ECO4 and Insulation Schemes

Lord Hunt of Kings Heath Excerpts

Wednesday 29th January 2025 Lords Chamber

[Lord Teverson (LD)]

My Lords, I gather from looking at the press release more than the original Statement that 65,000 applications will be checked through Ofgem procedures. Today I met someone who is affected by this, and I want to emphasise just the worry that the 65,000 or whatever will have over the future of their houses, their saleability, their onward renting or the damages to landlords. This is a real concern.

How many of the 39 companies that the noble Baroness, Lady Bloomfield, mentioned, were part of the TrustMark scheme? That scheme, which I believe all those contractors should have been a part of, is described as “Government Endorsed Quality”. What really worries me regarding future schemes—I know there is a big ambition on the part of this Government to carry on retrofitting—is that there will be a loss of confidence.

The one question I would really like an answer from the Minister on is about what I think is wishful thinking: namely, the Government’s view that all these issues will be replaced or rectified by the original installers. I do not wish to accuse the department of being naive, but let us be clear: the majority building business model is that when you get into trouble, you go into liquidation. I and, I think, other people really want to understand who will then bear the cost of those rectifications where that happens, as I suspect it will quite regularly.

[The Minister of State, Department for Energy Security and Net Zero (Lord Hunt of Kings Heath) (Lab)]

My Lords, I am grateful to the noble Baroness and the noble Lord. The noble Baroness has taken time out from Nuclear Week, which we have both been spending a very enjoyable three days on. She is absolutely right to stress the importance of the scheme. Clearly, there is consensus across the House on dealing with this big problem, as both the noble Lord and the noble Baroness suggested.

I make it clear that we have the evidence of an audit of about 1,100 of those 65,000, and there will now be a massive piece of work to follow up with further audits, which will be overseen by Ofgem. Some of those will be desk based and others will be in-person site visits. There will be a proportionality test to decide how the audits will be undertaken.

The sampling that has been done was geared towards the installers that were thought to be most risky, but the fact is that a significant proportion of that sample showed that there were major issues, which is why we needed to take swift action to conduct further checks and initiate a further programme of remediation. We think it is 38 installers, not 39—a correction has been made by TrustMark. To answer the noble Lord, of course they were all under the auspices of TrustMark, and we are working very hard through certification bodies and TrustMark to require them to remediate the work.

As the noble Lord pointed out, it is a requirement for those schemes to be registered with TrustMark. In the case of those already audited, this is happening. I believe most installers want to do the right thing and do a good job. My understanding is that where issues are being flagged, they are repairing the work, but clearly we are having mechanisms put in place to make sure that the installers deliver on their obligations, and the guarantee system we have acts as a backstop. Clearly, the current system is not working. There is a combination of TrustMark, the companies involved, the certification process and the UK accreditation system—there are a lot of bodies involved and there is not sufficient co-ordination or tight oversight of this. We need to focus on remediation, but then we must move on to establish a better system in future.

On whether remediation will be carried out effectively, we are going to put additional spot checks in across the system to make sure that where insulation faults have been remediated, that work has been done to the required standard. Suppliers have committed to additional checks and monitoring future installations of solid-wall insulation so that householders can be confident that it is done to a better standard. I very much agree that any householder who has learned about this issue will be concerned. They will be concerned about the impact on their home, but also about whether the remediation work will be done effectively.

In terms of information to those households, Ofgem has begun writing to all households that have had solid-wall installation installed under energy company obligation 4 or the Great British Insulation Scheme. As I said, we will be reviewing the quality of all 65,000 solid-wall insulations, and we hope that the vast majority will not have any issues or that any issues found will be minor, but if we see major concerns, we will want action to take place immediately. It is clearly important that we carry out a quality check across all solid-wall insulation under these schemes.

I want to pick up the issue of saleability raised by the noble Lord, Lord Teverson. Clearly, this will be a concern. Householders seeking to sell or perhaps remortgage their home will be worried about lenders’ approach. Our expectation is that the firms that have done this shoddy work must pay for the remediation. Clearly, that must be the principle under which we operate. There is a moral hazard in my saying anything different from the Dispatch Box on that issue.

Looking further ahead, it is clear that the whole system of consumer protection is fragmented and in need of reform. In terms of our overall goal towards net zero and the massive challenge of heating efficiency in our homes, it is essential that in all these programmes the public have confidence in the quality of the installation. That is why what has been discovered has been very disappointing, but we have to take it, look at the whole system and improve it.

[Lord Foster of Bath (LD)]

My Lords, I do not for a minute doubt the Government’s commitment to improving the energy efficiency of existing properties, and I know that they are well aware of the huge task that is ahead of them to meet the 2030 and 2035 targets. However, the Statement makes it very clear that yet more work will have to be done as a result of the problems described in it. Earlier today, I asked the noble Baroness, Lady Taylor, whether she could explain where the staff were going to come from to carry out this work. Now there is an additional problem to be dealt with. The noble Baroness made it very clear that the department is working closely with the Department for Education to develop solutions to this, not least through the apprenticeship scheme, but can the Minister give us a little more detail about what is actually going to arise as a result of those discussions, because many people are deeply concerned that we will not have the staff to be able to carry out the work that arises under this Statement, let alone the work that is urgently needed to improve energy efficiency in other homes?

[Lord Hunt of Kings Heath (Lab)]

My Lords, I was privileged to be by the side of my noble friend when we had that very interesting Question, because of course, although she answered it, the future homes standard very much concerns my department as well, which is why we are working so closely together. I think that she said that not only is the skills issue very much on her agenda but that her department is working closely with the Department for Education. Of course, my department has a huge vested interest in ensuring that we deal with any skills shortages. We are very focused on the supply chain. We are supporting the sector to obtain necessary qualifications to work in government schemes through our skills competition and exploring measures to ensure that installers are getting the right skills and experience to carry out high-quality installation. Clearly, this is one issue that must arise from what has happened: why installers do not seem to be able to do the right thing.

There is much that we are going to work on, but I would say on the positive side that if ever one wanted to make a connection between the growth agenda and the charge to net zero, this is it. A huge number of skilled jobs will be there to be filled in future. Our job in government is to facilitate the training and development that need to take place to respond to that challenge.

[Baroness Bennett of Manor Castle (GP)]

My Lords, the Minister just spoke about the possibility of a huge number of skilled jobs. He may be aware of the TUC’s recommendations from last year for the Government’s warm homes strategy. If we are going to train people in those skills, we have to make sure those are also good jobs. Those TUC recommendations include ensuring that these are high-quality jobs supporting direct employment, with strong procurement rules and adherence to nationally negotiated terms and conditions. One key thing we have seen in the past is that government policies have come and gone, people have got trained up and started businesses, then the money has gone away and those people have left the industry. The TUC is recommending a multi-decade national retrofit plan. Are the Government listening to what the TUC has to say on making sure those are good jobs for skilled people?

[Lord Hunt of Kings Heath (Lab)]

Actually, I agree with much of what the noble Baroness says. What the sector—and that includes trade unions and the people working in the sector—needs is certainty for the future. Indeed, to relate it to another low-carbon energy structure, nuclear, that is the message that we have been getting over the last three days. Obviously, we are still developing our plans and projects around the massive challenge of the decarbonisation of buildings. Clearly, we need to make sure that we provide the kind of certainty that the private sector needs to make the investment. We need to make sure that a supply chain is vibrant and that we have skilled people working in it. I should say that the whole energy industry, if I may put it that way, although it also relates to my noble friend’s responsibility, offers such potential for the future. It really is an exciting time to be thinking about what we need to do to provide what the noble Baroness has just said.

[Baroness Wheatcroft (CB)]

My Lords, the Statement says:

“We will put in place a robust system of compliance, audit and regulation, so that consumers have the confidence to take up the offer of upgrading their homes”.


Can the Minister say whether he thinks this was a failure of regulation? If so, can he reassure the House that the move to regulate or not regulate so that growth can be set free will not jeopardise schemes such as this and lead to more failure?

[Lord Hunt of Kings Heath (Lab)]

Actually, that is a very interesting question and the answer is yes. Clearly, the failure was in the hands of the companies that got the contracts to provide the services. They have been shown visibly to have failed. However, the regulatory system is a mishmash. There are too many bodies involved. There is confusion about who is responsible for what. The certification bodies can be in competition with each other. There is a risk, therefore, of a lowest common denominator approach. Clearly, we need to improve that, but what we want is not a huge amount of unnecessary bureaucracy but proportionate regulation. I think this can be done more efficiently and the public can have more confidence—and that actually is the Government’s view on regulation generally.

[The Earl of Lytton (CB)]

My Lords, the Minister has made several points that certainly chime with me. In a sense, we have been here before because of things such as electro-osmotic damp-proof courses, types of urea formaldehyde foam being put into wall cavities and, more recently, polyurethane foam being sprayed on the inside of roof slopes. All these firms seem to be task-and-finish jobs. I have been involved with this for probably nearly 50 years as a professional dealing with property and I have seen these people come and go and reappear in different guises. If one is going to have a system of regulation-lite and move to individual responsibility, I get that up to a point, but there is not the penetration to make sure that that is constantly policed and enforced, and there is only one other option that is available to prevent people operating like spivs and charlatans, if I can put it that way—that is not to say all in industry are like that, but clearly some of them are—and that is to have a regime of strict liability at director and company level, in the same way as we had with health and safety, in order that they cannot escape the liabilities anything like as quickly simply by disappearing off and becoming insolvent. Would the Minister care to comment on that?

[Lord Hunt of Kings Heath (Lab)]

My Lords, I am grateful to the noble Lord because he speaks with such expertise in this area. In a sense I should have reflected on that in my answer to the point made by the noble Lord, Lord Teverson. I am not going to commit myself in terms of what the future is going to look like, but I will take his remarks and make sure my ministerial colleagues see them. As I said, our first task must be remediation and responding to the concerns of 65,000 people who will be very concerned. Obviously, they are going to get the letter from Ofgem; some of them are already getting it. We will then be reflecting very much on how we need to develop a more robust system.

I, too, have experience. I remember being a Minister in the Department for Work and Pensions when King’s College reviewed the work of gas installers, and, again, they found a great number of problems. As a result, the whole gas regulation process was shaken up. So we have to look at these things very seriously, because the credibility of the net-zero programme and the decarbonisation of our homes depends on public trust. If we cannot gain the public’s trust, they will not take the necessary action, so we really have to work hard on this.

[Viscount Thurso (LD)]

My Lords, further to the answer the Minister gave to my noble friend Lord Foster regarding skills, I sit on the Industry and Regulators Committee and we had a very good presentation regarding the Government’s skills strategy and the formation of Skills England, but there was some concern expressed as to whether sufficient weight would be given to those in the construction trades, which is where many of those who are required will come from. I hope that the Minister and his ministerial colleague will put some pressure on Skills England to make sure that those skills are given the weight they should have, because without them we will not get the benefits of growth in that industry.

[Lord Hunt of Kings Heath (Lab)]

My Lords, I agree with the noble Viscount. I will take that away in terms of the work we are going to be doing. Within the energy sector there are some fantastic examples of industries that really have invested in skills and training. To take EDF as an example and looking at Bridgwater and Taunton College, where it has invested hugely and where the quality of education and skills training is phenomenal, I say that it is things like that I would like to see across the whole sector.

[Lord Grantchester (Lab)]

I welcome the determination to correct this and put the situation right. I am concerned over the effect of this on public confidence in TrustMark and undertaking home improvements. Regarding retrofitting, householders used to be able to approach with confidence the charity Carbon Trust as a one-stop for advice on energy home improvements. It was extremely helpful in giving independent guidance to householders on the necessary measures for upgrading the energy efficiency of their homes. Will the Minister look at how such advice might be made available again?

