden costs of harnessing wind power, which seems to be a theme, will the Minister acknowledge that, in any wind turbine, there is a huge amount of steel, fibreglass, resin, plastic, copper, aluminium, iron and cast iron? Therefore, does the Minister acknowledge that, for decades to come, these materials will be extracted and manufactured only with the help of fossil fuels? As is often the case, fossil fuels are invaluable, but that is never part of the public discussion.

[Lord Callanan (Con)]

My Lords, I am happy to acknowledge the noble Baroness’s point, but, if she is attempting to say that other forms of generation—gas-fired power plants, nuclear power plants or whatever—do not have many of those materials, she would be wrong.

[Lord Hain (Lab)]

My Lords, the Minister mentioned China. Why are some of the offshore wind farm components, especially the huge structures and blades, being manufactured in China rather than in Britain?

[Lord Callanan (Con)]

The noble Lord makes an important point. Actually, relatively few components are manufactured in China, although some are. Many of them are manufactured in other parts of Europe, and increasingly many are manufactured in the UK. If the noble Lord had been in the Grand Committee earlier this week, he would have heard us debate a new regulation designed precisely to overcome that problem. This is to make sure that there are extra payments to some of the developers to make sure that we locate more of the supply chains in the UK, because we want to see the benefits spread throughout the country, particularly Wales and northern parts of the UK, which already have many of these supply chain companies. We need to become increasingly successful at that. The rest of the world is proceeding to copy us and develop offshore wind, so there are massive export opportunities if we can locate those supply chains in the UK.

Hydrogen Energy

Lord Callanan Excerpts

Tuesday 14th May 2024 Lords Chamber

[Baroness Sheehan]

To ask His Majesty’s Government what assessment they have made of the implications of their decision to cancel the pilot plan for a ‘hydrogen town’.

[The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)]

It is me again, I am afraid.

We have decided not to progress work on a hydrogen town pilot until after a decision in 2026 on any potential role for hydrogen in heating. The Government carefully considered the implications of this decision and the alternative options. Heat pumps and heat networks will be the primary means of decarbonisation for the foreseeable future.

[Baroness Sheehan (LD)]

I start by congratulating the Minister on injecting a modicum of common sense into the myth that hydrogen could ever be a meaningful player in home heating. My Question was prompted by a conversation with the CEO of a heat battery company, who is having to postpone a decision to build a new factory until the Government can give a clear signal that the 2026 deadline for the hydrogen strategy review has gone. Will the Minister take this opportunity to give him that clarity, so that he and others can add to the 9% green growth seen last year in an otherwise stagnant economy?

[Lord Callanan (Con)]

I would be very interested in speaking to the noble Baroness’s contact in heat batteries; I have also met a number of heat battery manufacturers. For those who have not come across it, it is a great growth industry in the UK and a fantastic technology. There is one particularly good company up in Scotland that I visited recently. I am not sure what extra clarification we could provide that would help her contact. We have said—indeed, I said it in my Answer—that heat pumps, heat networks and electrification will be by far the vast majority of the decarbonisation of home heating in the UK. If hydrogen plays any role at all, it will be only a very tiny one.

[Lord Naseby (Con)]

My noble friend just stated that hydrogen is going to play a very minor role. How is it that, on the continent, hydrogen is playing an increasing role in the domestic markets there? Is he not aware that British Gas has done extensive testing, with varying mixes of hydrogen, and that so far all has gone well with those tests? Why now are His Majesty’s Government kicking hydrogen into the long grass and telling the British consumer that it is basically heat pumps or maybe electrification?

--- Later in debate ---

[Lord Callanan (Con)]

I hesitate to disagree with the noble Lord, but I think I will on this occasion. I would be interested to know where on the continent hydrogen is being rolled out, as he referred to. I am aware of one or two experimental schemes, but no widescale rollout. There is no question that it could work technically—indeed, two homes have been built in Gateshead as an experiment by Northern Gas Networks that currently are heated by hydrogen boilers and hydrogen hobs. Technically, it can work, although there are safety implications that we need to look at. The question we need to be answering is whether this is an efficient use of the country’s energy resources.

[Viscount Stansgate (Lab)]

My Lords, the Minister says that hydrogen might play only a minor role, but does he accept that, in the future, this country is possibly going to need a strategic reserve of energy to take account of the times when the wind does not blow and the sun does not shine, and that hydrogen might play an important part in the long-duration energy storage that we are going to need in this country? It could be a vital part of the country’s strategic energy future.

[Lord Callanan (Con)]

The noble Viscount is absolutely right. I am a huge advocate of hydrogen precisely because of its role in long-term energy storage in the circumstances that he outlined—when the wind does not blow and the sun does not shine. We were debating whether it has a viable use in home heating. I submit that electrification and heat pumps are a much more efficient way of heating homes.

[Lord Howell of Guildford (Con)]

My Lords, my noble friend seems to have to answer every question on these matters these days, and he has another one coming. My understanding is that green hydrogen can be manufactured—all you need is a wind turbine or two—and stored quite near consumer markets in cities and towns, and that it is very effective for trucks and big mobile users but not much use for domestic heating because you cannot get it through the distribution system. Is that a correct assessment? If so, does it put the hydrogen issue in perspective and remind us that we will need a lot more nuclear, and will have to rely on gas as well, to get anywhere near net zero?

[Lord Callanan (Con)]

There was a lot in that question. I agree that there are great potential uses of hydrogen in long-term energy storage, as the noble Viscount just mentioned, and in the decarbonisation of some aspects of rail transport and heavy goods vehicles—particularly for non-road mobile machinery, where there are no real electrification options, and we have a number of successful manufacturers in this country. The original premise of the noble Lord’s question is what the best method of home heating is. All the evidence and reports show that, even if it were technically possible to pipe hydrogen into domestic homes, electrification is a much more efficient option.

[Baroness Northover (LD)]

My Lords, the Minister is being very clear, perhaps clearer than his department has been. However, the fact that there is an assessment in 2026 still rather muddles things. His message—which is surely right—that a national hydrogen network is simply not the answer instead of gas boilers and that we need to encourage the take-up of heat pumps, on which we are massively behind most countries in Europe, needs to be clearly put over. At the same time, as the noble Viscount, the Royal Society and others have said, the Government should also be taking action on long-duration energy storage, but they seem not to be.

[Lord Callanan (Con)]

I am sorry to disagree with the noble Baroness, but we are taking action. We let the first 11 hydrogen electrolytic allocation contracts in what is called the HAR1 round last year. The HAR2 round for further electrolytic allocation is happening this year. We have produced business models for the transmission and storage of hydrogen. I disagree with her that there is no place for a hydrogen distribution network in the UK. There absolutely is a case for that —not for home heating but for industrial uses and some of the uses that the noble Lord mentioned. I disagree with her on the fundamentals of this. We are putting these things in place and we are one of the leading nations in Europe on the production and distribution of hydrogen.

[Baroness Blake of Leeds (Lab)]

My Lords, the Government’s previous announcement on the cancellation of the hydrogen village trial in Redcar stated that it was delayed because

“the main source of hydrogen supply will not be available”.

With stakeholders and residents raising real concerns about the Government’s plans, for the sake of clarity, will the Minister inform the House why the decision was taken to postpone the hydrogen town pilot until after 2026?

[Lord Callanan (Con)]

It was not postponed—it was cancelled. I visited Redcar and met many of the residents and businesses in the town who were concerned. The noble Baroness is right that one of the principal reasons why the trial did not proceed was that the source of green hydrogen, which would have been produced locally to the trial, for various commercial reasons did not go ahead. We also have to take into account public opinion. We always said that this would depend on public acceptability, and it was increasingly obvious that many people—though not all—in the trial area were not prepared for the trial to go ahead.

[Baroness Goldie (Con)]

My Lords, I have listened with great care to the responses from my noble friend the Minister. What are the implications of these responses for future grid hydrogen blending trials?

[Lord Callanan (Con)]

We have said that blending into the network can still go ahead. It is possible to put hydrogen into the existing gas mains at up to about 20% concentration. We have said that this can go ahead, because it provides an offtake of last resort for the electrolytic hydrogen producers, so that they have a market for it. Existing appliances will work perfectly satisfactorily, and this is a useful first step in rolling out hydrogen production and distribution across the country for all of the commercial and industrial uses that I mentioned.

[Lord Whitty (Lab)]

My Lords, in previous Questions the Minister and the Government have indicated that all strategic decisions on the use of hydrogen will be taken in 2026. Clearly, the decision on home heating has already been taken. Does the Minister intend to bring forward decisions on the strategic use of hydrogen in industrial and transport applications? If not, are we going to wait another couple of years and have things dribbled out, rather than take a strategic approach to the use of hydrogen, which the Government previously implied would be there in 2026?

[Lord Callanan (Con)]

I am sorry if I have given the noble Lord the wrong impression. We have already taken strategic decisions on the use of hydrogen. We are supporting the production of both electrolytic green and CCUS-enabled blue hydrogen. We are already rolling out the business models for the delivery of commercial-scale use of hydrogen, and we are one of the leading nations in Europe on doing that. The decision in 2026 would be on whether hydrogen has a role in domestic heating. The noble Lord is getting the issues confused.

Home Insulation

Lord Callanan Excerpts

Tuesday 14th May 2024 Lords Chamber

[Baroness Blake of Leeds]

To ask His Majesty’s Government what progress they have made towards delivering the Great British Insulation Scheme.

[The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)]

My Lords, until the end of February 2024, provisionally, 7,506 measures had been installed in 6,238 households under GBIS. The Government are considering whether any legislative changes to GBIS are necessary, and any policy changes would be subject to public consultation, which we would aim to issue this summer. Changes would then be implemented through affirmative regulations.

[Baroness Blake of Leeds (Lab)]

My Lords, even if the delivery of the Great British insulation scheme keeps pace with its most successful month to date, it will reach just 13% of its target of 300,000 homes by March 2026. The green homes grant was scrapped before it reached just 10% of the 600,000 homes it targeted. Meanwhile, insulation rates declined by 90% when the Government scrapped the successful programmes they inherited in 2013. The fact is that UK homes are some of the least well insulated in Europe. If the Government cannot make progress on delivery, have they considered giving devolved Governments and local authorities the power and resources they need to upgrade cold and draughty homes in their areas instead?

