Energy Bill
Debate between Lord Cameron of Dillington and Lord Roper
Lord Cameron of Dillington (CB)
My Lords, hotfoot from Ethiopia, I rise to support this amendment. Unlike the noble Earl, Lord Caithness, I believe that this is a fallback amendment which cannot in any way harm either the general thrust or the detail of the Government’s policy, as spelled out in the Bill. As I said on Report, and the noble Lord, Lord Jenkin, has made amply clear this afternoon, the Secretary of State continually talks the talk about the importance of competition to all parts of the energy industry, yet the Government seem strangely reluctant to walk the walk when it comes to the Bill. I remain rather mystified by that.
I am sure that the noble Lord, Lord Jenkin, will respond to the comments of the noble Earl, Lord Caithness. However, the amendment refers to drafts of instruments being approved by each House of Parliament, so I do not see that the Secretary of State would be denied democratic freedom under the revolutionary scenario that the noble Earl made out. I hope that the unassuming, safety-net nature of the amendment will prove an exception to the Government’s reluctance to walk the walk in respect of competition.
Lord Roper
My Lords, this proposed new clause follows up debates we had in Committee and on Report and is, I believe, a matter of considerable importance. I shall therefore listen with great care to what the Minister has to say in reply.
Energy Bill
Debate between Lord Cameron of Dillington and Lord Roper
Lord Roper (LD)
The noble Lord, Lord Broers, and my noble friend Lord Deben have widened the amendment tabled by my noble friend Lord Jenkin to other, rather important issues on competition in the course of this Bill. Although it may take us a little time to get from six to 60, or even 600, this amendment is important because of the immediate impact upon independent generators when the capacity mechanism comes into operation next year.
As my noble friend Lord Jenkin points out, the Bill and the proposed rules for the capacity market would make it virtually impossible for independent generators to raise project finance and compete with the big six. My noble friends Lords Jenkin and the noble Lords, Lord Cameron of Dillington and Lord Berkeley, have talked to a number of them and they really do not see how they would do it. We have also talked to their bankers and they do not see how this would be possible for independent generators. That is why it is very important that the regulations and other provisions for the capacity market are drawn up in a way that is fair to smaller generators.
As my noble friend Lord Jenkin has said, we would obviously prefer it if the Minister were able to accept these amendments today. However, there may well be technical problems with them, so we hope that if she were not able to accept them today, she would be able to give us some indication that she will bring back something covering this ground at Third Reading.
Lord Cameron of Dillington (CB)
My Lords, as this is my first intervention on Report, I must declare an interest as a farmer with a renewable scheme on my land.
Most of what needs to be said in favour of these amendments concerning competition has already been said and as a co-signatory I very much support them. However, I want to underline the fundamental point involved. It has become obvious to anyone reading newspapers in recent months that the electricity industry needs a huge amount of investment. In Europe it amounts to trillions of euros, and in the UK it is hundreds of billions of pounds. This investment is needed for generation, transmission, distribution and supply. If we do not have that investment, to believe some of our journalistic forecasters, we are likely to get power cuts with all the economic and social tragedies which that might involve. This investment cannot be provided by the government. It has to be provided by the private sector; that is, you and me or, rather, our pension funds in most cases.
The other issue on which anyone reading our newspapers in recent days and weeks will have come to a conclusion is that the oligopoly of the big six is not the political flavour of the month. While being aware that the root of the problem is the rise in the price of gas—I was going to say feedstock—there is something to be said for the fact, which I read in a newspaper, that this oligopoly has some sort of stranglehold. We have a vertically integrated oligopolistic situation within our electricity industry, as the noble Lord, Lord Jenkin, has pointed out. If you wish to deal with this stranglehold, it is crucial that you stick to the golden rule of in no way deterring investment in the panoply of the electricity industry. Investment is crucial. Either freezing electricity prices or putting a windfall tax on the big six does not conform to that rule.
What would conform to that rule, which you have to do, is to increase competition, which ensures that everyone can compete. As the noble Lord, Lord Deben, has said, that could involve very small competitors at every stage and in every sector of the electricity supply chain. Competition is vital to the success of the Bill and to the entirety of electricity market reform. The Bill will be judged on its long-term effects on the security of supply and on the decarbonisation of the electricity and, above all, on how effective it is attracting competitive investment.
Energy Bill
Debate between Lord Cameron of Dillington and Lord Roper
Lord Roper
My Lords, as my noble friend Lord Jenkin has said, I moved a similar amendment in Grand Committee. As he has also said, we felt that the Minister’s reply on that occasion was not as helpful as it could have been. Although the wood panel industry is not large, it has a significant annual turnover and employs both directly and indirectly a significant number of people. If it is possible for appropriate guidelines to be issued in Scotland, it is not totally clear to me why it is not possible to have them here. Obviously, it is a good thing that a voluntary disclosure agreement now exists, but I think that the industry would prefer there to be a requirement regarding disclosure rather than this voluntary agreement. Like my noble friend Lord Jenkin, I shall be interested to hear the Minister’s reply.
