Lord Carter of Coles
Main Page: Lord Carter of Coles (Labour - Life peer)EU: Energy Infrastructure (EUC Report)
Lord Carter of Coles Excerpts
Lord Carter of Coles
That the Grand Committee takes note of the Report of the European Union Committee No Country is an Energy Island: Securing Investment for the EU’s Future (14th Report, Session 2012–13, HL Paper 161).
Lord Carter of Coles
My Lords, I chaired Sub-Committee D—the Sub-Committee on Agriculture, Fisheries, Environment and Energy—when this report was produced at the end of the previous Session. I have since stepped down from that position. I am therefore very grateful to the noble Baroness, Lady Scott of Needham Market, for allowing me to introduce this report today. I should also like to record my thanks to the Government for their comprehensive response to our report and for their positive engagement with us during the inquiry. I should be very grateful if the Minister would be kind enough to pass on our thanks to the Secretary of State for giving evidence to the committee about some of these issues on 15 July.
Sir John Beddington, the Government’s former Chief Scientific Adviser, famously described an imminent “perfect storm” of water scarcity, food shortages and energy insecurity due to a global population projected most recently to reach 9.6 billion by 2050. Our two major inquiries prior to this were on EU freshwater policy and agricultural innovation. We therefore considered it appropriate to look at the third strand of the food-water-energy nexus and seized the opportunity to do so after we assumed responsibility for energy last year.
Another compelling reason to undertake the inquiry was timing. We knew that the European Commission planned to review the EU’s energy and climate change policy this year. I was therefore delighted that we were able to publish in good time, to respond formally to the Commission’s consultation. Of course, we were also mindful of an increasingly intense domestic debate about energy. This culminated in the Energy Bill, to which I know many of your Lordships are currently devoting considerable time and, obviously, a great deal of energy. We hope that our report has helped to place the domestic debate in the wider context of EU policy.
More generally, we were interested to develop a greater understanding of some of the emerging debates in this area. The first was whether shale gas can have a transformative effect in the EU, similar to the one that we have seen in the United States. Secondly, is the EU emissions trading system—the ETS—dead, or is it drowning, or is it just desperately in need of reform? Thirdly, will carbon capture and storage be developed, and why is it remaining embryonic? Fourthly, what policy framework does the EU need to take a lead internationally? Tying all those things together, is it possible to deliver the triple challenge—the so-called trilemma—of decarbonising, energy security and competitiveness?
To dwell briefly on the latter point, it was extremely important to us to ground this work in the reality of our current economic situation. For that reason, we emphasised that policy solutions needed to be presented not as an environmental policy incurring significant and necessary cost, but as an economically beneficial solution.
During the course of our inquiry I met several journalists, and even those experienced in this policy area pressed me to explain why EU energy policy was at all relevant to the UK. The basic answer is encapsulated by the title of our report: No Country is an Energy Island. Yes, EU member states retain the right to decide on their own energy mix, but the reality is that one country’s choice has implications for others.
Europe is already joined up. The UK has gas interconnectors with Norway, the Netherlands and Belgium and an electricity interconnect with France, which seems to be a hub now as it has the interconnectors with Spain, Germany and many other parts of Europe. It is rather ironic that Germany, in its hasty move to go from nuclear, at certain times of year will probably rely on French electricity generated from nuclear power. Interestingly, too, looking at the environmental consequences, we noted that Germany managed to move its power from the north, where it was plentiful, to the south by wheeling it through Poland and the Czech Republic, apparently rather than building very big high-transmission lines across its own country.
The EU aspires to completion of a single energy market by 2014. Given where we are, there is a considerable debate about whether that will happen, but it places importance on investment in cross-border infrastructure and interconnections between member states and has clear implications for the UK’s capacity mechanism, to which I shall return in a moment.
Investors, on whom this whole agenda relies, are international in nature. Most of our energy companies are not British. Clear efficiencies can be achieved by working together on research and innovation rather than duplicating efforts; we have seen duplicative effort wasting money and resources many times. Lastly, we have shared environmental objectives, which are clear at EU level, and a common desire at this time to boost jobs and growth.
I turn to investment. As I have already indicated, we grounded the report in the economic reality of our current situation. It was clear to us that investment in energy, particularly in low-carbon energy, can bring rewards in both jobs and growth. However, that investment has to be unlocked, unleashed and brought forth. We discovered that this is no easy task and, frankly, is the key issue to be tackled. Private sector share values of generators have slumped across Europe, and the public sector across the EU is hardly in a position at the moment to make a significant contribution. Ultimately, therefore, we will be heavily reliant on institutional investors, those who manage our savings and pensions, to provide that necessary investment. I was interested to read in the Government's response that a meeting will be convened between the Commission, member states and investors later in the year. Is the Minister in a position to tell us more about the meeting, including some of the hoped-for outcomes?