[Lord Callanan (Con)]

There were a number of questions there. In response to the noble Baroness’s last question, the majority of the schemes are currently delivered through local authorities. I absolutely concede that delivery through GBIS has been disappointing. I held a round table with the obligated energy suppliers in March to discuss possible changes and improvements to the system. We will have more to say on that shortly. But this is only one of a number of different energy-efficiency schemes. In the last year alone, we spent about £2.5 billion on improving insulation and upgrading the homes of the poorest members of society.

[Earl Russell (LD)]

What actions have the Government taken to improve the energy efficiency of homes in the private rented sector to date, and what outcomes have been achieved? Does the Minister agree that it is imperative that we improve the take-up of home insulation schemes among the poorest households, which are often the hardest to reach?

[Lord Callanan (Con)]

I certainly do agree that we need to target the poorest households, which is precisely what we do under schemes such as the social housing decarbonisation fund and the energy company obligation. The noble Lord is also right to point out that the private rented sector is one of the most difficult sectors. But home insulation grants, ECO, et cetera, are often rolled out in PRS homes.

[Lord Birt (CB)]

My Lords, insulation is plainly cost-saving, whatever form your heating takes, but it is particularly important in respect of heat pumps, powered as we know by expensive electricity. Does the Minister yet know when the Government will announce the long-promised rebalancing of the cost of electricity versus the cost of gas?

[Lord Callanan (Con)]

The noble Lord is absolutely right that, whatever form of heating you have, insulation is always a good thing, because you can use less of it. Rebalancing is obviously a particularly tricky political issue. We are currently looking at it and, although I cannot give the noble Lord a date yet, we hope to have a consultation on some proposals out shortly.

[Baroness Whitaker (Lab)]

As the noble Lord, Lord Birt, says, reaching net carbon zero requires the use of heat pumps, but they are too expensive for most people. Also, installers will not put them in flats even where there are suitable areas, such as the boiler next to the outside balcony, that can be used. What are the Government going to do about propelling installers into helping us reach net zero?

[Lord Callanan (Con)]

Installing a heat pump where you need an outside condenser unit is difficult in flats, but it is certainly not impossible. I am certainly not aware of any prohibition from installers on installing them in flats. If you have the available outside space, if it does not disturb your neighbours too much, and if planning requirements are specified, it is perfectly possible to install heat pumps in flats.

[Lord Teverson (LD)]

My Lords, in 2015, George Osborne, as Chancellor of the Exchequer, cancelled the zero carbon homes regulations that were supposed to come into force the next year. Since then, several hundred thousand houses have been built that are substandard in terms of insulation. Would it not have been a much better decision to have implemented the 2016 regulation, which would have stopped all this expenditure now on retrofitting?

[Lord Callanan (Con)]

The noble Lord is asking me to speculate on past Governments, some of which the Liberal Democrats were part of. I agree with the noble Lord that the future homes standard should be implemented as quickly as possible, and DLUHC assures me that the consultation is live at the moment and will be implemented next year.

[Lord Brownlow of Shurlock Row (Con)]

My Lords, there is a growing need for this sort of endeavour. I am not sure whether the Minister is aware that, over in the United States, ChatGPT and other artificial intelligence is currently consuming 4% of America’s electricity generation. It is forecast that, by the end of this decade, six years away, it will be 20% to 25%. Are the Government making any plans to prepare for greater electrical generation in this country?

[Lord Callanan (Con)]

Indeed, my noble friend makes a very good point about the extent to which electricity usage will grow. Actually, the peak electricity usage in the UK occurred a number of years ago. We have actually been becoming more efficient in how we use electricity, with better lighting, et cetera. Clearly, if we move to more electric vehicles and more electrically powered heating, along with some of the circumstances that my noble friend outlines, electrical use will go up. We are spending many tens of billions of pounds on upgrading the electrical grid and rolling out increasing amounts of renewable: offshore wind, tidal, solar and so on. But in essence my noble friend is right that we need to plan for an electrical future.

[Lord Howell of Guildford (Con)]

My Lords, following on from that last question, my understanding is that, to have the all-electric, decarbonised, net-zero goal that we really want, we will have to produce and indeed consume about four or five times the present amount of electricity, from various sources. Here we are looking at an area that might reduce the growth of demand by some percentage—and the Minister mentioned the huge figure of some £2.5 billion. Can he give us some idea of what that percentage is? Will we use a quarter less electricity than otherwise, or half, or merely one-tenth? Can he give us a rough idea of where the money is going and what it is going to achieve?

[Lord Callanan (Con)]

I do not quite understand the noble Lord’s question. We will clearly use more electricity as we roll out more electric vehicles, the electrification of heating, et cetera—but we will use it in different ways. There are ways, for instance, in which we can do load spreading. One of the advantages of smart meters is that they allow people to consume electricity at different times and take advantage of different time-of-use tariffs, et cetera. So, as well as having particular peaks, we can also spread out those peaks over longer times of the day. There is a lot of demand management we can do, as well as increasing the amount of renewables we have on the grid, which we are doing.

[Lord Whitty (Lab)]

Further to the point made by the noble Lord, Lord Teverson, is the Minister at all confident that the standards for insulation are being met for all new build? Likewise, is he confident that they are being met where planning permission provides for refit? Because anecdotal evidence suggests that both are very low in achievement.

[Lord Callanan (Con)]

I think that the noble Lord is talking about the building regulations under future homes standard, which is what I was referring in response to the question from the noble Lord, Lord Teverson. They are responsibilities of DLUHC. I am not aware of any evidence that the standards are not being met —clearly, it is the responsibility of local councils to ensure that the building regulations are adhered to—but I am sure that we would be interested in any evidence that the noble Lord has that the regulations are not being adhered to.

[Lord Forsyth of Drumlean (Con)]

My Lords, there are examples of firms persuading people to use foam and other cavity insulation systems that cause great damage to their property, thinking they are doing the right thing. What are the Government doing to prevent this being carried out?

[Lord Callanan (Con)]

The noble Lord makes a good point. Cavity wall insulation needs to be installed correctly. Under the Each Home Counts review, we instituted a system of trust mark licensing for contractors, so certainly under all government schemes any cavity wall insulation that is installed comes with a 25-year guarantee, with appropriate supplier protections and a quality mark guarantee as well.

[Lord Harris of Haringey (Lab)]

My Lords, what assessment has the Minister made of the report placed by his department on the government website last month saying that there were major problems with the supply chains necessary for the development of offshore supplies? What are the Government going to do about it?

[Lord Callanan (Con)]

When the noble Lord says “offshore supplies”, I presume he is referring to offshore wind production. I have not seen that particular report, but now the noble Lord has mentioned it, I will look at it. Supply chains in offshore wind are particularly important. In fact, yesterday in Grand Committee we debated a new regulation of supplier interest reforms that will give an additional payment to offshore wind providers to ensure that their supply chains are more appropriately located in the UK, with more domestic production, et cetera. For existing contracts for difference, they will need to produce a supply chain guarantee to show where the supply chain is and where it originates.

Prepayment Meters

Lord Callanan Excerpts

Tuesday 14th May 2024 Lords Chamber

[Lord Lennie]

To ask His Majesty’s Government what steps they have taken to compensate individuals or households who have had pre-payment meters wrongly installed.

[The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)]

My Lords, suppliers are responsible for paying compensation. It is paramount that customers affected by the involuntary installation of some prepayment meters receive compensation as soon as possible. Suppliers have so far carried out 150,000 assessments to ensure that those impacted get the compensation they deserve. Of those, around 2,500 customers have been identified as requiring compensation, and 1,502 payments worth £342,000 have been made so far. We engage with Ofgem regularly to ensure that suppliers compensate remaining customers promptly.

[Lord Lennie (Lab)]

I thank the Minister for that Answer. However, as he said, the assessment was carried out by the selfsame people who supplied the enforced prepayment meters in the first place. Does he not see that there is a potential conflict of interest here? Will he say whether the Government have arranged for any independent checks to show that these assessments are accurate and are not simply letting companies mark their own homework?

[Lord Callanan (Con)]

I understand the point the noble Lord is making, but that is the role of the independent regulator Ofgem. My Secretary of State and Minister Solloway have had regular meetings with suppliers directly and with Ofgem to ensure that they are doing the job correctly and that the assessments are being made correctly, but the noble Lord is right, and we are monitoring the situation closely.

[The Earl of Clancarty (CB)]

My Lords, energy companies will sometimes say that your meter needs to be replaced because it is too old. Of course, this can be used as a ruse to get a prepayment meter installed. Can the Minister say what authority any energy company has to demand that? Who really decides whether a meter is too old? Where does the responsibility lie for this—with property owners, landlords or tenants, who are paying the bills and are often the point of contact? If the Minister cannot answer this question now, I am happy for him to write to me.

--- Later in debate ---

[Lord Callanan (Con)]

Of course, if the customer is not in debt, it is their choice whether to have a prepayment meter. There are circumstances in which prepayment meters are fitted involuntarily—the consequences of the scandal that we saw last year are being closely monitored—but, in most cases where a customer is in credit and not in debt, it is their choice whether to accept a prepayment meter or, indeed, a smart meter.

[Lord Teverson (LD)]

My Lords, one of Ofgem’s new conditions for energy suppliers, now that they can start forcing prepayment meters again, is that they carry out internal audits to make sure they are complying with Ofgem’s new rules—that is, marking their own homework. Given the trauma to households of forced entry and the bad behaviour of the sector in the past, should Ofgem not get off its backside and instigate its own external audits?

[Lord Callanan (Con)]

My Lords, energy suppliers are not marking their own homework. Ofgem very closely monitors them. Not all suppliers have been given permission to restart involuntary installations. They have to put in place a strict code of conduct and make at least 10 attempts to contact the relevant customer. They have to put in place relevant prepayment plans and credit payment plans, if necessary, taking into account the customer’s ability to pay, and some prepayment forcible installs are banned completely in the case of vulnerable customers.

[Lord Watts (Lab)]

My Lords, all the regulators seem to be failing the public. Is it because the Government do not want them to do the job properly, or are all our regulators incompetent?

[Lord Callanan (Con)]

I think that is a bit of broad generalisation, if the noble Lord will forgive me for that. The principle of independent regulators was established a number of years ago throughout many Governments. I think all of us will have our opinions on how good or bad independent regulators are—they sometimes absolve the political system from some blame; that is my personal criticism—but we put in place through legislation the system of independent regulators, and of course we need to keep an eye on how they are doing their job.