Lord Cameron of Dillington (CB)
My Lords, I hesitate to speak to the amendment because I am not against it and I sympathise with the intentions of the noble Lords who are proposing it, particularly if it affected the price of construction timber and made housing more expensive, which would not be good. However, I advocate a bit of caution. I have recently come across a company which is trying to build four medium-sized biomass-powered electricity generating stations using brash, tops, coppice, sawmill offcuts and other non-value timber. They are putting them at different ends of the United Kingdom so they have good local sources for the timber. Each power station will be producing between 12 and 25 megawatts and will cost about £60 million. The material is sustainably sourced and will encourage the use of thinnings. For those noble Lords who do not know, thinnings are quite often not taken out because it costs more to do so than to leave them. If you could take more thinnings out it would create more high-value timber for construction or other uses.
I sympathise with the amendment but if it were applied across the board, with a generalised percentage, it would cripple a highly sustainable, beneficial biomass-generating business before it got off the ground. Before an amendment of this nature is enacted, it either needs to be reworded or we need a statement from DECC guaranteeing a flexible interpretation.
Energy Bill
Debate between Lord Cameron of Dillington and Lord Roper
Lord Roper
My Lords, Amendment 55AB is also in the names of my noble friend Lord Jenkin, who unfortunately is unable to be with us today, the noble Baroness, Lady Liddell of Coatdyke, and the noble Lord, Lord Cameron of Dillington. The amendment, which is fortunately grouped with the very interesting amendments that the Government have tabled on the same subject, tries to guarantee the independent renewable energy generators who have a vital role to play in ensuring that we have secure, affordable and sustainable energy in the United Kingdom.
The independent generators feel—they certainly did before the Government tabled their amendments last week—that the Energy Bill puts at risk their ability to raise the funds necessary to invest in vital infrastructure because it does not provide a clear route to market for them once they have carried out that investment. They feel that the Bill effectively entrenches independent generators’ dependency on the big six through their power to provide long-term power purchase agreements. They therefore feel, and have felt for some time, that the lack of effective competition for those long-term power purchase agreements means that the terms available to the independent generators make their position unviable and make it that much more difficult for them to raise the funds necessary to carry out the investment that we all believe is important.
This is a problem, in their view—I realise that others may have a different analysis—of a structural market failure that will not be solved by Ofgem’s liquidity reforms. Nor will the move to a new structure of CFDs provide to a market source the sort of competition that would enable them to obtain PPAs. This problem of market access by the independent generators was, I understand, first raised by them with the department two years ago when it was first announced that the renewables obligation was to be withdrawn and replaced by the generation support mechanism that we have been discussing this week.
The failure to tackle the problem earlier reflects to some extent—I do not want to be unkind; I understand the difficulties that the department has had in trying to model these problems—inadequacies in the assumptions that were made about how the market would operate in this situation. There was an assumption that it would operate rather more effectively and that, therefore, there was no need to guarantee a route to market for the independent generators.
Of course, those of us who have had a chance to study the Baringa report on which the Government’s amendments for a backstop PPA proposal are to some extent based, was received by the department in its final form less than 10 days ago. Therefore, one understands why there is still a great deal more work to be done before final decisions can be made as to the way in which a backstop could be set up. On the other hand, the independent generators feel that there is an urgent need for the Energy Bill to be amended in such a way that it includes a solution which incorporates plurality in the market for PPAs from the beginning. It will not be possible for them to make applications for CFDs without having some assurance that they will be able to market what they produce on that basis.
As was discussed in Committee in the other place, many in the industry prefer the solution of a green power auction market to solve the problem. The Government have claimed that this would be a more expensive way to achieve the objective. There is, of course, a dispute about that. The independent generators would argue that they could achieve a £2 billion saving for consumers by removing a middleman charge that the current market generates. I am not sure about that but one of the problems that I have, and why this amendment has been tabled in the way that it has, is the complexity of developing the backstop PPA. The more I read the Baringa report, the more difficult I feel this is going to be. That complexity is such that I believe it is important that there should be a backstop in the form of a green power auction market if it is not possible to implement the backstop PPA. That is why this amendment has been put down in the way that it has. If the backstop PPA is not viably implemented and in place when the first CFDs are in operation, the independent generators will be under a clear disadvantage compared with the big six and the foreign state-backed utilities, contrary to what the Minister in the other place pledged in Committee, and UK energy security will be at risk.
According to what we have read in the department’s helpful briefings, the regulations will not necessarily be laid until next year. What we need to hear from the Minister today is an assurance about when they will be implemented so that the independent generators can be sure that they will be available at the appropriate time. With the detail of the backstop proposals still to be finalised, it seems to us necessary that the Bill also empowers the Government to implement as a backstop to the backstop the GPAM, which is the only clearly worked-out solution, and one which could operate, even though I realise it has some disadvantages.
