Energy Market Design

Alan Whitehead Excerpts

Monday 23rd November 2015 General Committees

[The Chair]

We now have time for questions to the Minister. May I remind Members that these should be brief? It is open to a Member, subject to my discretion, to ask related supplementary questions.

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

The Minister mentioned the importance of interconnectors in the UK’s approach to the reform of the single energy market. She will know about the programme already under way of increased UK interconnectors. Is she confident that the present UK system of requiring interconnection to work on the basis of arbitrage between different levels of price in the energy system in the UK and where those interconnectors are connected to will work on the basis of a far higher level of interconnection, even in the context of caps and floors, as is envisaged in the EU document?

[Andrea Leadsom]

Yes, I am confident. I think that at the moment, it is very important that interconnectors respond to price movements. The hon. Gentleman will be aware that in the recent notice of insufficient supply margin, interconnectors played their part, so they are a very valuable resource for the UK at times of stress—when we have an unexpected outage of a plant—so that price signal is very important for them. He will also be aware that there are, however, measures to put in place in the event of a real system stress, where system operators can call on each other to provide specific support and help, which potentially can overrule simple price movements; but of course, competition and free-flowing markets are vital.

[Dr Whitehead]

The Minister states that she supports a common methodology for assessing capacity adequacy—indeed, in her Department’s response to the document, it is stated that the methodology

“must respect the differences between Member States”.

What does she think are the main differences that would cause the UK to resile from the real common capacity adequacy methodology?

[Andrea Leadsom]

I am not completely sure that I understand the hon. Gentleman’s question. The point I am making is that it is for individual member states to look at the balance of energy mix that is important for their own energy security. The integration among and co-operation between member states leading to greater interconnection offers all member states access to surplus in another member state, which is of benefit to energy security and, of course, prices in each member state. Interconnection is valuable, but that is not to say that one size fits all and that a common methodology must therefore be used in every member state for every interconnector.

--- Later in debate ---

[Andrea Leadsom]

Yes. I am grateful to the hon. Gentleman for making that point. It is absolutely right to say that domestic battery storage is a small solution for an enormous problem. However, there is increasing use of smart metering; domestic households are increasingly generating their own power through solar panels on their own domestic rooftops; and so on—all these small measures in aggregate are changing the balance of the system. Those demand side responses of individuals play a very important part. Nevertheless, he is exactly right that there are some amazing technologies coming to fruition: compressed air; pumped storage; and grid level battery storage. There are a number of different technologies and my Department is very keen to see which one can have the biggest effect and, of course, which one can offer the most cost-effective solution for consumers.

[Dr Whitehead]

What progress has the Secretary of State made with the inclusion of non-UK-based projects that are eligible for contracts for difference, which the document clearly indicates would be the sort of cross-border collaboration that might be necessary in this reformed energy market? I believe that she produced a document in 2014 that indicated that the proposed date of 2018, when overseas non-UK projects might be eligible for CfDs, would be the earliest date at which that could be achieved. Is the Minister happy with that rate of progress?

[Andrea Leadsom]

Yes, I am entirely happy with that rate of progress. The hon. Gentleman is quite right to raise the issue of CfDs being made available to foreign generators. Of course, the key point for the British consumer is the evaluation of the contribution that offering a CfD to a non-British generator could make to our energy trilemma: decarbonisation; keeping the costs down: and keeping the lights on. We are considering two projects, but he is absolutely right that we will not be making decisions for the next year or two. The two projects are with the Isle of Man and Iceland. The Isle of Man has shallow waters and the appetite to build an offshore wind project, which it would then seek an export market for, and of course that could be very advantageous to the British consumer, because it could be very cheap energy to produce, so it could be good value for the consumer here. Likewise, a project with Iceland could offer us access to geothermal energy sources, which could be very advantageous for the UK. All those projects require quite a lot of evaluation, but I can assure the hon. Gentleman that we will look at them carefully, based on whether they offer best value to consumers.