[Lord Hunt of Kings Heath (Lab)]

My Lords, I think my noble friend is hinting at whether there is a one-stop shop. The answer is no, there is not. Obviously, we have a number of agencies that provide very helpful advice, including the Energy Saving Trust, Citizens Advice and National Energy Action. In the immediate aftermath of what has happened, Ofgem, in addition to sending letters out, will have a helpline and contact details. The point the noble Lord raises is an important one and we will be looking at this as part of our review of the general arrangements.

Environmental Permitting (Electricity Generating Stations) (Amendment) Regulations 2024

Lord Hunt of Kings Heath Excerpts

Tuesday 28th January 2025 Lords Chamber

Moved by

[Lord Hunt of Kings Heath]

That the draft Regulations laid before the House on 30 October and 3 December 2024 be approved.

Considered in Grand Committee on 27 January.

Motions agreed.

Environmental Permitting (Electricity Generating Stations) (Amendment) Regulations 2024

Lord Hunt of Kings Heath Excerpts

Monday 27th January 2025 Grand Committee

Moved by

[Lord Hunt of Kings Heath]

That the Grand Committee do consider the Environmental Permitting (Electricity Generating Stations) (Amendment) Regulations 2024.

[The Minister of State, Department for Energy Security and Net Zero (Lord Hunt of Kings Heath) (Lab)]

My Lords, these regulations were laid in draft before the House on 30 October 2024. The Government believe that the answer to the challenges around energy security, affordability and sustainability point not in different directions but in the same direction: clean power. Investing in clean power at speed and scale can help tackle the climate crisis and create good jobs. We believe that it is the only route to protect bill payers and ensure energy security; this is why making Britain a clean energy superpower by 2030 is one of the five central missions of this Government.

To deliver that mission, we will rely increasingly on a renewables-led system as the foundation for a decarbonised grid. We have set ambitious but deliverable targets to double onshore wind, treble solar and quadruple offshore wind by 2030. Although renewable energy is at the heart of our plan to deliver clean power, we also know that we must bring forward low-carbon generation sources, providing added security for when the sun does not shine and the wind does not blow. This includes flexible supply sources that can scale up or down instantaneously to meet peak demand.

Some of this flexibility can be provided by short-duration technologies such as batteries, which can help balance the system within each day, but we know that we will also need long-duration technologies, which can run for extended periods of low renewable production. To meet this challenge, the Government are investing in low-carbon flexible technologies, such as carbon capture and storage at existing power stations, hydrogen and long-duration electricity storage. This flexibility is critical to maintaining a constant supply of electricity in the UK, keeping the lights on for millions of homes and businesses.

However, as these new low-carbon technologies scale up, we will continue to need reliable mature technologies, including gas, to provide energy security. The National Energy System Operator’s report on delivering clean power by 2030 showed that maintaining gas capacity in the system is in line with the mission to deliver clean power. We have been clear from the outset that gas is expected to be used less in our future energy system, moving to an important strategic reserve role in order to ensure security of supply. Although gas will continue to play an important role in the system, it is only right that we should expect any new or substantially refurbished combustion plants to be built “net zero-ready”. This is why we are uplifting the existing regime and introducing the new decarbonisation readiness requirements.

Before I turn to detail of the decarbonisation readiness requirements, let me first set out the current regime. Since 2009, all new-build combustion power plants in Great Britain sized over 300 megawatts have been subject to the carbon capture readiness requirements. These regulations require plant operators to demonstrate that it is technically and economically feasible to retrofit carbon capture and storage technology. Due to the threshold of 300 megawatts, the policy has seen limited application since 2009. The reality is that it has contributed to a costly market distortion by incentivising the building of smaller, less efficient plants and inadvertently creating an unacceptable loophole. This has resulted in a significant number of plants being built at 299 megawatts in order to avoid the carbon capture readiness requirements.

The policy landscape has changed significantly since the carbon capture readiness requirements were introduced. Plant operators now have an alternative pathway to decarbonise, through hydrogen-fired generation, as well as the introduction of the UK’s legal obligation to meet carbon budgets and reach net zero by 2050. In March 2023, a final consultation on the decarbonisation readiness proposals was published alongside the publication of two technical studies for hydrogen and carbon capture and storage. The consultation received positive feedback from industry. Some 28 organisations and one individual responded—representing plant operators, original equipment manufacturers and trade associations—with broad support for the proposed changes and implementation of the decarbonisation readiness requirements. We published a response in mid-October, giving the go-ahead to proposals set out in the consultation.

On the details of the regulations, this statutory instrument will amend the Environmental Permitting (England and Wales) Regulations 2016 by inserting new Schedule 25C. It will remove the minimum capacity threshold of 300 megawatts, which will remove any existing market distortion and support rapid decarbonisation by ensuring that nearly all new and substantially refurbishing combustion power plants must have a credible plan to decarbonise. The regulations will also move the requirements from the planning consent process, where they currently sit for carbon capture readiness, to environmental permitting. This will ensure that the responsibility for regulating the requirements falls to the Environment Agency rather than to local planning authorities and my own department. Unlike local planning authorities, the Environment Agency is already involved in the assessment of carbon capture readiness and has the technical expertise to assess the requirements. As I mentioned a moment ago, that will also include hydrogen readiness.

The new requirements will now enable combustion plants to demonstrate decarbonisation readiness through conversion to hydrogen firing, as well as carbon capture. In doing so, the instrument introduces hydrogen conversion readiness and carbon capture readiness assessments, which are proportionate to the developing nature of hydrogen to power and carbon capture and storage. The requirements will also expand the generation technologies in scope of the requirements to include biomass, energy from waste and combined heat and power plants. This will ensure that a higher number of carbon-intensive plants are now captured.

These updated requirements are intended to strike a balance. They ensure that new-build plants and the refurbishment of old sites are conducted ready to take full advantage of future decarbonisation opportunities, while acknowledging the emerging state of hydrogen and carbon capture technologies and their enabling infrastructure. We expect that the requirements will be strengthened over time as the generation technology improves and clarity on enabling infrastructure availability increases. To ensure that we regularly assess the impact of the policy and the case for strengthening the requirements, we have included a statutory requirement for the Government to carry out a review of the policy in periods not exceeding five years.

In summary, these regulations will ensure that the gas capacity we need for security of supply is future-proofed and has a credible plan to transition to low-carbon operation. In doing so, it will help deliver our aim to become a clean energy superpower and deliver net zero by 2050. I beg to move.

[Lord Teverson (LD)]

When one is first appointed to Parliament, one worries about addressing a huge crowd of parliamentarians and being on the telly as well. I am not feeling too nervous today.

I found the Minister’s explanation excellent; I did not understand it particularly from the legislation or the Explanatory Memorandum. I presume that the whole area around potential new gas, in particular combustion power stations, is about aiming for 95% decarbonisation by 2030 rather than 100%, which I understand in terms of pragmatism.

On the areas that I do not really understand, the one that I had not really realised is the hydrogen aspect of these regulations. I find it difficult to understand how one would ever convert a gas power station to a hydrogen power station in a way that would make any economic sense whatever in terms of gas storage coming in and perhaps being used as part of the capacity mechanism. The hydrogen would have to be green hydrogen, which means that it is probably generated by electricity in the first place—so why would one de-convert it through various inefficiency mechanisms for it then to go through a degassed power station? That just does not seem logical to me.

On that, the other risk seems to be that—I am not a technical expert on this, obviously—the conversion from a gas-fired power station to a hydrogen-fired power station is probably not that different, and therefore the cost of conversion, or of being hydrogen-ready, is not very great. Carbon capture and storage, however, is a major conversion and, presumably, it has to be near facilities that can store carbon: either a carbon pipeline, which we went through all the legislation for in the last Energy Act, or something on the coast, so it can go undersea. So I ask the Minister: is this effectively another loophole like the one that already exists, in that new combustion stations just say that they are hydrogen-ready? In terms of carbon capture and storage, does that very much restrict where they are?

I have another concern, although I fully accept what the Government are trying to do here. The Minister mentioned energy from waste plants. We all know that, as part of their planning permission, the plants often have to be ready to have heat networks—but this hardly ever happens. Occasionally it does; there are examples of energy from waste being tapped into heat networks. I just feel that there is a risk that these things can be built in a certain way—I do not know how much they have to be ready or near a connection—but in reality they will never happen. Certainly, that tends to be the track record in this area.

I will be interested to hear the Minister’s comments, but, generally, I welcome what the Government are trying to do.

[Lord Offord of Garvel (Con)]

My Lords, in speaking to these regulations, I will concentrate on a major area where I feel the Government must provide some clarity: regulatory burden. In doing so, I am of course mindful that it was the previous Government who introduced the initial consultation to expand and update carbon capture readiness requirements, now rebranded as decarbonisation readiness requirements. The immediate effect of these regulations will be felt across electricity generating stations in England, particularly those now required to meet the expanded decarbonisation readiness criteria. Operators will be required to submit a decarbonisation readiness report as part of their environmental permit applications, which must include technical details on the feasibility of carbon capture or hydrogen conversion during electricity generation.

A significant provision in this statutory instrument is the removal of the 300 megawatt minimum capacity threshold, which currently dictates when carbon capture readiness requirements apply. In this amendment, the requirements will apply to both new and substantially refurbished combustion power plants, as well as voluntary applications for existing plants. Additionally, the SI introduces assessments for hydrogen conversion readiness and carbon capture, usage and storage.

It is incumbent on the Government to outline comprehensively what specific support will be available to businesses as they are required to adjust to these new requirements. Can the Minister assure me that his officials in the department recognise that the onus must be on helping operators achieve compliance rather than face an undue burden? Will he outline whether exemptions have been considered—for example, for smaller or older power plants that may face specific challenges in meeting the requirements on day 1? There is a fine line to be walked between regulation and innovation, and, to use a familiar proverb, there is a real need here to make sure that we are not cutting off our nose to spite our face.

This instrument hands the Environment Agency direct assessment powers over compliance. Again, can the Minister provide the necessary detail on the actions that the agency will take to facilitate a smooth transition before the implementation date of February 2026? Additionally, will there be any further consultations, or will any additional guidance be issued, before the regulations come into effect?

[Lord Hunt of Kings Heath (Lab)]

My Lords, I thank the noble Lords, Lord Offord and Lord Teverson, for their comments. I should say to the noble Lord, Lord Teverson, that I am grateful for his support and for noting the clarity with which we have presented the proposals. In terms of the popularity of debates on energy SIs, we have had more colleagues here in previous debates, but we are presently on a rota of two SIs every Monday, and at some point I hope we might come to a conclusion in relation to that.

Internet Activity: Energy Use

Lord Hunt of Kings Heath Excerpts

Monday 27th January 2025 Lords Chamber

[The Minister of State, Department for Energy Security and Net Zero (Lord Hunt of Kings Heath) (Lab)]

My Lords, the National Energy System Operator has estimated that data centres consume around 2.5% of the UK’s electricity. The UK is not a major centre for cryptocurrency mining. We estimate the share of power consumed in the UK for this purpose to be negligible.

[Viscount Stansgate (Lab)]

I thank my noble friend for that Answer. I do not know whether the House quite realises the staggering quantities of energy involved in normal internet activity and, in particular, in crypto mining. It has been estimated that the usage is approximately the same as that of a mid-sized European country, such as the Netherlands or Denmark. How much of this activity is based in the UK? Who is doing it and where? Does my noble friend agree that it has an adverse impact on carbon emissions and brings with it electronic waste? Will he agree to undertake an assessment of the potential adverse effects on carbon emissions of internet activity and, in particular, of crypto mining, so that we can have an honest discussion about the future and the effect of this on our climate change objectives?

