Energy Bill [Lords]

Debate between Alan Whitehead and David Mowat

Monday 14th March 2016 Commons Chamber

[David Mowat]

A few moments ago, the shadow Secretary of State appeared unhappy that the capacity auction announced by the Government two weeks ago had been brought forward. Is the Labour Front-Bench position that the auction should not be brought forward?

[Dr Whitehead]

The question of whether the capacity auction should have been brought forward is secondary to the extent to which the Government believe that the auction will actually produce new capacity, as I am sure the hon. Gentleman is fully aware. Like the levy control framework, capacity auctions warrant a much deeper reorganisation than the rather tepid arrangement undertaken by the Government. Simply bringing an auction forward by a year, using roughly the same parameters about the likely clearance price and the distance between the clearance price and the likely price necessary to secure any new investment over a 15-year period for new gas-fired power stations, does not strike me as the smartest way to procure longer-term capacity in the capacity market. A deeper reorganisation of capacity auctions is required to secure that aim over the next period.

Before that intervention, I was briefly thinking about the subject of my amendments 23 and 52, to which I wish to draw the House’s attention. If the Government were serious about the proposals in their manifesto—that schemes that have local support should proceed—they should immediately adopt these amendments. They are about schemes where all the right moves in getting local agreement to the plans have been undertaken, all inquiries, concerns and planning arrangements have been dealt with, the schemes are on the cusp of getting agreement at planning and local authority level, and they have the support of local communities, but the Government have just pulled the plug on them and they now cannot proceed. The Government ought to adopt these amendments if they were, in principle, serious about their own principle that local areas should decide on local schemes and that those local schemes could be supported where local communities support them. Conversely, I fear that if clause 80 remains in the Bill, as amended, we will have in store a programme of onshore wind execution and not the execution of an onshore wind programme.

Labour’s vision is for a locally supported, appropriate programme of onshore wind deployment, complementing other renewables such as solar, biomass, offshore wind and tidal in reaching renewable targets, not because we have to, but because it is the right thing to do in ensuring that we have a balanced, low-carbon energy mix for the future. This clause points us squarely in the opposite direction and I urge hon. Members to support amendments that put us back on track again.

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[David Mowat]

The hon. Gentleman’s position strikes me as rather odd. I agree with him that the ETS status is important, that dumping is important, and that business rates are important, but, as is made clear in report after report—there is one from the aluminium industry in my office now—so are energy prices.

I do not think that I am making a massively controversial point. I am merely saying that in an industry that uses significant amounts of electricity, it is not a competitive advantage if our electricity costs more than other people’s. I agree with the hon. Gentleman that Chinese dumping is probably more significant, but we are talking about economics, and in economics everything happens at the margin. The stuff that I am talking about matters to our manufacturing industry. My central point is that if we are intending to have a march of the makers that involves a rebalancing of industry predicated on high electricity prices, it is going to be tough.

As I was saying before the hon. Gentleman’s interventions, the cross-European Paris INDC submission is about 50% less onerous than the requirements of our own Climate Change Act. When I first saw that statistic, I thought it odd. Why had we allowed this to happen? Given that we have a stringent, rigorous and, in many respects, very good process involving carbon budgets driving down emissions, and all that goes with that, why did we become involved, at a big world summit, in a European submission that was so feeble? Although the requirements of the European submission are so much lower than those of the UK, in terms of the Climate Change Act, it is not allocated by country, even now. I believe that that process will start this year, or perhaps next year.

My second point relates to the European emissions trading system itself. New clause 10 was deemed necessary because it was felt that the system was not acting as enough of a brake on carbon emissions. The European price of carbon—which is implicit within the system—is too low: it is about €5 a tonne, as opposed to the €23 a tonne or so that we are paying. In 2013, precisely that point was debated in the European Parliament. It was proposed, in an amendment, that the emissions trading system should be “re-baselined” in a way that would have made it meaningful. The amendment might have prevented the need for a carbon price floor in the UK, and created a carbon price that properly reflected where the market needs to be in order to drive actions. However, the European Parliament did not pass it, probably in response to the vested interests of big manufacturers in a number of big countries in Europe. I think that that was a pity.

As a consequence, here we are now, saying that the ETS is not fit for purpose, that the accounting that it implies—which was intended, in the Climate Change Act, to serve as a way of controlling generated power—does not work, and that therefore we are doing something different. However, the right answer is not to turn our back on the European system. I am a Conservative. I may be an “inner”, but only just. It is odd that those in the Opposition parties who are deeply committed to the European ideal should turn their backs on this European solution.

My third point is that there is no country-based reporting or control of emissions in Europe. Since 1990, Austria has increased its emissions by 13%, Ireland has increased its emissions by 7%, and Holland has kept its emissions static. During the same period, the United Kingdom has reduced its emissions by some 28%. If the European Union were serious about getting to grips with emissions, and getting to grips with individual countries that are tackling the problem, it would have addressed that fact.

My final point is that we are seeing dysfunctional member state behaviour. Germany and Holland are building brand-new coal-powered stations—lignite-burning stations. I believe that those countries not only do not engage in carbon capture and storage, but have made it illegal, which does not suggest that they understand the challenge that must be faced.

I have just been given a note saying that I should wrap up. Let me end by saying that, while there is no doubt that we all agree that climate change is a clear and present danger, we must bring the rest of the world with us, and by turning our back on arrangements such as the European emissions trading system and allowing the EU to put a submission to the Paris COP talks that is frankly feeble, we are doing the opposite. We will not solve the problem of global warming by fixing our 1.5% of total global emissions.

