Energy Bill
Debate between Lord O'Neill of Clackmannan and Viscount Hanworth
Lord O'Neill of Clackmannan
I welcome the amendment and the noble Viscount, Lord Hanworth, is to be congratulated on giving us an opportunity to debate this matter. In many respects, if in the nuclear industry we had been able to get things started at Hinkley right away, we probably would have been committed to different reactors from the ones that are now coming along as opportunities. There is therefore some virtue in a degree of delay in the process. However, both PRISM and CANDU have to go through the generic design assessment process, which could take up to 30 months although, in fairness to the regulators, they have suggested that they will try to accelerate that by using foreign experience and so on.
We are talking here about a nuclear programme of construction that will continue for probably 30 years. As someone once said in the context of school dances, “You rarely went home with the person you danced with first”. In this context, we may well find emerging technologies that provide us with opportunities. At the moment we have to be realistic about the fast breeder element in the technologies that have been spoken of this afternoon—they are somewhat limited. When I was chairing the Nuclear Industries Association, I had the opportunity to attend a conference in Paris that was meant to be a shop window for the French nuclear industry. I think that the French were a bit miffed when Japanese and South Korean companies came forward and spoke very confidently about their capacity to realise fast breeders in what will now probably be 15 years’ time. We did not go down the road of fusion today, which every schoolboy knows will be available in 35 years’ time; 35 years ago, they said it was going to be available in 35 years’ time. We therefore have to be a wee bit cautious about fast breeders, but we could be talking in terms of getting one in the United Kingdom perhaps 20 years from now, when we will probably still be building—
Viscount Hanworth
Perhaps I may interject. The truth of the matter is that we have already had a fast breeder in the UK that worked fairly well, in spite of rather diminished support. There were two fast breeders in France. There was Phénix and Superphénix. Phénix was very successful. There were some doubts about Superphénix, which had some engineering difficulties. However, its primary difficulty was, of course, political. I will reassert what I said previously, which is that fast breeders constitute an eminently practical technology. They are not 15 years away, but are as far away as it would take to ratify and certify them.
Lord O'Neill of Clackmannan
This is a classic example: if it was that good, why are we not using it?
Lord O'Neill of Clackmannan
It is no longer for political reasons. Proliferation arguments have been set aside for a long time. The Koreans would not be knocking their socks off to try and do this if there was a technology they thought was good enough lying there untouched.
We have to be realistic. There is no question that I am an enthusiast for nuclear power but I also live on planet Earth. This planet is governed by rules of economics which the noble Viscount probably knows more about than I do. These technologies are, to a large extent, not proven in a commercial context for the generation of electricity. There are arguments about whether or not you should be using plutonium and how it can be dealt with. These are understandable but they are yesterday’s arguments. Today’s concern is producing reactors which can do the job at a reasonable price, efficiently and safely. At the moment, these criteria have not been met. If they had, the Japanese and Koreans would have the full-blown fast breeder on the table.
We know that there have been these things. There is a case for thorium but, as I understand it, the reactor in India produces 40 megawatts of power at the moment and it has quite a way to go. Some years ago I was fortunate to host a conference when a group of Indian technologists came over and described their work. It was fascinating but it was still small scale: I could compare it to carbon capture and storage. An enthusiast will tell me that somewhere in the world there is carbon capture and storage on a big scale but nobody has yet been able to find a way of developing it in an economically efficient manner.
Within 10 to 15 years we will probably have this kind of thing. Is Britain in a position to either contribute to this process or properly benefit from it? This is where the Science and Technology Committee report was highly critical of Government for not taking this seriously enough, over a number of years; this was not a coalition-specific charge. The previous Government, when they woke up to the requirement to embrace nuclear, understandably did a number of commendable things in terms of training and widening the opportunities for nuclear to be part of university engineering qualifications. Something like 13 university courses across the UK offer that, which is an achievement which is down to both Governments’ active encouragement. However, we still have a long way to go. We have a national laboratory at Sellafield which is not getting the funding it merits. This was the view of the Science and Technology Committee. Professor MacKay, the scientific adviser to DECC, who was before the committee last week but we have yet to get Michael Fallon, the Minister responsible, who will come before us after the recess.
