Renewable Energy: Costs

Lord Offord of Garvel Excerpts

Thursday 14th November 2024 Lords Chamber

[Lord Offord of Garvel (Con)]

My Lords, it is a pleasure to wind up this interesting debate on energy on behalf of the Opposition. Indeed, it is the second such debate we have had in the last two weeks, with a third to come on Monday as we begin the discussion on GB Energy.

It is worth framing this debate in the context of the new Government’s stated ambition on this topic, which is to make Britain a clean energy superpower. They are now bringing forward specific proposals for cheaper zero-carbon electricity by 2030, accelerating to net zero.

It is worth reflecting again on the consensus that exists on net zero: that we have set a target of 2050; that at the moment the majority of our power—roughly three-quarters—comes from hydrocarbons and a quarter from non-hydrocarbons; and that our objective, over one generation, is to flip that on its head so that a maximum of a quarter comes from hydrocarbons, which will be green hydrocarbons, and three-quarters from non-hydrocarbons.

As to what that mix, or matrix, might look like, we have used words in the past such as a “balanced scorecard”. We have also discussed the fact that 2024 may not be the right moment to accurately predict what will make up that matrix or scorecard. We know the direction of travel, but as the noble Lord, Lord Browne, has mentioned, technology is advancing rapidly and costs will move accordingly. Therefore, there will be a debate to be had on how we move forward and in which area.

It is interesting, therefore, having set that scene, to think about the specific proposals we will be considering next week, because this is the first concrete step on this Government’s journey to that end. The keyword here is “accelerating”. A number of noble Lords have already expressed concern about this concept of accelerating, and why and how we do that.

Coming before us will be the Great British Energy Bill, and the Budget committed £8 billion of funds as a key enabler of the zero-carbon electricity target of 2030, which has been brought forward by five years. The NESO report has described the ambition to achieve zero-carbon electricity by 2030 as “immensely challenging”, requiring the UK to double its onshore wind capacity and triple its solar power; and it will depend on flexible power demand—a euphemism for rationing.

That is quite a considerable statement by NESO, and a number of experts have raised concerns that this is going to be too aggressive. In fact, as we know, the analyst Cornwall Insight says that we are on track to get 44% from renewables, but that decarbonising the electricity grid completely would require getting to 67%. That is a long way off, and we estimate that that will cost an extra £50 billion.

I think the point the noble Lord, Lord Elliott, was making is this. These are great targets to have, but the Scottish Government, for example, have had to roll back very considerably on targets that were set, it would appear, more for grandstanding than in reality. I think we all agree that we do not want to set false targets that we cannot achieve, when we have an opportunity to do this in the right way and in a considered fashion.

Turning to the Great British Energy Bill that is coming up next week, I am concerned that the Government may have to manage public expectations on this matter. I gained some direct understanding of this a couple of months ago when I was in Irvine for the BBC’s “Any Questions?” The audience was convinced that GB Energy will be a new low-cost energy supplier, and was quite taken with the figure being bandied around of £300 per household. Rightly or wrongly, this is now in the public domain. In reality, as we will next discover week, GB Energy is simply an investment fund that will channel £8 billion of taxpayers’ money into renewables, principally offshore wind farms.

That may or may not be the right thing to do, but at the moment that sector is well invested in by the private sector. There is already £35 billion of private sector money in offshore renewables, projected to rise to £60 billion. This is a well-functioning market, so why does the taxpayer need to put £8 billion into a sector that is already well invested in?

If we take the £300 per household and multiply it by 28 million households, by compete coincidence that comes to £8 billion. Therefore, one has to double one’s money in five years—by 2030. Renewables is a low return on investment category, in the region of 5%, whereas hydrocarbon is a high return on capital category, in the region of 20%. The private sector has been investing renewables over a 20-year period and does not contemplate doubling its money in the space of five years, so why would the taxpayer expect to be able to do something different and double the money in five years? It is, frankly, beyond me, and we will get to the point where these numbers will be interrogated and will need to be backed up.

It has also been asked whether, if there is a spare £8 billion going and we are told that money is tight, the taxpayer should be considering getting rid of some of the bottlenecks in the system. Should we be thinking about some of the plumbing, for example? Should the money be invested instead in the national grid?

