EU: Energy Infrastructure (EUC Report)

Lord Whitty Excerpts

Monday 29th July 2013 Grand Committee

[Lord Whitty]

My Lords, I am delighted to see the name of the noble Baroness, Lady Rawlings, on this list, and to follow her now. This is partly because, with all due respect to other noble Lords and Baronesses in the Room, we have spent rather a lot of time together on this subject over the past few months, beginning upstairs in the committee and in recent weeks here in the Committee stage of the Energy Bill. Much of that work in the early months has been properly reflected in this report, and I praise the leadership of the noble Lord, Lord Carter, and his very comprehensive explanation of this report.

We have to deal with two things in parallel: something that is going on at the EU level and something that is transforming UK energy policy at the same time, in developing new mechanisms to deal with the trilemma, as was spelt out by the noble Lord, Lord Carter. How UK energy policy fits within the overall EU policy is not an easy question to answer. If we are honest about it, policy at the EU level has been piecemeal and partial and aspects of it have been quite a mess; policy at the UK level has not exactly been consistent either and has left us with some very serious problems.

We are not alone in that. If we look at the record of most member states, we find that there is a crisis of investment in energy in almost all of them. That crisis has been aggravated by sudden changes of policy; the most dramatic was Germany’s abandonment of the nuclear option but there are others, including within this country, such as the change of subsidy regimes and the change of direction in regulatory matters.

We have also seen growing public opinion, of which we should take greater account. On the one hand it is quite hostile to some forms of energy development, notably—for reasons with which I do not sympathise—to aspects of renewable energy, in particular wind energy; in other countries, as well as to some extent in this country, to nuclear developments; and elsewhere to the revival of coal. That means that there is a political problem for Governments and for the EU, as well as a technical problem, with which we grappled in both the Bill and in the sub-committee’s work on this report.

The problem is encapsulated in a concern that the lights may go off all over Europe, but it is even more fundamental than that. The issue is whether we have grasped what the structure of the energy industry should be in 10 or 20 years’ time, in a context where we are trying to decarbonise, increase Europe’s energy security and at the same time ensure that the price paid for energy by both ordinary consumers and business—which will have an effect on Europe’s international competitiveness—can all be brought together. For that reason as well, consumer reaction is part of the political reality that we are facing.

My noble friend Lord Carter quoted the Commission and other European institutions as saying that the internal market in energy would be completed by 2014. That is Eurospeak at its worst. There is nothing like an internal single energy market in Europe. We are a long way off. We have 27 different energy markets. Some are still dominated by state or ex-state incumbents. Others are dominated by companies that operate right across Europe, such as our own. Still others have insufficient investment because they have insufficient domestic companies to provide that investment. Therefore, we have a hotchpotch of energy policies, and the European effort of bringing them together has not, despite a third and now a fourth energy package, created an internal energy market in the sense that other markets have been created.

Some of this could be addressed by greater physical interconnection. A strong case is made in our report for increasing the degree of interconnection. The UK has some interconnections. In our Grand Committee on the Energy Bill the other day, the right reverend Prelate pointed out that he had an app on his iPad that could have told him that we were 6% dependent on the French nuclear industry at that moment. That is a reality, but we could get much more cost-effective value for money from our energy system if two-way interconnection were more the norm right across Europe.

However, we have not only 27 different regulatory regimes but 27 different contracting arrangements, 27 different energy mixes, and 27 different forms of anxiety about what the future holds. There is a lot of anxiety, in eastern Europe in particular, for obvious reasons, about being dependent on Gazprom and the whim of the Kremlin for its gas supplies. We have seen the Government of Bulgaria effectively stopped as a result of energy prices. We are seeing problems in the switch back to the energy sources that we know. Heavily carbonised coal and lignite are being adopted in Germany and Poland as the main platform of their energy policy. As a result, their carbon targets are seriously in jeopardy.

We are faced with this range of problems. Overriding it is the level of investment required to even address them. We are talking about €3 trillion over the next period. It sounds a lot of money, but some witnesses told us that the money was around and that the issue was how we attract it and get it invested in energy. It will not come from any of the member states, or from the energy companies’ balance sheets. Some accusations of profiteering may be correct. There is a certain lack of transparency in their balance sheets, as the Select Committee’s report in the other place published today underlined, but the fact remains that there is not a lot of money on their balance sheets, and their stock market ratings are a fraction of what they were 10 years ago.

If investment will not come internally, it must come from the markets. To attract the markets’ money into energy in Europe, including the UK, you need to give investors far more clarity and a greater sense of direction on how that market will go. On the face of it, it is a long-term investment with an almost guaranteed return. Some of the provisions of the Energy Bill try to institutionalise that as far as this country is concerned, but there is actually huge uncertainty.

This is not surprising, given the fluctuations in energy policy and the energy markets over the past few years. It is also not surprising given that Europe is still floundering about whether it can actually make effective the one measure which has been adopted on a pan-European basis: the European trading scheme. At the moment it looks very poorly. Certainly, at the market price it is not going to work. The European Parliament and the European Council of Ministers were even reluctant to make the relatively minor reforms to the ETS of the system of backloading. This would tighten the market slightly in the current phase and the next phase. They were reluctant to do that. If they are also reluctant to adopt more radical measures, such as the carbon price floor to which my noble friend Lord Carter referred, then we are in serious difficulty.

The successful part of pan-European policy so far is the targets for 2020, most of which will be hit or almost hit. Yet there is still an argument within Europe and within the UK—along with a certain reluctance within the UK Government—about what the targets should be for 2030, particularly in relation to decarbonisation of the electricity supply.

There is also the big problem of how we tackle the technological challenge. If we do not develop a technically, economically and commercially effective form of CCS then there will be a reversion to significant proportions of our energy supply being delivered by coal, by lignite and even by gas. This would mean that nothing like the trajectory to meet our decarbonisation targets for 2030 and 2050 can be achieved. Without CCS—with unabated coal, unabated gas and unabated lignite—there is no way in which those objectives can be achieved.

We are seeing not only a dash for gas—which is probably sensible and rational at this point, although it will not be much cheaper in the short term even with significant amounts of shale gas, and which is itself carbon-intensive—but a significantly more damaging role for coal. This is happening in eastern Europe and Germany, but if we are not careful, it might also be a side-effect of the capacity mechanisms that we are developing within this country.

We need technological progress on carbon capture and storage, which still seems a long way off. We need a more genuine single internal market for energy, which involves more physical interconnection. We need more moves to harmonise our regulatory structure, and more effective regulators. There is criticism here of Ofgem as a weak regulator, some of which I agree with, but some of the regulators on the continent are yet weaker and markedly less independent of the industry or the government. We need to develop a common approach to developing this internal market. It is a big challenge; a political challenge, a technical challenge and an economic challenge. If we do not meet that challenge, I think this report underlines the fact that there will be serious failures right across Europe. We need to be careful that we do not jeopardise whatever measures we put in place.

If we go too far down the road of capacity mechanisms, state by state, then we are actually moving in the opposite direction to achieving a single market and the cost benefits which would come from that. Although I broadly support the capacity mechanisms proposed in the Energy Bill, there are consequences to relying too heavily on those here. Some of the other mechanisms which have been developed in Spain and elsewhere jeopardise the objective of a single market. Those of us who are, broadly speaking, pro-European need to push for that. Those who are perhaps more hesitant about that must recognise that it needs to be an important part of the national policy, along with action at European level.