Without getting too specific or hung up on particular technologies within the nuclear framework, it is essential that if we are going to take advantage of the new technologies as they come through we have got to have trained, capable people to do that. At the moment, I am not certain that the Government are giving it the highest priority and that is what this debate should be about. We could go through the specifics of Select Committee reports but that is not productive. If we are going to have this technology it is not a once-and-for-all thing. It is not like combined cycle gas plants which just need a little tweaking here and there. There are possibilities for bigger changes but, in order to invest in the right and most appropriate one, we must have a skilled labour force and institutions and research establishments capable of dealing with that. As someone hinted, we need to have an open-mindedness in the industry which, at times, it does not have—because they are very much companies wedded to particular technologies, as EDF is. It is just unfortunate in some respects that the company that is first to the starting line is the one that in the European context uses the least reliable technology in terms of construction, and probably the most expensive to run. If we get a strike price, as we will eventually, it will have to be set in such a way that it does not provide the more efficient and perhaps cheaper technologies with a chequebook to make fabulous amounts of money out of. I realise that that is the predicament that the Government have, but we must not just keep saying, “We don’t have a UK capability—we’re dependent on foreign countries”. The technical changes that will come through in the medium term will be such that it would be a tragedy if we repeated the failure of the 1980s, the 1990s and the noughties in terms of getting the proper people and technical capabilities.
We do make reactors in the United Kingdom; we make them for our nuclear submarines, and they are made by Rolls Royce. If a proper programme was developed, one would imagine that Rolls Royce would be interested in getting into the new generation of nuclear technologies. There are companies within the United Kingdom that have the capability to take advantage of this, but they need encouragement from government more than anybody else.
Energy Bill
Debate between Lord O'Neill of Clackmannan and Viscount Hanworth
Viscount Hanworth
My Lords, I, too, express my appreciation of the intentions of the noble Lord, Lord Teverson, and the noble Baroness, Lady Parminter, but I should like to pick holes in the amendment in much the same way as has my colleague, my noble friend Lord Davies. Whereas he considered proposed paragraph (f), I shall concentrate on proposed paragraph (g). It may well be that the amendment is more sophisticated than it seems, because it is possible that the noble Lord, Lord Teverson, is trying to strike a judicious balance between saying something felicitous and saying something that will get past the Minister.
Let me try to deconstruct what is being said in paragraph (g). It is an injunction,
“to progressively increase the energy efficiency of the United Kingdom as measured in terms of quantity of energy used per unit of GDP”.
That is most unlikely to impose a binding constraint. The fact is that the ratio has been decreasing monotonically since 1950, at least, so that in 2010, we used about half the quantity of energy per unit of real GDP as we did in 1950.
I want to make a bigger point than that. I think that we should approach most of what we read in the Bill in a spirit of cynicism and scepticism. I am sorry if that sounds strong, but if we analyse a great many clauses in detail and think of the circumstances in which they would be applied, we realise that they impose non-binding constraints and impose no particular behaviour by the Government that might staunch emissions, improve efficiency, or whatever. I do not fully understand the motives of the noble Lord, Lord Teverson, and they may, as I said, be more sophisticated than they seem but, if I may be forgiven for saying so, his amendment would perpetrate exactly such an ineffective provision. I hope that he will forgive me.
Lord O'Neill of Clackmannan
I follow on from my noble friend’s remark and say that Amendment 51N is pretty vacuous. It is giving us the excuse to have a debate, but it will not come to anything. It is certainly the case that the Government have been reasonably successful in demand reduction because of their economic incompetence over the past three years. We have been in recession, we have seen emissions fall and we have seen the demand for electricity change. That is the first point which has to be made.
Sooner or later, we will come out of this recession—and when we do, we are going to need far more than Amendment 51N would do regarding capacity changes. We are, I hope, going to have an economy growing in a manner which, in its early stages, will probably not be the most attractive for energy efficiency. In some respects, we want to get out of the recession as quickly as possible. Having to chase around for the most energy-efficient way of doing that when we are trying to find economic prosperity for our people would be questionable in the eyes of the public and their sense of priorities. Frankly, the quicker we move on from this amendment the better, because it is a waste of time, although the other amendment has a degree of merit. I am also always dubious about split infinitives in law at the best of times.