In addition to tackling the issue through that type of dialogue, it was also clear that investors would like clarity on the direction of policy. The Energy Bill is designed to provide some clarity in the UK, but UK policy does not sit in a vacuum distant from the EU’s own energy and climate change framework. Our core policy recommendations related to that framework, setting policy through to 2030 at least, with both clarity and urgency. The Government have already made their position clear, including a commitment to a unilateral EU 40% emissions reduction target, with the option of a 50% target conditional on an ambitious international agreement in Paris in 2015. The committee strongly welcomed this strong commitment by the Government.
Where we differed from the Government was on the topic of more specific targets. A target is an intervention in the market and is therefore not ideal. On that, we agree with the Government. However, it was not possible for us to ignore the weight of evidence suggesting that investment, particularly in low-carbon energy, requires some sort of regulatory signal, and that the 2020 renewables target has been pivotal—in fact, central—in boosting investment in that sector and, critically, driving down the costs of those technologies.
We therefore recommended the setting of a target on the minimum level of energy to be provided from renewable sources by 2030. This may not be politically possible, so we would recommend that we certainly have an electricity-specific decarbonisation target.
Quite simply, we struggle to understand what commitment the EU can show to low-carbon electricity without some form of renewable or low-carbon power target. On a purely theoretical basis, the Government’s argument has validity, particularly for the UK energy market, supported by the energy market reform. However, we find ourselves in an EU investment crisis, where it is time for action and not theory. I would therefore very much welcome the Minister’s comment, not on the ideological principle of a technology-neutral approach in the UK, but on precisely how the EU policy will demonstrate that the EU is committed to low-carbon power and, above all, attract the necessary investment.
I will now say a few words about the ETS, the emissions trading system. We devoted a lot of attention in our inquiry to the future of the emissions trading system. I remind everybody that this scheme gives companies the option of either buying the right to emit carbon, or alternatively taking action to reduce emissions so that there is no need to buy the emissions allowances. Of course, carbon needs to trade at a price that is sufficiently high to influence the choices made by emitters. As your Lordships are aware, this has not been the case. After trading at around €30 per tonne of carbon in 2008, earlier this year the price dropped to less than €3. Clearly, there are a range of reasons for this. Probably the most specific reason is the recession, which has driven down demand. The classic case of a high level of supply and a low level of demand has led to this.
The ETS must be strengthened if it is to survive. Frankly, we see that as the only realistic option, because we could not envision an EU-wide carbon tax that would meet with general approval. The recent proposal to take surplus allowances out of the market—with so-called backloading—and put them back later has merit as a stop-gap proposal, but frankly that is as far as it goes. In the longer term we recommend the introduction of a floor price—in other words, a minimum price above which carbon would trade. Critically, this would give certainty to both investors and national treasuries, to which the proceeds of the auctioning accrue. Clearly, carbon would ideally trade above the floor price. For that to happen the overall ceiling on the number of allowances needs to be tightened. There must be a clear trajectory for tightening, so we can take this down gradually and manage the market.
Those are our recommendations for ETS reform. We consider that they can be presented as part of a package of measures to attract new investment and support efficiency and innovation. I would welcome any light that the Government can shed on the progress they have made on establishing their own policy on the future of the ETS, particularly as the proposals for change are expected from the Commission towards the end of the year.
I turn now to carbon capture and storage. One reason why it is so important to strengthen the ETS is that a proportion of the allowances was meant to provide a source of funding to support carbon capture and storage demonstration plants. The low price of carbon has meant that the available pot of money has been much smaller than anticipated, which contributed to the lack of demonstration plants in the EU.
As a committee, we are very supportive of CCS. Realistically we can see the challenges, but we would like to see the development of existing and innovative new low-carbon forms of energy. This is critical. However, it is inevitable that for the foreseeable future fossil fuels will deliver the majority of the EU’s energy. We have only to look at cheap coal arriving from America, or the burning of lignite in northern Germany, to see that there is still a massive dependence on fossil fuels. It is because of this dependence that the lack of progress in the development of CCS technology in the EU is deplorable. Unless we get this to work, the whole of our future policy must be under question.
We see room for a regulatory approach to be developed at the EU level, including a provisional target date for requiring CCS to be applied to any new fossil fuel power stations, based of course on the results of the pilot study. Disappointingly, the Government did not respond directly to that recommendation in our report. Yes, the UK’s emissions performance standard was mentioned, but my understanding is that this will not affect gas. I would therefore be grateful if the Minister could explain the Government’s position on potential EU regulatory action to encourage the adoption of CCS technology.
I turn to shale gas, a matter of enormous interest in our report and in recent months. We wished to understand from the outset whether the US shale gas revolution could be repeated in the EU. The answer, we concluded after listening to a wide range of witnesses, was that it was unlikely in the short to medium term.
We were told that the United States has 50 years of good seismic data, a conducive land tenure system and has drilled 40,000 wells looking for gas. At the time of our report, fewer than 100 wells have been drilled in Europe, so there is quite a long way to go if we are to have a shale gas revolution. There is undoubtedly potential for its exploration—we see this happening in the UK and possibly Poland—but the creation of an expectation that the EU can compete on the basis of cheap fossil fuels in the short to medium term would undermine the policy stability that we need to attract investment. It would be one more uncertainty if we hung our hats on that hope.
