Energy Trilemma

Alan Whitehead Excerpts

Thursday 23rd March 2023 Commons Chamber

[Dr Kieran Mullan (Crewe and Nantwich) (Con)]

I shall be happy to accommodate your request, Mr Deputy Speaker.

I thank my right hon. Friend the Member for South Northamptonshire (Dame Andrea Leadsom) for securing the debate. Her framing of this issue—her description of it as an energy trilemma—is typical of her shrewd and clear thinking: it does an excellent job of setting out the nature of the challenge. I was delighted to be able to feed into the report that she produced, along with my hon. Friend the Member for Stoke-on-Trent Central (Jo Gideon), on deep geothermal and mine water technology.

This issue is more important than ever. The western world has come to learn, in an abrupt and challenging way, the cost of relying on states such as Russia for energy supplies. The record of Europe in this regard, and that of Germany in particular, will be viewed through the long lens of history as naive, and I am glad to see Europe now united in understanding the importance of prioritising our security—energy or otherwise.

I know that these Backbench Business debates are held in a less party political spirit than others, but I must say that I have been surprised by what the Opposition have had to say about this issue in recent months. Let me remind them, and the House as a whole, that it was Tony Blair who said, during an EU-Russia investment conference that he chaired in 2005, that increasing reliance on Russian oil and gas was not something to be concerned about. Both Mr Putin and Mr Blair insisted that the EU’s growing reliance on Russia for energy would not compromise the ability of EU leaders to express concerns, and that our economic futures were “bound together”. Opposition Members should remember that.

I have also noted with interest that it seems that the original Captain Hindsight, the Leader of the Opposition, has now been joined by a lieutenant in the form of the shadow Energy Secretary, whom I notified that I would mention him. When I looked through Hansard to find his contributions over the last few years, I was shocked to discover that he had not spoken about energy security in 2021, or in 2020, or in 2019; in fact, he had not spoken about it for 10 years when he finally did so in March 2022. Maybe he has spoken about it elsewhere and I have missed it. I can, however, confirm that the shadow Minister has been much more successful in that regard, raising the matter repeatedly. Perhaps he should put in for a job from the Leader of the Opposition.

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

Would the hon. Member like an edited copy of the speeches that I have made about energy security over the years? I think he might find something useful there.

[Dr Mullan]

As I explained, the hon. Member has a good track record. I was talking about the shadow Energy Secretary—as he was called until recently. I apologise if I did not make myself clear; I thought that I had. As I said, I think the Opposition should be cautious in their criticism of us. I make that point not to suggest that they have been unacceptably slow in this regard, but to show how, across the western world, we politicians have been too slow to recognise the danger and too quick to work with Russia.

As my right hon. Friend the Member for South Northamptonshire clearly laid out, we must find a path forward. Many of us in the House have advocated a variety of approaches, and I encourage the Government to be ambitious and innovative. I want to use the rest of my speech to talk about one technology that I think can help us meet the demand of the energy trilemma: deep geothermal heat and energy.

Deep geothermal heat and energy is an environmentally friendly, dependable and cost-effective source of heat and energy that can be found right under our feet. The technology is based on relatively simple concepts: first, that heat radiates from the earth’s interior; secondly, that while it dissipates once it reaches the surface, the heat remains significant at depths accessible with current drilling technology; and thirdly, that water can be used to absorb and transmit that heat to the surface.

Those mechanisms are what heat hot springs, most famously demonstrated in the UK by the Roman baths. Iceland has uniquely conducive geology and enjoys vast utilisation of geothermal energy. While natural occurrences of any significance are relatively rare, boreholes can be drilled to access this natural resource.

Deep geothermal energy heats 250,000 homes in Paris, and across France more than 600 MWh of heat is produced annually as the Government aim to increase the number of schemes by 40% by 2030. Munich is pouring in €1 billion through to 2035 to develop geothermal energy and make the city’s heating carbon neutral. Germany already produces more than 350 MWh of heat annually, and its Government are targeting at least 100 new geothermal projects.

The primary method by which we assess the scale of the opportunity for geothermal heat in Great Britain is geological temperature data collected from petroleum borehole data, mining records and a number of boreholes drilled as part of geothermal studies. I have been introduced to deep geothermal technology since my election as Member of Parliament for Crewe and Nantwich in December 2019, and my research has encouraged me to see its potential. Theoretically, it is able to provide enough heat energy to meet all our heating needs for at least 100 years, and even a conservative estimate of what we could utilise suggests that it could provide 15,000 GWh of heat for the UK by 2050.

In the UK, perhaps because of our past success in drilling for oil and gas and our status as a world leader for cheap wind and solar, we have fallen further behind on geothermal. But getting to net zero by 2050 in such a way that we share the proceeds of investment and utilise as much of our existing skills and workforce as possible will require us to pull every lever, and deep geothermal is an important one that will help us in the transition from oil and gas with our existing industries.

Like wind and solar were at the outset, schemes in Europe have been supported by things such as insurance and incentive schemes from Governments. I think it is the lack of such schemes in the UK that has led us to fall behind. I do not think the industry is asking for the open-ended subsidies that were originally in place for wind and solar, but a time-limited, targeted scheme of support would make a difference. I was pleased to see the set-aside in contracts for difference for tidal power and the green gas support scheme, which mirror the sort of thing that the industry is asking for.

I was delighted to be asked by the Prime Minister to conduct a review of geothermal technology and its potential in the UK. I am pleased to say that the first draft has been completed, and the report should be published shortly. It contains interesting figures on the potential overlap with levelling up, and I look forward to sharing the findings with the Secretary of State and the rest of the ministerial team.

