Energy Market Reform

Alan Whitehead Excerpts

Wednesday 24th October 2012 Commons Chamber

[Mr Davey]

No, I will not.

I have spent some time on competition in the retail energy markets, but the right hon. Lady spoke a lot about competition in the generating markets, to which I should like to turn. She made a great deal of wanting to reintroduce a pool to the UK and said it was in the Labour party’s manifesto. She did not really explain why, having abolished the pool in the UK in 2001, Labour wanted to re-introduce it. The Labour Energy and Competitiveness in Europe Minister at the time of pool abolition—she is now the noble Baroness Liddell—told the House:

“There is no question but that the electricity pool has distorted the market”.—[Official Report, 15 June 2000; Vol. 351, c. 1102.]

When the NAO reported on the old pool in 2003, it said that the

“the centralised arrangements of the pool carried with them a risk that some generators could manipulate the market and Ofgem consider that this risk materialised through much of the period of the Pool’s operation to the detriment of consumer interests.”

Indeed, many at the time believed that the pool was leading to higher and not lower energy bills. That is why the Government are not convinced by the Opposition’s policy.

[Dr Alan Whitehead (Southampton, Test) (Lab)]

rose—

[Mr Davey]

I will give way to the hon. Gentleman, who is a member of the Select Committee on Energy and Climate Change.

[Dr Whitehead]

Is the Secretary of State aware of how many generators there were at the time of the abolition of the pool compared with the number of retailers, and does he think those circumstances have been replicated today? It would help the debate, if he could provide some numbers.

[Mr Davey]

I have already. I explained how the number of companies fell under Labour. [Hon. Members: “How many?”] There were two: PowerGen and National Power. Yes, I do know. And there are more generators now, so going back to the pool, when there were fewer generators, would be a bit odd.

--- Later in debate ---

[Dr Alan Whitehead (Southampton, Test) (Lab)]

When the Government announced that they were going to introduce electricity market reform and publish a White Paper and a Bill, I was pretty excited, because I thought it would be an opportunity to reform the way the electricity market works—or rather does not work—in delivering choice and providing for entry to the market and price stability, as a result of competition, and how it might do that in future on a low-carbon basis. In truth, however, we see from the electricity market reform Bill that is coming forward that there will be no reform of the electricity market. In fact, the Bill that is coming our way ought to be called the “Additions and wheezes to try to make the existing market work rather better, particularly as it refers to lower-carbon energy” Bill, because that is in practice what is happening—that is what is before us at the moment. The Secretary of State appears to be happy to go along with that, not only in not reforming the electricity market at all, but by relying on a wonky grasp of history to reject alternatives ways in which the market might work to secure better competition, a better level of entry and an end to the vertical integration that has plagued the market over recent years.

The pool has been mentioned this afternoon, but the pool as was—up to 2000, when it was abolished—was in fact never a full pool. Something like 90% of bilateral trades were allowed to escape the consequences of the pool, and for most of its time it had only two generators—and sometimes three—for the wholesale end of the market. Circumstances are fundamentally different today, inasmuch as one thing has remained constant. Most trades escape the day-ahead market and are done bilaterally—and completely non-transparently, in defiance, essentially, of what the market was supposed to do—and those who generate the power have an overwhelming stranglehold on the retail market. The market is vertically integrated to the extent that an awful lot of deals take place not between people, but within a company.

Consequently, the market simply does not work; it does not keep bills down, get new entrants in and work properly for consumers. The idea of a modern pool therefore seems essential to moving the market forward. A pooling arrangement would separate who sells into the market from who buys out of it. Such a system, as put forward by the Opposition as part of their proposals for real electricity market reform, can on the basis of a low-carbon and a high-carbon pool ensure a proper market for those low-carbon generators that are independent of the vertical integration that goes on elsewhere.

What I find truly dispiriting is that the electricity market reforms proposals as they stand will end any obligation to purchase any power from low-carbon and renewable generators in 2017. As a result, vertical integration is likely to proceed apace into the areas of some independent entry among low-carbon generation providers. With the ending of the renewable obligation in 2017 goes the ending of any power purchase agreements, which have given people certainty that they might be able to sell the power they generate on a low-carbon basis into the market. Surprise, surprise, the only people who will be likely to offer anything like a power purchase agreement once the renewable obligation has gone will be the very companies that are integrated into the market at the moment. Therefore, the prospect before us is of further vertical integration of the market as so-called electricity market reform proceeds.

We have to break that cycle. Over and above the half-hour settlements, the only way we can do so within the central trading arrangements in the market is to ensure that all trades are conducted within a pool system and are completely transparent and completely contestable both ways—low carbon or high carbon. That system would make eminent and straightforward common sense given the current failure of the electricity market.

If we do not address this problem in our reforms, we will live to regret it, because we will not have given ourselves the opportunity to introduce a key instrument that can bring about price discovery and stability and competition in the market. If that is what we want, we will be sorely disappointed as the market will subsequently fail to protect both the consumer and routes for new entrants to make their way into the market and to provide greater choice for the future. I urge Members to take careful note of the proposals both for that reason and because we want a stable market for the future which provides low-carbon energy.