[Lord Hunt of Kings Heath (Lab)]

My noble friend is right to raise this important question. I should say that the Government keep this under review. In fact, we reckon that only 0.2% of global crypto mining takes place in the UK. The International Energy Agency has estimated that, in 2022, 2% of total global energy demand came from data centres, cryptocurrencies and AI. It expects that to double by 2026. However, it makes the point that it expects that doubling to be met by an increase in clean energy sources. The lesson here for us is that we need to power on with our aim to get to clean power by 2030.

[Lord Clement-Jones (LD)]

Despite the Minister’s earlier Answer, nevertheless the Government are keen to see the building of data centres. Will the need for additional energy consumption form part of the National Energy System Operator’s strategic spatial energy plan and the centralised strategic network plan? What assumptions are being made about the sustainability of the energy sources needed for those data centres?

[Lord Hunt of Kings Heath (Lab)]

The work of NESO in mapping out how we get to clean power by 2030 is the start of this process, and we will keep those matters within the review. We are working very hard with the network companies and Ofgem to accelerate investment and reform in the grid and in connection. That is a crucial matter in wanting to see an expansion of data centres in the UK where we have a significant advantage and an increasingly important market.

[Lord Holmes of Richmond (Con)]

My Lords, I declare my technology interests as set out in register. Does the Minister agree that, going broader, we need far greater transparency about all the power that it takes to fuel these new technologies—compute power, energy power, and financial and natural resources? Is it time that we reviewed the power usage effectiveness measure, or PUE, for data centres? Is it the case that all these new technologies need to be considered not just in respect of how efficient they are and how effectively they are fuelled but, crucially, that this is done in a sustainable manner?

[Lord Hunt of Kings Heath (Lab)]

My Lords, I certainly accept the challenge from the noble Lord: as we wish to see the encouragement of data centres and the use and development of AI in the UK, clearly we want it to be sustainable. I make the point that, in the first place, newer cryptocurrencies use less energy than the original ones, and, secondly, that data centres are increasingly looking to energy efficiency methods. AI can be used as one way in which to improve our management of energy efficiency.

[Lord Patel (CB)]

My Lords, the Minister said that current data centres use about 2% of total electricity generation. Can he quantify that in respect of how many terawatt hours are currently being used by data centres? With the Government’s ambition for AI and the development of more data centres, what will be the requirement in terawatt hours by 2030?

[Lord Hunt of Kings Heath (Lab)]

My Lords, my understanding is that NESO has estimated that 7 terawatt hours will be used by data centres in 2025, rising to 22 terawatt hours in 2030 and to 62 terawatt hours in 2050. As a comparison, it expects annual electricity demand in 2050 to be between 533 and 700 terawatt hours.

[Lord Spellar (Lab)]

My Lords, the expansion of data centres will require a significant expansion of the grid and of energy sources. In a written reply to me, the Minister indicated that, for the high-level grid, there is something like a four-year lead time for securing equipment. Furthermore, on energy sources, data centres need reliable sources of supply. Inevitably, that will mean the development of nuclear power, including small modular reactors. When will the Government get on and make a decision about the future of the small modular reactor programme?

[Lord Hunt of Kings Heath (Lab)]

My Lords, I agree with everything my noble friend said. He knows that we have a programme within Great British Nuclear to appraise the technology involved in a number of shortlisted small modular reactors. It is making considerable progress. We expect further announcements to be made in spring. My noble friend will understand that there are discussions taking place within the spending review.

[Baroness Bennett of Manor Castle (GP)]

My Lords—

--- Later in debate ---

[Baroness Bennett of Manor Castle (GP)]

My Lords, the Minister has already acknowledged the energy demands and pressures. The noble Viscount, Lord Stansgate, raised the issue of mining and the resource use going into data centres. I would add a further one to that: water use. A typical data centre uses the same amount of water as 100,000 homes. We have a situation where seven out of 17 regions in England are expected to have water stress by 2030, rising to 12 by 2040. Are the Government considering ensuring that all new data centres use closed systems for water, so that we do not put more pressure on this vital resource?

[Lord Hunt of Kings Heath (Lab)]

My Lords, in wishing to develop their projects, these are the matters that data centre operators have to keep under consideration. If we are interested in the growth of the UK economy, we should welcome the potential in the UK, and build on what has already been achieved, through data centres and through artificial intelligence. We should look at the amount of money that has been spent in those areas and at the number of highly skilled jobs that are being used to employ many good people.

[Lord Lilley (Con)]

My Lords, will the Minister explain why electricity in this country is more expensive than in any other OECD country?

[Lord Hunt of Kings Heath (Lab)]

My Lords, I think the noble Lord is in a better position to explain, since that was the position we inherited from his Government. It is our view, as well as that of the Committee on Climate Change, NESO and many other bodies, that the best way to get stability and then reductions in prices is to move fast to clean power.

[Lord Offord of Garvel (Con)]

My Lords, the stark reality is that the green policies of successive UK Governments, however well-intentioned, have come at a prohibitive cost to the UK economy. The average UK industrial energy price is now five times that of the USA and seven times that of China. The sad reality is that the UK is locked out of the digital revolution in crypto and AI. Does the Minister think there are lessons that can be learned from the new US Administration’s approach to energy supply? Does he agree with me that this is now the time for common sense to prevail? Will he please go to the Department for Energy and persuade his boss to drill, Mili, drill?

[Lord Hunt of Kings Heath (Lab)]

My Lords, I suspect that the experience in the US will rather depend on the price of oil and gas than on any other intervention. Let me quote the figures. In the AI market, we have 3,000 companies, with £10 billion in revenues, and 60,000 people working in the industry. In data centres, 17,000 people are directly employed, with a total revenue of £4.6 billion a year. These are two very successful industries. Developments are taking place at the moment which will continue in the future. This Government will support them in so doing.

Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2025

Lord Hunt of Kings Heath Excerpts

Monday 27th January 2025 Grand Committee

Moved by

[Lord Hunt of Kings Heath]

That the Grand Committee do consider the Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2025.

[The Minister of State, Department for Energy Security and Net Zero (Lord Hunt of Kings Heath) (Lab)]

My Lords, this order was laid before Parliament on 3 December 2024. Noble Lords will know that the UK Emissions Trading Scheme, UK ETS, was established under the Climate Change Act 2008 by the Greenhouse Gas Emissions Trading Scheme Order 2020 as a UK-wide greenhouse gas emissions trading scheme, contributing to the UK’s emissions-reduction targets and net-zero goal. The scheme is run by the UK ETS authority, a joint body comprising the UK Government and the devolved Governments. Our aim is to be predictable and responsible guardians of the scheme and its markets.

Under the UK ETS, operators are required to monitor, report on and surrender allowances in respect of their greenhouse gas emissions. Most allowances are purchased at regularly held auctions. However, operators in certain sectors at risk of carbon leakage are given a number of allowances for free in order to manage both their exposure to the carbon price and the risk that businesses’ decarbonisation efforts could be undermined by higher-carbon imports.

Under the UK ETS, an operator is the person who has control over an installation. Installations are stationary units at which regulated activities take place. Sub-installations represent operations carried out at an installation in respect of which free allocation operators are required to report activity levels for the purposes of the ETS.

I now turn to what this statutory instrument does. We have brought forward this SI to enable important changes and improvements to the scheme to be made. Under previous UK ETS policy, where a sub-installation ceased operation, free allowances were no longer distributed in respect of that sub-installation in the year after the year in which the relevant sub-installation ceased operation.

However, the operator was entitled to retain the full amount of free allowances made available in respect of the sub-installation without recalculation to account for the permanent cessation of the sub-installation within the scheme year. Noble Lords will readily see that this had the potential to result in the overallocation of free allowances beyond the volume required for carbon leakage mitigation, as well as the distribution of free allowances that were no longer associated with an activity that resulted in emissions.

This instrument ensures that the volume of free allocation to which an operator is entitled in the final year in which operations are carried out at one or more sub-installations is calculated by reference to the level of activity at the relevant sub-installation in that year. To facilitate this change, this statutory instrument will require that operators prepare an activity level report in respect of the final year in which operations are carried out at a sub-installation. That report will be used to recalculate the volume of free allocation to which the operator is entitled in the final year in which operations are carried out at a sub-installation, and any overallocation will be recoverable in accordance with existing scheme rules.

This instrument includes an exception to the final-year rule in circumstances in which the permanent cessation of operations at a sub-installation is part of a series of changes that has resulted in a material reduction in the specified emissions per unit of production of those pre-cessation products that continue to be produced at the installation. This exception to the final-year rule will incentivise decarbonisation, as operators that can demonstrate that the relevant requirements are met will continue to be entitled to the free allocation calculated in accordance with existing UK ETS rules, which is calculated in advance on the basis of historic activity levels.

This instrument also amends the circumstances in which an installation or sub-installation has ceased operation for the purposes of the UK ETS legislation. The previous definition of the circumstances in which an installation or sub-installation had ceased operations was at the point in time when it became technically impossible to resume operation. This definition was difficult to apply consistently in practice. The updated definitions provide that an installation has ceased operation when all regulated activities, in the case of an installation, or the relevant operation, in the case of a sub-installation, have permanently ceased to be carried out at the installation. This amendment increases certainty for both the scheme regulators and operators.

This instrument also introduces a requirement for operators to notify the relevant scheme regulator of circumstances in which all regulated activities cease to be carried out at an installation by the end of the scheme year in which the cessation occurs or within one month of the date of cessation—whichever is later—and to confirm whether the operator intends for one or more regulated activities to resume at the installation. Operators are similarly required to provide details of a cessation of operations in respect of a sub-installation in annual activity level reports prepared in relation to the 2025 scheme year and thereafter. Requiring these reports will facilitate the application of the new final-year rule.

The statutory instrument introduces a new power for regulators to issue a notice to an operator which determines that an installation or sub-installation has ceased operation for the purposes of UK ETS legislation. The new power is available in circumstances where the regulator is not satisfied that the operator intends regulated activities to resume at the installation or intends for regulated operations to resume at the sub-installation level. The change will increase certainty for operators and facilitate equivalent treatment for all installations undergoing a cessation.

The changes follow comprehensive engagement and consultation with stakeholders. Between 18 December 2023 and 11 March 2024, the UK and devolved Governments ran a consultation, seeking views on proposals to alter the free-allocation methodology for the UK ETS statutory sectors to better target those most at risk of carbon leakage and ensure that free allocations are fairly distributed. The UK Emissions Trading Scheme: Free Allocation Review covered the provisions included in this statutory instrument on permanent cessations. The responses to this consultation were in broad support of the proposed technical changes to the treatment of permanent cessations. The authority response to this consultation will be delivered in two parts; an early response to proposals on permanent cessations was published last November.

In conclusion, I have spoken at considerable length on what seems to me a perfectly sensible order that builds on the work of the last Government. It seems to me absolutely sensible and proportionate. I beg to move.

[Lord Teverson (LD)]

I do not think I have ever known something so simple be made to sound so complicated, if I am honest. Basically, this will stop people having a free ride after they have closed down a particular part of their business; I think that describes it. Therefore, it makes sense and is right to do.

Perhaps I may come back to a slightly broader canvas, because this is a really important area for the UK ETS. Free allocations come primarily from grandfather rights and work through. I presume that all free permits will cease as the UK introduces the carbon border adjustment mechanism, which I think is coming in 2027, as planned by the previous Government. Free allocations are all about carbon leakage and, when we have a carbon border mechanism, clearly, carbon leakage is solved by that instrument rather than by free issue. So will they be phased out in that time?