The national grid was built in the 1960s and ’70s, when energy was generated in coal-fired power stations in Scunthorpe and had to be sent to Orkney, which was considered a remote region and therefore had to pay more for its energy. Today, the majority of the wind farms are off Orkney and now send energy back to Scunthorpe, but at the moment the pipes do not allow for that to happen. There is no storage capacity in the meantime, which is why we have this ridiculous concept of curtailment payments and subsidies to switch off wind farms when the wind blows and keep the gas-fired power stations open when the wind does not blow. Given this, a lot of thought needs to be put into how we proceed.

As the noble Baroness, Lady Finn, said, the real issue is that our electricity is too expensive. Our energy in the UK is too expensive. The cost of living crisis has been driven largely by the fact that basics—energy, housing and transport—are too expensive in the UK. Any Government of any shape or form should be working hard to bring down these costs. Why should it be that UK consumers are paying 43% more than French consumers in domestic usage and 83% more than the French in industrial usage? That should be the focus of government activity, rather than piling into a sector that is already well covered by the private sector as things stand. If we see the likes of the OBR saying that the levies will rise by £3 billion, which is £100 per household, and if the IFS is correct that these levies are fundamentally raising prices for consumers, I do not understand how that ties in with the narrative of any Government saying that we need to make the lives of our citizens better by urgently bringing energy prices down and not up.

I conclude by coming to the precise events on this issue that we saw in the other place last week, when the Government voted against an amendment to cut bills by £300, which they had promised would be a strategic priority for Great British Energy. That might be the wrong number, but can we please have some analysis on what the number will be? Why did the Government vote against an amendment that would hold them to their word if, at the end of the day, that is to the detriment of the British consumer? I am sure that we will get into this next week. When we come to the Second Reading, I will ask the Minister to confirm that these energy policies will cut energy prices as promised, and by how much.

Climate Agenda

Lord Offord of Garvel Excerpts

Thursday 24th October 2024 Lords Chamber

[Lord Offord of Garvel (Con)]

My Lords, I thank the noble Lord, Lord Lilley, for tabling this debate. I also welcome my noble friend Lady May of Maidenhead to her place in this House and congratulate her on a first-class and compelling maiden speech.

Speaking on behalf of the Front Bench of His Majesty’s Opposition and having read the document, I begin by applauding the Government on their ambition in this area—the ambition to

“make Britain a clean energy superpower”.

This is something I think all sides of the House can agree on. I note that the energy mission is very specific and stated as being to cut bills, create jobs and deliver security with cheaper zero-carbon electricity by 2030, accelerating to net zero. This has been highlighted by my noble friend Lord Leicester. The practicality of this is an area that I should like to explore this afternoon.

To remind ourselves what we mean by net zero at 2050, we can say that today we power our economy by roughly 75% hydrocarbon and 25% renewable, and that our target by 2050 is to spin that on its head and make it 75% renewable and 25% hydrocarbon. We can all agree that it is a good target. What we are talking about today is how we get there and at what cost.

The first thing to say about net zero is that it does not mean zero hydrocarbon. Hydrocarbon is a very important part of our energy supply. We still have high-intensity industries in this country that we need to power. We have days when the sun does not shine or the wind does not blow. We have a baseload that we need to take care of. However, we have an opportunity to make our hydrocarbon the greenest in the world. The science and technology being deployed in the North Sea is extraordinary. There will be no flaring, there will be carbon capture and there will be the use of green hydrogen. The technology will allow us to have the greenest hydrocarbon fuels in the world, thereby not relying on bringing in dirty fuel from elsewhere.

We will surely end up with a balanced scorecard. Is that not the point of this? We will have 75% non-hydrocarbon, whether—pick a number—50% or 60% renewable and 15% or 25% nuclear. If we do this correctly, we will have a balanced scorecard, which will be to everybody’s benefit.

The philosophical question is: who are we to determine the mix? Should it be left to bottom-up forces to determine where the best solutions lie, as technologies emerge, or should it instead be imposed by top-down ideologies? My worry about the Government’s 2030 target is that it is artificially unrealistic and driven by ideology and politics rather than practical. If that is the case, what are the costs? Will this cost the British consumer on the journey that we feel sure we will achieve by 2050?

Why do I say that the Government’s ambitions are perhaps unrealistic? To take the calculation of leading analyst Cornwall Insight, if the renewables are principally solar, onshore and offshore wind, they will provide 44% of UK electricity by 2030. That is the date that the Government have in mind, but 67% is required to fully decarbonise the electricity system. These are two quite different numbers, and Cornwall Insight calculates that it would cost a whopping extra £48 billion, on top of the £18 billion already committed, to achieve that target by 2030. The British taxpayers will ultimately bear that cost, through a combination of higher consumer bills and higher taxes.