Lord O’Neill of Clackmannan
I have some questions for my noble friend. What he is suggesting has been tried before. We used to have the separation—I shall not say of powers—but we did not have vertical integration at the time of privatisation. That position prevailed for about 10 years. My noble friend has to show us whether things were better then. Were prices, independent of exterior energy costs, cheaper than now? Certainly the degree of obfuscation of tariffs was not as sophisticated as it is now, but whether that is down to the character of ownership, the nature of the industrial organisation or just the badness of some of the people involved in setting the prices is for others to decide.
The point I am getting at is that this is not new; we have had it already. I am not sure that consumers were any better protected then than they are now, or that prices were that much lower, when we take out the externalities that determine the price. I am not sure that when we take out the impact of the price of oil and gas on the energy market there is that much of a difference.
Let us not forget that one of the first things that the Labour Government did in 1997, which attracted no opposition at all, was to introduce the windfall profits tax because of the way in which a number of the utilities had been screwing the country as a whole. The Select Committee that I chaired thought that we made a sizeable contribution to a better understanding of the abuse of utility power at the time. Indeed, I always worried that such was the universal acclaim for the Labour Government’s windfall profits tax that they had probably got it too low. They probably could have got far more out, because people knew the degree of pain and had prepared themselves for it.
That is not the point that I am trying to get at here. If there are abuses of the kind that my noble friend suggests, would it be better to go through what might be a lengthy and costly process—I can imagine the lawyers salivating at the moment over the prospect of what they would get out of it—or would it not be more appropriate to try to deal with that market abuse by a radical reform of the regulatory process? The selective choice of international examples made by my noble friend is not really relevant, because in the case of France and Germany, we are dealing in the main with regional monopolies. Their markets are not like ours. We have an oligopolistic system where there is fantastic loyalty to the old electricity boards, and people still talk about them in that way. The reluctance of people to switch has been one of the great frustrations of the regulator and the advocates of the market, because people, by and large, like to stay with the devil they know and choose not to move, for whatever reason.
My real point is that I am not sure that the international comparison is that relevant because although the companies are vertically integrated, they are operating in different market structures. While this is an interesting debate to engage in, I am not certain that it will come up with the answers that my noble friend is looking for. In the 1990s, when we had something like this, it did not really work that well and there were an awful lot of other forms of market abuse. Indeed, that is why we had market reforms—the previous Labour Government had two bites at the cherry during their 13 years. I understand where he is coming from but I am not sure whether he would get where he wants to be by the mechanism he suggests, short of having a radical, tough regulator prepared to have a go, unlike the overly cautious regulators that we have been blessed with in the energy markets over the past 20-odd years. The Opposition have said that they would like to change drastically the character of regulation in this area, and that might be a more productive way of going about it.
As I said, I am grateful to my noble friend for raising the issue because it is important that we consider it, although I am not quite convinced that past experience or the evidence that he has adduced are necessarily unduly relevant to the objectives that he is trying to find.
Viscount Hanworth
My Lords, I support the amendment of my noble friend Lord Berkeley. If his amendment were adopted, and indeed if the policies that it prescribes were implemented, I believe that many of the problems that afflict our electricity industry would be overcome—notwithstanding what my noble friend Lord O’Neill has just said, which I shall consider at some length.
The amendment would radically alter the oligopolistic environment in which the big six vertically integrated companies dominate the generation of electricity and its supply to industrial, commercial and domestic consumers. There would then be some chance that a genuine economic competition could ensue. The vision of the free-market fundamentalists, who inspired the radical restructuring of the industry through a privatisation that occurred a quarter of a century ago, would come closer to being realised than ever it has been.
Having said that, I confess that I greatly regret the demise of the state-owned electricity industry. Mine is not a doctrinaire position, as some might imagine, albeit that much could be said to justify a doctrine of state ownership. An attitude in favour of state ownership of the electricity industry needs no further justification than a reference to the example provided by the French electricity industry. Although the dominant French company Électricité de France, or EDF, sometimes adopts a cunning commercial concealment, it is state-owned, excepting a very small proportion that is attributable to shareholdings which are predominantly in the hands of other companies closely allied with the French state.
I am an admirer but not a friend of Électricité de France. A testimony to its success is the fact that, apart from being one of the aforementioned big six companies dominating the English market, this company owns virtually all of Britain’s nuclear generating plant. Over many years, Électricité de France has worked in close collaboration with the French Government to realise the latter’s strategic objectives regarding the provision of the nation’s electrical power. Only recently, with the advent of François Hollande, has there been any significant difference of opinion between the politicians and the management of EDF regarding the investment strategy.