The Minister will also be aware that, under the trade and co-operation agreement negotiated by the previous Government, there was a strong inference that the UK ETS and the EU ETS should recombine in a single scheme. In fact, one of the issues at the moment is that the UK ETS carbon price is significantly less than the European one. This is due to what I would probably see as an overallocation of free permits.

So my question is: are this Government still considering bringing those two schemes together? This is particularly important at present because, in one year’s time, the EU will introduce its carbon border adjustment mechanism for heavy industry, but, in particular, energy exports will be taken into account by the first phase. If we do not have an equivalent scheme or are not part of a joint scheme, effectively we will be subject to tariffs in terms of those effective carbon charges.

A particular problem with the carbon border adjustment mechanism is the GB-Northern Ireland issue, because there will effectively be a tariff for carbon costs and energy between Great Britain and Northern Ireland. I visited Energy UK one or two weeks ago, and it was particularly concerned about these aspects of the UK ETS into the near future and when the EU moves forward with its well-planned carbon border adjustment mechanism. It is really important to make decisions here and get on with them, because there will be very difficult issues if we do not resolve this over the next 12 months.

[Lord Offord of Garvel (Con)]

My Lords, this statutory instrument proposes amendments to the UK emissions trading scheme, including expanding its scope to cover CO2 venting for upstream oil and gas operations, lowering the emissions cap and introducing new penalties alongside a flexible reserve mechanism. It is crucial that industries and communities affected by these changes receive the necessary support during the transition period.

The amendments introduced by this order significantly expand the UK ETS. Notably, it will now cover CO2 venting from upstream oil and gas operations, requiring companies in this sector to purchase allowances for their emissions. The adjustment of the emissions cap ensures that the allowances for companies to buy in 2025 will be reduced by 12.4%. By 2027, the number of allowances will fall by 45%, ultimately reaching a 70% reduction by 2030.

I draw noble Lords’ attention to the introduction of new penalties and a deficit notice in this instrument—fines for non-compliance linked to the carbon price, obviously designed to incentivise businesses to meet their obligations. How will these penalties be enforced in practice and are they really proportionate, particularly for industries already facing complex and burdensome regulatory frameworks? Additionally, the establishment of a flexible reserve to buffer against market volatility can be seen as a step towards ensuring stability in the carbon market, but can the Minister explain what assurances the Government can give that this mechanism will not inadvertently lead to market manipulation or instability, rather than solving it?

Requiring oil and gas companies to purchase allowances for CO2 venting could significantly increase their operational costs, placing UK producers at a disadvantage compared to international competitors in regions without similar emissions trading schemes. This could lead to carbon leakage. The Government must address how they plan to mitigate such risks.

Another concern is the regulatory burden. The introduction of additional regulations and financial costs tied to purchasing allowances may create a substantial compliance burden, particularly for smaller operators. It is essential that the Government provide clear guidance and support to ensure that businesses can adapt without undue strain.

On investment and mitigation technologies, while the scheme encourages decarbonisation, can the Minister outline how it plans to incentivise and facilitate the scale-up of carbon capture, utilisation and storage technologies? All these are said to be necessary to keep to the Government’s timetable. Further clarity is needed.

Market price volatility presents an additional challenge. Fluctuating carbon prices expose companies to financial uncertainty. While the flexible reserves aim to stabilise the market, further clarity is needed on how effective this mechanism will be in managing price volatility and ensuring long-term stability.

The introduction of penalties and enforcement provisions raises important questions about fairness and proportionality. Will penalties be applied equally to all operators, or will they be adjusted based on companies’ size or ability to comply? Can the Minister clarify how this will be structured?

It is essential that the Government spell out how they intend to carry through this order without unintended negative consequences for the industry.

[Lord Hunt of Kings Heath (Lab)]

My Lords, I am grateful to the noble Lords who spoke in this short debate. I will first respond to the noble Lord, Lord Teverson, on international co-operation on carbon pricing. I certainly accept that, as we transition to net zero, it is important that we work across international borders to drive climate ambition. Under the terms of the trade and co-operation agreement, the UK Government and the EU agreed to consider linking our respective carbon pricing schemes and to co-operate on carbon pricing. The noble Lord will know that we are working to reset our relationship with the EU and strengthen ties and improve trade and investment relationships with it, including promoting climate, energy and economic security, while recognising that there will be no return to the single market or customs union.

The Prime Minister visited Brussels on 12 December 2024, and the joint statement with President von der Leyen illustrated that the UK and the EU would take forward this agenda of strengthening co-operation at pace over the coming months. As set out in the TCA, carbon pricing remains an area where we will continue to co-operate, and it is right that we will continue to develop the UK ETS to support our climate goals and support sectors in the transition to net zero.

The carbon price within the EU emissions trading scheme is determined by the market, and it is designed this way because competitive markets are likely to deliver the most efficient transition to net zero across the economy. This will give emitters the flexibility as to how they abate their emissions, thereby allowing businesses to cut carbon where it is cheaper for them to do so.

I assure the noble Lord, Lord Offord, that, as I said earlier, we are here simply building on the work of his Government in just making a sensible adjustment to make sure that there is no free ride in removing the excess allocation of free allocations, as the noble Lord, Lord Teverson, suggested. When the production has been ended as part of a decarbonisation programme, allowing them those free allocations recognises that. We do not think that these rules will lead to disproportionate regulation or that there will be potential manipulation of the market.

On oil and gas, I will write to the noble Lord with further details on his specific question.

[Lord Teverson (LD)]

I am afraid I do have to come back to the Minister. Is it the Government’s intention to integrate, if they can, the two emissions trading systems? Is that a government goal or not? Also, do the Government still intend to do what the previous Government suggested—to introduce a carbon border mechanism for the UK at the beginning of 2027? This is pretty fundamental stuff that industry and the whole economy need to understand. If the Government do neither of those, how will they solve the problem of the EU carbon border mechanism from the beginning of next year?

--- Later in debate ---

[Lord Hunt of Kings Heath (Lab)]

My Lords, I am not sure that I can respond any further than I have already. Clearly, we are now working with the EU on some of those issues, and clearly we accept the point that we need the systems to work effectively together to deal with wastage. But I am afraid that I cannot give the noble Lord any more certainty than that.

Motion agreed.

Small Modular Nuclear Reactors

Lord Hunt of Kings Heath Excerpts

Wednesday 22nd January 2025 Lords Chamber

[Lord Spellar]

To ask His Majesty’s Government when they expect to announce the orders for the first small modular nuclear reactors.

[The Minister of State, Department for Energy Security and Net Zero (Lord Hunt of Kings Heath) (Lab)]

My Lords, Great British Nuclear is pushing forward with the SMR competition and is negotiating with a four down-selected companies. Once negotiations have concluded, the companies will be invited to submit final tenders, which Great British Nuclear will then evaluate, with final decisions to be taken in the spring.

[Lord Spellar (Lab)]

I thank the Minister for that Answer. He will be aware that the Government’s response to the AI action plan this month refers to the opportunity

“to accelerate investment in … Small Modular Reactors”.

He will also be aware that Britain is at the forefront of developing this technology, which could make a significant contribution to our growth agenda right through the country. However, delays in decision-making by the last Government led to significant slippage in the programme. What is the Minister’s department doing? He gave the procedure that would be undertaken, but what is the department doing to get the SMR programme back on track?

[Lord Hunt of Kings Heath (Lab)]

My Lords, I understand my noble friend’s impatience. It is an impatience that I share, because we can all see the potential of small modular reactors in the UK and the export potential of UK companies that are involved in developing SMRs. With fairness to Great British Nuclear, it is going through a tough process. We will have assurance with regard to the technologies and value-for-money issues. Spring is not far away. I understand the haste with which my noble friend wishes us to act in this area.

[Lord Deben (Con)]

My Lords, the French Government have given this Government a great opportunity to stop any further growth of Sizewell C and use that money for small modular nuclear reactors. This is an out-of-date proposal. It will cost much more than we bargained for. It is a brave and sensible Government who would say, “We will stop that and move to new technology”.

[Lord Hunt of Kings Heath (Lab)]

My Lords, if a Government were suddenly to say to Sizewell C, “We’re not going ahead with it”, that would have a devastating impact on our nuclear industry. We are not going to do that. We are moving towards a final investment decision. I do not recognise some of the figures that have been quoted in the media recently. It is 80% replication of Hinkley Point C, but because of that, a lot of the risks have already been ironed out.

[Lord Birt (CB)]

My Lords, I am attracted in principle to the idea of small-scale nuclear reactors scattered across the country on small sites and not just in nuclear submarines. But I have attended a number of meetings with the industry and have no clarity on the economics of the technology and how they compare with alternative paths to net zero. Does the Minister think that the economics are clear yet? If not, will the Government set them out?

[Lord Hunt of Kings Heath (Lab)]

My Lords, there are two points to make. Our analysis is that, overall, a renewable-led system complemented by flexible technologies, alongside technologies such as nuclear, will form the cheapest foundation for our decarbonised power grid. The value for money for SMRs is a very good question. That is precisely why the work that Great British Nuclear is doing will be so important and why it then has to feed into more general discussions within government about the finance involved.

[Earl Russell (LD)]

My Lords, as the SMR contracts have been delayed, has the proposed twentyfold increase in AI been included in the clean power plan? What are the Government’s proposals to deliver the energy required and meet our energy net-zero targets if SMRs will not be ready before 2032?

[Lord Hunt of Kings Heath (Lab)]

My Lords, obviously, we are all very excited by the potential of AI. My understanding is that current electricity demand from, for example, data centre growth—which is part of the package that the noble Earl is referring to—would in 2022 account for 4.05% of UK electricity consumption. NESO’s analysis of future energy scenarios reckons that data centres could increase annual electricity demand by between 27 and 62 terawatt hours by 2050, with estimates of total annual electricity demand ranging from 533 to 700 terawatts hours. Obviously, we are giving this a great deal of consideration.

[Lord Harris of Haringey (Lab)]

My Lords, I refer to my interests in the register. Existing civil nuclear power stations are protected by the Civil Nuclear Constabulary, which is, of course, wholly armed. What consideration has been given to who will protect and police modular nuclear reactors? Will it be the Civil Nuclear Constabulary, which would mean covering far more sites than it currently does, or will it be the other police forces? What discussions has the Minister had with his colleagues at the Home Office?

[Lord Hunt of Kings Heath (Lab)]

My Lords, it is a little early to give a definitive view to my noble friend but clearly the role of the Civil Nuclear Constabulary is a very important one. I reassure him that in the 14-year gap since I was last responsible for that force, there have been huge improvements in the way in which the constabulary works. I keep this matter under very close oversight.

[Baroness Bloomfield of Hinton Waldrist (Con)]

My Lords, it is welcome news that the Minister has indicated there will be a decision by Great British Nuclear on SMR technologies in the spring. However, we still await any guidance on advanced modular reactors, let alone details on how they can come to the market and generate much-needed clean energy here in the UK from the early 2030s. A number of privately funded developers—newcleo, X-energy, TerraPower and others—are ready to go and want GBN to have a parallel process alongside the SMR competition to help them realise their ambitions in the UK as soon as possible. Will the Minister please give a clear indication on when a plan for AMRs will be published? Will His Majesty’s Government support those that want to get on with things in the meantime, invest in the UK, boost economic growth, and create thousands of jobs through their supply chains?

[Lord Hunt of Kings Heath (Lab)]

My Lords, I am grateful to the noble Baroness for her questions and we certainly take account of what she said. We all see the potential of AMRs. We have also seen that some of the major west coast companies in the US are interested in reaching agreements with project developers for AMRs to be sited near data centres in order to produce decarbonised energy. The noble Baroness’s Government produced an alternative routes to market consultation. We are currently considering the results of that and will make announcements in due course. I understand what she said about the role of GBN. These matters are all under earnest consideration at the moment.