Whether the technology is deep geothermal or nuclear, tidal or hydrogen, there are opportunities to create jobs, grow our economy and make us more secure. I look forward to seeing us drive this agenda forward, for the benefit of my constituency and the whole country.

--- Later in debate ---

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

This has been an interesting debate, and I congratulate the right hon. Member for South Northamptonshire (Dame Andrea Leadsom) on securing it. I thought that it was about tackling the energy trilemma, so I have prepared all sorts of interesting things about the energy trilemma and how it works. However, although the contributions have been interesting, the debate has not necessarily been about the energy trilemma.

The right hon. Lady spent a lot of her contribution talking about the 1922 Back-Bench committee report on energy, which sounds very interesting. Indeed, it appears to contain quite crucial insights, particularly on the need for speeding up the planning system as far as grid development is concerned, speeding up connections, and developing new connections and ring main in offshore wind. As far as I am concerned, those things are crucial to delivering the rest of our green agenda. I can offer her a slogan, “no transition without transmission”, which she might want to put on the front of a future report. They are crucial insights, and it would be a good idea for her to provide a submission to the Labour party national policy forum on this, because she would get a better hearing than she would from the present Government.

The right hon. Lady mentioned the three-legged stool. This is about how we achieve our net zero outcomes while taking the whole question of affordability and of energy security along with us as we go. This is not a zero-sum game. It is not the case that if we consider affordability and security, we take away from our net zero ambitions. After all, we in this House already decided which of those legs we are going for most strongly when we decided on net zero as our target as far as climate change is concerned. That means we have to consider the energy trilemma from the point of view of not whether we will get there but how we can get there with those other matters being taken into account.

I would prefer to put the question of energy security into a slightly different mode, and that is the one it was put in by the World Energy Council, which has done a lot of work on the energy trilemma as a tool for deciding how we make progress in these areas together. It has produced an isosceles triangle—I am confident that the word “isosceles” has not been recorded in Hansard before—that has spines going to the centre of it, and we can advance further along to each corner from the centre with various elements of the energy trilemma in it. We have decided to advance substantially down the left-hand spine, which is the sustainability part of the triangle. The job we have to do is make sure that what happens with the other two legs does not draw back the sustainability leg but enhances it, which is exactly the point that the hon. Member for Kilmarnock and Loudoun (Alan Brown) made.

It also means we have to take decisions in other areas that are compatible with the particular length of spine we have gone down on that triangle. I would politely say to the hon. Member for Banff and Buchan (David Duguid) that, while it may be the case that the hydrocarbons we bring into the UK are more carbon-intensive than the ones we produce in the UK for transport reasons and others, they are still hydrocarbons. With what we have decided, yes, we are going to need oil and gas in our future economy, but in far smaller quantities than is the case in our economy at the moment. We have to think about the right use for oil and gas in our future energy economy, making sure that as much of that as possible is produced in the UK as opposed to importing, but also that the total that we have coming into the economy as a whole is compatible with that net zero goal on the left leg of the sustainability triangle.

[David Duguid]

I appreciate the hon. Gentleman giving me the chance to come back on that point. Surely he will recognise, as I think he did in his statement just now, that there will be a gap for some time, and that we need to keep that gap closed. As rapidly as we all want renewable and low-carbon energy to be developed, we need to make sure that that gap is closed, and that we do not become even more dependent on foreign imports than we already are.

[Dr Whitehead]

The hon. Gentleman is absolutely right: we should not be dependent on foreign imports. However, we need to be thinking about a long-term overall reduction in what we are doing. I do not think that simply saying, “We’re going to increase oil and gas production over the next period” is an answer to our present problems, because in the end, that is incompatible with the commitments we have made on net zero. We cannot go down that path in the long-term future.

[Dr Mullan]

I was pleased to hear the hon. Gentleman say that he agrees that we should do as much of our own energy production as possible in the meantime, during the transition. Is that the official Labour party position—that we should be doing more oil and gas in this country while we’ve got to still be using it?

[Dr Whitehead]

No, what I said was that we should be trying to make sure that the reduced amounts of oil and gas that, in the end, we use in our system are as indigenous as they can be. That does not mean that we increase oil and gas production overall. We have to make sure that what we are doing in terms of our route to net zero and our energy provision for the future is secure and affordable.

For example, we are, I hope, on track to make our energy economy—for power—based pretty wholly on renewables. Certainly, that is a Labour target for 2030; I think the official Government target is 2035. Of course, as hon. Members have mentioned, that means that we have to take account of what the issue is for variables in that energy economy. But, we should not back those up with a whole lot more oil and gas; we should back them up with things such as storage, which the hon. Member for Stoke-on-Trent Central (Jo Gideon) mentioned, and methods of making sure that we can use our energy as flexibly as possible. Also, our variability must be accommodated by what we do alongside it to make the overall system work. That is actually working quite well so far, inasmuch as renewable energy is the cheapest form of energy there is at the moment. On the affordability criterion, we really are making progress on that front.

The hon. Member for North Devon (Selaine Saxby) mentioned the Celtic sea. If we expand our offshore renewables into the Celtic sea, we will have a further security addition to what our energy supplies are going to look like, which will make that second leg work very well as well. Those are the sorts of things we need to consider for the future in terms of how we solve the energy trilemma: not going backwards with higher hydrocarbons, but making the lower hydrocarbons that we have work as well as possible.

