Energy Bill
Debate between Lord O'Neill of Clackmannan and Lord Cameron of Dillington
Lord Cameron of Dillington (CB)
My Lords, I support all the amendments in this group, as well as the amendments to which I have put my name. Last week we had our debate on the need to open up all sectors of the electricity industry to more competition. We on our side of the amendment were surprised at the reluctance of the Government to acquiesce enthusiastically to what we were proposing. We were even more surprised when later in the week the Secretary of State for Energy and Climate Change went on the “Today” programme and also spoke in the other place about how greater competition was at the heart of the Government’s electricity market reform. I have to admit I had the surreal feeling that there seemed to be one Government at that end promoting competition and talking about its importance and a completely different Government at this end seemingly trying to ward off competition. I hope that this week we have one pro-competition Government in both Houses.
In my short remarks in the debate last week, I linked the need for competition with the need for investment and spoke about how the two are closely intertwined. The UK’s aging energy infrastructure needs some £75 billion invested in new, largely renewable, generation facilities by 2020, and the Government are relying on independent generators, or at least their investors and financial backers, to produce some 35% to 50% of this—that is, £27 billion to £38 billion—before 2020, so this is not a marginal problem. Only by solving it will we ensure that we get the investment we need along with the much needed competition.
Of course, there is a problem. In an ideal world, an independent generator would want a backer for 15 years, because that is the normal length of any form of mortgage agreement for such a scheme, but no supplier is going to gamble on a 15-year PPA because the demand for electricity could reduce over 15 years and a supplier could find itself having bought more power than it could sell. Indeed, already four out of the big six suppliers are not buying power at all from independent generators, while the other two are charging up to 15% or 20% commission on even short-term contracts, which for the independent generator makes for an unviable PPA.
As has already been explained, this situation scares the independent generators and, above all, their investors, so no truly independent generator is going to invest without some form of compromise in the long-term marketplace. Equally, no aggregator is going to enter the fray with the big six oligopoly holding all the cards. We desperately need these independent generators to invest and, as the Government—well, the Government at the other end—keep telling us, it is only by encouraging more competition that we will achieve that investment.
The department has gone for an offtake of last resort—an OLR—to solve this problem, which is fine, but as it stands, the solution in the Bill is completely useless, as Clause 44 is so hedged about with “may”s rather than “must”s that no self-respecting financier would put any trust in it at all. The Minister’s letter of 26 July, I think it was, does not give them any encouragement either. It is a political cop-out rather than a financial foundation on which to build a competitive electricity industry. The words “political cop-out” may be a bit harsh, but the clause is clearly written from a political perspective, rather than the drafters putting themselves in the minds of an investor or a mortgage company and thinking, “What can I put in this Bill that will really reassure these much needed investors that we the Government say we desperately want?”. They just have not done that.
I hope we all agree that this is not a marginal issue. That is why it is vital that these amendments are adopted. It is vital that OLRs are available from day 1 of CFDs. It is vital that they are operational the moment—well, within seven days—of a generator finding itself squeezed out of the marketplace without a commercial PPA. It is vital that the price on offer is evidently—I stress that word “evidently”—going to be enough to reassure a financial backer that lending money in this new and uncertain marketplace is not going to be a wasted investment. There is an enormous amount hanging on getting this right, so I hope that the Minister will be able to reassure us.
Lord O'Neill of Clackmannan
My Lords, my previous remarks might have been interpreted as being antagonistic to small generators but I am not. What we are talking about here is a reform of the market that will encourage investment, but investment can only be encouraged if there is the prospect of stability. We are yet to receive from the Government a clear indication that there will be stability in this area.
I am not certain that praying in aid the German experience is necessarily that relevant seeing as Germany is having to accommodate the withdrawal from nuclear generation on a considerable scale and will be happy to get generating supplements or replacements from any source that it can. To a certain extent, that might be the same for the United Kingdom if coal is to be exited from our energy mix in a significant way. If that is the intention, and I believe that it is, we must have facilities available to mop up, or fill in the gaps, of what remains.