We welcome plans by the Commission to develop a framework for the sustainable exploitation of shale gas, but, as with many things in life, we should be careful what we hope for. At the moment, shale gas in the United States is selling at between $3 and $4 per billion BTUs. The major exporting countries—Russia, Qatar and Algeria—rely on a price of $10 to $12 in Europe and maybe $15 in Asia. We can only shudder to think—we saw it the last time the gas price collapsed in the effect on Russia—of the geopolitical consequences of a dramatic reduction in gas prices. I am sure that views will be expressed on that.
Before I close, it would be remiss of me not to draw your Lordships’ attention to the issue of capacity markets and interconnection. We support greater interconnection between EU electricity markets, and I have already touched on the fact that it exists widely now. More effective interconnection will also reduce the need for member states to develop their own national mechanisms to guarantee energy capacity, potentially at a higher cost than if the single energy market were to be working effectively. We welcome the Government’s approach to the UK’s capacity mechanism as a short to medium-term provision. It may or not be needed once interconnection and demand management have improved, but it is greatly to be welcomed.
I have spoken today on behalf of the committee, but have been able, frankly, only to canter over a range of subjects and hardly to touch on others. This does not do justice to the meticulous work of the committee over 10 months. I look forward to colleagues pursuing the points that I have not covered.
To conclude, I return to Sir John Beddington’s perfect storm:
“We can’t ignore food, we can’t ignore water, we can’t ignore energy demands. What will the world of 2030 look like if we don’t mitigate these things?”.
The year 2030 is only 17 years away; it is not a long time in terms of the challenge that we face. That is the backdrop to what I expect to be a colourful, interesting, informative and constructive debate today. I beg to move.
Lord Carter of Coles
My Lords, I conclude by thanking all noble Lords for their very eloquent and extremely well informed contributions. The debate demonstrated the breadth of issues within the policy area. It touches all levels of government and every single individual.
The contributions got off to a cracking start when the noble Baroness, Lady Rawlings, took us straight to fracking. I am in the camp that rather approves of the word “fracking”. However, “subsidiarity” is a separate matter to which we should return. My noble friend Lord Whitty commented on the failure of the single market and the fact that too many changes in policy were detrimental to investment going forward. The noble Lord, Lord Maclennan, made some very telling points, but the one which stuck with me was that the EU had not made a good fist of its energy policy. He put it very simply, and it points to the fact that we need to do something about this.
The noble Lord, Lord Cameron, made several very powerful and well informed points. I will take away his image of the grid in Europe becoming like the cell phone. I fervently hope that it will happen. It was a wonderful analogy and we must do everything we can to make it happen. As always, I learnt something from the noble Baroness, Lady Byford. She found that the US data put us at third in energy security, and I am going to scurry off immediately and read that report. She also made a very telling point about information on the return on investment in renewables, which we should have looked at sooner.
The noble Lord, Lord Giddens, made the point very powerfully that the EU needs to do something at this time of economic chaos, and this should be one area of it. I was very taken with the Minister’s point that we should look to Germany because there are things to learn. We must learn from every place we can. The noble Baroness, Lady Parminter, with her usual clinical focus went straight for the regulatory framework for shale gas and she made a very important contribution.
The noble Lord, Lord Kerr, landed a characteristically elegant punch on the matter of oil, which is absolutely right, as is his knowledge of the treaty. I disagree with him about two things. The whole concept of state aid seems to me to need examining. The idea that a state in a market can subsidise one generator of power to the disadvantage of the nation seems rather strange. The whole idea that we should not have consumption targets seems to be something that we could debate another time.
The noble Earl, Lord Caithness, always finds a good point. He made a point about forecasts, and one thing is very clear. All the evidence we have had over time suggests that forecasting is incredibly difficult. Even in the life of our inquiry, and subsequent to it, the shale gas forecasts were revealed to be incredibly wrong. The noble Baroness, Lady Howarth, made a point about human behaviour. Her distinction between the need for pure science and social science was incredibly well made, and is something that all politicians seeking to drive change must pay attention to. How do we carry people with us? How do we balance popular accord with the need to go forward?
Very importantly, my noble friend Lady Worthington brought her experience in this whole area, particularly her understanding of CCS. Her suggestion of further inquiry for the committee obviously will be taken away. Above all, I thank the Minister for setting out the views of the Government. It was most helpful. I return to our thanks for the response to that report. I also thank everybody who gave evidence.
I thank our specialist adviser Professor Michael Grubb, the two clerks to our committee, Aaron Speer and Kate Chapman, and Alistair Dillon, our researcher. They all displayed great humour, skill and diligence in helping us with this report. This debate on EU energy and climate change is a critical point, and I am sure noble Lords will agree that the delay and the failure to do things now will cost us dearly in the future. At the risk of parodying John Donne, I hope that when the energy bell tolls it does not toll for us.