[Lord Tarassenko (CB)]

My Lords, the noble Lord, Lord Spellar, mentioned the AI opportunities action plan, including the plan to build data centres—among them, the largest UK data centre so far. These data centres, which have been designated by the Government as sovereign data centres, will require SMRs to power them. Rolls-Royce, in which the Government hold a golden share, has produced and maintained the nuclear power systems for the UK’s submarine fleet using similar —not the same but similar—technology for SMRs for the last 60 years. Will the Minister ask the Science Secretary and the Energy Secretary, who together will chair the AI energy council, to designate the SMRs that will supply the sovereign data centres, also as sovereign assets, and run a much shorter bidding process open to UK companies only?

[Lord Hunt of Kings Heath (Lab)]

My Lords, I do not think I can give that commitment, although I recognise what the noble Lord says. I can certainly assure him that we are in close discussions across government departments about taking forward the implications of what was contained in the plan. I, of course, recognise the role that Rolls-Royce plays. I do not want to say anything further about that because it is currently in a competitive process in relation to SMRs that is being run by Great British Nuclear.

[Baroness Winterton of Doncaster (Lab)]

My Lords, is my noble friend the Minister aware that the proposal by a consortium of Sheffield industrialists for an SMR national manufacturing centre of excellence would create hundreds of highly skilled jobs in South Yorkshire and across the country, and would also open up the opportunity for British industry to compete internationally for the manufacture of SMRs with British components? Can he assure me that this is exactly the sort of proposal his department will consider supporting and is in line with the points made by my noble friend Lord Spellar?

[Lord Hunt of Kings Heath (Lab)]

My Lords, the noble Baroness may know that I met our former colleague Richard Caborn and colleagues from Sheffield to discuss this. We have now asked UK Research and Innovation to review the detail and advise us. We will then consider the next steps. Clearly, this is a very interesting concept.

Great British Energy Bill

Lord Hunt of Kings Heath Excerpts

Committee stage
Wednesday 22nd January 2025 Grand Committee

[Lord Roborough (Con)]

My Lords, I briefly address Amendment 113 in the name of my noble friend Lord Fuller. I declare my interest in the ownership of salmon fishing rivers.

Proposals that I have seen in the past for energy generated from tidal turbines have tended to be located where currents are strongest. By definition, this is where sea movement is constricted by narrower channels —between islands, between islands and the mainland, in estuaries or on prominent headlands around which currents and tides race. These locations are precisely where the movements of migratory fish species such as salmon and sea trout, as well as saltwater species, will be concentrated. The wild Atlantic salmon is already an IUCN red list species and the greatest of care must be taken with any further risk to the survival of every individual fish, given that the species is so threatened.

For these reasons, I strongly support my noble friend’s amendment and those of my noble friend Lord Offord of Garvel, which he and my noble friend Lord Howell of Guildford have spoken to very convincingly. I urge the Minister to take these concerns seriously and consider incorporating environmental protections in this Bill.

[The Minister of State, Department for Energy Security and Net Zero (Lord Hunt of Kings Heath) (Lab)]

My Lords, this first group of amendments has led to an interesting discussion that went somewhat wider than I expected.

Amendments 111 and 112 proposed by the noble Lord, Lord Offord, and Amendment 113 proposed by the noble Lord, Lord Fuller, would require the Secretary of State to assess the environmental and animal welfare impacts of Great British Energy projects. Amendments 111 and 112 relate to offshore wind energy projects and the decommissioning of offshore oil and gas structures, respectively, involving Great British Energy. Amendment 113 relates to Great British Energy’s offshore tidal energy projects. Under each of these amendments, if, following assessments, significant environmental damage or animal welfare issues are identified, Great British Energy must cease these activities.

The noble Lord, Lord Offord, started by referring to the partnership agreed between Great British Energy and the Crown Estate. He is right that we see great potential in this for our 2030 ambition for offshore wind at between 43 and 50 gigawatts. We also see potential in tidal stream. I relate that to the comments of the noble Lord, Lord Howell, on the huge increase in future electricity demand and his suggestion that it would likely have an environmental impact, which Great British Energy would be promoting through its investment in various projects and in clearing the way for other projects.

I very much take the point of the noble Lord, Lord Howell, on the partnership needed between government and the private sector and private finance. I do not know whether that unit in the Cabinet Office still exists, but I am pretty certain that the Cabinet Office is extremely interested in leveraging private finance. This Bill is partly to enable that and to promote expertise in the private sector on behalf of the polices that the Government wish to enact on clean power and net zero.

The noble Lord, Lord Cameron, had some interesting insights on the environmental issues and presented a balanced and helpful report. I make it absolutely clear that the Government’s commitment to the environment is unwavering. We have the Environment Act targets of halting biodiversity decline by 2030 and safeguarding our marine protected areas. We believe that a healthy natural environment is critical to a strong economy and sustainable growth and development. We have a duty to uphold environmental protection and minimise any impact on biodiversity. This must and will extend to any project that Great British Energy is involved in.

I reassure the noble Viscount, Lord Trenchard, that projects involving Great British Energy will be subject to rigorous planning and environmental regulations that consider impacts on the environment and habitats. The general theme of my argument is that it is not for GBE to do this; it will ensure that any project it is involved with follows the law and the guidance to protect our environment. It seems to me that the argument noble Lords have is with those environmental protections, which, by implication, they presumably think are not strong enough, rather than with Great British Energy.

Perhaps I can carry on that theme. As an example, projects will be subject to the Infrastructure Planning (Environmental Impact Assessment) Regulations 2017, under which the impact of these projects on the environment and habitats are considered as part of the development process. Additionally, as part of the nationally significant infrastructure regime, developers are required to provide environmental assessments as part of their application for development consent, which will be subject to detailed scrutiny through an examination held by the Planning Inspectorate. This will include scrutiny of the environmental impact assessment and a habitats regulations assessment, which would consider the likely impacts of a proposed development against a range of environmental receptors.

The planning process, at both national and local level, is underpinned by a number of other pieces of legislation that will apply to projects in which Great British Energy might have a role. They include: the Town and Country Planning (Environmental Impact Assessment) Regulations 2017; the Environmental Assessment of Plans and Programmes Regulations 2004; the Conservation of Habitats and Species Regulations 2017; and the Conservation of Offshore Marine Habitats and Species Regulations 2017. On offshore wind, I should say that we are working with Defra on the offshore wind environment improvement package to expedite offshore wind consenting while protecting the marine environment.

On the point made by the noble Baroness, Lady McIntosh, in England we are committed to meeting our four legally binding targets for diversity: to halt the decline in species abundance by 2030; to reverse declines by at least 10% by 2042; to reduce the risk of national species extinction by 2042; and to restore or create more than 500,000 hectares of wildlife-rich habitat, also by 2042. We have launched a rapid review of the environmental improvement plan to ensure that it fully supports our mission to recover nature.

We also intend to establish industry-funded marine recovery funds into which applicants can pay to discharge their compensation obligations, underpinned by libraries of approved strategic compensation measures. We are engaging in discussions with the Scottish Government with a view to reaching an agreement on the establishment of, and the delegation of appropriate functions to operate and manage, a separate marine recovery fund for projects in Scotland. We think that the offshore wind environmental improvement package—the OWEIP —will, on the whole, accelerate and de-risk the consent of offshore wind projects while continuing to protect the marine environment.

Great British Energy will not play a role in the decommissioning of oil and gas structures. However, I should say that the UK’s decommissioning regulatory regime requires a robust assessment of the potential impact on safety, technical constraints and costs, ensuring no harm to human health or the environment. Decommissioning proposals are subject to thorough environmental assessment before a regulatory decision is made.

On the matter of tidal, I was interested in the contribution from the noble Lord, Lord Fuller. He referred to the tough challenges involved. I well remember visiting the Pentland Firth when I was last in this job; Rolls-Royce was engaged then, I think. I readily accept that this is a very tough challenge. On the other hand, we are the world leader in tidal stream—half of the world’s operational capacity is situated in UK waters—and we want to go further. My understanding is that six tidal stream contracts, with a capacity of 28 megawatts, were secured in Scotland and Wales in the latest allocation round of the Government’s contracts for difference scheme.

I had responsibility for the River Severn project between 2008 and 2010. I chaired a number of community forums with people in the south-west who were keen to see progress in the Severn but, I have to say, I received the same advice as the noble Lord, Lord Howell: the environmental damage would be so considerable that it was not thought appropriate to go ahead. My understanding—I am not going to guess; I will write to the noble Lord, Lord Hamilton—is that the position is still the same, but I will find out some more and let him know, because he clearly has a keen interest in this matter.

--- Later in debate ---

[Lord Offord of Garvel (Con)]

My Lords, I thank and express my support for my noble friends Lord Frost and Lord Hamilton of Epsom, whose amendments address the matter of subsidised renewable energy technology. Considering that GB Energy is already supported by £8.3 billion, I see no viable reason why it should invest in renewable energy projects that are already substantially supported by government subsidies and funded by the British consumer, as my noble friend Lord Petitgas highlighted. Surely it is essential that the renewable energy industry in the UK is not reliant on government handouts for ever. We must look to create an environment that promotes competition and innovation and mitigates the likelihood of inefficiency.

At present, the Government subsidise low-carbon electricity initiatives through contracts for difference, where they guarantee developers a fixed price for the electricity that they generate. This is funded via a levy on consumer bills and, at the end of last year, the Government were considering holding the largest auction yet in 2025 despite recent scrutiny over consumer energy bills. The British consumer is already burdened by the cost of turning off wind turbines to avoid overloading the power grid; this costs the UK £1 billion a year, with that predicted to rise to more than £3.5 billion in the next decade. Why should the taxpayer be burdened numerous times?

According to the OBR, environmental levies are around £12 billion. This amounts to £400 per household in the UK. Yet the cost of offshore wind is less than current market prices and those agreed in auction rounds. If renewables are supposedly cheaper, I query why we are paying these subsidies in the first place. The truth is that the Government’s clean energy by 2030 agenda will require substantial levels of borrowing, which will be spent on subsidising renewable energy technologies. This rushed target will only cost the consumer more. It will not cover energy bills by the £300 a year promised during the election campaign.

Amendment 130 in the name of my noble friend Lord Frost would prevent the Bill being passed until the Secretary of State publishes a report calculating the costs to consumers and taxpayers of the UK renewable energy industry. The amendment raises the issue of transparency. If we are to pass a Bill that is so financially consequential, we must have sight of the Government’s current spending on renewable technologies.

Amendment 118B from my noble friend Lord Hamilton of Epsom would prevent GB Energy investing in a project

“that relies wholly or in part on”

government subsidies. Amendment 129 would prevent the Act being passed until

“the Secretary of State publishes a report on the appropriateness of further Government subsidy for offshore wind developments”.

These three amendments neatly touch on the concerns that I have raised. I ask the Minister to thoroughly consider the worries expressed by my noble friends.

[Lord Hunt of Kings Heath (Lab)]

My Lords, I am grateful to all noble Lords who have taken part in this debate, which reflects previous debates in Committee. It started with the noble Lord, Lord Hamilton, being worried that GBE will invest badly, not make money and invest in speculative projects, which he thought the Treasury might encourage it to do. My experience of the Treasury is that that is not how it works out in practice. Our challenge is encouraging the Treasury to make investment decisions, and the scrutiny with which it approaches this matter can be described as vigorous.

[Lord Hamilton of Epsom (Con)]

Does the Minister anticipate that the Treasury will have a veto on anything that Great British Energy invests in?