I was about to denounce the hon. Member for Crewe and Nantwich (Dr Mullan) for being nasty to me, but I gather he was not being nasty to me, but to someone else entirely. I thought he greatly redeemed himself with his passionate espousal of deep geothermal energy, which is bang on. We need to do a lot more work on geothermal energy for precisely the reasons I have mentioned in terms of the energy trilemma in this country, as it is affordable and low carbon at the same time.

I thank hon. Members for this excellent debate this afternoon. By the way, in how we balance out the three legs of the World Energy Council trilemma tool, we are fourth in the world. That may be a free gift to the Minister, but it is something we are not doing badly on in this country as a whole.

Draft Electricity Supplier Obligations (Excluded Electricity) (Amendment) Regulations 2023

Alan Whitehead Excerpts

Monday 13th March 2023 General Committees

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

The SI looks very straightforward. It proposes two minor amendments to the qualifying arrangements for the energy-intensive industries exemption scheme, which, as the Minister says, came into force in 2017. It replaced a discount scheme with one in which energy-intensive industries were eligible for a discount of 85% on the green and environmental levies charged to other industries to deal with, for example, the cost of the renewables obligation and contracts for difference.

As the Minister says, the continued eligibility of companies for the scheme was designed to be reviewed by 2022. Some companies’ eligibility may have lapsed because during the pandemic they did not produce to the same extent as they do now, or because they had other arrangements that they needed to carry out that might have infringed on the rules of the scheme. The arrangements proposed today shorten the period for which accounts and various other things need to be provided, so that eligible companies can be judged on the basis of their present performance, rather than their performance over five years.

I would be grateful if the Minister could elucidate other matters relating to the scheme, as they are quite important for our overall judgment of it. First, as she said, the original 2017 EII exemption applied to about 315 eligible businesses. Indeed, the SI that introduced the scheme provided a number of specified activities in sectors exempted because of their energy-intensiveness. However, although she suggested that those 315 businesses now have their eligibility up for renewal, it appears that when the scheme was launched in November 2017, only 170 companies applied. Unless there has been substantial changeover since 2017, and a number of new companies make up the difference between the 315 eligible businesses and the companies that applied, we appear to be short a number of companies—eligible companies that have not yet received the discount on their electricity bills, for reasons that I can only conjecture about. Perhaps they thought applying for the scheme was too difficult, or did not know about it.

We have a potential double problem. The SI suggests that things could be made easier by our relaxing the requirements on companies that are renewing their eligibility. It appears that a number of companies that were in principle eligible for the scheme as it was—not as it is now—still have not got any exemption. With these new reliefs and eligibility requirements, companies not in the scheme could be brought into it. Whether the Government have any positive methods of ensuring that they are brought in, I do not know; the Minister may be able to enlighten us.

In 2017, when the scheme came in, it gave an 85% exemption, but in August 2022 the Government announced that they would take the scheme further and introduce 100% exemption for energy-intensive industries. As far as I know, nothing has happened on implementing that proposal. There was considerable press coverage of the intention to increase the exemption to 100%, but there is very little press coverage of the fact that the Government appear to have done nothing to implement that increase—or if they have, it has passed me by, and it has certainly has not been recorded to any great extent.

If it is still proposed that the 100% scheme will be implemented in the not-too-distant future, that will make a difference to the extent of the exemption arrangement, and to the measures needed to make sure that the scheme is easier to requalify for, so that businesses can get an exemption more valuable than the 85% exemption.

[Samantha Dixon (City of Chester) (Lab)]

Forgive me if I have misunderstood, Dame Angela, but only this morning, I received a letter from a laundry based in my constituency, which made the point that its energy bills have escalated considerably. It appears—unless I misread the letter—that the laundry sector is not covered by the regulations. Does my hon. Friend agree that laundry—for the tourism trade in my constituency, but also for healthcare operations—is a vital sector that has soaring costs, and needs to not be overlooked?

[Dr Whitehead]

My hon. Friend makes a very good point that slightly anticipates my third and final question for the Minister. She is quite right, and by coincidence, I have in front of me the complete list of activities that qualify as energy-intensive industries. Laundry and associated activities are not on the list. However, interestingly, the mining of hard coal is. It is curious that those mining hard coal are exempt from all the levies that go towards mitigating the pretty bad things done to the environment through the mining of hard coal. I would have thought that the mining of hard coal should in no way be in the schedule of specified activities. My hon. Friend suggests other things that should be in that schedule and eligible for levy reductions. Does the Minister intend to review the schedule, which dates from 2017, and who is eligible for exemptions? If she does, what will be the criteria for inclusion among energy-intensive industries? If she does not, is she happy that mining hard coal continues to be 85% exempt?

Labour will not oppose this SI, because it represents a sensible change to the scheme and takes account of what happened during covid. I think the Minister will agree, however, that there are questions, some clear and some rather less clear, about the operation of the EII scheme that need answering before we can conclude our business this afternoon.

[Amanda Solloway]

I thank the hon. Member, as ever, for his valuable and well thought out contribution.

The exemption provides relief for key foundation industries, including companies operating in the steel, paper, chemicals, cement, and glass sectors. The scheme also supports emerging sectors, such as battery manufacturers and companies making semiconductors. The companies that the scheme supports are located across the country and provide high-paid, good-quality jobs, both directly and in the supply chain.