I have a further amendment in this group, which is the traditional amendment with which, I am afraid, I have teased the Committee in the past—that is, the power to make regulations by the affirmative procedure rather than the negative procedure. I am sure that the Delegated Powers and Regulatory Reform Committee would have recommended that provision if it had had a chance to consider these amendments. I beg to move.
Lord Cameron of Dillington
My Lords, I have put my name to this amendment. Our energy markets are dominated on both the generation and supply sides by the big six integrated utilities. Meanwhile, we have a very complicated situation whereby the Government are trying to maintain semi-market conditions in a marketplace that is obviously rigged, and rightly so, in order to decarbonise it and ensure security of supply. As a result, the contortions and complications in this marketplace are mind-boggling, as my noble friend Lord Roper said. It is hard to see how the EMR game will evolve in this respect over the next decade.
One basic principle if we are to have an efficient marketplace is that we need to balance as far as possible the amount of power generated with the demand for that power—with a capacity margin, of course. There is no doubt that the integration of a power supply chain makes achieving that balance much easier but having all the power generated by only a few is not in anyone’s interest. We need as many independent generators as possible and that means they need to be able to secure investment for their projects. The Government recognise both these facts in their amendments in this group.
To touch on the principles involved here, I understand the argument made by some that no business should have the right to make a guaranteed return for its investors, but in the electricity market we are dealing with a special situation. We have to make the big jump from fossil fuels to renewable power. In a competitive, international financial marketplace, with many variable investment opportunities in many less risky and possibly less complicated fields, investors and banks are reluctant to commit to the renewable generation industry without a reduction in the long-term risk. For the sake of our energy security and energy decarbonisation, not to mention our overall economy, we need that reduction in risk and thus that commitment. The Government’s recognition of this in their amendments is very pleasing.
To continue to defend the principles behind the Government’s amendments, it is important to remember that an increased risk inevitably leads to an increased cost of capital, which in turn leads to higher costs for consumers. We do not want that increased risk. Bear in mind that renewable technologies are pretty much all about the cost of capital because after the initial capital cost the actual source of the power—wind, sun, tide or waterfall—is usually free, provided that the management is satisfactory.
So far I could have been speaking in favour equally well of the new government amendments as our own. My only real worry about the government amendments is that, with all the “may”s rather than “must”s, and all the possible provisions that might or might not appear at some undecided time in the future, these amendments descend on one like an amorphous cloud of uncertainty. One recognises that somewhere within them are the right intentions but no one is quite sure how it will all work out. I suspect that we will return to these amendments on Report to get greater clarity.
Returning to our amendments and Amendment 55AC in particular—the noble Lord, Lord Roper, spoke about this—it might be worth touching on the choice between a backstop power purchase agreement, or PPA, and a green power auction market, or GPAM. My own view is that of the two options GPAM is the better one. I would very much prefer it if the Government could keep Amendment 55AC up their sleeve in case their backstop PPA does not do the trick for the investors. I cannot see what harm it would do to have it in reserve. That would make it much easier in future to revert to the existing, proven system. I stress those last three words: the NFPA exists and works. It would be crazy not to put this option in the Bill now just in case investors lose confidence in the backstop powers. It does not matter how confident the Government are that their way will work. It is the confidence of the investors that matters. There is no way of second-guessing the marketplace.
As I said, the existing NFPA is already a proven option and works extremely well selling six-month contracts six months ahead—because it is only for six months. The balancing risk is low for the supplier. They will not get caught out buying too much power at the wrong price that will look silly in five or six years’ time. That is very helpful to the small supplier and therefore encourages greater diversity and competition at that end of the marketplace. That may be why the big six do not like it. Meanwhile, we already know that GPAM creates enough flexibility and reliability in the marketplace to boost the confidence of the investor, who is needed to support the independent generator. All that is already proven.
The other element that persuades me that GPAM is best is that I do not like the idea that the backstop PPA leaves DECC or Ofgem in overall command of the marketplace, setting both the strike price and the electricity floor price. I prefer some semblance of a working market, even though a true market may be some way off. I guess that this is my main preference for GPAM. We all hope that in 25 or 30 years’ time, our reliance on CFDs and strike prices will be considerably less. I hope that we will not need a floor price set by a backstop PPA.
The renewable power industry in all its diversity will be strong enough to stand largely on its own feet, and it is at that point that we will need a real marketplace with as many players as possible to help create competition, both for generators and suppliers, and thus help provide cheap energy. There is more chance of the currently proposed GPAM transmogrifying into a body fit for purpose at that time than a state-controlled backstop PPA. I am surprised that a Conservative Government do not also see that.
I am not saying that we should attempt to create a power marketplace in 2013 that is fit for the 2030s but let us focus now on the needs of today. We should stick as closely as possible to a real market, even if it is at this stage only an embryonic market. Thus, I believe that as a backstop to the backstop, Amendment 55AC is an option that is very worth while considering while we are in legislative mode.