[Lord Hunt of Kings Heath (Lab)]

No, I do not imagine the Treasury will have a veto, but I think it will keep a careful eye on the work of GBE. I have already mentioned in previous debates the number of controls that will be in place.

Noble Lords argue this many ways around, but we are trying to reach a middle ground where we get the benefits of a company with people on the board who are very experienced in this area making hard-headed commercial decisions, because we want GBE to be successful and to make a profit. On the other hand, it is also a public sector body accountable to the Secretary of State and therefore subject to the normal public sector controls. The skill of the GBE board will be to find a way through this, and that is why we wish to give it as much operational independence as possible.

At the risk of repeating myself on the cost issue, in its whole-system analysis undertaken for the previous Government, my department concluded that a renewables-led system, complemented by flexible technologies to ensure that supply and demand are balanced, alongside technology such as nuclear, would form the cheapest foundation for a future decarbonised power grid. Since that analysis was published, a range of external commentators, such as Energy Systems Catapult and the Climate Change Committee, have published analysis which reaches similar conclusions.

Noble Lords have quoted Dieter Helm and other commentators but I believe that there is a general consensus on the broad make-up of the most cost-effective future systems, although there will be some disagreement over potential technologies in future. For instance, the noble Lord, Lord Hamilton, raised hydrogen, and, in our short debate on small modular reactors in the House this afternoon, there was a question about value for money in their development. I readily accept that; however, we think that the general mix is the most cost-effective way to go forward.

Amendment 118B seeks to add after Clause 7 a new clause that would prevent GBE investing in any project that relies wholly or in part on government subsidies. I am not in favour of that. First, GBE is operationally independent, so commercial investment decisions need to be made separately from government decisions on subsidy provision. Secondly, GBE will be focused on driving clean energy deployment through its functions. The Government provide different subsidies in different ways across the energy market, so limiting GBE’s activities to areas where there are no government subsidies would unnecessarily constrain the company.

Coming back to a point from the noble Lord, Lord Hamilton, the advice we have had from the Climate Change Committee is that CCUS would enable us to have the lowest-cost pathway to net zero. It described it as

“a necessity, not an option”

for maintaining our climate commitments.

The way in which GBE will interact with existing and new government policies and influence the energy system will clearly be determined on a case-by-case basis. We will clarify the relationship between existing schemes and GBE in due course. I assure the Committee that we are currently seeking advice on Great British Energy’s compliance with the Subsidy Control Act in both its establishment and operation.

Amendments 129 and 130 propose additions to Clause 8. In essence, they seek to delay the commencement of the Act until the Secretary of State publishes a report on the appropriateness of further government subsidy for offshore wind developments, as well as a comprehensive report detailing the full costs to consumers and taxpayers of the UK renewable energy industry. Noble Lords will not be surprised to hear that I resist these amendments. We want to see Great British Energy get set up as quickly as possible and get on with the job. Frankly, I do not see it as necessary for those reports to be published.

On Amendment 129, as I said in our debate on the previous group, we are committed to increasing radically the deployment of offshore wind, which provides us with secure, domestically generated electricity. As I have already mentioned, we want 42 to 50 gigawatts of offshore wind by 2030, up from 15 gigawatts today. The contracts for difference scheme is the Government’s main mechanism for supporting new renewable electricity generation projects. We continue to evolve that scheme to ensure that it is aligned with the Government’s wider objectives. In addition, the clean power action plan that we published last year reconfirmed our view, and that of NESO, that clean power can be delivered by 2030 without increasing costs to the consumer and with scope for lower bills.

Overall, I really think that GBE should now be allowed to get on with the job. I do not believe that putting in amendments that would prevent it investing in schemes that attract subsidies is the right way forward. The Government would certainly resist that.

[Lord Hamilton of Epsom (Con)]

My Lords, my concerns remain. This is such a thin Bill and commits the Government to so little—other than spending other people’s money in inordinate quantities—that one can see the potential for things going wrong very easily. I beg leave to withdraw my amendment.

--- Later in debate ---

[Lord Hamilton of Epsom (Con)]

My Lords, I speak to the two amendments in my name. The first, Amendment 126, is about the jobs in Aberdeen. Unfortunately, this amendment gets involved only in the number of jobs that are created by Great British Energy in Aberdeen. As my noble friend Lord Trenchard has already referred to, it does not make any reference to the number of jobs that have already been destroyed by the Secretary of State for Energy in not granting any more licences in the North Sea, which will have—

[Lord Hunt of Kings Heath (Lab)]

It is all very well the noble Lord saying that, but I remind him that a lot of jobs were lost on the UK continental shelf during his Government’s stewardship.

[Lord Hamilton of Epsom (Con)]

Yes, but the fact that a number have gone already because the industry is declining is not a compelling reason for destroying even more, in my view—but I hear what the Minister says.

Of course, this contrasts tremendously with the inaugural address from President Trump, saying, “Drill, baby, drill”. He is quite keen on expanding the oil industry in the United States, which is interesting because he slightly gives the impression that the United States has been rather laggardly in producing oil. I have some quite interesting statistics from the Library that indicate that, throughout the Biden years, despite all the green initiatives that were produced, the United States was actually the biggest producer of oil in the world. In 2020, it produced 11.3 million barrels a day, and in 2023 it produced 12.9 million barrels a day. Of that, it was using about 8 or 9 million barrels for its own consumption and exporting the rest. The idea being put out by the Trump regime that drilling for oil will somehow be a new venture is quite interesting; it has been going on, fit to bust, under the Biden Administration—you slightly wonder how that ties in with all the green credentials that he was boasting about, when they were producing these vast quantities of oil. They were way ahead of the Russians, who were the second-biggest producer of oil, at about 10 million barrels a day.

We are now in an interesting situation, as there seems to be a recognition by the Trump regime that we will go on needing hydrocarbons and oil way into the future. At the end of the day, the idea that we can somehow phase all this out in this country slightly defies credibility because, as we have discussed already, the reserves of oil are higher than they have ever been, and we will go on needing it for quite some time. It is rather extraordinary that we do not produce our own oil in the North Sea for our requirements. As it is, we will have to import it from other places, creating CO₂ emissions and so forth on the way.

--- Later in debate ---

[Lord Offord of Garvel (Con)]

I thank the noble Earl, Lord Russell, for moving his amendment and all noble Lords who made contributions or comments. Perhaps I may take them thematically, starting with the importance of oversight. As regards the amendments in the name of the noble Earl, Lord Russell, we on these Benches are in favour of the sentiment of Amendments 122 to 124.

As mentioned by the noble Lord, Lord Vaux, the strategic priorities for GB Energy are not included in the Bill. Indeed, we have not had sight of those most important principles; we simply do not have any concrete examples of what GB Energy as a company will be trying to achieve. I must therefore ask the Minister: how can we support the Government if we do not even know what the proposed investment vehicle will put taxpayers’ money into? This House and the other place must have sight of the strategic priorities of GB Energy so that we can assess its goals, what it intends to achieve, how these goals will be achieved, in what order they will be prioritised, and how much money will be spent on those goals and priorities.

I turn to Amendment 125 in my name, which ensures that the Bill cannot come into force until a financial framework document has been laid before Parliament. Much like the noble Earl, Lord Russell, I am deeply concerned that we have not yet had sight of this most important information. I do not feel it is possible to move forward with the Bill, or GB Energy itself, until we have understood its financial structure. I therefore strongly urge the Government to produce a financial framework for GB Energy and let us examine it.

Amendment 126, in the names of my noble friends Lord Hamilton of Epsom and Lord Trenchard, requires the Secretary of State to publish an assessment of the impact GB Energy will have on the number of jobs in Aberdeen. The Government are already putting at risk 200,000 jobs in the North Sea oil and gas sector in the UK but, of course, this will hit the city of Aberdeen particularly hard, as it is the centre of the UK domestic oil and gas industry. None of us would object to the Government looking to bring a more diverse range of sovereign energy sources online, but we should not be sacrificing hundreds of thousands of jobs or people’s livelihoods in the process.

The transition to green energy, if it is managed correctly and done in an orderly fashion—not on an artificially accelerated basis—has the opportunity to provide a swathe of new well-paid jobs. We must therefore hold the Government to their word that GB Energy will create 650,000 jobs, which is a big number and target. It is for this reason that the Secretary of State must publish an assessment of the impact GB Energy will have on the number of jobs in Aberdeen. That will show noble Lords whether the Government are keeping their word, whether these jobs are created and will be of benefit to Aberdeen, and whether we have indeed seen the transition talked about.

Finally, I turn to Amendment 127 in the names of my noble friends Lord Hamilton of Epsom and Lord Trenchard. That amendment will ensure that the Bill cannot come into force until the Secretary of State has published a report on the cost and viability of the Government’s net-zero targets. We should transition away from the use of fossil fuels and reduce the volume of greenhouse gases we emit into the atmosphere, but it must be done in an economical and sustainable manner. I hope that the Minister has listened carefully to these concerns.

[Lord Hunt of Kings Heath (Lab)]

My Lords, I do listen carefully to what noble Lords have said. Our final debate in Committee, as the noble Lord, Lord Vaux, suggests, takes us back to some of the early debates and concerns that noble Lords have. I am particularly grateful to the noble Earl, Lord Russell, for his support. The point he made is that the cost of doing nothing will, in the end, be much more expensive than the cost of net zero. I say to the noble Lord, Lord Hamilton, that sticking to oil and gas is certainly not a free lunch, either. The noble Earl also pointed to the declining reserves in the UK continental shelf. This is a fact of life and why there were losses of jobs in Aberdeen under the previous Government. I will come back to the issue of Aberdeen in a moment.

Clearly, the effect of the amendments will be to defer the commencement of most provisions in the Bill until several requirements have been met. They include the laying before and approval by Parliament of a framework document and statement of strategic priorities, the publication of an outline statement of strategic priorities, the publication of an assessment on the expected impact of the Act on the number of jobs in Aberdeen and the publication of a report on the cost and viability of the Government’s net-zero targets. We have already discussed many of these matters in Committee and the Committee will be aware of the Government’s views and intents on this.

Our aim is to get this Bill on the statute book as soon as we can. It is also our clear intention that the statement of strategic priorities cannot be produced without the full involvement of Great British Energy in order to get its expertise, including that of the newly appointed non-executive directors, to inform the statement. This is why we do not believe that we can publish the statement of strategic priorities either during the passage of the Bill or before Royal Assent. Once parliamentary approval is given, we will ensure that we move as quickly as we possibly can to produce the statement.

On accountability, in the end, Ministers will agree with the statement that we are accountable to Parliament. I do not think your Lordships’ House is backward in holding Ministers to account for what they do. We have the Select Committee process, there are numerous opportunities for scrutiny of what we decide in relation to the statement and, of course, the statement is also subject to revision from time to time.

On the framework document, I suppose I can only repeat what I said before. We are committed to producing a framework document. It will, as framework documents do, cover the governance structure, the requirements for reporting and information sharing, and the financial responsibilities and controls. I have given this assurance from the Dispatch Box, so that is a government statement of what is going to happen. The framework document will be extensive and will follow the normal course of action. I hope that assures noble Lords that everything is being done in a proper way and with proper accountability, ensuring that Great British Energy is subject to the appropriate controls—as is only right for a body that is ultimately responsible to the Secretary of State for its activities.

We think that it is a very good thing that GBE will be based in Aberdeen; a significant proportion of GBE’s staff will certainly be based there. We think that Aberdeen will benefit from new jobs in the economy created because of GBE’s investment in renewable energy projects. I understand and very much accept the need to ensure, as we have talked about, a just transition for the people involved in the oil and gas sector. We want to do everything we can to enable offshore workers to lead the world in the industries of the future, which is why we are working very hard with businesses, employees and workers to manage our existing fields for the entirety of their lifetime and are putting in place programmes to support a transition. It is interesting that research from Robert Gordon University shows that 90% of oil and gas workers have medium to high transferable skills for offshore renewable jobs; knowing the skills that people who work in the North Sea bring to the jobs they do, that does not surprise me.

