Lord Whitty
Main Page: Lord Whitty (Labour - Life peer)
Lord Whitty
“( ) The Secretary of State and the Authority must ensure that any arrangements made under this section are fully reflected in the future plans of the Electricity Distribution Network Operators.”
Lord Whitty
My Lords, in speaking to Amendment 52B, I shall speak also to the other amendments in this group. They deal with the distribution network operators, which very little of the rest of the Bill explicitly does. In a formal sense, the distribution network operators look very similar to the structure both pre- and post-privatisation but, in a real sense, they have been through exactly the process referred to by the noble Lord, Lord Jenkin, and my noble friend Lord O’Neill. Formally speaking, there are about 13 companies which actually are limited to six, most of which are part of vertically integrated monoliths. I am not sure whether in this context competition is operating effectively. It is also true that DNOs are the part of the structure which has the most direct link with business consumers and household consumers. They are a key part of Ofgem’s universe in terms of its price regulation and have a vital role in delivering what most consumers would regard as security of supply—that their own lights do not go out. They are also an important part of making the whole electricity market system more efficient.
However, DNOs largely are a passive part of the system. They are a conduit for electricity rather than a lever for policy and innovation, and simply pass electricity from, say, the national grid to the ultimate user. Therefore, to a large extent they are a regional monopoly in each case but not entirely. They have hardly been mentioned in this debate and are hardly explicitly referred to in the Bill or in our discussions in Committee. The role of DNOs in the policy objectives, which the reform is intended to deliver, and the other outputs we have sought to achieve in this debate, is vital. They will be vital in terms of moving to smart grids, and in what we have just discussed in relation to electricity demand reduction and in demand response mechanisms. They also are vital in relating the whole of the system to an increased use of decentralised energy, decentralised generation, district heating and other forms of embedded energy. They therefore need to be seen as a key aspect of the capacity system and of the delivery of energy to consumers. Reducing demand and increasing the efficiency of the total distribution system plays its part in the inefficiency referred to by the noble Lord, Lord Teverson. Yet that dimension hardly features here.
In a different part of the jungle, things are going on. Ofgem is conducting a price-related review of the DNO structure. It requires strategic business plans in the context of RIIO, which a year or so ago Ofgem was always using as the term for the brave new world. It uses a slightly different system now but it is part of that approach from Ofgem. In March this year it issued a strategy document for the DNOs—which, incidentally, I think I am right in saying implied a serious move away from the kind of RPI minus X approach, which the noble Lord, Lord Jenkin, was extolling just now—and that process has been going on. Only at the beginning of this month, on 1 July, did it issue a consultation paper about the strategic business plans that were required under that previous strategy. Incidentally, that strategy extends the period of the review from five to eight years and is therefore dealing with the period from 2015 to 2023. In terms of what the Government and the industry are intending to deliver and the changes that we are intending to require, that period is absolutely vital. The consultation was six pages long but it cross-referred to the individual strategic business plans of each of the companies, some of which amounted to 400 or 500 pages, if not more. However, the deadline for the response to that was 2 August—that is, the paper was issued a fortnight ago and a reply is required by tomorrow fortnight.
Meanwhile, we are dealing with the broader aspects of capacity mechanisms and the whole of electricity market reform. Presumably Ofgem, after the close of that consultation, will finalise its view of the DNO structure for a period of eight years. Although all the DNO companies seem to have produced strategic plans, it is somewhat difficult to see how they could have done so for that eight-year period without knowing what was coming out of the process that we are discussing here today and have discussed over the past few sessions, and indeed what is going to come in the statutory instruments and the follow-through after the Bill has passed into legislation.
It is also a bit odd that we should move to an eight-year period when other aspects of electricity market reform may well have different time periods attached to them. The only conclusion from that would be that the department and Ofgem do not expect everything in the Bill, as well as all the intentions and strategies laid out under the Bill, to have much impact on the way that the DNO sector operates. That cannot be right and it cannot be the Government’s intention. In fact, whole new capacity mechanisms, including those that we have debated in connection with energy demand reduction, must have an impact on the DNOs’ operation. This document on the market reform delivery plan ought to have a dimension which is specifically related to the DNOs, but I cannot see it in there—it is 70-odd pages of big print and I did try to flick through it last night. However, it must have serious implications for the DNOs.