[Lord Woodley (Lab)]

Does the Minister agree that these energy companies are very fast in putting up their prices but very slow in paying compensation? Does he agree that pensioners and poor people should not be forced to put these meters into their homes if they do not want them?

[Lord Callanan (Con)]

Of course, I am pleased to tell the noble Lord that, since the height of bill rises, the price cap has come down by about 60%. So it is not true that prices are going up; they are coming down, although they are still at a historical high. As I said in response to a previous question, if the customer is not in debt, it is absolutely their choice what kind of meter they have.

[Lord Porter of Spalding (Con)]

On the basis of that answer, can my noble friend confirm for the public at large, so that there is no doubt, that any tenant who has occupied a property that had a bad credit history before the tenant moved in should have been entitled to have that meter swapped to a normal meter—and that any customer who has been kept on a prepayment meter against their will on the basis of a previous tenant’s history should not have had to suffer that and should be due compensation?

[Lord Callanan (Con)]

I think I would agree with the noble Lord’s point: of course you are not responsible for the debt of a previous tenant. The only qualification I would make on that is that, if it is a tenant, the landlord owns the property, so the choice of meter would be subject to the permission of the landlord as well.

[Lord Porter of Spalding (Con)]

That is strictly not true. The tenants in rented property are responsible for their own gas, electricity and water supplies; the landlord is not.

[Lord Callanan (Con)]

I am happy to hear the noble Lord’s clarification. If I am wrong on that, I will certainly write to him about it.

[Lord Sahota (Lab)]

My Lords, I represented one of the most deprived wards in my town for over 20 years. What I learned about these prepayment meters is that they are the bane of the lower-paid. Some of those people wanted them made illegal and to be taken out. Do the Government have any such plans?

[Lord Callanan (Con)]

No, we believe that some customers prefer to have prepayment meters, which enable them to manage their credits and debts responsibly. Some customers choose that; some prefer direct debit; some prefer to operate on a normal credit basis. All choices will remain available. As I said, if they are not in debt, it is the customers’ choice as to what payment method they use.

[Lord Foulkes of Cumnock (Lab Co-op)]

My Lords, I have been away for a couple of weeks, and the answers on my return are no better than when I left. Can I give the Minister the opportunity to answer my noble friend’s question? Which organisation is doing best: Ofsted, keeping our education at a high level; Ofgem, causing problems for the consumers, not the suppliers, as we have heard; or Ofwat, for getting the rivers so polluted? Which is number one on his list?

[Lord Callanan (Con)]

Of course, the absence of the noble Lord has been a great loss to the House. While he may complain about the quality of some of the answers, some of us might take issue with the quality of some of the questions. The noble Lord is asking a very broad question about a whole range of regulators. I suppose I would say that perceptions of the quality of regulators may vary.

Carbon Capture Revenue Support (Directions, Eligibility and Counterparty) Regulations 2024

Lord Callanan Excerpts

Monday 13th May 2024 Grand Committee

Moved by

[Lord Callanan]

That the Grand Committee do consider the Carbon Capture Revenue Support (Directions, Eligibility and Counterparty) Regulations 2024.

Motion agreed.

Carbon Dioxide Transport and Storage Revenue Support (Directions and Counterparty) Regulations 2024

Lord Callanan Excerpts

Monday 13th May 2024 Grand Committee

Moved by

[Lord Callanan]

That the Grand Committee do consider the Carbon Dioxide Transport and Storage Revenue Support (Directions and Counterparty) Regulations 2024.

[The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)]

My Lords, I beg to move that these regulations, which were laid before the House on 15 April this year under the affirmative process, be approved. I will also speak to the draft Carbon Capture Revenue Support (Directions, Eligibility and Counterparty) Regulations 2024. To save a considerable amount of time, I will hereafter refer to these regulations as the CO₂ transport and storage regulations and the carbon capture regulations.

These regulations are part of a series of secondary legislation made under powers in the Energy Act 2023, a landmark piece of legislation, which received Royal Assent on 26 October; I am grateful for the support that noble Lords gave me in getting that important legislation through. I will first provide some important background on the UK’s carbon capture landscape before turning to the rationale and the details of the regulations.

Carbon capture, usage and storage, commonly known as CCUS, supports the UK’s legally binding commitment to reduce greenhouse gas emissions to net zero by 2050. In 2021, HyNet and the East Coast Cluster were announced as the UK’s first CCUS clusters, where CO₂ will be captured from a range of sources to support the low-carbon economic transformation of our industrial regions. The CO₂ transport and storage network—the T&S network—is essential for building that CCUS capability, as it is the enabling infrastructure for captured CO₂ to be transported to permanent, offshore storage.

To facilitate the development of T&S infrastructure, the Energy Act 2023 makes provision for revenue support to be available to any eligible transport and storage company, abbreviated to T&SCo. Revenue support is part of the broader T&S regulatory investment model, or TRI model.

Under the TRI model, an allowed revenue will be determined for transport and storage companies, and exposure to revenue gaps, which refer to instances where annual revenue from user charges is less than a T&SCo’s allowed revenue, will be mitigated. For example, where a revenue gap arises beyond a T&S company’s control, such as where a network user is late joining the network, a shortfall in allowed revenue may arise. In those instances, T&S companies can increase charges across the user base up to a cap.

Should the increase in charges across the user base up to the cap be insufficient, we are proposing that T&SCos be entitled to revenue support as a last resort mechanism, funded by the Government, enabling T&SCos to recover shortfalls through a revenue support agreement—hereafter shortened to RSA. Without this, there would remain a significant barrier to investment in T&S infrastructure in the early stages of development of the CCUS sector.

I turn to the detail of the transport and storage regulations. RSAs will be offered as a contract between a T&S company and a counterparty, which will be done under a direction of the Secretary of State in accordance with Section 60 of the Act. To maintain integrity of RSA allocation, the first aspect of these regulations places requirements on the Secretary of State’s directions and sets out circumstances in which a direction ceases to have effect, including where the Secretary of State revokes a direction before a T&S company accepts a contract in writing.

Secondly, the counterparty will be responsible for publishing each RSA contract, as well as for establishing and maintaining a public register of key project information. Ensuring transparency of these contracts is essential for encouraging greater understanding of the level of support for, and confidence in, this critical but nascent sector.

To be clear, the regulations allow sensitive information to be redacted by the Secretary of State, ensuring that any sensitive commercial information—for example, information that constitutes trade secrets—or personal data is removed before documents are made public. The statutory instrument’s final measure will require the counterparty to promptly notify the Secretary of State if it is unable to perform its duties.

Turning to the carbon capture regulations, I will first set out the context of industrial carbon capture, ICC, which is critical to decarbonising industries with hard-to-abate emissions and achieving net zero by 2050. The Government’s ambition is to capture and store 6 megatonnes annually of industrial emissions of CO₂ by 2030, increasing to 9 megatonnes of CO₂ annually by 2035. The ICC business models are designed to incentivise the deployment of carbon capture technology by industrial and waste users who often have no viable alternative to achieve deep decarbonisation.

I turn now to the role of the carbon capture regulations in facilitating the business models. The regulations broadly mirror those that I detailed on transport and storage in respect of the Secretary of State’s directions to a counterparty—in this instance for offering a contract with an eligible carbon capture entity, including where directions cease to have effect or may be revoked. The reporting requirements for a counterparty also remain, including a duty to publish contracts entered into, establish a public register and promptly notify the Secretary of State if the counterparty is, or considers that it is likely to be, unable to carry out its functions.

However, the regulations also satisfy the duty in Section 68(4) of the Act, by determining the meaning of “eligible” in relation to a carbon capture entity, specifically one where the CO₂ to be captured and stored is produced by commercial or industrial activities, as set out in the Act.

In short, the regulations set out who can be eligible for support. The transport and storage regulations do not include a definition of eligibility, as an eligible transport and storage company is defined at Section 60(2) of the Act as a person who holds an economic licence or has been notified in writing by the appropriate parties that an economic licence is to be granted. The ICC business models have been developed to support decarbonisation of the industrial sector, including the waste management sector.

We do not consider it appropriate for the ICC business models to support carbon capture deployment for certain parts of the power sector. Therefore, the regulations set out that an entity would be ineligible if it is capturing CO₂ produced by the generation of electricity and is connected to one or both transmission and distribution systems in respect of all the electricity that the generation station produces.

However, capture from combined heat and power plants and energy recovery generating stations would be eligible, regardless of how and whether they are connected to the transmission and distribution systems. It should be noted that these regulations form only one part of the assessment for whether projects would be awarded an ICC or waste ICC contract. Further eligibility criteria are expected to be set for individual allocation rounds in the appropriate allocation guidance.

In conclusion, in implementing transport and storage infrastructure and the industrial carbon capture business models, these draft regulations represent an essential step towards achieving our 2030 deployment ambitions and, ultimately, net zero. I therefore commend them to the Committee.

[Lord Jones (Lab)]

My Lords, I thank the Minister for his explanatory and informative remarks, for these regulations are complexities for the uninitiated in these deceptively thinly paged dual sets of regulations. Surely, they are regulations to be welcomed. It is the war against CO₂, and the Minister, if I may say so, has escaped the thickets of Brexit legislation to display insightful knowledge of the huge energy world.

Climate change is upon us. We should not be complacent. I hope the regulations will facilitate the successful overcoming of a big challenge. There are certainly ambitious targets. Can the Minister explain a little further the register and the counterparty in Regulation 6(2)? Also, in paragraph 4.2 of the helpful and necessary Explanatory Memorandum we see the power of the Secretary of State to “direct”. It is reasonable for a Back-Bencher in a Parliament to query that word. Here, at first glance, it is the granting of all-powerful influence. Is that so? I think I know the Minister well enough in parliamentary terms to know that he is not a person who seeks all-powerful directions, but he might like to explain with his usual expertise what that is all about. This is, after all, a Parliament.

At paragraph 4.3 of the Explanatory Memorandum, we have references to the nations and, not least, to Wales. How many likely carbon capture projects are mooted or in the pipeline for Wales, Scotland and England, not forgetting Northern Ireland? At paragraph 5.3, what is the department’s understanding of

“a reasonable return on investments”?