The hon. Member asked about communication. Communication is key in all that we do, and we will endeavour to ensure that we keep on communicating all we are doing to support the industry. The regulations are necessary to improve the operation of the scheme. They will make it easier for start-ups and businesses to apply. They will also allow businesses to account for the impact of covid-19 when applying for relief. We will update and publish our guidance on gov.uk in April 2023 to ensure that business is aware of the relief, and we will proactively engage with stakeholders to ensure that they are aware of the changes. All 320 companies have received a discount, and we know that other companies have already applied. The list of eligible sectors is based on the most electricity and trade-intensive businesses. We continue to engage with industry and other stakeholders to ensure that support is targeted at those sectors most exposed to high electricity costs.

The hon. Member asked about the 100% exemption. On 23 February 2023, the Government announced their intention to move to 100% as part of the British industry supercharger. The delivery mechanisms and timelines for the implementation of the supercharger will be consulted on this spring.

[Dr Whitehead]

What the Minister says appears to be a reannouncement of what was announced in August and not proceeded with. Is the Minister now saying that the 100% discount is being proceeded with, and will be in place, say, this spring or later on? When does she think that might happen?

[Amanda Solloway]

To reiterate, the Government announced their intention to move 100% as part of the British industry supercharger on 23 February 2023.

[Dr Whitehead]

But you announced it in August last year.

[The Chair]

Order. Rather than speaking while sitting down, the Member might want to intervene; I am sure the Minister would let him.

[Dr Whitehead]

I apologise.

Energy

Alan Whitehead Excerpts

Tuesday 7th March 2023 Commons Chamber

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

As the Minister has said, these statutory instruments deal with alternative fuel payments within the general scope of the domestic energy price guarantee scheme and the non-domestic energy bills support schemes. They deal specifically with circumstances in which the customer does not hold a fuel account directly with the supplier but, either domestically or commercially, is able to secure assistance with energy costs by ensuring that the saving is passed through from the supplier to them. This applies to, for example, park home occupiers or, in business cases, end users such as those who run cafés and guest houses and are lessees of a landlord who pays the bills, and receives the rebate, in the first instance. There will be pass-through payments of £200 for domestic end users and £150 for non-domestic end users. It should be noted that in Northern Ireland alternative fuel payments have been combined with a main payment of £600.

These latest SIs represent what I hope is the end of a long line of provisions for various sub-categories of people for whom we seem to have been legislating for a very long time. However, we ought to note, at least in passing, that this has meant that schemes that were announced in the autumn and were supposed to run for six months are now in the last month of their operation, and some people who should have received support are still waiting for it six months after the scheme started. Lest there be any doubt about that, I can tell the House that in February the Government issued a press release headed “Households, businesses and organisations off the gas grid to receive energy bill support over the coming weeks”, which stated that:

“£200 payments for off grid households start today, while businesses off the grid are expected to receive £150 payments by 10 March”,

which is in three days’ time. I therefore think that the inquiry from the hon. Member for Kilmarnock and Loudoun (Alan Brown) about who had not yet received their payments is rather germane, given what the Government themselves said about the long delays in releasing the payments.

I appreciate that the support schemes have proved difficult to administer, and that there have been repeated instances of new sub-categories of people for whom separate secondary legislation has been necessary to secure the integrity of the schemes, but does the Minister really sit comfortably with the knowledge that a not inconsiderable number of customers, both domestic and non-domestic, did not receive help that was often desperately needed for virtually the whole passage of the scheme itself, and in some instances, as I have said, may not receive support until the middle of the month?

We will not be opposing the SIs. Indeed, we want to see them dispatched so that help, albeit late, can assuredly reach people, particularly those who are relying on pass-through arrangements for relief when they do not receive the up-front sums directly. We are discussing these SIs because—as far as I can see—of defects in the original pass-through SIs, which we have already debated, as reported to the Government by the Joint Committee on Statutory Instruments.

The Committee cited one particular defect in the Energy Bills Support Scheme and Alternative Fuel Payment Pass-through Requirement (Northern Ireland) Regulations 2023, which failed to make it clear that support is to be delivered as a single rather than a monthly payment. That has been corrected in the Non-Domestic Alternative Fuel Payment Pass-through Requirement and Amendment Regulations 2023. However, the Committee reported on a second defect in the legislation which I think is potentially serious: namely, the fact that there are requirements in both pass-through SIs for the intermediary in the scheme to notify the end user within 30 days of the provision of the scheme benefit of how and when the pass-through will take place and what amount will be passed through, and convey the important information that the end user can recover amounts to which they are entitled but do not receive as a civil debt.

All the information about how the end user can expect a pass-through benefit should be contained in the information from the intermediary. The Committee noted that no sanction is attached to the provision to cover cases in which the intermediary fails to inform the end user in that way. It seems that the vital part of telling someone that they will receive the benefit or can sue the intermediary if they do not receive it is essentially a voluntary act for the intermediary to perform.

Yes, they should send the information, and yes, the legislation says that they should, but if they do not, nothing will happen to them, and unless the end user is aware of their entitlements, they might remain in complete ignorance of an expected payment. Thus, nothing will happen as far as a payment is concerned. This is in spite of requirements being placed in the main legislation, the Energy Prices Act 2022. Section 10(b) of that Act states that regulations may make provision

“for the payment of a specified amount, on an application made in accordance with the regulations by a person who is an end user of an intermediary, where the intermediary fails to comply with a requirement by virtue of subsection (9) to provide information to the person”.

It is therefore clear in the main legislation what the secondary legislation is intended to achieve.