An investment strategy is precisely what the Bill is about. The danger we face is that the industry’s dominant firms will have no interest in providing the investment in the UK that would serve to avert the risk of a serious electricity shortfall. Although the free-market economists might deny this reality, the fact is that these are multinational companies, often with head offices in other countries. This implies that their primary interests and loyalties are not with the UK. When they are seeking profitable investment opportunities, they are liable to look much further afield.
There are some minor players in the UK electricity market that are based predominantly in this country and have few interests abroad. These are the independent electricity generators which are concentrated in the renewables sector. It is perhaps inevitable that the Government should look to these companies to provide a substantial proportion of the new investment in renewable generating capacity. Notwithstanding the fact that they currently account for only a small proportion of the generating capacity, it is hoped that they will provide something between 35% and 50% of the new investment in renewable plant.
The truth of the matter is that these companies are in trouble. They are being squeezed out by the big six, which have an increasing proportion of renewable capacity in their own portfolios and a declining reliance on the independent generators to fulfil their renewables obligation. The eventual suspension of the renewables obligation in 2017 will spell the doom of these companies, unless measures are adopted to safeguard their position. This is what the present amendment and subsequent amendments being spoken to today propose. It may well transpire that the measures proposed in subsequent amendments represent the only viable ways to protect the interests of the small generators and ensure that they continue to have a market into which to sell their produce.
Energy Bill
Debate between Lord O'Neill of Clackmannan and Viscount Hanworth(11 years, 5 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Viscount Hanworth
Clause 113, which makes provision for the sale of the Government’s pipeline and storage system, is the central clause of an extraneous part of the Bill, which should not exist and which the amendment seeks to remove. The provisions in Part 4 are enabling clauses designed to ensure that the future sale of the asset, were it to occur, would not be subject to any further parliamentary scrutiny but would be entirely at the discretion of the Secretary of State. As such, it is an affront to the rest of us.
We are told that the purpose of the sale would be to raise cash and to avoid the burden on the state of the costs of maintaining and investing in the pipeline system. Parenthetically, this declared intention of burdening the purchaser with the costs is liable to make the asset virtually unsaleable except at a knockdown price unless, of course, the purchaser can expect to extract exorbitant monopoly profits.
I should say briefly what the government pipeline and storage system—the GPSS—consists of. It is a pipeline system run by the Oil and Pipelines Agency in the Ministry of Defence. The network consists of 2,500 kilometres of pipeline and some 46 other facilities and is interconnected with several private networks. The pipeline was originally built before World War 2 and was used to supply oil for the Normandy invasion via Pluto, the pipeline under the ocean. Nowadays, in addition to supplying fuel required for defence purposes, it supplies fuel for civil aviation, which takes as much as 40% of the supplies.
The GPSS is what economists describe as a natural monopoly. It might be helpful if I were to supply a definition of a natural monopoly and provide further examples. A monopoly is a situation in which the majority of sales in a market are attributable to a single firm. A natural monopoly is a circumstance in which the technology of an industry and its associated costs imply that the most efficient form of production is to concentrate it in a single firm or organisation. Examples include the road and rail networks, the postal system, the provision of gas, water and electricity, the nation’s ports and much else besides. It is commonly agreed that in order to ensure the integrity of a natural monopoly and to ensure that it does not generate exorbitant profits, the state should play a leading role either by owning the monopoly or, at the very least, by regulating it closely.
The ideology of free market enterprise and the programme of denationalisation have come into conflict with the realities of the structure of industries, and there have been some absurd outcomes. Through the programme of denationalisation, which began under the Thatcher Administrations and which was intended to engender free market competition, the Government have succeeded, in the main, in creating collusive oligopolies. The electricity industry, for example, which is dominated by six large firms, is nowadays best described as an oligopolistic market. In the most misguided instances of denationalisation, the Government have created monopolies that are in the hands of foreign state-owned enterprises. A case in point is the British nuclear industry, which is in the hands of a French state-owned monopoly.
One of the motives of denationalisation, which I have already touched on, is the desire to remove the capital costs of state-owned industries from the Government’s net borrowing requirement. In Britain, we have been exceedingly inept at what should be a simple exercise of corporate structuring and accountancy. A previous Labour Government proposed to overcome the restrictions on the borrowing requirement by encouraging the formation of public-private partnerships. The outcome has been that in return for providing a share of the investment capital, the private sector partners have reaped exorbitant returns and, in doing so, run rings around public servants.