Is there a percentage in mind? Shall it not be a blank cheque? Can the Minister also explain further, for the uninitiated, what the “CCUS cluster” is at paragraph 5.5?

At paragraph 6.5, the department rightly points to “large upfront capital expenditure”. Can the Minister give a possible list of the scale of this up front? Surely there are in existence projects quite far down the line. I ask for the Minister to give his best guesstimate. At paragraph 5.9, it is welcome—to be very positive—that the public are to be made aware of deployment of a public register of projects. That has to be good.

Time is of the essence. I am aware that in north-east Wales, Connah’s Quay Power Station proposes carbon capture. This station is in the constituency that for 31 years one represented in another place. One visited regularly. It was once mooted for nuclear power, being on the substantial River Dee estuary. I emphasise that I have no registered interest whatever in raising this matter, but since I still live in the shadow of this establishment and have had a connection with it for the best part of 54 parliamentary years, I raise the matter. Currently the station is owned by a company called Uniper, about which I know very little. The company is briefing in the locality. I quote from the letter of invitation to visit for briefing. It is from a shrewd, practical managerial team that I encountered in response to its invitation.

Briefly, it says that it is

“developing plans for a new low-carbon, highly efficient gas-fired power station with carbon capture technology at the site … We expect to reuse an existing pipeline, which will connect to the regional CO₂ infrastructure currently under development by Eni, enabling the captured CO₂ to then be transported to permanent offshore storage facilities in repurposed depleted offshore gas fields”.

I visited this plant as a result of receiving that invitation for briefing and, on the face of it, the project seems to be very much related to these regulations. That is why I have quoted from that letter.

--- Later in debate ---

With those comments, I look forward to the Minister summing up.

[Lord Callanan (Con)]

My Lords, I thank all noble Lords for their contributions. Before I get into the detail on particular questions, I will talk about the general issue, particularly as raised by the noble Baroness, Lady Bennett, of CCUS and the principle. Obviously, that was a Second Reading speech for the legislation rather than for this particular statutory instrument, but let me explain why I think the noble Baroness is both misinformed and wrong.

First, most informed opinion disagrees with the noble Baroness on this, including the Climate Change Committee, which told us in its advice that CCUS is essential and not an option if we are to reach our decarbonisation goals. She said many other things that were incorrect. To take an example, she said that CCUS had never been tried and was unproven. Again, that is incorrect. There are many operating CCUS plants in the US. I witnessed one in Alberta, Canada, last year and, only last week, I was in Iceland to see the opening of the largest direct air capture greenhouse-gas removal plant in the world. It has an operating CO₂ ejection system into the basalt rock, which has been working successfully for many years.

So, the technology does work and is proven. We are attempting it at a greater scale than many other countries, but that is a fantastic business opportunity for the UK. We are privileged to have fantastic, tremendous storage potential in the North Sea, where we can store not only our own emissions but possibly those produced by other nations and Europe as well. This has the potential to be a massive revenue earner for the UK, generating potentially tens of thousands of jobs and millions of pounds of contributions. There are a number—dozens—of really innovative UK companies that are experimenting and working in this area. There is great export potential for the UK, and potentially many jobs—or rather, there are hundreds of jobs already.

I can understand the noble Baroness’s point—and I agree with her—that we should seek to minimise emissions as much as possible by processes such as fuel switching. But what would she say to those industrial plants that generate CO₂ as part of their processes rather than by heating? What about cement plants, for instance? Does she think that they should just close down? Should they not exist at all? These are the practical issues that, when dealing with policies that affect people’s jobs and livelihoods in the construction sector, we need to have a solution for rather than just airy-fairy academic views. As the CCC said, CCUS will be essential and is not an option. If the noble Baroness wants to make a point, I will be happy to hear it.

[Baroness Bennett of Manor Castle (GP)]

I am not sure whether this is procedurally correct, but the Minister directed the question directly at me. Once we set up these CCUS plants and establish the contracts, as I said with reference to incinerators, we will need to feed them, whereas, if we look at different technologies that are being developed for cement, for steel or electric arc furnaces and so on, the point is to—as the noble Baroness, Lady Blake, said—have a transport modal shift. We need to plan for the shift in operations—in ways of doing things—rather than business as usual.

To address the point about the Climate Change Committee, we come back to the issues around growth and the assumption that we must have economic growth. If we look at social innovation and changing the way in which our society works, we are looking at a very different model for the future than is traditionally presented.

[Lord Callanan (Con)]

The noble Baroness is addressing issues that I never even raised. Her last point is for a completely different debate. Nobody is suggesting CCUS for transport emissions or steel emissions. Again, the noble Baroness is evading the central issue. Some industries have no choice but to produce CO₂. Anyway, it is a separate issue—let us get back to the debate that we are here for today.

These two instruments are broadly administrative in nature but outline vital operational procedures to enable the Government’s proposed business models for carbon capture, transport and storage. I start with the issues raised by the noble Lord, Lord Jones, who asked for the directions of the counterparty and the register to be explained further. In relation to a direction to the counterparty, the counterparty would enter into and manage contracts at the direction of the Secretary of State and would be the conduit for HMG funding to successful projects. A direction to the counterparty would be a direction to offer to enter into a revenue support contract. The register would be a public register of contracts entered into, and the details that the counterparty would be required to publish are set out in the schedules to the regulations.

The noble Lord, Lord Jones, and the noble Baroness, Lady Bennett, asked about confidentiality. It is appropriate for companies to be able to protect commercially sensitive or privileged information—for example, information that relates to a company’s intellectual property. We expect redactions to be made to published contract information only when there is strong justification for doing so. Any redactions or exclusions in the contract do not, of course, limit what information must be disclosed in that public register.

The noble Lord, Lord Jones, asked for a definition of “cluster”. We would define it as carbon capture projects, onshore and offshore pipeline infrastructure, transport infrastructure and the associated offshore storage site, all located in a defined geographical area. We have two in the so-called track 1 process in the UK: one is the HyNet consortium in the north-west and Wales, and the other is on the east coast and is centred around Teesside and, to a certain extent, Humberside. There are two additional ones in Scotland as well as the Viking consortium, which will be in the so-called track 2 process.

The noble Lord, Lord Jones, asked about funding for CCUS, and the geography. We have announced up to £20 billion of funding for the early deployment of CCUS in the UK and, as I have just said, we aim to establish up to four clusters in the UK by 2030. The noble Lord might be a little more interested in the details of the projects of the HyNet consortium, which is located in north-west England and Wales. From memory, there is one project in Wales; it is at the Padeswood cement plant, which we are negotiating with at the moment. I think I am correct in saying that that is the one. We are currently in negotiations on eight projects and transport storage systems in total across the two clusters. We hope to reach final investment decisions by the third quarter of this year for the rollout and deployment of this technology. We have announced those first two clusters and the track1 negotiation list with, as I have said, eight projects selected through the cluster-sequencing projects to progress to negotiations by—I hope—the third quarter.

In addition, we announced two further clusters in July last year: the Acorn cluster in Scotland and Viking in Humberside. Again, those will be two additional T&S systems. We think that, after the first two, they will be best placed to deliver on our objectives—again, subject to appropriate due diligence, consenting, subsidy control, affordability and value-for-money assessments.

The noble Lord, Lord Jones, asked what the department’s understanding is of a reasonable return on investment. I would say that that is the six million dollar question, but it is probably a bit more than that. Of course, this is subject to ongoing contract commercial discussions with the relevant projects. The noble Lord can be assured that we are subjecting all the negotiations to precise considerations on value for money, subsidy control and affordability. As an indication of the scale of support, we have announced up to £20 billion for the early deployment of CCUS in the UK.

Contracts for Difference (Sustainable Industry Rewards) Regulations 2024

Lord Callanan Excerpts

Monday 13th May 2024 Grand Committee

Moved by

[Lord Callanan]

That the Grand Committee do consider the Contracts for Difference (Sustainable Industry Rewards) Regulations 2024.

Relevant document: 21st Report from the Secondary Legislation Scrutiny Committee

[The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)]

My Lords, I beg to move that these draft regulations, which were laid before the House on 21 March 2024, be approved.

The Joint Committee on Statutory Instruments and the Secondary Legislation Scrutiny Committee have provided a very helpful review of these regulations and, I am pleased to say, have not drawn any special attention of this House or the other place to them. These regulations amend the regulations underpinning the contract for difference scheme. The CfD scheme is the Government’s main mechanism for supporting new low-carbon electricity-generating projects in Great Britain. It has been hugely successful in driving down deployment costs and driving up the share of renewable energy in the UK.

These amendments are about providing extra funding support through the CfD so that we can better support offshore and floating offshore wind supply chains. Offshore wind in particular is a critical industrial sector. It has been hard-hit by inflationary pressures and supply chain disruption resulting from the Russian invasion of Ukraine. Consequently, necessary investments in manufacturing and infrastructure have been delayed or, in some cases, abandoned altogether.

As the CfD currently focuses on prices of deployment and no other factors, offshore wind developers are incentivised to use the cheapest supply chain options available, regardless of where in the world or how dirty their means of production. We are therefore introducing sustainable industry rewards—SIRs—to rebalance CfDs, to address some of these supply chain challenges which are already causing bottlenecks in the supply chain, further increasing costs and slowing down deployment. This policy intervention has understandably been much welcomed by supply chain companies. It is intended to take effect for the seventh CfD allocation round, which should take place in 2025.

How does this policy work? These regulations require all offshore wind and floating offshore wind CfD applicants, as a condition of entry to the CfD, to obtain an SIR statement from the Secretary of State. Those applicants who obtain an SIR statement will receive additional revenue support through the CfD—a top-up, as it were—for investing in the economic, social and environmental sustainability of their supply chains. SIR statements are obtained if applicants make successful SIR proposals that fulfil one of two sustainability criteria. One is investment in shorter supply chains in UK deprived areas. This means investing in manufacturing in the most disadvantaged parts of the United Kingdom. The other is investment in more sustainable means of production. This means investment in manufacturers who have signed up to the Science Based Targets initiative for the reduction of carbon emissions.

The mechanism to allocate SIR funding will be a competitive auction just before the main CfD auction. An applicant that obtains SIR funding will be contractually obliged to deliver their commitments; undelivered commitments will be subject to a system of performance adjustments. SIRs will make more expensive but more desirable investments from offshore wind developers cost-neutral, and therefore will not impact the main CfD auction, held shortly after the allocation of SIR funding.