The Government’s response to the information they received from the Committee on this defect was to decide not to amend their approach and effectively to ignore this provision in the Act. They say so in the explanatory notes to this SI, and it is worth putting the Government’s line of argument for ignoring the main legislation on record. The explanatory notes state:

“Section 19(10)(b) of the Energy Prices Act 2022 provides that pass-through regulations may require an intermediary who is in breach of requirements to provide information to pay a specified amount on application by the end user to a specified person. The Department decided that the incentive for end users to make such an application for payment would have been insufficient given the time and administrative burden involved in doing so. However it is still considered that there is merit in including notification requirements in the instrument. This is on the basis that many intermediaries would be likely to comply with the requirements notwithstanding the lack of an enforcement mechanism.”

Frankly, that is a rather laughable defence for not doing in the secondary legislation what the original Act said should be done.

Is the Minister comfortable with this state of affairs where the secondary legislation has written out a provision contained in the primary legislation and potentially makes the receipt of relief from bills much more capricious in the process? Does she consider that there is arguably a case for action against the Government by those deprived of the information to which they are entitled on the grounds of negligence in doing their own pass-through, which is to pass the requirements of primary legislation into secondary legislation in such a way that it reflects the primary provisions? Clearly these are not in themselves grounds for chucking these SIs out on a vote, but perhaps the Minister should consider, since she is clearly no stranger to SIs, correcting the defects of previous SIs, and consider whether there might be a case for a further correction of these SIs to place the primary and secondary legislation on a watertight footing.

Energy Suppliers: Customer Credit

Alan Whitehead Excerpts

Wednesday 22nd February 2023 Westminster Hall

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

I congratulate the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry) on securing the debate. I share hon. Members’ disappointment that the Chamber is not more full this morning, because this issue is really important as regards the overall life of energy companies. Most importantly, as the hon. Member said—I am happy to repeat it—it is not the companies’ money but the customers’ money that is being used in such a way.

We know from the record what the large sum floating about in energy companies’ bank balances is used for—we cannot get an accurate picture, but £9 billion is probably not too far adrift—and we know how disastrous that is on occasion for the overall operation of those companies. Between the middle of 2021 and the summer of last year, we had the unfortunate experience of 28 energy companies going bust. Some research was done into what those bust companies had been doing with credit balances. A company called Oxera, commissioned by Ofgem, did a research project on seven failed energy suppliers that found that most of the companies did not just use credit balances, but were reliant on them for their business models.

Oxera stated that the companies,

“relied on receiving customer balances prior to the provision of services. Suppliers used these prepayments to fund the ongoing costs of the business and to act as a buffer against any short-term shocks. They then relied on growth in the customer base to keep ahead of future liabilities, making the strategy unsustainable in the long term during times when growth slows down”.

This was not just an accident of balances appearing in companies’ accounts because they had not accurately worked out what to do with direct debits. It was an integral part of the companies’ business model—or so they thought at the time—to accelerate their progress by using customers’ money to borrow ahead and fund their expansion, and of course they came horribly adrift as a result of the slowdown in the market.

The SNP spokesman, the hon. Member for Kilmarnock and Loudoun (Alan Brown), underlined the other part of that dreadful arrangement. When those companies went bust, the credit balances that they held had gone. The companies that took over through the supplier of last resort arrangement looked at the books and found that there were no credit balances in the books because the companies had borrowed and then gone bust, and they had to restore the balances to their new customers. That is what they did in most instances, but they then billed Ofgem for the work they had done to restore credit balances to those customers after the companies had gone bust, and they were paid for doing that. Guess who paid for those companies to restore the credit balances? The customer. It was socialised across their bills, so bills went up as a result of companies borrowing money, going bust and having to have those credit amounts restored.

The system is not just thoroughly rotten but systemically rotten. I do not want to resort to anecdotes, but I will talk about a recent experience I had—a small straw in the wind—when I changed my parliamentary flat. It is a one-bedroom flat that I inhabit now and again. I went to set up a direct debit, and the company quoted me £350 a month to start. I am sure it is a coincidence that it is exactly the sum that the Government have put up for the average household bills. I said, “This is just not right. You can’t start a direct debit at £350 on a small flat like that. I think I would prefer a smaller sum of £150.” We had a long argument on the phone, and the person eventually agreed, but I found when I went into my account that they had stuck with the £350. I had to have further phone calls to say, “I am not paying that amount of money in a direct debit per month. Can you put it down, please?”

[Drew Hendry]

I am grateful that the hon. Gentleman is talking about his personal experience. I looked into this on a personal basis and found that what my constituents were saying was true. What he has just relayed is the real difficulty in communicating with companies that are setting these arbitrary figures, and of course in the process building up credit balances. Does he agree that this poor communication and confusion is a far more common problem than perhaps even we in this Chamber expect?

[Dr Whitehead]

The hon. Gentleman is absolutely right. Had I not had a reasonably informed view of how direct debits work, I may well have just said, “Okay, I’ll go with that,” with the inevitable result that I would have built up a huge credit balance. That would have been good for the company’s working practices. I do not know whether it was an instruction from the company that the person should start with a high direct debit and then argue down, but it looked to me like they should not have been engaging in that practice.

After various companies went bust, Ofgem started looking at companies’ financial resilience, and that process is continuing. There have been a couple of reports and processes. Among them, Ofgem suggested a couple of arrangements that might help with this scandal of how much is in credit balances—money that is not for companies to use. It proposed that credit balances should be restored to nought at the end of each contract year, even if customers had not requested it. I take the point that, in general, it is often in the customer’s interest to smooth payments out over the year, so that higher bills in certain parts of the year are countered by lower bills at other times, and the overall account can be smoothed out, but there is no justification for a large ongoing credit balance in the company’s books after the end of the contract year.