These amendments provide a clear and explicit set of measures. But they are only amendments and were the Minister able today to give us the degree of certainty required, I imagine that they would be withdrawn. However, what Mr Fallon said elsewhere probably was based on the optimism that has existed throughout the activities of the Department of Energy and Climate Change these many months—that every deal is just days away. Yet the days become weeks and the weeks become months. We do not have much more time. Therefore, it is essential that the Minister gives us a far more positive assurance than she was able to give last week. If she can do that, these amendments will melt like snow off a dyke, as we say in Scotland. However, if they do not, they will come back to haunt the Minister, because there will be a clear indication of what could have happened had there been a greater sense of urgency in the Department of Energy and Climate Change than had been anticipated by Michael Fallon before he went eastward.
Energy Bill
Debate between Lord O'Neill of Clackmannan and Lord Cameron of Dillington
Lord O'Neill of Clackmannan
It is. Not only is it slow to build, but it is more expensive than some of the other kit that could be available. It is on a wing and a prayer. We have fallen behind. It may well be that the Finnish and the Flamanville experiences will be such that all the problems will be ironed out and we will have EDF building the first reactor at Hinckley on time and within budget. One can only hope that. Companies ride learning curves. One hopes that Arriva has ironed out all the kinks. The problems in Finland were different from the problems in France, but the combination of the two seems to suggest that they had not really done so in Europe at least, because power stations of this character are being built efficiently and speedily in the Far East but unfortunately not in continental Europe.
Lord Cameron of Dillington
Perhaps we can get back to the amendment. I support it because connectivity is like an international capacity mechanism, except that it has the ability to incorporate renewable technology and even intermittent power. I say to the noble Lord, Lord O’Neill, that it is not all about the UK. It is about sharing surplus all over Europe. That is the whole point. It is very unlikely that you will get a particular moment when there is no sun in Italy, no wind in Germany or Ireland, no water behind the hydro dams of Norway and no nuclear power coming out of France. There will always be surplus here and there. For instance, at one moment last week in the German market, 33% of the power was being produced by PV. There was a complete surplus in the marketplace. It was disastrous for the coal-fired power stations of Germany because suddenly the price of electricity went very cheap.
The interconnectivity is a transEuropean thing which we can all work together. I believe that an interconnected Europe would be a secure Europe in that way. However, we have a long way to go, and the noble Lord, Lord O’Neill, is correct to refer to the glacial speed. There are different regulations in different countries and different ownership structures, including some nationalised industries and old semi-nationalised industries, which are very inefficient yet determined to fend off any possible competition from abroad. There is also the question of different voltages operating in different countries. Hovering over all these uncertainties are the European public, who seem to want their power but under no circumstances want to have more pylons.
Meanwhile, in all this the EU Commission has made £9.2 billion available for overall connectivity, including gas, when the rough estimate for the electricity grid connections is £104 billion, including £23 billion for subsea cables alone. I ought to correct one other thing that the noble Lord, Lord O’Neill, said: with high-voltage direct current there are almost nil losses in transmission. Although the power stations at either end are obviously more expensive the line itself is much cheaper, particularly if it goes underwater.
The point is that the rest of that money—the £104 billion —has to come from the marketplace but to get even a proportion of that money, the market will need the certainty of international commitment and the certainty of a plan. It will need an EU plan set out by the Commission in a way that guarantees long-term commitment and is signed up to by all the member states involved. Eurelectric, the trade body representing the European electricity sector, says that creating a predictable policy framework would help utilities to finance their investment plans and attract the necessary funds. Incidentally, Herman van Rompuy says that the implementation of such a framework, which includes electricity and gas, could save the EU consumer up to €30 billion per annum. My point is that in order to get a firm and committed EU strategy, we need to start with a firm UK strategy. That, in a nutshell, is why I support this amendment.