Noble Lords should note that the regulations provide the powers to run the SIR allocation. The explicit, detailed rules of that allocation are set in the draft SIR allocation framework that was released in parallel to these regulations. The regulations replace the current supply chain plan process for offshore wind and floating offshore wind. The Government are very conscious that this extra support for offshore wind will have an impact on consumers’ electricity bills as, like the rest of the CfD scheme, SIRs will be funded through the existing electricity supplier obligation levy, which electricity suppliers pay.

The actual budget for SIRs is still being discussed with the Treasury. However, we estimate it could be in the region of £150 million to £300 million per year, for no more than three years, subject to the number of applicants. The impact on consumer bills will be very small, in the region of £2 per year per consumer. I hope that noble Lords will agree that £2 a year per consumer is a small price to pay for the benefits that sustainable industry rewards could bring to UK communities, through creating new and cleaner manufacturing facilities in deprived areas, alongside highly skilled jobs or carving out opportunities for businesses to become part of the offshore wind supply chain.

To ensure that the policy does not become a permanent burden on consumer bills, our proposal is that the intervention is time limited for three years; it is there to address specific market failures. The SIRs work as a prerequisite to the CfD for offshore wind, although applicants will have access to the main CfD round as long as they meet a required minimum standard of investment in their supply chain. The SIRs also complement other government support for renewable supply chains, such as the £1 billon Green Industries Growth Accelerator, which runs to a similar timeframe. I beg to move that these regulations are approved by the Committee.

[Baroness Bennett of Manor Castle (GP)]

My Lords, I have some technical questions, although I begin by broadly welcoming the Government’s direction of travel on this. It really is urgent that we proceed with offshore and floating offshore wind schemes.

I have two questions, one of which refers to the Procurement Act, which I spent more hours than I care to remember debating in this very Chamber when it was a Bill. How does this provision fit with the social value provisions in the Procurement Act? These measures would seem to be carved-out and very narrow provisions within that, so I am wondering how those two legal elements interact. My other question is, this provision provides a mechanism for offshore and floating offshore wind; how will this impact potentially on bids for solar, hydro and other schemes? Will it create a disadvantage for smaller-scale schemes, particularly community schemes?

--- Later in debate ---

[Lord Callanan (Con)]

I thank all three noble Lords for their contributions.

Let me say at the start that CfDs are a key pillar of our energy security. They have been fantastically successful in what they have delivered in terms of our renewable energy mix, but they need to adapt to changing market conditions. We are determined to make offshore wind deployment an even greater success story and are willing to look at various innovative steps to help make that happen. These SIRs represent one of those innovative steps. We have developed them with industry input and believe that they will provide much-needed support to a sector that has faced a tough economic environment and many supply chain disruptions. This support should trigger significant investments in expanding the supply chain’s capacity and capability in many deprived coastal areas around the UK—the noble Lord, Lord Lennie, and I should declare an interest in this matter—and in new, cleaner manufacturing processes. I mean that in terms of the fact that we are from the north-east of England and not in terms of any financial interests, by the way.

These investments will help deliver our levelling-up agenda and positively impact the communities hosting large infrastructure projects by providing new, well-paid, high-tech manufacturing jobs, as well as maintaining many existing successful jobs. Already, new offshore wind manufacturers, both British and from overseas, are looking to relocate to the UK thanks to this package of supportive measures.

It is true, as I said at the start, that these measures will have an impact on consumer bills. We are talking to the Treasury to get the balance right between the cost to consumers and what we can achieve through targeted revenue support in order to get investments in the supply chain back on track. However, I emphasise once again that we are looking at a very small impact on bills—around £2 per year per consumer—in all the scenarios we are considering, for a time-limited period of only three years, and that the competitive auction process will ensure that consumers see the greatest return on their investment. We believe that this is a small price to pay for the benefits that SIRs could bring to UK communities and beyond, as I articulated earlier.

These measures will also put us on a more equal footing with our direct competitors in the US and the EU, who are also investing heavily in their offshore wind supply chains. Considering how much deployment and potential we have here in the UK, it is only right that we, too, try to attract and support as much of that supply chain as possible. It is key, though, and important to emphasise, that we need to provide this support in a targeted and proportional way.

As Members have already indicated, allocation round 6 of the CfD is now live. The budget for AR6 was announced as part of the Chancellor’s Spring Budget and, at more than £1 billion, is four times larger than the budget for the previous allocation round. Although this current round does not include SIRs, I wanted to flag that as it is none the less a crucial step in our renewable energy deployment plans and it demonstrates the Government’s commitment to ensuring that the UK remains one of the world leaders in renewables. Of course, the Secretary of State will decide in due course whether to increase that budget later this year.

Let me deal with some of the points that were raised during the debate. The noble Baroness, Lady Bennett, asked how this SI fits with the social value provision in the Procurement Act and how CfD/SIRs impact on solar, hydrogen and other schemes. It is important to emphasise that the CfD is not a public procurement mechanism and therefore does not fall under the Procurement Act; it is a revenue support scheme, although many of the aims and mechanisms are of course similar. Solar, onshore wind and other technologies face different challenges to offshore wind; SIRs are therefore not appropriate interventions for them. For example, solar supply chains are currently massively dominated by China and the UK market alone will not help to shift that dominance, sadly.

The noble Earl, Lord Russell, asked how the value for money of SIRs will be assessed, what a sustainable means of production will look like and whether this policy is sufficient to meet future commitments. The budget, as I said, is still being negotiated with the Treasury. It is likely to be in the region of £150 million to £300 million; that will be determined shortly. The budget should be set out in June and value for money will be determined by a competitive allocation of that funding. I am happy to reassure the noble Earl that there will be a dispute resolution mechanism as part of the application process and that a sustainable means of production means either shorter supply chains made closer to the home in the UK, with a lower carbon footprint, or the use of firms signed up to the Science Based Targets initiative for the reduction of carbon emissions.

As to whether we are doing enough and what will happen afterwards, we will see in due course, but the global market for renewables has changed dramatically since Covid and the Russian invasion of Ukraine. CfD/SIRs is just one initiative we are using to address those new challenges. Of course, it complements the other initiatives that the Chancellor announced last year: the Green Industries Growth Accelerator, or GIGA, funding, which stands at over £1 billion and whose allocations will be announced shortly; and the Floating Offshore Wind Manufacturing Investment Scheme, or FLOWMIS, which is another policy that we are using to help support this industry. In answer to the question of whether this policy will be extended, it will depend on the market circumstances at the time, faced by whoever is in the Government at the time.

The noble Lord, Lord Lennie, asked when the SIR budget will be finalised and why we have limited the scheme to three allocation rounds. I think that I have just answered that question: it will be finalised in June. We will then take a view on how successful the current allocation round was and whether we will wish to extend it in future. If a developer is unsuccessful at the SIR auction, they would still be able to enter the main CfD auction as long as they have met the minimum standard of investment required in their supply chain.

Regarding the question posed by the noble Lord’s honourable friend in the other place, Alan Whitehead, the whole scheme is designed so that an SIR bid has no impact on the main CfD bid. We are covering the costs of the extra expenditure in a cleaner supply chain, which will allow an applicant to go into the main CfD auction on a cost-neutral basis, needing neither to increase nor to decrease their CfD bids. As I said, this scheme has initially been limited to three rounds over three years so that we can then reassess the market conditions and take a view on how successful the initial intervention has been.

I thank the Committee for the support that was expressed. I hope I have dealt with all the questions that were asked. I commend these draft regulations to the Committee.

Motion agreed.

Energy: Welsh Government

Lord Callanan Excerpts

Wednesday 24th April 2024 Lords Chamber

[Baroness Wilcox of Newport]

To ask His Majesty’s Government what assessment they have made of the case for stronger consultation and co-operation with the Welsh Government on energy policy to manage overlapping responsibilities in that area.

[The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)]

My Lords, the UK Government are committed to strong, effective co-operation with the Welsh Government on energy issues, supporting our shared energy security and net-zero objectives. We engage Welsh Ministers on a range of issues, and our support for the energy transition in Wales includes Great British Nuclear’s recent purchase of the Wylfa site, the ongoing HyNet project in north Wales and supporting the development of offshore wind in the Celtic Sea.

[Baroness Wilcox of Newport (Lab)]

My Lords, the port of Milford Haven brings in 20% of the UK’s energy. It is part of our critical UK infrastructure; there are huge opportunities here. The Welsh Government made £1 million available to support that emerging sector, yet the UK Government have just rejected the port’s bid for a share of £160 million to help develop the technology. Can the Minister please explain why the Government have left the port’s hopes on offshore wind high and dry, and what conversations the Government had with the Welsh Government before making this decision?

[Lord Callanan (Con)]

We have regular discussions with the Welsh Government. The noble Baroness neglected to say that Port Talbot was one of the two ports in the UK that was taken forward, with one in Scotland as well. She is being slightly unfair in that assertion.

[Earl Attlee (Con)]

My Lords, is the Minister aware that the UK burns about 50,000 tonnes of coal for the heritage steam sector, but due to the closure by the Welsh Government of the Ffos-y-Fran colliery, that coal now has to be imported from Colombia and South Africa, and increases emissions rather than reduces them? Will my noble friend the Minister have a chat with the appropriate Welsh Ministers about that?

[Lord Callanan (Con)]

The noble Earl makes an interesting point, and I am of course aware of the requirements of the heritage steam sector. We would be happy to take it up with the Welsh Government.

[Lord Wigley (PC)]

Does the Minister accept that over recent years, there has been immense frustration in Wales as projects involving tidal lagoons, floating offshore wind—as highlighted by the noble Baroness, Lady Wilcox, a moment ago—and inland hydro pump storage schemes have failed to progress, partly because of the split of responsibility between Westminster and Senedd Cymru? If the Government cannot get their act together, will they please devolve full responsibility to the Welsh Government, with the cash resources needed to drive forward these much-needed projects?

[Lord Callanan (Con)]

I am sorry that the noble Lord takes that attitude, because all projects across the UK are evaluated on the same basis. Of course, it is not possible to take forward every project, but the assertion that projects in Wales are somehow discriminated against is just not true. I could give him many alternative examples of projects in Wales—from nuclear, to hydrogen storage, to hydrogen allocation rounds, and CCUS projects—that are going forward.