I tried to look at one of these business plans. My own company, Western Power Distribution, supplies consumers in the south-west and has a good level of consumer performance, although it has since merged with some other companies. It has produced a plan totalling 704 pages which sets out everything about its investment, its expenditure, its price approach, its customer services—some of it is quite good, although some of it is a bit unambitious; its carbon saving, for example, is only 5% over those eight years, which is slightly less than we are expecting of the system as a whole—its approach to leakages and other environmental considerations, and its social obligations, including a worthy reference to fuel poverty. However, what it does not do is to say anything about its place in the restructuring of the electricity market as a whole. That I find very odd. There is nothing, for example, on the demand reduction side; there is nothing about the effect of smart users at the user end; and there is nothing about the move to smarter grids at the other end.
On present progress, quite apart from the process started by this consultation on the electricity market reform delivery plan, after 2 August Ofgem will presumably be endorsing those business plans or otherwise within the context in which they were set and without fully taking into account what is happening in the rest of the Bill and the rest of the Government’s intentions. So the times are out of joint and these amendments are a modest attempt to try to put them back into a degree of conjunction.
Baroness Verma
My Lords, I thank the noble Lord, Lord Whitty, and the noble Baroness, Lady Worthington, for tabling these amendments, which highlight the important role that the distribution network operators play in our electricity system, including in supporting electricity demand reduction. Amendment 52B seeks to ensure that distribution network operators take account of government policy as set out in Clause 5. Amendment 55ZZC would insert a requirement in Clause 37 for the Secretary of State to take account of the role of distribution network operators in a pilot scheme to permanently reduce electricity use.
Ofgem regulates through a licensing system and electricity distribution network operators need to obtain licences from Ofgem to participate in the energy market. An important aspect of this system is Ofgem’s power to set regulatory price controls, and its price control framework. This, as the noble Lord pointed out, is known as RIIO, and is well aligned with the Government’s energy policy, including the requirement for network companies to invest efficiently to ensure continued safe and reliable services, to innovate to reduce network costs for current and future consumers, and to play a full role in delivering a low-carbon economy and wider environmental objectives.
As we have previously debated, the Government are providing even greater clarity, as Clauses 119 to 126 will enable the Secretary of State to introduce a new strategy and policy statement for Ofgem to help improve alignment with government policies. In addition, my department works closely with DNOs and the wider industry, through groups such as the Smart Grid Forum, to satisfy ourselves that strategic investment decisions are being made.
On the specific issue of efficiency and reducing demand, DNOs have a licence condition on them to reduce losses, and they have been required to set out in their business plans how they will reduce losses, and to publish annual reports on what loss reductions they planned and what they actually achieved. A discretionary reward of up to £32 million will be made available by Ofgem, over the price control period, for efficient and innovative loss reduction initiatives.
In future price control reviews, when more reliable data may be available through smart meters and smart grid technology on the networks, Ofgem expects to introduce further incentives. Furthermore, Ofgem has recently extended the scope of its Low Carbon Network Fund to enable DNOs to carry out electricity demand reduction projects, which will complement the Government’s larger-scale pilot.
To reiterate the points made in our earlier debate on the electricity demand reduction pilot, while I support the noble Lord’s aim of ensuring that we test variations of the key elements associated with demand reduction projects, the Secretary of State already has the ability to design and run a pilot—or pilots—to test different approaches.
Clause 37, as I said earlier, is simply a spending power; it authorises the spending of money for EDR pilots. Our intention is design the pilot in a way that encourages projects to be delivered by a variety of organisations, including DNOs, provided the projects meet the criteria that we develop.
The noble Lord, Lord Whitty, asked why we cannot deliver eight year-old DNO plans without details under EMR. We have set out clear policy intentions—for instance in the renewables road map published last year, and in our various announcements on EMR—to move to a low-carbon energy mix. This informs the development of the DNO plans.
The noble Lord also asked why we had moved to an eight-year period. This was to encourage DNOs to work more strategically and to invest over a longer term, instead of making short-term investment decisions.
I hope the noble Lord is reassured that I recognise the important role that DNOs are already able to play in helping to realise reductions in electricity use. I hope that on that basis he feels able to withdraw his amendment.
Lord Whitty
My Lords, I am grateful to the Minister and also to the noble Baroness, Lady Maddock, for her support.