The first question I pose to the Minister is whether the Department for Energy Security and Net Zero and the Treasury completed an impact assessment of this timetable and the 2030 target, including a sensitivity analysis that clearly takes account of energy pricing and capital cost volatility.

On energy transition, there was consensus in the House that we will go from 75% to 25% or the other way round. The worry is that we do not want to do this at the point of endangering jobs and prosperity. Take, for example, the impact on the North Sea oil and gas sector. This sector employs 220,000 people in the UK. These are highly technical and well-paid jobs, 93,000 of which are in Scotland. The windfall tax imposed by the previous Government, however reluctantly, at least had the merit of being temporary until 2025. It could be justified as preventing short-term profiteering after the Ukraine war. The current Government’s plan to increase that to 78% and extend it to 2029 will create a massive disincentive to investors in this sector, which remains important to our economy. This will be a barrier to growth. As one American investor said to me recently, “We now consider west Africa a more stable and appealing investment environment than the UK”.

Labour’s proposed ban on awarding any new North Sea oil and gas licences has already spooked producers. For example, the three owners of the Buchan field, 120 miles off the shore of Aberdeen, have already delayed by a year their planned start to oil production, until they have clarity on the Government’s intentions. Be aware that these gas licences are already in the pipeline. Approval was given many years ago and they are already baked into our net-zero plan for 2050. They are already baked into the green hydrocarbon fields, which will still allow us to have a quarter of our energy from that important source. Delays in this regard are not to the benefit of anyone, consumers or otherwise.

Just look at how the North Sea transition should work practically, rather than ideologically. The fact is that the biggest investors in renewables in the North Sea are the hydrocarbon companies, as they are reinvesting their profits in renewables. They hold the two key components for an orderly transition to net zero from oil, gas and renewables—capital and people.

I will give the House an example on capital. I had the privilege of sitting on the North Sea Transition Forum while I was a Scotland Office Minister. One of the investors in the North Sea said their target for capex in 2025 was going to be 50% in hydrocarbon, 50% in renewables to get a blended return on capital of 12.5%. Being a private equity guy, I asked, “What is your return on capital on renewables?”. After a short silence and a slight look at the floor, it emerged that return on capital is quite low, about 5%. If you do the maths at 50:50, you work out that the return on capital on hydrocarbon is 20% to get your blended 12.5%. That is market economics because wind and water are, on the face of it, relatively cheap to capture, and therefore they are not expensive things to generate and one has a lower return on capital, whereas hydrocarbon is more difficult, especially in the deeper fields in the North Sea, requires a lot more expense and therefore has a higher cost of capital. The point is that one is funding the other, and you cannot disconnect the two.

On the second thing around people, I had the privilege in that period of going to the offshore wind farm at Kincardine, off Aberdeenshire, which is the biggest in the UK. Fun fact: if you are doing media, take them on the boat to Kincardine wind farm. The journalist was so ill on the journey that he could not ask me any questions. What is notable about the sheer scale and size of these floating turbines is the technology and engineering required to power and maintain them. The skills that have been developed in the deep sea offshore oil industry are now being deployed to create our offshore wind farms overseas. That expertise is sought around the world. I did a couple of trade missions to Chile and Mozambique, two countries with large coastlines. UK expertise is required to help the world understand how to do offshore wind farms.

Hydrocarbon companies have the key components of capital and people. If we accelerate the transition just for ideological purposes—just to say at conferences that we have brought our target forward by five years—and along the way we reduce capital in the system and make skilled people redundant, I am afraid we will not get the transition we all want. There will be no transition at all; it certainly will not be a just transition. It will result in needless job losses and project cost inflation to the great detriment of British consumers and taxpayers. Offshore Energies UK thinks that trajectory of shutting down the North Sea too early will result in 42,000 job losses, 25% of this critical and well-paid sector. So my second question for the Minister is: have DESNZ and the Treasury done any impact assessment on the jobs and prosperity to come from this ideological early acceleration of the North Sea transition?

The issue—ideology versus being practical—is also driven by top-down targets imposed by Governments. Is that the right thing that we should be doing? If we look at a couple of examples, such as what is happening with electric vehicles at the moment, we have actually managed to reduce—oh, I am way over my time. I will leave that there.

In conclusion, my worry is that we need to be more practical in how we deliver the transition, and we also need to allow technologies to emerge. They will provide the answer to the question we are facing. We do not wish to become like a telecoms company in the 1990s installing infrastructure for phone boxes, landlines and fax machines. We need to be savvy and technologically aware.