[Earl Russell (LD)]

My Lords, does the Minister agree with the Institute of Welsh Affairs that Wales should retain, and local communities gain, greater income from the renewable energy developments that they host?

[Lord Callanan (Con)]

I am not familiar with those particular circumstances; I would be happy to chat to the noble Earl about it.

[Lord Morgan (Lab)]

My Lords, is this not an opportunity for further investment in west Wales, which by comparison with east Wales, which is closer to the English border, has suffered considerably in economic investment in recent years?

[Lord Callanan (Con)]

There are opportunities with the energy transition for investment in all communities throughout the UK, including, of course, in Wales. There are considerable investments in north Wales, and I mentioned some of those in south Wales as well. It is perfectly possible that onshore wind projects are being taken forward in west Wales, but I am not familiar with that particular area.

[Lord Faulkner of Worcester (Lab)]

My Lords, further to the question from his noble friend Lord Attlee, is the Minister aware that his colleague, the noble Lord, Lord Parkinson of Whitley Bay, and Huw Merriman, the Rail Minister, have written a joint letter to the First Minister of Wales asking him whether the Welsh Government would reconsider the closure of the Ffos-y-Fran pit in south Wales? This pit would provide coal for the heritage sector for many years to come. Would he chase that up and see whether we can get a positive answer to it?

[Lord Callanan (Con)]

I thank the noble Lord for that information. I was not aware of that, but now that he has mentioned it, I will of course chase it up.

Offshore Petroleum Licensing Bill

Lord Callanan Excerpts

Committee stage
Tuesday 23rd April 2024 Grand Committee

With that, I look forward to the Minister’s comments.

[The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)]

My Lords, first, I thank everybody who contributed to what I think has been a positive debate on a number of important issues.

Amendment 1 in the name of the noble Baroness, Lady Hayman, seeks to prevent the NSTA inviting applications for licences until regulations banning non-emergency flaring and venting on new offshore installations are in force. After two years, it would also prevent the NSTA inviting applications until additional regulations banning all flaring and venting on existing offshore installations are in force.

Flaring and venting are controlled processes to dispose of gas. These activities can take place for emergency or safety purposes, during non-routine operations and on a regular basis, as a result of the design of existing platforms. This latter category is known as routine flaring and venting.

The Government are clear on the importance of having a target for zero routine flaring and venting in the North Sea. This is a key measure for reducing greenhouse gas emissions from production. We are committed to the World Bank’s zero routine flaring initiative, which aims to eliminate the practice globally by 2030; indeed, we are going further with a commitment to ending not just flaring but venting for both oil and gas by 2030.

The North Sea Transition Authority’s current strategy includes enforceable obligations on industry to reduce greenhouse gas emissions from a range of sources, including flaring and venting. As the noble Lord, Lord Bruce, and my noble friends Lord Moynihan and Lord Lilley pointed out, the NSTA’s current guidance to industry also makes it clear that all new developments should be planned on the basis of zero routine flaring and venting. Further, the new OGA plan, published last month, confirms the expectation that there should be zero routine flaring and venting on all platforms from 2030 and requires industry to report in more detail, including on financial planning, to ensure continuous improvements in flaring and venting.

The UK’s proactive approach is already reaping rewards. Based on the latest data, North Sea flaring is down by 50% since 2018. The sector is on track to deliver on the ambitious decarbonisation target in the North Sea transition deal to reduce emissions from operations to 50% of 2018 levels by 2030, ultimately ensuring that the UK continental shelf reaches net zero by 2050. Key to delivering a 50% emissions reduction by 2030 will be eliminating routine flaring and venting in a responsible manner and electrifying platform operations to enable this to happen.

I say in reply to my noble friend Lord Moynihan that it is the Government’s view that our 2030 flaring and venting target is already ambitious. Significant changes to infrastructure, which require appropriate time and planning, need to be made. If we do not carefully manage the ending of routine flaring and venting, it will lead to the early closure of platforms—I suspect that some noble Lords would welcome this—and the potential loss of both the appropriate UK production and the jobs, tax revenue and economic activity that go with it.

Of course, as I have pointed out repeatedly, loss of domestic production will also increase our reliance on imports, including liquefied natural gas, which, as we have said repeatedly, has higher production and transportation emissions. My submission is that that would make no sense either economically or from the point of view of emissions. As drafted, this amendment would also prohibit flaring and venting for emergency and non-routine purposes after two years. That would create unacceptable health and safety risks for workers and would likely result in a shutdown in production in those circumstances. Taking on board the suggestion of the noble Baroness, Lady Blake, I am always happy to meet further with the Opposition to discuss this important matter.

Amendment 2 in the name of the noble Baroness, Lady Hayman, would require the Secretary of State to publish a green skills retraining plan for oil and gas workers before the NSTA could invite applications for offshore production licences. I can reassure the Committee that the Government absolutely recognise how important the skills, expertise and resources of the oil and gas industry are for our transition to cleaner technologies. A report by Robert Gordon University found that over 90% of the UK’s oil and gas workforce have medium to high skills transferability to the offshore renewables sector.

It is vital that the transition to cleaner energy is managed carefully and responsibly. We must ensure that oil and gas jobs are not lost before renewables and other clean technologies grow sufficiently to take up those valuable skills and workers. That is why we are taking action, including by introducing this Bill to safeguard those jobs for the future.

To take an example, a key commitment of the landmark North Sea transition deal between the Government and the industry is to ensure that people and skills from the existing oil and gas workforce are transferable across the wider energy sector. This includes the development of a digital skills passport to facilitate this transferability, which is being funded by the Scottish Government and industry. We are interested in this work and keen to take it forward. Indeed, we are working with the Scottish Government, the industry, relevant skills bodies and trade unions to support the delivery of this work, which is led by Offshore Energies UK and Renewables UK.

In addition, the Government are shortly due to launch our green jobs plan in the first half of this year, supported by the green jobs delivery group. This plan will provide the actions needed to ensure that we have the skills and occupations within the UK workforce, at the right time and in the right place, to develop our net-zero, nature and energy security targets.

All in all, the Government’s spending and policy ambitions will support up to 480,000 green jobs by 2030. The additional requirement that this amendment places before further licensing can take place would damage investor confidence and cause confusion for industry, employers and the workforce. It would therefore only undermine the ongoing work across the UK and could be inappropriate, given the responsibilities of the devolved Administrations also in this area.

Amendments 6 to 8 are in the name of the noble Earl, Lord Russell. Amendment 6 would remove requirements on the NSTA to invite applications for production licences when both the net importer and carbon intensity tests have been met. I take this opportunity to remind the Committee of the purpose of the Bill: it is designed to give industry certainty on the future of licensing rounds. By providing industry with this confidence, the Bill will support the required ongoing investment and protect the jobs and skills required to support the energy transition. Amending that duty on the NSTA when the net importer and carbon intensity tests have been met would undermine the purpose of the Bill and the confidence that it is designed to provide, and will put these important benefits at risk.

Amendment 7 would modify the duty that the Bill places on the NSTA, so that only companies that have committed to investing half their profits from activities carried out under licences in the green UK economy would be invited to apply for production licences.

The Government have a tremendous record for attracting investment into green industries. Since 2010, we have seen around £300 billion of public and private investment in the low-carbon sectors. According to BloombergNEF, total public and private investment in UK low-carbon sectors reached £60 billion in 2023—up by 71% in real terms from 2022.

--- Later in debate ---

[Lord Callanan (Con)]

I was just making the point that the licences provided for in the Bill, where granted, will give exclusive rights to explore an area. Additional permissions will be required before any activity can take place, such as the drilling of a well or construction of a development facility. At each stage and ahead of every such permission being granted, an environmental assessment takes place including, where necessary, public consultation and consultation with nature conservation bodies, to ensure that the impact on the environment, including MPAs, is taken into account in the licensing process.

In response to a specific question, I am not aware of my department having received any communications from the Joint Nature Conservation Committee about the Bill, but noble Lords can be assured that the Government remain committed to ensuring that we meet our Environment Act target on MPAs.

The Government’s marine spatial prioritisation programme will ensure that a strategic approach is taken to identifying future marine development sites. The programme is exploring opportunities to optimise the use of the seas and enable marine activities to co-exist.

Similarly, the strategic spatial energy plan, which the Government will commission in spring 2024 from the National Energy System Operator, will assess the most efficient locations and types of energy infrastructure, reducing inefficiency in infrastructure build. The Bill will not undermine our ability and ambition to ensure co-existence between strictly regulated human activities that may be both possible and necessary in an MPA and, of course, the wider marine environment, including fishing, offshore wind construction and offshore oil and gas, to ensure that we continue to strike the right balance between the full range of our different priorities.

I hope that with those assurances and the explanations that I have been able to provide, noble Lords will feel able not to press their amendments.

--- Later in debate ---

[Lord Moynihan (Con)]

My Lords, I recognise the expertise of the noble Lord who has just spoken, but I think that the two tests in the Bill—which is the subject of this group of amendments, because we are looking to see whether it is feasible and appropriate to add to those tests—are important tests.

On the net importer test, it is fundamentally important as a country to have security of supply. Security of supply comes through diversity of supply, and that security of supply has been shown to be exceptionally important recently, not least with the Russian invasion of Ukraine and the impact that had on western Europe’s gas, being at the end of the pipeline from Russia. It was important to bring home the reality that we need to develop our own energy sources efficiently and economically, in the most benign, sustainable way that we can possibly do with modern technology. The net importer test is important, and I am pleased that it is in the Bill. It absolutely underpins the concept of security of supply, which has always been the basis for our energy system in the United Kingdom.

The carbon intensity test is also relevant, in this day and age of developing reserves internationally and bringing them here with LNG, then transferring that LNG, through a process, to natural gas for power generation in the United Kingdom. If the LNG had a lesser carbon footprint than what we produce in the North Sea, then there would be a very real argument for not having further licensing rounds in the North Sea, because the environmental impact of what we do in this industry is vital, and that is shared on both sides of the Committee.