--- Later in debate ---

[Andrea Leadsom]

I am sure the hon. Gentleman is aware that we have not stopped the feed-in tariff entirely. We are consulting. The consultation is now closed and we will respond as soon as we can. There were significant numbers of responses, and we hope to provide the Government’s policy response by the end of the year. The hon. Gentleman will be aware that, in fact, the proposal is to continue to give a return to investors from participating in the feed-in tariff. He will also be aware that there is a significant amount of onshore wind still in the pipeline in terms of meeting the grace period for the early closure. He will also be aware that, only last week, the Secretary of State gave a continued commitment to support for offshore wind, where Britain has 50% of the world’s deployment. I hardly think that that is calling a halt to renewables.

[Dr Whitehead]

I note that the Minister, in response to my previous question, cited the Isle of Man as somewhere where a connection might be made outside Great Britain. How should other such areas, which are not in the EU, but are clearly associated with Great Britain, be dealt with in the discussions? I have in mind the Channel Islands, in particular.

[Andrea Leadsom]

That is not something to which I have given a great deal of thought. The key thing, from an energy policy perspective, is for the market to come forward with ideas. We do not go out and seek bids directly from the Crown dependencies, the islands, other member states and so on. We are looking for ideas to come forward. They can be generated by developers who have a good idea or by Governments in other countries that feel there is an opportunity. I understand that, in the Channel Islands, there is the potential for a tidal project in Alderney, but we are looking to developers or other Governments to come forward with those suggestions.

[Andrea Leadsom]

I am very disappointed with the hon. Gentleman; I thought he would take a pragmatic view. Hinkley Point offers excellent value to the UK consumer. It provides baseload, it is as low carbon as offshore wind, the consumer pays nothing until such time as it is producing electricity and private investors will be making the investment. The decommissioning price is included in the strike price of the CFD and the funded decommissioning programme has to be agreed up front, so it is simply not true that the decommissioning has not been considered. Hinkley Point will contribute enormously to our energy security at a time when we want low-carbon sources.

Every day of the week, we receive about 19% of our electricity from ancient nuclear power plants that will be shut down some time during the 2020s. We have to replace them either with something that is higher carbon or with new nuclear. France benefits from a relatively older, but not too old, nuclear fleet that reliably provides it with low-carbon energy day in, day out. That is what we want for Britain, which is why we are so committed to new nuclear.

In the UK, we have a huge opportunity to design our own small modular reactors. All the amazing R and D that is going on in the UK right now gives us the opportunity to be part of that. As the hon. Gentleman no doubt knows, Hinkley Point C offers about 25,000 jobs in the Somerset area, and 60% of the £24 billion being spent on it will be spent in the UK. It is a great news story for economic growth, jobs and security of supply, and it will keep the bills down.

[Dr Whitehead]

My hon. Friend the Member for Luton North, in introducing the EU document on behalf of the European Scrutiny Committee, talked about the immense change that is taking place in the way that electricity is generated across Europe. It is becoming decentralised and is entering into different forms of generation, which removes the assumptions about centralisation that have been at the heart of the European system for a long time. Is the Minister confident, in the light of her Department’s recent reset statement, which appeared to point to a very centralised energy future, that the way forward for UK energy will be compatible with the changes that take place in Europe when those greater connections happen?

[Andrea Leadsom]

I do not agree at all that the Secretary of State’s speech suggested centralised energy systems. The UK is facing the most superb and exciting revolution in power generation. One of our biggest challenges in managing the system is the diverse range of power generators coming on to the system, putting stresses on the system and leaving us with the risk of projects being delayed due to the inability of getting a grid connection, for example. Those are the sorts of challenges that we are trying to address right now. Far from being centralised, our energy policy is very decentralised. The Secretary of State was trying to make it clear that the transition away from coal towards gas, which is the greenest, cleanest fossil fuel, and a renewable future is the right way for the UK to go, and I think she is absolutely right.