That seemed a good plan from Ofgem, but it decided not to proceed, on the grounds that quite extraordinarily—guess what?—a number of companies responded to the consultation saying, “We would really like to keep the credit balances because it is very helpful to us.” Ofgem concluded that the proposal might be a bit complicated, so it has not been proceeded with, so the situation of rolling credit balances in companies’ books continues.

Another financial resilience proposal from Ofgem was that a company’s customer accounts should be ringfenced. The company might hold the credit balances on its books for the purposes of smoothing customers’ accounts, but they should be in a separate account, since that was not the company’s money; the money should not be usable for other purposes. The company may get some interest, but the money should not be used as working capital.

Ofgem consulted on that proposal. Again, a number of energy companies responded and said, “No, we don’t think that is a good idea, because that might cause us some problems with our working practices.” So Ofgem decided not to proceed with that proposal either, and there is no ringfenced money—except where, and I am finding it hard not to laugh, a company is thought by Ofgem to be in some financial distress. Then it might decide to ringfence the balances so that they could be rescued when the company went bust and not be used to pay further bills in cases such as those when the supplier of last resort took over the bust company only to find that all the money had gone. Presumably, thanks to Ofgem’s intervention, all the money would not be gone in these cases. That is perhaps a sort of progress, but it is not exactly the sort of progress anybody in this Chamber would see as a serious attempt to address the issue.

My concern is not that the matter has not been looked at by the regulator; it is that the regulator has failed to implement the more or less common-sense measures necessary to ensure that where there are credit balances, they are used for the purposes for which they are intended—smoothing over accounts and nothing else. After all, as the hon. Member for Inverness, Nairn, Badenoch and Strathspey said, this is not the companies’ money. The companies should use it on the basis that they have permission from the customer to keep it on trust for the customer, for their bills, and not for the company’s own purposes. That should be the central principle of this whole arrangement in the future.

I congratulate the Minister on her good practice in talking to the hon. Member for Inverness, Nairn, Badenoch and Strathspey. I hope that that good ministerial practice will wash over into good practice on energy companies. She might have a quiet-ish word with Ofgem and say, “Maybe your consultations and discussions on financial resilience did not work out quite as we all hoped. Could you reopen the matter and have another look?”

The principle on which we all agree is that people’s money is there in trust. It is not there for the companies to use; it is there only for the purpose of smoothing out bills. That is the principle that Ofgem ought to apply to protect customers, but I am sorry to say that in this instance that has not happened. It would be great if the Minister addressed that. I hope that she will respond positively and get on the phone to Ofgem to see what can be done.

Nuclear Energy (Financing) Bill (First sitting)

Alan Whitehead Excerpts

Committee stage
Tuesday 16th November 2021 Public Bill Committees

[The Chair]

In that case, let us start with Her Majesty’s official Opposition, represented by Alan Whitehead.

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

Q Good morning. Could I start with the Sizewell C company, and could you let me know, from the point of view of the company that has been set up for the purpose of developing Sizewell C, how you view the emergence of the RAB—regulated asset base—model as a way of funding the project at Sizewell C in particular?

Julia Pyke: I think the emergence of the RAB model is very welcome. We obviously believe that the country very much needs nuclear, to support the growth of renewables and to produce electricity when the wind is not blowing and the sun is not shining. It is very important that we deliver nuclear in a way that reduces the cost to consumers to the greatest extent it can, and we believe that the RAB model is a way of doing that and enabling private finance.

A point that is not always made about the introduction of private finance is that if we want a nuclear fleet, which, you will not be surprised to hear, I believe would be a good thing, then always relying on taxpayer funding for that fleet is not necessarily going to promote the growth of a fleet, whereas getting nuclear on to a financeable footing means that the country can size the fleet to need rather than to the availability of taxpayer funding from time to time.

[Dr Whitehead]

Q Mr Powell, Hitachi was very much involved with the Horizon consortium that pulled out of other nuclear plants a little while ago, which I believe was on the grounds that they could not sort out the financing of those projects. If the consortium had been offered in effect a RAB model to develop those projects, would you have had a different view?

David Powell: Just to make things clear, I represent GE Hitachi, which was helping with the technology supply for the project that Horizon and Hitachi was taking forward. Hitachi was one of the main participants in trying to push forward the project at Wylfa, and I think that one of the big issues was the project’s financing aspects. It takes considerable time and a lot of effort to build two large-scale reactors, and I think that the RAB model could have helped. Obviously that is history now, and we would have to go back and look at that, but I think it would have helped at least in being able to move forward with the project.

[Dr Whitehead]

Q Mr Waite, Westinghouse is the owner of Springfields Fuels.

Michael Waite: That is correct.

[Dr Whitehead]

Q I think Springfields has a series of difficulties in the continuation of its nuclear fuel and nuclear rods business. What difference would the construction of Sizewell C make to its viability as a future supplier of nuclear fuel rods and associated activities for the UK market and, indeed, the international market?

Michael Waite: As you say, Springfields has been fuelling the majority of the UK’s nuclear fleet for almost 75 years. It is the exclusive supplier to the advanced gas-cooled reactor fleet, which will all have retired by the end of this decade. Whether Sizewell C moving forwards under a RAB would mean a supply of fuel from Springfields has yet to be determined. From a Westinghouse perspective, we see RAB as part of the solution for enabling further nuclear projects after Sizewell C. Certainly, the 2035 zero-carbon targets for the electricity generation sector require there to be further projects., If we could start a project at Wylfa and deliver our AP1000 technology under RAB, that would absolutely take its fuel from Springfields for the life of the facility and secure the life of the plant.