This is all I will say to the noble Lord, Lord Hamilton, in relation to President Trump’s decisions: it is interesting that, in his first term, the US actually saw quite a drive into renewable energy. It may be that we will still see the same direction under the new Administration in the end; that is for the US Government to decide. We as a Government are sticking to the Paris Agreement and to the need to get to net zero and clean power as soon as we possibly can.

[Lord Hamilton of Epsom (Con)]

There are interesting comments in the press that, although President Trump is committed to increasing the amount of oil the United States produces, that is very much dependent on the price. The frackers of oil and gas in the United States will frack it if they can get a good price for it; if the price drops, they will hold back, so it does not follow that he will actually increase the oil production of the United States by saying, “Drill, baby, drill”.

[Lord Hunt of Kings Heath (Lab)]

My Lords, that is a very interesting comment indeed.

I turn to Amendment 127, the effect of which I resist because in the end, it is inconsistent with our intention to set up GBE as quickly as possible. I understand noble Lords’ concerns about information being available now, but we are keen to see GBE up and running. The statement of strategic priorities will ultimately be subject to parliamentary scrutiny. We want GBE to play a full part in the discussions on it and the framework document will be extensive, following normal procedure.

On that basis, the Government are not willing to move in that area. However, I am looking at some of the issues around the statement of strategic priorities, particularly in relation to timing, and will perhaps give a sense of some of the pointers that will be raised in it. I will continue to have discussions with noble Lords on that between Committee and Report.

[Earl Russell (LD)]

I thank all noble Lords who have taken part in this debate. I start by reflecting the Minister’s last sentence in his response to this group of amendments. I thank him and his officials for the open nature with which they have engaged and continue to engage with us. The prospect of further discussions on these issues prior to Report is very welcome from my point of view.

As I have said, I recognise the need to set up GB Energy at speed, and I recognise that it needs to exist to feed into the strategic priorities. I particularly welcome the Minister’s last sentence. As I said, my amendments in this group were about trying to find a compromise and a way forward. I also welcome his comments from the Dispatch Box on the framework document, guaranteeing that it will be produced and will be extensive and follow the proper course of action. Again, those are welcome documents, and I am sure that Members of this Committee will note them.

It is welcome that GB Energy will be headquartered in Aberdeen. It is my opinion that GB Energy will help to create good and stable green jobs. The Minister said that 90% of oil and gas offshore jobs have high levels of transferrable skills. I think we can all agree that we need a just and fair transition for the people who work in our oil and gas industry, and we all need to keep that in mind. The Committee will also note the Minister’s comments on Amendment 127. With that, I thank all noble Lords for taking part in what has been an interesting set of debates.

Electricity Capacity Mechanism (Amendment) Regulations 2024

Lord Hunt of Kings Heath Excerpts

Wednesday 22nd January 2025 Lords Chamber

Moved by

[Lord Hunt of Kings Heath]

That the draft Regulations laid before the House on 18 and 21 November 2024 be approved.

Relevant document: 10th Report from the Secondary Legislation Scrutiny Committee. Considered in Grand Committee on 20 January.

Motion agreed.

Clean Heat Market Mechanism Regulations 2024

Lord Hunt of Kings Heath Excerpts

Monday 20th January 2025 Grand Committee

Moved by

[Lord Hunt of Kings Heath]

That the Grand Committee do consider the Clean Heat Market Mechanism Regulations 2024.

Relevant document: 10th Report from the Secondary Legislation Scrutiny Committee

[The Minister of State, Department for Energy Security and Net Zero (Lord Hunt of Kings Heath) (Lab)]

My Lords, I beg to move that these regulations, which were laid before the House on 21 November 2024, be approved. The instrument forms an important part of the Government’s commitment to make the UK a clean energy superpower and deliver warmer homes. It is the Government’s mission to make energy affordable and to strengthen the UK’s energy security. By supporting heat pump manufacturing and encouraging innovation, we are giving more consumers the choice to make the transition to low-carbon, high-efficiency heating.

With over 80% of homes using fossil fuel gas for heating, there is a huge opportunity to deliver affordable and efficient heating and protect consumers from the costly vagaries of international gas markets while reducing a major source of greenhouse gas emissions. Heat pumps, which are on average three times more efficient than a gas boiler, are suitable for the overwhelming majority of UK homes, and they have a role of paramount importance role to play in delivering this ambition. That is why in November last year the Government announced a range of first policy steps under our warm homes plan, alongside investment in training and British manufacturing capability, to make it easier and more affordable for consumers to make the switch to a heat pump.

The clean heat market mechanism will provide industry with the stability and confidence to scale up and invest in the heat pump supply chain. It will also ensure that British businesses can benefit from the transition to low-carbon heating as they create future-proofed skilled jobs. Importantly, the scheme protects consumer choice in when and how to upgrade to clean and efficient heating, while providing industry with the encouragement to develop a wider range of products and services for consumers to choose from as the transition gathers pace. Neither this scheme nor any other requires home owners to remove or replace their boiler against their will. For their part, we know that businesses are ready to drive innovation, build relationships with installers across the country and continue to make heat pumps more affordable and more accessible to home owners.

Today’s statutory instrument establishes the scheme from 1 April this year, setting its rules, parameters and timelines under enabling powers established in the Energy Act 2023. The scheme is designed to accelerate deployment of heat pumps, thereby driving down energy demand and greenhouse gas emissions from buildings. It complements, and is complemented by, a range of other policies, such as grant funding for heat pump installations through the boiler upgrade scheme and other schemes; investment in British manufacturing through the heat pump investment accelerator competition; and support for installer training through the heat training grant, to provide wraparound support for a transformation of the low-carbon heating market over time.

The scheme sets a requirement for heating appliance manufacturers to achieve the sale and installation of a proportion of heat pumps relative to their gas and oil boiler sales or to acquire equivalent credits from other heat pump manufacturers. For the first year of the scheme, starting this April, this is set at 6% of relevant boiler sales. The record number of heat pumps installed last year, a full 43% growth in certified installations in 2024 versus the previous year, would suggest that it is right to support the development of a thriving UK heat pump market and that the target of 6% is entirely achievable—and there is no reason to believe that there will be any undue costs faced by manufacturers.

The proposals for the scheme were subject to three rounds of public consultation—two under the last Government, in late 2021 and mid-2023, then a third in mid-2024. These consultations sought views on, among other things, scheme targets, technologies in scope, credit trading and scheme administration. A wide range of organisations, representative and trade bodies and industry professionals, as well as individual members of the public, responded on each occasion.

The Government are committed to working in partnership with industry on delivering the warm homes plan, and since coming into office have been engaging with market actors from across the supply chain to consider views on the right mix of policies and other enabling actions needed to support the expansion of the UK heat pump market that is needed. The Government have also taken steps to provide appliance manufacturers with more time and space to adapt to the introduction of this mechanism, scale up supply chains and expand heat pump operations. This includes a decision to reduce the payment in lieu for any missing heat pump credits to £500 for the first year, which is a change from the £3,000 previously proposed.

We will continue to engage closely with industry both on considerations related to the future evolution of the clean heat market mechanism and, more broadly, on the development and delivery of the warm homes plan so that we can put the UK’s world-leading businesses at the heart of leading the transformation of the heating market. The clean heat market mechanism is an important part of the framework that the Government are putting in place to support a much-needed acceleration in our transition to low-carbon heating, strengthening our energy independence and delivering warmer homes for all. I beg to move.

--- Later in debate ---

[Lord Offord of Garvel (Con)]

My Lords, the clean heat market mechanism represents a clumsy attempt by the Government to impose unrealistic and burdensome targets on the heating industry. While the overarching goal of reducing carbon emissions and decarbonising heating in the UK is commendable, the regulatory approach taken here is flawed.

The mechanism requires that major boiler manufacturers—those selling more than 20,000 gas boilers or 1,000 oil boilers annually—must ensure that at least 6% of their sales consist of heat pumps by 2025-26. Although heat pumps, which run on electricity rather than gas, are often hailed as a cleaner alternative, these regulations fail to consider the practical challenges faced by both manufacturers and consumers.

This mechanism promises market certainty, investment in low-carbon technologies and a reduction in heat pump costs through increased competition. However, these lofty claims are undermined by overly ambitious targets, coupled with the Government’s failure to address the considerable barriers faced by consumers. Far from facilitating a smooth transition, these regulations risk causing significant disruption to the industry.

Set to run from April 2025 to March 2029, the scheme faces growing doubts about its ability to meet its long-term target of 600,000 heat pumps sold annually by 2028. This concern is further exacerbated by the fact that heat pump sales remain alarmingly low, with both the National Audit Office and the House of Lords Environment and Climate Change Committee warning that current sales levels are far too low to meet the proposed targets.

Returning to the effects of this SI, this initiative imposes stringent sales targets on large boiler manufacturers, forcing them to meet heat pump quotas. If these quotas are not met, manufacturers will face damaging fines, in some cases of £3,000 for every heat pump missed. Although manufacturers can carry forward up to 35% of their annual target to the following year, this strain on the industry cannot be overstated. When the original plans for the CHMM were first announced in 2024, some manufacturers pre-emptively raised their prices to account for the anticipated fines, only to lower them after the previous Conservative Government pragmatically delayed the scheme in March to allow the industry more time to prepare. Will this Government consider doing the same?

Furthermore, it is not only the industry that will face a financial burden from these regulations; the most pressing concern is the significant impact on consumers. Although environmentally beneficial, heat pumps remain expensive for many households, with installation costs ranging from £6,500 to £11,500. This is not just a challenge; it is a significant obstacle. Many families are already struggling with the cost of living, and these regulations threaten to impose yet another financial burden. The Government cannot continue to ignore the stark reality that these high costs will place heat pumps well beyond the reach of many ordinary households unless substantial and sustained financial support is provided.

The burden of financing such an expensive transition should not fall squarely and only on consumers. Despite the grants available through the energy company obligation and the boiler upgrade scheme, which offer up to £7,500 in England and Wales, the high upfront cost of heat pumps remains a significant barrier. This policy risks making a greener future inaccessible to those who need it the most.

Moreover, it is essential to question whether the Government have adequately considered the industry’s capacity to meet these targets. The regulation requires major manufacturers to ensure that a specific proportion of their boiler sales, 6%, consist of heat pumps. However, given that the heat pump market is still in its early stages, with many manufacturers struggling to scale up production, where is the recognition of this challenge?

Lastly, the proposed scheme risks undermining the very people it aims to help. The Government’s approach, imposing fines on manufacturers that fail to meet the sales targets, could lead to price hikes for consumers. There is already evidence that some manufacturers have raised prices, as has been said before, and if that trend continues it will not be the manufacturers that bear the cost; it will simply be passed on to the consumer.

In conclusion, although the Government may be well meaning, the clean heat market mechanism, as it stands, is flawed and could have serious unintended consequences for consumers, manufacturers and the wider heating industry. It is vital that the Government reconsider this approach, provide proper financial support for consumers and work with the industry to ensure that the transition to low-carbon heating is both achievable and affordable.

[Lord Hunt of Kings Heath (Lab)]

My Lords, I am most grateful to all noble Lords who have taken part in this interesting debate. The noble Lord, Lord Offord, says that although he understands the intent behind the regulations, we are clumsy and have overambitious targets. He asks us to repeat his Government’s actions in delaying or not going ahead with implementation. We are not going to do that. We are confident that we have a scheme that is practical. As a new Government, we have engaged in extensive discussions with industry.