--- Later in debate ---

[Dr Whitehead]

The document before the Committee addresses the move towards greater integration of the EU energy market. The Minister has answered a number of wide-ranging questions, but the document is at the heart of our discussions. I will make a couple of remarks about the extent to which we are already starting to integrate with the European energy market, at least in the way in which we are jointly facing outwardly. The UK needs to consider carefully how it integrates its activities with the way in which Europe is now going. The document does not make any particular policy recommendations. Nevertheless it points in a clear direction, with regard to what an integrated energy market in the EU might look like, and the sorts of provisions that would go along with that.

In a context where we already collaborate to an extent with the EU in various energy matters, reductions in, or the removal of, subsidies for onshore wind and solar are being defended on the basis that we have already reached the expected deployment of renewable sources of electricity generating capacity. I assume that the Minister at least bows in the direction of the idea that we have a joint EU target on renewables, and that energy as a whole should include a joint target for renewables. Indeed, the UK’s renewable energy target is 15% of energy by 2020, as part of an EU-wide agreement.

We may be reasonably close to the target in relation to one pillar, but we are woefully failing to get near the target in relation to the other two pillars—heat and transport. The EU target mechanisms enable member states to exceed the sub-targets in particular areas, to bring the overall target together. I should have thought that, bearing in mind the success of the UK deployment of solar and onshore wind, as well as the development of offshore wind as a substantial part of our renewable electricity targets, over-achieving on those target areas would make a major contribution to keeping the UK on track to meet its overall EU energy targets. Cutting the one area where we are almost achieving our target, when we are making no progress in the other areas, does not seem to be a terribly constructive way to secure our European commitments to EU energy targets.

Perhaps that is no more than a straw in the wind—an indication of the problems that the UK may encounter in making its position compatible with the EU’s, as we move on to greater integration of markets. I remind the Committee that for Paris COP 21 we have a joint position with the EU on the European contribution to carbon reduction and climate change targets; I would also point out the extent to which we are negotiating on those targets in Paris as one body. That will ensure that the member states can join in a real contribution to the joint targets agreed across the EU.

I want to highlight something on which I put a question to the Minister earlier. I warmly welcome the process—and I commend some of the early methods used to make progress with it—of expanding interconnection between the UK and the rest of Europe. The Minister will of course be very aware of how lamentably weak the UK has historically been in that respect. Not only are we an actual island, but we have been an energy island for many years as far as the rest of Europe is concerned. The level of interconnection of 3% to 4% is way below the norm in most of the rest of Europe and way below the norm target that the EU has set for the interconnection that should be afforded to member states of about 10% of supply.

The increase in interconnection is under way. Arrangements have been made by National Grid to develop caps and floors for the regime as far as the interconnectors are concerned. Even discounting the more longer-term arrangements that we might have in, say, Iceland and elsewhere, several interconnection plans look as though they are under way. However, there is the problem of the operation of interconnection. If we continue to operate the working assumption of interconnection in the UK on the basis of arbitrage between different prices between the UK and the continent, as my hon. Friend the Member for Luton North mentioned earlier, it is a matter not only of EU regulation, but of logic.

The more interconnectors we have, the more those interconnectors bear down upon price differentials, and the possibility of making money for the interconnectors through arbitrage is deflated interconnector by interconnector. The model upon which interconnectors work therefore becomes untenable over time. My concern about other aspects of the way in which the UK energy market operates is that we may be in difficulty as far as being able to take advantage of how energy markets are moving in Europe. Should those markets come about, the danger is that they might be one-way markets as far as the UK is concerned and not the two-way markets that the greater integration of European markets should bring about.

The Department will want to have a good look at the direction this document moves us in, notwithstanding the fact that we are not required to make decisions at this moment, because that does set some store for the future. I hope that, given how our markets work in the UK, the Department will be active in ensuring that when the changes come about in the fullness of time, once the EU has discussed them and gone through all the various mechanisms, we will be in a position to be a genuine partner in that more integrated market, rather than a bystander.