It is important to question whether we should move towards a position whereby we go to a global test, which the noble Lord, Lord Lennie, suggested, through what was probably a probing amendment rather than one that he would like to see in the Bill. We have an important but minimal impact on whether that 1.5 degree average surface warming above pre-industrial temperatures under the Paris Agreement is achieved. We should be looking to make sure that, as far as possible, everything we do in the North Sea is as sustainable as possible, with the lowest possible carbon footprint. As far as I am concerned, sustainability is one of the four pillars for the consideration of our energy sector. We must address sustainability concerns; we must address GHG emissions; and we must ensure the protection and stewardship of our environment. As I have mentioned, at the same time, we need to have security and reliability. That is the second pillar. We must ensure that current and future energy demand is supplied reliably and responsibly, and, as I said earlier, is able to robustly withstand system shocks.

The third pillar is accessibility and affordability. We must enable energy provision to consumers while minimising cost, and we must support social and economic development. That is one of the reasons we have diversification of supply in the country and the free market to ensure that that is the case.

That free market point is important because we need economic viability of investment. Investment in, and the adoption of, energy solutions characterised by a sustainable return on investment is the fourth and most fundamental pillar. I would just question whether we need to go further than the two tests in the Bill.

I have never, either at Second Reading or in Committee, thought that this Bill was top of the agenda in terms of importance to any Government. I am not sure that it is. I agree with the noble Lord, Lord Bruce, that we can have annual licensing rounds if we want them. In any event, if it is important that they are annual as opposed to biennial, to me, is debateable. The important thing is that all the licences that are awarded must be awarded against a set of criteria; increasingly important in the set of criteria is the environmental footprint around every single aspect of offshore oil and gas production.

We need firm, reliable energy in the United Kingdom to underpin a growth in renewables, but that firm power must be uninterrupted. At a time when we are not moving towards new nuclear as fast as we should be, gas is that basic firm power that will fuel the whole electrification of our system. The other side of this coin is that we are looking for far greater electrification of our rail and wider transport system. Well, for that, you need firm power.

How renewables are at the moment, as well as the lack of good battery storage power—it is interesting to note that the existing battery storage power in the UK covered approximately only eight minutes of average UK electricity demand for the whole of 2023—this lack of battery technology and breakthrough on renewables, without firm power, shows just how much further we have to go. We must have improved and enhanced battery technology. We need firm energy as our lifeblood in this country, not sporadic energy, although moving towards a greater reliance on renewables is, to me, critical. That needs to be underpinned by maximising our gas reserves in the United Kingdom.

Given the limitations of this Bill, those two tests seem reasonable and appropriate to me. I am not sure that the additional tests that are being recommended in the amendments are necessary or helpful in achieving the four pillars that I set out in response to the noble Lord’s very good introduction, if I may say so, of his amendment.

[Lord Callanan (Con)]

I thank all those who contributed. I start with Amendments 3 and 18 in the name of the noble Lord, Lord Lennie, which seek to impose a new climate change test as part of this Bill.

I say at the outset, in response to the challenge presented by the noble Baroness, Lady Jones, that this Bill is entirely consistent with the Government’s target to reach net zero by 2050. Even with continued exploration and development, UK oil and gas production is expected to decline by 7% a year. This decline is faster than the average annual global decline needed to align with the IPCC’s 1.5 degrees Celsius pathway. The noble Baroness might not like those facts but they are facts nevertheless.

As net importers, we produce less than we need—a point made ably by the noble Lord, Lord Bruce. This is projected to remain the case even as our demand for oil and gas shrinks as we achieve net zero. There are already a number of climate checks to ensure that offshore oil and gas activities remain consistent with our climate goals: the climate compatibility checkpoint ensures that the compatibility of future licensing with the UK’s climate objectives has been evaluated before a new licensing round opens; and the North Sea Transition Authority has a specific obligation to assist the Secretary of State in meeting the net-zero target. The recently published OGA plan makes clear that, for production to continue in the North Sea, it must continue to become cleaner. Adding a new test to this Bill is, in our view, therefore unnecessary.

--- Later in debate ---

[Baroness Blake of Leeds (Lab)]

I acknowledge the comments from the noble Baroness, Lady Jones, and the noble Earl, Lord Russell. To repeat the concerns as outlined at Second Reading, our belief is that the tests identified in the Bill will be impossible to fail and are thereby fundamentally flawed, as my noble friend Lord Lennie has previously outlined.

Amendments 12 and 15 in my name are straight- forward. The intention is to be as simple as possible, leaving out “liquified” from the Bill to include all natural gas imported into the UK. We need to achieve clarity, which is not present in the current wording. If the Government want to keep it in, they should be open about the consequences. Liquified natural gas will always be more greenhouse gas intensive in production than UK natural gas. The North Sea field will not meet our total demand for oil and gas, as we know. We need to replace these tests with ones that produce a proper judgment about whether a licence should be issued. The main consideration should be whether issuing a licence is in line with our climate change goals.

Another disappointment with this Bill, as we have discussed, is that there is no reference to previously introduced climate change compatibility tests into production generally—quite an omission. Including only LNG presents a serious problem. We acknowledge that substantial amounts of natural gas come into the UK from Norway via the pipeline. The production of that gas is substantially cleaner than that of UK natural gas. Indeed, we need to be sure that managing the decline in demand for gas is at the heart of a successful net-zero transition. The best and fairer test would be to consider gas imports in the round.

We are trying to amend a Bill that is deeply flawed, as I have previously recognised. I recognise the opposition of the noble Baroness, Lady Jones, to the Bill as a whole. I believe that this a simple way in which we could make some improvements; I look forward to the Minister’s comments with interest.

[Lord Callanan (Con)]

The noble Baroness, Lady Jones, tabled notice of her intention to oppose Clause 1 standing part of the Bill so let me begin my remarks by briefly outlining the purpose of that clause. Under the Petroleum Act 1998, offshore oil and gas licences are administered by the Oil and Gas Authority, which is operating as the North Sea Transition Authority. A seaward production licence grants exclusive rights to the licensee to explore, bore for and produce oil and gas from the geological formations that lie beneath the UK’s offshore waters, within an area defined by the licence. Additional permissions are required before any activity can take place.

Periodically, the NSTA launches licensing rounds inviting companies to apply for such licences. During this process, interested companies submit bids and licences are awarded to bids that promise to ensure the economic recovery of the UK’s oil and gas resources, while of course supporting the drive to net zero by 2050. This existing arrangement means that industry does not have certainty as to when—or, indeed, if—the NSTA will launch a new licensing round. This clause provides that certainty by amending the Petroleum Act 1998 to place a duty on the NSTA to invite applications for seaward production licences in each annual period, which runs from October to September each year. This is subject to two tests being passed: that the average carbon intensity of domestic UK gas is lower than the average carbon intensity of imported liquified natural gas; and that the UK remains a net importer of both oil and gas.

Together, these tests, which will be conducted by the NSTA, will ensure that the annual duty on the NSTA applies only where this supports our wider energy security and energy transition objectives. If the annual duty is triggered, the NSTA proceeds with the current licensing process. It will remain a matter for the NSTA as an independent regulator to decide how many and which blocks or part-blocks to offer for applications—with a minimum of one block—and to ensure and apply the appropriate criteria for determining those applications. It will remain the responsibility of the NSTA to decide whether to offer and grant any licences at the conclusion of that process and whom to offer them to; the NSTA will retain the discretion to grant licences outside of this new annual process in the usual way where needed.

I assure noble Lords that the offering and granting of licences under the new annual process will remain subject to the existing rigorous environmental regulatory requirements. These include the obligation written into the NSTA’s strategy to assist the Secretary of State in meeting the target of net zero by 2050. Indeed, I want to be clear that nothing in this clause contradicts our steadfast and, of course, legally binding commitment to achieving net zero by 2050. We do not need to choose between either delivering net zero or supporting our domestic oil and gas sector; the two things are not mutually incompatible.

Amendments 11, 13, 14 and 16 in the name of the noble Baroness, Lady Jones, and Amendments 12 and 15 in the name of the noble Baroness, Lady Blake, seek to amend the carbon intensity test. This test looks at historical carbon dioxide emissions from the production and supply of natural gas during an assessment period spanning the preceding three years. The test is passed if, during that timeframe, per unit of energy, the carbon emissions of producing gas domestically were lower than the average carbon emissions from the production and delivery of liquefied natural gas from all geographic locations.

The amendment put forward by the noble Baroness, Lady Jones, seeks to change the test to include in the comparison all imported and produced petroleum products, including crude oil, and all forms of natural gas. The amendments put forward by the noble Baroness, Lady Blake, seek to include an assessment of the carbon intensity of all imported natural gas.

It is important to recognise that the markets for oil and gas work very differently; it is not possible to make the same comparisons for oil as it is for gas. In the case of gas, we have a choice either to maximise domestic production or to import more. The more gas we produce domestically, the less we need to import; that seems obvious to me. For oil, we do not have that same choice because oil has to be refined before it is used. For historical reasons, UK oil is generally processed abroad—predominantly in Europe, where our production supports the energy security of our European allies. So a comparison of the carbon intensity of imported oil versus domestically produced oil would be the wrong one to make.

Turning to the test for gas, LNG has been chosen as the relevant comparator as it is a critical marginal source of energy, providing an essential buffer source—especially in winter, when gas demand is higher. Over the past decade, LNG has become an increasingly important method of moving natural gas to market. This will only intensify in the coming years because UK natural gas production peaked in 2000 and the UK has been a net importer since 2004 in order to meet domestic demand.

It is fortunate that some of the UK’s gas imports, in particular pipeline imports from Norway, have relatively low production emissions. However, it is a fact that Norwegian production, like our own, is declining. We will still need gas in the coming years as we transition to net zero. With both UK and Norwegian production declining, it is likely that LNG will play an increasingly important role. During periods of high demand in winter, LNG is a key, flexible source of supply; this role will only increase over time as UK and Norwegian production declines. Producing less domestically means importing more carbon-intensive LNG, which is why a comparison with LNG is the right one to make, in our view, and why we have included it in the Bill.

With the explanation I have been able to provide, I hope that it is clear why the test focuses on LNG and not comparators with oil, which is completely different, or other forms of gas. I therefore ask the noble Baroness to withdraw her amendment.

[Baroness Jones of Moulsecoomb (GP)]

It is hard to summon up the energy to rebut anything. What the Government proved to us yesterday with the Rwanda Bill is that they are prepared to deny reality. So I beg leave to withdraw my amendment.