[Anthony Browne (South Cambridgeshire) (Con)]

Q I am interested in the allocation of risk between companies and consumers. Obviously, one of the problems with the contracts for difference model is that you bear the construction risk, the political risk and so on, whereas with the RAB model you do not. If there are cost overruns, is there a risk that the consumer ends up paying for it rather than you and that you do not have the right incentives to control costs?

Julia Pyke: The first thing I would say is that, of course, it is very important that the developer remains incentivised to minimise construction spend consistent with building safely and to time. The introduction of the RAB model will enable Sizewell to move ahead, so, primarily for consumers, not only will they need the electricity that Sizewell can produce but electricity bills will reduce when it comes on, because the alternatives to nuclear as the producer of electricity when the wind is not blowing and so on will cost more. Overall it will reduce consumer bills. It is, as you say, very important that we get the incentive regime right so that, although risk is shared with consumers, developers are always incentivised.

--- Later in debate ---

[Alun Cairns]

Thank you.

[Dr Whitehead]

Q Ms Pyke, you mentioned that you are basically responsible for getting the money in for Sizewell C. What hurdle rate do you anticipate that the investments will come in at as a result of RAB?

Julia Pyke: RAB is designed to attract low-cost capital, and the cost of capital will be set competitively. We anticipate a competition, which should drive down the cost of capital, between equity investors. We also anticipate that the cost of debt, which will actually be the majority cost of the project, will be set competitively. We do not have a hurdle rate, and deciding that hurdle rate will obviously be in part a matter for Government in terms of what will offer value for money. The Government’s impact assessment talks about example hurdle rates and we anticipate that the return will be somewhere in the region of the Thames Tideway tunnel rate, plus possibly some premium for it being nuclear, which is a novel asset class for private sector money in the UK.

[Dr Whitehead]

Q You have absolutely correctly drawn attention to the impact assessment, which as you know projects a number of hurdle rates that could transpire below the 9% that is effectively the implied rate for Hinkley C. The calculations for the difference between what would have happened with a CfD as opposed to RAB depend on what hurdle rate comes out as a result of that. I wonder if you are able to give us any better indication of the area the hurdle rate is likely to fall to as a result of RAB being applied to the investments you are seeking?

Julia Pyke: We think the relevant rates to look at are the rates that are currently determined by Ofgem for investors in the £200 billion of existing UK regulated assets. That is the range that we anticipate will be relevant.

[Dr Whitehead]

Q Which is what?

Julia Pyke: As the Government have put in their impact assessment, you can run this at percentages over inflation that equate to the existing market in investing in RAB. I do not want to suggest a particular number—that would not be appropriate, because we are going to set the cost of capital competitively—but you can see the ranges that the Government have used, which they have based on the evidence of what is invested today in RAB assets.

[Dr Whitehead]

Q Yes, but they have used that with what the impact assessment calls an “optimism bias assumption” behind it. What is your view of the optimism bias assumptions that you might have to make about the hurdle rate you are going to get? I am sorry you are not able to give even a range of percentages this morning.

Julia Pyke: Do you mean whether I think the Government have been overly optimistic in assessing the likely cost of capital to be derived through competition? Is that your question?

[Dr Whitehead]

Q No. I take it from the impact assessment that they are trying to price in, if at all possible, what they regard as the almost inevitable optimism bias in terms of initial figures. I am afraid it is a staple of nuclear calculations that there is usually a pretty optimistic bias in the initial calculations that the project will run exactly on cost calculations and exactly on time.

Julia Pyke: I think we are talking about two things here. There is optimism bias in relation to the outturn capital costs. The Government have taken a cautious approach to applying optimism bias to the capital costs, given that we are replicating the Hinkley design, using the experienced team, and we can see the savings made in unit 2 compared with unit 1. In relation to the cost of capital, it is entirely sensible for the Government to have based their calculations on the existing market of investment in regulated asset base industries in the UK. I do not think there is an optimism bias issue around their evaluation of existing investment rates.

[Dr Whitehead]

Q But you would perhaps conclude that at least you can go to a 6% hurdle rate, if not better?

Julia Pyke: I would conclude no such thing. What investors choose to bid will be a function of how attractive the product is to the equity, what else is available in the market—it will be a whole range of considerations, but essentially it will be in the area of the existing investments in regulated assets in the UK, which are publicly available.

[Dr Whitehead]

Q I think you would appreciate that the whole question of what RAB saves over a period of time depends on that hurdle rate?

Julia Pyke: Indeed, it does depend on the hurdle rate, but—

[Dr Whitehead]

But you are not able to help us this morning.

Julia Pyke: I do not think anybody is questioning the assumption that, in moving to a RAB from a contract for difference model, the cost of capital will come down, so it will save money compared with a contract for difference model.

[Dr Whitehead]

Q But we do not know how much?

Julia Pyke: We cannot know how much, because it will be set in the future through competition.

[The Chair]

Unless any other of our colleagues have a one-minute question, we are at 10.24 am and that very neatly brings us to the end of our time. [Interruption.] I am afraid we only have one minute, Alan; one yes or no question, perhaps?

--- Later in debate ---

[The Chair]

Thank you all very much for being here. We will start with Her Majesty’s loyal Opposition and Dr Whitehead.

[Dr Whitehead]

Q Good morning, everybody. I would like to start with Sue. As you will know, we have had quite a lot of dialogue about Springfields nuclear fuels, the role that Springfields nuclear fuels has played in providing fuel for the UK nuclear industry, and the role that it might play in the future. Could you briefly take us through, first, the problems that Springfields nuclear fuels has at the moment and, secondly, what role you consider it might play should the Sizewell C project go ahead?