The noble Earl, Lord Russell, was critical of us for reducing the level of the fine. The fact that we have done so shows that we are concerned about ensuring that we introduce this in an evolutionary way, which is why we have started with the fines at the level we have set. We are confident that industry can rise to the challenge. The noble Lord, Lord Offord, said that sales of heat pumps were disappointing. I thought he might have said that in the last year, 2024, sales had an encouraging increase. We want to build on that with the incentivisation for householders plus the introduction of potential fines for manufacturers, although overall we think that manufacturers will be able to rise to that challenge.

On the issue of cost, which a number of noble Lords raised, of course heat pumps cost more money than gas boilers, but as when one introduces most new technologies, or extends them, the price will come down. We think it will fall significantly, making pumps a more attractive and affordable options for UK households. As noble Lords have referred to, at the moment we are funding installations to kick-start the market, for example through schemes such as the boiler upgrade scheme and the warm homes local grant.

The noble Lord, Lord Lilley, asked whether non-UK manufacturers of heat pumps could earn and sell credits under the scheme. The intention here is that any manufacturer of heat pumps sold on the UK market acquires credits and can make them available to other parties in the scheme. Of course, there is no obligation on manufacturers to acquire those credits; this is one of the various options available to them. In parallel, the Government are supporting the expansion of UK heat pump manufacturing through the heat pump investment accelerator competition. The noble Lord is absolutely right that further legislation would be required to revise targets for future years of the scheme.

The instrument today sets a target for the first year. This would roll over to year 2 if there were no amendment by further legislation. Here, the Government have committed to consult further this year, before setting targets for future years, and then returning to the House if we wanted to change the target. I hope this reassures noble Lords that we are fully engaged with industry. We will obviously discuss the implications carefully before we come back with any further proposals.

--- Later in debate ---

[Lord Lilley (Con)]

I am grateful to the Minister for letting me intervene and for answering a number of my questions. On his point about costs coming down, is he suggesting that they will come down in Britain because they are artificially high to start with, or because we will discover technological ways of producing it that have not been found in continental countries, where they already have large-volume manufacturing? That is one thing.

Could the Minister also respond to another point I made, admittedly in rather garbled form, so I can excuse him for not replying? The correct figures in his document are that the costs of this process are £195 million, while the benefits from reduced carbon emissions are £187 million—less than the costs—but, fortunately, that is supplemented by £34 million of benefits from cleaner air. The whole thing is pretty marginal. Could he comment on the marginality of the cost benefits of this extraordinary regulation?

[Lord Hunt of Kings Heath (Lab)]

My Lords, surely the point is this: we have to decarbonise our home stock. At the moment, 80% of homes use gas for heating so, as part of our plans towards decarbonisation and moving on to net zero, this is an essential mechanism that we need to take forward. As for the cost-benefit analysis, I do expect the cost of the heat pumps to come down in relative terms, in future. I am not prepared to engage with the noble Lord on the exact whys and wherefores of how that might happen. I just look in history—

[Lord Lilley (Con)]

So leave it to miracles.

[Lord Hunt of Kings Heath (Lab)]

No. The noble Lord referred earlier to mystical or quasi-religious belief. I regard myself as a high church Anglican atheist, and I do not bring a fervour to this from belief; I think that the rational response to what we are doing, and to the risk of climate change, is so huge that we have to use these kinds of mechanisms and do something about housing and the current use of gas. This is the way that we think we need to go forward, but we will keep it under review and look closely at costs, manufacturing capacity in this country and the public’s ability to ensure that they have good installations. Overall, I commend these regulations to the Committee.

Motion agreed.

Electricity Capacity Mechanism (Amendment) Regulations 2024

Lord Hunt of Kings Heath Excerpts

Monday 20th January 2025 Grand Committee

Moved by

[Lord Hunt of Kings Heath]

That the Grand Committee do consider the Electricity Capacity Mechanism (Amendment) Regulations 2024.

[The Minister of State, Department for Energy Security and Net Zero (Lord Hunt of Kings Heath) (Lab)]

My Lords, this instrument was laid before the House on 18 November 2024. It seeks to revoke and alter several provisions in assimilated Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity, relating to the capacity market. For ease, I will refer to this as the assimilated electricity regulation. The instrument makes targeted, technical amendments which are intended to support the continued operation of the capacity market, Great Britain’s main mechanism for ensuring security of electricity supply. It does not introduce any practical changes to the operation of the capacity market.

Before outlining the specific provisions of this draft instrument, I will briefly provide some context. Great Britain’s electricity capacity market was introduced in 2014 and is designed to ensure that sufficient electrical capacity is operational and on the system to meet future predicted demand, thereby maintaining security of supply. The capacity market scheme provides all forms of existing and new-build capacity with the right incentives to be on the system to deliver when needed. It covers different types of electrical capacity, including generation, storage, consumer-led flexibility and interconnection capacity.

Through capacity market auctions held annually one year and four years ahead of delivery, the aim is to secure the capacity needed to meet future peak demand under a range of scenarios. This is based on advice from the capacity market delivery body—the National Energy System Operator. Capacity providers which are successful in the auctions are awarded capacity agreements, which range in duration from one to 15 years.

The capacity market was introduced in 2014. Since then, it has contributed to investment in just under 19 gigawatts of new, flexible capacity needed to replace older, less efficient plant as we transition to a net-zero economy. The capacity market was originally approved under European Union state aid rules for a period of 10 years. Following the United Kingdom’s withdrawal from the European Union, a requirement in EU law for approval of up to 10 years was brought into domestic law as part of the assimilated electricity regulation. To date, the capacity market has been successful in ensuring that Great Britain has sufficient electrical capacity to meet demand and continues to be required to maintain security of supply and provide confidence to investors.

On the detail of the instrument, it revokes and alters a number of provisions relating to capacity mechanisms in the assimilated electricity regulation, including Article 21.8, which requires that

“Capacity mechanisms shall be temporary”

and

“shall be approved … for no longer than 10 years”,

and other references to such mechanisms being temporary. The instrument also revokes provisions that either are no longer considered to be necessary or require minor correction following the UK’s withdrawal from the European Union. We are seeking to make these changes so that our post-EU exit legal framework reflects the continuation of current arrangements for maintaining a secure electricity supply, since there remains an ongoing need for the capacity market to ensure sufficient investment in reliable electricity capacity.

Furthermore, following the UK’s withdrawal from the European Union, the domestic subsidy control regime was introduced. The subsidy control regime does not require subsidy schemes to be granted an approval or limited for a specified period. Therefore, the approval requirement in the assimilated electricity regulation does not reflect our post-EU exit arrangements. Of course, it is important that we keep the capacity market under review and there are multiple controls set out in domestic legislation, all of which will be retained. This includes a statutory requirement for my department to review the capacity market regulations every five years, which provides an opportunity to review the need for the scheme. Ofgem also undertakes an independent five-yearly review of the capacity market rules. Furthermore, the Secretary of State can decide not to hold a capacity market auction. These embedded controls all remain as part of the wider domestic capacity market legislative framework.

In conclusion, this draft instrument revokes and alters certain provisions related to the capacity mechanism in the assimilated electricity regulation. This includes a requirement for an approval lasting no more than 10 years, as well as references to capacity mechanisms being of a temporary nature. These changes are being made to ensure that our domestic legislative arrangements reflect the continuation of the capacity market, which is Great Britain’s main mechanism for ensuring electricity security of supply. I beg to move.

[Lord Lilley (Con)]

My Lords, I want to use this as an opportunity simply to ask a question of the Minister. Why do we not take the advice of Professor Dieter Helm, in his review of energy policy, which was that instead of us providing the capacity mechanism centrally, we require anyone providing electricity into the system—wind generator, solar generator or whatever—from an intermittent source to provide firm power, in other words to pay for some capacity for the times when the wind is not blowing? If that were done, this whole arrangement would be unnecessary. We would have a much clearer idea of the total cost of intermittent energy if the supplier were also paying for some of the back-up capacity that is necessary to meet the occasions when intermittency prevents delivery of the power.

The only argument I have heard against this is that, if you do it wind farm by wind farm, the aggregate amount of capacity would be statistically greater than is necessary to meet the fact that some wind farms will be producing when others are not, but that surely can be overcome by saying that a certain statistical proportion of the necessary capacity should attach to any intermittent generator. Then we would have a more rational, more credible and more manageable system than the one that we have under these regulations.

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I now turn to some questions and concerns. Although these amendments are designed to improve the efficiency and flexibility of the capacity market, one or two questions must be addressed. Given the removal of the 10-year approval requirement for the capacity market, how do the Government plan to ensure that long-term energy investments, particularly in low-carbon technologies and flexible capacity, are sufficiently incentivised to continue to support the transition to a net-zero energy system by 2050? Finally, with the removal of the requirement for the Secretary of State to prepare and monitor an implementation plan for the capacity market, what steps will the Government take to ensure continued oversight and transparency in the market’s operation, particularly as it evolves to address future energy challenges and technological advancements?

[Lord Hunt of Kings Heath (Lab)]

My Lords, I am most grateful to noble Lords who have taken part in this short but none the less interesting debate. As we move to a clean power system and closer to achieving net zero, it will be critical to ensure we have adequate flexible electricity capacity that can be ramped up quickly when renewable generation is low, such as on dark, still days.

We believe the capacity market remains an effective insurance mechanism for security of electricity supply, providing revenue certainty to market participants and a secure and affordable electricity supply that families and businesses can rely on. I am grateful to the noble Lord, Lord Offord, for his general support for the regulations. I certainly acknowledge that a lot of the groundwork was undertaken by the previous Government, as he suggested. I can also assure him that we as a department will continue to provide oversight of the way the arrangements will operate.

As for the point raised by the noble Lord, Lord Lilley, the noble Lord, Lord Offord, referred to the REMA consultation, which we have debated as well. I think that Professor Helm’s proposals were considered by the previous Government, who decided not to take them forward. My understanding is that there was thought to be insufficient evidence that putting responsibility for procuring flexibility on generators, which would mean decisions being taken at a project rather than a system level, would lead to a low-cost capacity mix. Many respondents also expressed concern that this option would increase risks on renewable generators, leading to higher strike prices and overall system cost without the compensating benefits of efficiency or security of supply. We remain of the view that the current system is probably the best way to manage the issues that I have referred to.

I thank the noble Earl, Lord Russell, for his support. The question of reviews was also implicit in the question from the noble Lord, Lord Offord, and alongside the five-year reviews, each year an assessment is made of the required capacity to meet the expected level of peak demand in four years’ time. The majority of the predicted capacity required is secured well in advance. A proportion of capacity requirement is secured one year in advance, based on latest demand forecasts, so it is a continuous process, if you like.

We keep the capacity market mechanism itself under constant review and consult regularly on amendments and incremental reforms. In late 2024 we consulted on a number of changes to the capacity market to ensure security of supply and enable flexible capacity to decarbonise. We hope this will ensure that supply can meet demand as we transition to net zero.

As for the comment about the mix of technologies going forward, the report by NESO and my department’s clean power action plan set out our view of the technologies by around 2030. We will rely on unabated gas as the main mature, reliable technology capable of filling that role at the moment. We expect that the amount of unabated gas we need will reduce as we deploy more low-carbon technologies. Our aim is to move gas into a reserve role, used primarily to ensure security of supply.

The noble Earl also mentioned tidal and other technologies, and we remain open to those possibilities. He may know that I am meeting the noble Lord, Lord Alton—tomorrow, I think—to discuss tidal, so we are not ruling out the use of those technologies. I am grateful to noble Lords.

Motion agreed.