--- Later in debate ---

[Lord Lennie (Lab)]

My Lords, I thank everyone who has spoken in the debate so far. I thank the noble Earl, Lord Russell, for his proposal about omitting Scotland from the Bill, and the noble Duke, the Duke of Montrose, for his horrified response to the proposal to omit Scotland from the Bill. I am not sure about the debate on Scotland, to be honest, but on balance I think I would keep Scotland in the Bill. I say to the noble Baroness, Lady Jones, that I can see why these amendments would delay the Bill coming into effect, which would not be a bad thing. It would be better if the Bill were not here at all, but, hey, we cannot have everything we want.

The Government have admitted that the Bill will not take a penny off energy bills and will do nothing for energy security, because oil and gas are sold on the international market. The Bill will send precisely the wrong signals to investors about the UK’s commitment to the green transition: Amanda Blanc, chief executive officer of Aviva said that new oil and gas drilling

“puts at … risk the jobs, growth and the additional investment the UK requires to become more climate ready”.

The Bill has been slammed from many quarters, including some surprising ones, such as Theresa May, former Prime Minister. The noble Lord, Lord Browne, former chief executive officer of BP, said it

“is not going to make any difference”

to Britain’s energy security.

Annual licencing rounds will not boost the UK’s economy, as North Sea oil and gas is already in decline, as the Minister confirmed, and over the next decade, in Scotland and England, there will be 25 new jobs in clean energy for every job that is lost in oil and gas. That is what we have to secure: the transition of workers from oil and gas to the new green, clean energy. More extraction in the North Sea will not improve any security or lower energy bills. Remaining reserves are mostly oil, not gas, and 78% of that oil is exported, as it is not in the right form for use in the United Kingdom. The UK is already feeling the devastating impact of climate change, and granting licences simply amplifies the effects. Campaign groups have indicated that the current licences will send “a wrecking ball” through the UK’s climate commitments.

[Lord Callanan (Con)]

First, I thank noble Lords for their brevity on this group.

Amendment 20 seeks to amend the Bill to exclude Scotland. Of course, the vast majority of offshore oil and gas activity takes place off the coast of Scotland to the benefit of all citizens across the United Kingdom. Excluding Scotland from the scope of the Bill, which I understand is the intention of the amendment, would significantly undermine the benefits that the Bill is intended to create. It would risk causing unnecessary confusion for industry and create considerable complexity for the independent regulator. This is particularly true as we transition towards a low-carbon economy and workforce.

As I have already mentioned in previous groups, a report by Robert Gordon University found that over 90% of the UK’s oil and gas workforce have medium to high skills transferability to the offshore renewables sector. Many of those, of course, are in Scotland, where OEUK estimates that over 90,000 jobs are supported by the oil and gas industry. If we rush the transition, or create additional uncertainty in the investment environment, we risk losing the jobs and skills that we will need as we scale up the clean technologies needed to realise that crucial net zero target.

Paying Polluters: UN Report

Lord Callanan Excerpts

Monday 22nd April 2024 Lords Chamber

[Lord Browne of Ladyton]

To ask His Majesty’s Government what assessment they have made of the United Nations Special Rapporteur report on Paying polluters: the catastrophic consequences of investor-State dispute settlement for climate and environment action and human rights, published on 13 July 2023.

[The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)]

My Lords, investor-state dispute settlement mechanisms offer investors an independent means of legal redress to seek compensation following a breach of international investment agreements. The report notes that, outside the UK, investors have brought ISDS claims against climate change measures; however, the UK has not faced a successful ISDS claim. On 22 February we announced withdrawal from the energy charter treaty, to avoid remaining in a treaty not aligned with our energy security and net-zero ambitions.

[Lord Browne of Ladyton (Lab)]

My Lords, on 7 December we had a debate on a Motion moved by the noble Baroness, Lady Hooper, on Latin America. In the context of our trade deal with Colombia, my friend, the noble Baroness, Lady Coussins, raised the issue of the inherent manifold injustices of the ISDS. The Minister responding to the debate, the noble Lord, Lord Ahmad, wrote in response:

“ISDS is an effective means of resolving … disputes”,


and the Government are

“content with the standard of protection”

provided. So it is surprising that none of the free trade deals concluded since Brexit contains an ISDS—and the absence of one is an explicit goal of our negotiations for a UK-Canada deal. What is the Government’s view of an ISDS as a means of resolving disputes? If they have shifted their view, what are they doing to ensure that their new approach is reflected in trade with Colombia?

[Lord Callanan (Con)]

This is a complicated area. Of course, these treaties are bilateral, and they also help to protect the investments of UK companies investing in other overseas territories. However, the UK’s investment policy is designed to protect the UK’s right to regulate in the public interest, and so far we have been successful in that, in that we have not seen any successful claims against us.

[Baroness Coussins (CB)]

My Lords, the UN Working Group on Business and Human Rights has said that the ISDS mechanism incentivises investor irresponsibility. Currently there is a case of a UK-listed company using the ISDS in Colombia in a way that undermines the fundamental interests and rights of the Wayuu indigenous people. As penholder at the UN for the Colombia peace process, what are His Majesty’s Government doing to discourage such activity?

[Lord Callanan (Con)]

I thank the noble Baroness for her question. I cannot comment on cases that are currently ongoing, but we will certainly bear her comments in mind when we consider our policy on this matter.

[Earl Russell (LD)]

My Lords, with fossil fuel and mining industries already having won more than $100 billion in awards and at least 175 treaty-based ISDS cases closed or pending that are directly related to environmental measures, does the Minister agree that foreign investors are using the dispute settlement process to seek exorbitant compensation from states that seek to strengthen their environmental protection? What actions are the Government taking with partners and allies on the international stage to try to find solutions to these problems?

[Lord Callanan (Con)]

As the noble Earl is probably aware, there are discussions in the OECD at the moment about the use of these clauses. As I said, we are responsible for the ones that we have signed, recognised and arbitrated against, and we very carefully ensure that these clauses protect our right to regulate in these circumstances on energy and climate change matters. The success of that has meant that we have seen no successful claims against the UK.

[Baroness Blake of Leeds (Lab)]

My Lords, while we will of course hear a lot about the importance of investor confidence, it is as important to ensure that Governments, particularly of less affluent and more vulnerable nations, are able to fulfil their climate commitments. It is estimated that those Governments fulfilling their commitments under the Paris Agreement might be liable to pay up to $340 billion in future cases under this system. Can the Minister tell us the Government’s assessment of what the impact of this system will be on limiting the increase in global temperatures to 1.5 degrees centigrade above pre-industrial levels?

[Lord Callanan (Con)]

The noble Baroness is using the generality to refer to the specific. ISDS clauses are very useful in a whole range of different areas. I accept her point that there is some evidence of their misuse in the case of energy and climate change policies, and we will work with international partners to see how this can be mitigated. We are very careful to make sure that the ones to which we agree preserve our right to regulate. Other countries take their own decisions, of course.

[Lord Sikka (Lab)]

My Lords, many developing countries are handicapped by clauses in foreign direct investment agreements—sometimes called stabilisation clauses—that forbid the hearing of disputes in local courts. As a result, local courts’ lawyers are unable to develop the expertise or necessary institutional structure to combat corporate power. What steps are the Government taking to ban the inclusion of such clauses in FDI agreements, at least for UK companies?

--- Later in debate ---

[Lord Callanan (Con)]

All such agreements are different. Many rely on international arbitration panels that are appointed by the complainant company and the defendant company with an independent chairman. We are very careful in how we regulate these matters and which clauses we agree to. As I said earlier, we will work with other countries to look at their particular disputes as well.

[Lord Purvis of Tweed (LD)]

Is the Minister aware that one of the concerns around ISDS is that it is a secret process, as opposed to a multilateral judicial process that is more transparent? Given the fact that ISDS can be used against small emerging economies and deliberately facilitated by legal funds based in the UK, what discussions have the Government had with our legal community to ensure that ISDS is not just about protecting UK interests and that the legal community in the UK is not using it strategically against emerging economies that do not have the capacity and secret processes to defend themselves?

[Lord Callanan (Con)]

As I said, ISDS clauses work both ways. They also seek to protect the interests of UK companies investing in other overseas economies. Any state that wishes to regulate against the interest has to prove that it is being transparent and fair, not discriminating against foreign investors, et cetera. All these criteria are used to make judgments about whether cases will proceed.

[Lord Davies of Brixton (Lab)]

We discussed ISDS arrangements in the context of the CPTPP Bill recently, and a number of noble Members expressed concern about the impact on environmental standards. The response from the Government Front Bench was, “Not to worry; it won’t be used in this way”. That is clearly not the case with Colombia. It has faced at least 21 cases under the ISDS process, mainly for mining companies and mainly questioning the effect on the country’s environmental standards. Given the pressure that Colombia is under in its transition to full democracy and peace, would the money that it inevitably has to spend on defending these cases, and in some instances paying damages, be better spent on maintaining the peace process?

[Lord Callanan (Con)]

I am sure it would, but we are responsible for what clauses we agree to in the UK. We always protect our right to regulate, and we seek not to take actions that are arbitrary or discriminatory against foreign companies. Ultimately, it is a question of what clauses Colombia agrees to, what criteria it uses and how it will be arbitrated, so it is a difficult question to answer.

[Lord Kamall (Con)]

My noble friend will be aware that when we were both in the European Parliament we used to debate the issue of ISDS, and that one of the reasons that ISDS was asked for by investors was to ensure they had confidence, particularly when there was no confidence in the local legal system. The other side of that is that big companies were perceived to get preferential treatment in being able to go to the ISDS process, rather than through the legal system. We have to look at the trade-offs, and maybe one of the things that my noble friend’s department could look at is the impact of not including ISDS agreements and how much that would affect outward or inward investment in these countries.

[Lord Callanan (Con)]

My noble friend makes a powerful point; of course, it works both ways. We want to protect the interests of UK companies, which sometimes operate in very hostile, non-democratic countries with unclear or murky legal systems. By the same token, we need billions of pounds of investment into the UK—we are the top European destination for inward investment—to help us in our energy and climate change transition, so it is important as well that we demonstrate that we are liberal and open to companies investing here in the UK. These clauses help to deliver that, but they need to be structured in the right manner, transparent and liberal.