The successor Government should have endeavoured to find better ways of achieving the desired ends. Instead, they have reverted to an atavistic ideology that impels them eagerly to sell anything that amounts to public property. Governments in other countries have been far more adept than ours in the business of separating the finances of their state-owned industries from the finances of central government. A relevant example in the context of the Energy Bill is provided by the French state-owned electricity industry. The principal electricity companies of France, EDF and AREVA, work in close collaboration. They also work with central government to fulfil their strategic policies, but they have considerable commercial freedom. This freedom is exemplified by the fact that our Government have been relying on EDF to raise the capital from the financial markets for the construction of a new nuclear power plant at Hinkley Point.
I return now to the prospective sale of the GPSS. This should never be allowed to happen. One ought to consider the hazards that could arise from putting the network into private hands. The Bill would do nothing to constrain a private owner from abusing the monopoly position by reaping exorbitant profits, nor does it compel the private owner to undertake the necessary maintenance and investment. The consequences of the system falling into disrepair are obvious. Let us leave aside for the moment the consequences for our national defences to consider how this would affect the civil aviation industry. It would mean that aviation fuels that are presently pumped through the system would have to travel on our roads in tankers, which surely implies a major hazard.
Let us consider the possible private owners of the system. Who would they be? I am sure that we agree that we would not wish the owners to be venture capitalists intent on reaping major short-term rewards. We might prefer them to be enterprises that already have commitments to and experience of such aspects of fuel supply. In that case, the likelihood is that the owner would be a major oil or gas supplier or producer and, most probably, given the state of the ownership of the UK industry, it would be a foreign-owned enterprise. It could be Qatar Petroleum, for example, or the giant Russian Gazprom company. If it were the latter, we can imagine a fanciful scenario: there is a conflict in the eastern Mediterranean or the Middle East and various NATO allies have decided that the only viable intervention is to create a no-fly zone in the area. If we were to participate in this, the GPSS would be called upon to provide large quantities of aviation fuel to our Air Force, which would be a contingent of the international force. The owners of the erstwhile GPSS could then threaten a major embarrassment if we were to proceed with this interventionist military policy. They could threaten to bring our civil aviation to a halt unless we relented.
Such a scenario is not beyond the bounds of possibility and surely we would not wish to expose ourselves to such hazards. Were these hazards to be recognised and understood by the usual electorate of the Conservative Party, I am sure that there would be outrage. For this reason, I would expect that the proposal to sell the GPSS will go into abeyance.
I see the proposal as a throwback to a discredited programme of denationalisation that has been motivated by a combination of opportunism and ideology. On closer examination it seems to make no sense, and I beg to move that Clause 113 should not stand part of the Bill.
Lord O'Neill of Clackmannan
I would not perhaps go quite so far as my noble friend on these matters but it is important that we get from the Minister an indication of the regime under which a privatised gas storage and pipeline system would operate. Given that this will be a natural monopoly, as has been clearly explained, it ought to be under the regulatory scrutiny of Ofgem. If it is to be a natural monopoly, it should be regulated. At the moment, who owns it and for what purposes we leave other people to worry about. However, those of us who attended the talk last week by Peter Atherton might find it difficult to identify a potential purchaser of this system because it seems that it is a kind of secondary purchase, given the dire nature of a number of the obvious potential purchasers. They have far greater strains on their balance sheets than acquiring an asset like this, no matter how profitable it might be.
We may be worrying needlessly that this power will be granted as the Government may not do anything about it. However, were they to do so, it is important that an asset of this nature should not fall into monopoly hands of an unregulated character. Therefore, I certainly want to be given a clear indication from the Minister this afternoon that if this asset is to be privatised it will come under the scrutiny and regulation of Ofgem. I am not certain that such a move would raise sufficient money. It may be just another burden that DECC has to carry at present, and it feels that it would be simpler to transfer it. However, that is not the issue in question here: it is whether the people who buy the asset have unlimited powers to do whatever they wish with it or whether it should be subject to some kind of regulation. It need not necessarily be draconian but, rather, light-touch regulation—the kind which, in some respects, the regulator applies to National Grid and the wires and the pipes it owns and operates.