Sue Ferns: Certainly. At the moment, Springfields nuclear fuels faces a bit of a crisis, primarily due to the earlier than expected rundown and closure of the AGR—advanced gas-cooled reactor—fleet, which has been its major component of fuel manufacture, not the only but the major one. The effect of that is that from January of next year it will be producing only 55 tonnes of AGR fuel, compared with a normal load of about 200 tonnes. That obviously has implications for the workforce and it means that that plant will be operating in deficit as from January of next year.

There have been protracted discussions over the course of the year. We have seen two rounds of redundancy notices issued to the skilled and specialist staff on the site, and there is a danger, in the face of continued uncertainty, that more of those specialist skills and expertise will be lost.

I should say that fuel manufacturing is the key function of Springfields nuclear fuels but there is also much wider expertise. It provides a range of other services to the nuclear industry and is seen as a key part of the UK’s nuclear expertise. We very much fear for the future and are in active discussions with the company and Government about that.

There is both a short-term and a longer-term challenge, and a longer-term opportunity. If more nuclear power stations are constructed in the UK, we can see a good fuel load for Springfields from about 10 years’ time onwards, but the problem is that unless we solve the short-term hiatus in fuel orders, those skills and expertise will be lost and will not be easily recovered, if at all. The opportunity is for Springfields, as it was recognised in the nuclear sector deal, to continue as a centre of nuclear excellence and expertise as our unique UK fuel manufacturing capability, able to provide fuel to reactors in the UK of all types, and potentially to plants in other parts of Europe as well.

[Dr Whitehead]

Q Charlotte and Simon, you have been very involved in union representation at Hinkley Point C, and in the discussions on the transfer of skills and labour from Hinkley Point C, as it progresses, to the development of Sizewell C, as it progresses in its earlier stages. What is your view on the soundness of those possible arrangements, and what sort of saving to the project as a whole might arise from that doubling up of the workforce and skills between the two nuclear plants, and indeed the cloning of one nuclear plant with another in the Sizewell C model?

Charlotte Childs: The conversations that we have had with EDF in terms of building a nuclear supply chain, and the skills required to build both of those projects, and further projects, mean that the decision on the RAB funding model, hopefully leading towards a final investment decision in the near future, creates a really great opportunity for the timelines of those projects to line up, and for the skilled workforce who are needed at Hinkley Point to just about finish what they are doing there in time to move over to Sizewell. It creates certainty for the nuclear supply chain and for those who have gone through a training programme with Hinkley.

We have negotiated some industry-leading processes to ensure that people from the local area can go from low to no qualifications into qualified trades and apprenticeships. It creates an ongoing opportunity for those people and job security that we do not generally see in the construction sector. Time is of the essence. To maximise the benefit for the nuclear supply chain and drive down costs, because it is already in place, it is imperative that those decisions are made sooner rather than later.

Simon Coop: I reiterate those points. With regard to Hinkley Point C, it is really a no-brainer to adapt those transferrable skills and move them into Sizewell C in order to ensure that costs do not spiral out of control. There is a clear model already in use that we can learn from to move into Sizewell C. The timing of that transfer is of the essence in ensuring that we do not lose the skills from one project and that we develop and move them forward into Sizewell C. Urgency is needed to move that project forward as soon as possible in order to maintain the skills from Hinkley Point at Sizewell C. Any kind of developments have to be in line with industry standards, and we also have to make sure that any misgivings or fore learnings that we establish from Hinkley Point C are clearly ironed out as we move forward to Sizewell C. The replica gives us the opportunity not just to learn from what we have done but at Sizewell C to improve and iron out any problems that we have had to maximise value for money for all vested parties.

[Dr Whitehead]

Q Is it your view that the present workforce in Hinkley understand that possible process, and that they have, in principle, a willingness to relocate should that sort of model go ahead in the development of Sizewell C?

Simon Coop: The UK workforce are absolutely flexible and they are highly skilled. In construction, the same key workers with the key skills have moved to projects. I do not see that being a major problem in future construction projects. As a result of talking to the company, there are already plans to transfer the operational skills at Hinkley Point B to Hinkley Point C. Those operational skills are currently transferring and people are keen to move on and use those skills at the Hinkley Point C project. There should be no difference in terms of transfer to future construction projects.

[Alan Brown]

Q My question is to Ms Childs. I got a letter from GMB Scotland asking me as a Scottish Member of Parliament to support new nuclear projects because of the jobs that they create. I certainly understand the value of jobs because I come from a constituency where we welcome new jobs, but does the £20 billion for Sizewell C give a good enough return on the jobs created? I would argue that that money could be used to create a manufacturing process or more jobs around the UK rather than that £20 billion being spent at one location. Have those types of discussions happened within the union?

Charlotte Childs: We are a member of that organisation, so the letter you received and the policy that we have set is based on a wide-ranging discussion with our members. In response to your suggestion about investment in manufacturing, it is not a this or that situation, is it? Scotland in particular has benefited greatly from the current nuclear civil generation, and the zero carbon generated by Torness and Hunterston B have contributed to southern Scotland consistently hitting the 2030 target, working alongside other renewables like wind to provide green energy. Without heavy investment in new nuclear projects we will not reach our net zero targets, and Scotland has set itself an even more ambitious target of 2045 to reach net zero. That simply will not be possible without having a consistent and reliable baseload that is net zero in its production of energy.