It is certainly true that there have been general indications of the Government’s direction. No doubt they are taking into account the DNOs in drawing up their plans. It still strikes me as very odd that we have here a piece of legislation, the capacity mechanism bit of which we are discussing now but the detail of which is not yet known, and it will require considerably more explanation before we finish this Bill and some serious delegated legislation thereafter. If it applies to DNOs—as the Minister rightly says in a sense it will—it must have implications for how DNOs operate. The outcome of the demand reduction must have implications. The way in which the capacity mechanism brings other people into play in the grid, and ultimately down the distribution system, must have implications. Therefore, I still find it very odd, even if they have read all the signals right—and my brief reading of the 700 pages of the Western Power document suggests that they may have missed one or two.
I am not necessarily objecting to the eight-year period, but that period has to relate to something that is operating under the wider electricity market reform. Instead, we are going to have the approval of the DNO strategic plans within the next two or three months before we know how the capacity mechanism is working, before we know how the demand reduction mechanisms are working and before we know a lot of other detail that will emerge from this Bill, which will eventually be encapsulated in the new strategy and policy statement from the Secretary of State. That will be the context in which Ofgem and the industry will have to work.
I am not trying to be awkward with the Government. I just do not think that they have the pieces in the right order or in the right place. Before we complete the consideration of this Bill, we need to be a bit clearer on how the distribution structure will operate in the new system. We should not have Ofgem definitively endorsing the plans, which it will have before it in a couple of weeks. In the mean time, I beg leave to withdraw the amendment.
Lord Whitty
My Lords, I briefly signal the support of our Front Bench for the amendments. Although I am familiar with—and may even have been one of the Ministers who rebutted the noble Earl, Lord Caithness, in—long arguments about “may” and “must”, it is slightly different here because it is not so much about parliamentary counsel’s sensibilities on these matters. “Must” is here a statement of fact. The clauses on the capacity mechanism are wide and vague—understandably, at this stage. The Minister and everyone else have accepted that we will have to translate them into secondary legislation. If we do not do so, we will not have a capacity mechanism. In that sense, there is a stronger argument than there is sometimes for substituting “may” with “must”, because otherwise the whole point of this section of the Bill disappears.
On the second point, although the noble Earl is correct to say that there have been repeated references to the interests of households and small businesses, that is in the context of the demand reduction provisions within the capacity mechanism. It is not obvious from first principles that mechanisms will be involved which benefit the small users of energy, whether they are households or small businesses. I therefore think that it helps to insert that at this point. It will help to guide the drafting of statutory instruments, when we come to that. I hope that the Government will show some sympathy to the amendments.
Baroness Verma
My Lords, I start by thanking the noble Lord, Lord Davies of Stamford, for his amendments. Like my noble friend Lady Maddock, I say from the start that we are putting consumers and fairness to new entrants at the heart of the Bill. It is important to note that the Government confirmed on 27 June our intention to initiate the capacity market, with the first auction taking place in 2014 for delivery from 2018, which would provide an insurance policy against any future blackouts. I reassure the noble Lord that it is the Government’s clear intention to implement the capacity market through regulations as laid out in this chapter. That can be delivered without a statutory requirement in the Bill, so the may/must argument does not need to be fought at the moment.
On Amendment 53ZZB, although the noble Lord’s intention behind the amendment is laudable, we believe that the Bill already makes sufficient provision for driving energy efficiency. The Bill lays out how the capacity market is intended to involve permanent electricity demand reduction in Clauses 29 and 37. The inclusion of electricity demand reduction in the capacity market is of course complex and, as such, its impact needs further examination and assessment. Because of that, we intend that an electricity demand reduction pilot will be carried out to assess the viability of incentivising demand reduction in the capacity market.
Secondly, the Government are already doing a large amount of work to encourage increased electricity efficiency of homes and small businesses—for example, through the Green Deal energy company obligation and smart meters. I urge the noble Lord to consider those measures available to low-income and vulnerable families. I also remind him of how the number of tariffs rose under his Government. When they were in power, it rose to 4,000 tariffs. Fuel poverty nearly doubled during the last five years when they were in power. We are addressing a long-term, deeply embedded problem. Passing the amendment without the result of the pilot being known would risk duplicating existing policies for the promotion of energy efficiency and could lead to contradictory or inefficient regulations.
Although I have been rather brief, I think my explanation should reassure the noble Lord that the Government are doing everything possible through the Bill to answer his concerns, and I hope that he will withdraw his amendment.