[Dr Whitehead]

I want to speak about new clauses that relate to a number of aspects of the Bill, and to the position in which we find ourselves in relation to a low-carbon economy for the future.

New clause 7 is very similar to new clause 3, and concerns an issue about which I think both Opposition parties feel very strongly: the need to develop a systematic strategy for carbon capture and storage. We have heard several references to what the Conservative manifesto at the last general election did or did not say, but the Government mentioned CCS in that manifesto. They also mentioned the least-cost routes to decarbonisation. Clearly—this is certainly the advice of the Committee on Climate Change—they will have to think carefully about CCS when they respond on the fifth carbon budget this summer, because CCS, among other things, represents a substantial implementation of least-cost routes to decarbonisation in the long term. The shameful pulling of the two CCS pilot projects mentioned by the hon. Member for Aberdeen South (Callum McCaig), in essence on the grounds of cost, represents a missed investment opportunity that could have reduced the cost of decarbonisation at a later date. That cost is an important element of our approach to a future CCS strategy. It is important to be clear that the cancellation of the projects does not and should not mean the end of CCS in this country.

UK Energy Market

Debate between Alan Whitehead and David Mowat

Wednesday 9th March 2016 Westminster Hall

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

I congratulate the hon. Member for Central Suffolk and North Ipswich (Dr Poulter) on securing the debate, which is so timely, given that it is within 14 hours of the Competition and Markets Authority’s report on its findings coming out. Unfortunately, it is taking place 14 hours before the findings come out, but it is pretty closely targeted on the important development that we are about to witness. For this afternoon’s debate, we have the CMA’s provisional findings, which I guess will inform the report that will come out shortly. The hon. Gentleman directed his very thoughtful points about the whole question of competition in the energy market to a number of those.

This is a conundrum with many layers—exactly how competition works, how it can best work, how it can be better enhanced and how it can work for those customers who could benefit most from better competitive arrangements in the energy market. In many instances, those customers appear at present to be stuck in a non-competitive mode with energy companies. Energy companies almost regard those sticky customers as assets that they can use to make additional resources, as the hon. Gentleman mentioned, with which they can finance special offers and various other things, which, to some extent, rely on the knowledge that those sticky customers will remain with the company—perhaps that is part of the conundrum—apparently very much against their better economic interests and despite longer term concerns. I will perhaps return to that thought in a moment.

The hon. Gentleman also made the very important point that we are discussing one part of that energy trilemma, in that we have embarked on—and I hope we will continue to be solidly embarked on—a process of decarbonisation of our energy system. Clearly, that has to be achieved, but under the circumstances of two additional imperatives: first, that there should be security of supply, among other things to make sure that the lights stay on, which is perhaps a rather important part of the customer experience of electricity prices and the market; and secondly, that prices should be fair, reasonable and equitable, as far as customers are concerned.

I am not sure that it would too far outside this debate just to reflect on the first part of that energy trilemma. I gently ask whether the Minister has any sort of plan B in the light of the difficulties that we are having with capacity, the recent reports concerning the possible development of Hinkley Point C power station and the apparent inability of the capacity market as it stands to develop any contracts for new long-term building, particularly of gas-fired power stations. Does she wish to share any thoughts with us on how that particular leg of the trilemma might best be supported over the next period? That seems relevant to the other two legs, and particularly to the leg that we are discussing this afternoon.

As for the question of how prices can be as fair and competitive as possible to customers, we need perhaps refer to what is happening with the CMA. It was interesting last summer to see the CMA’s report on provisional remedies. As the hon. Member for Central Suffolk and North Ipswich outlined, it concluded that a number of features of the market gave rise to the finding of an AEC—an “adverse effect on competition”. The report stated that that arose through

“weak customer response, which, in turn, gives suppliers a position of unilateral market power concerning their inactive customer base”,

which they are able to exploit through their pricing policies or otherwise. That refers particularly to sticky customers, but I was slightly surprised at the brief consideration that the CMA’s interim report gave to a number of other factors that seemed to contribute to that, such as vertical integration in energy companies. That may not have a direct impact on competition, but it may have an indirect impact for a variety of complex reasons that may have a hand in the process.

Perhaps part of the answer to the conundrum that has been presented in this Chamber this afternoon about where the money goes when energy companies are apparently posting substantial losses is a better understanding of how vertical integration works. It is not just within the UK power generation and retail market. It has been suggested that companies that buy and sell to themselves create an opportunity to shift sums around considerably.

There is increasing vertical integration outside the UK. Some companies are reporting what is happening in the UK, but also in the context of what is happening outside the UK, such as company structures. The extent to which those companies are able to post profits or losses in particular countries in which they are working does not necessarily reflect entirely what is going on across the board in other countries of operation. That should be examined at least.

[David Mowat]

I am interested in the hon. Gentleman’s comments about vertical integration, because the interim report looked at that and theory of harm 3a and 3b. My reading of it was that the CMA did not regard vertical integration as a major issue. I looked at it quite carefully.

On the point about moving profits around, which is the issue regarding vertical integration, the share price of Centrica, the owners of British Gas and the biggest player in all this, has gone down by around 40% in the last five or six years. I have no truck with these oil companies and big players, but if they are running a cartel, it is one of the worst I have ever seen.

[Dr Whitehead]

The hon. Gentleman makes an important point. This issue is like an onion. It has many layers that must be unpeeled before anyone can get anywhere need the essence of it. Part of the process is that some companies are losing customers with insurgent companies coming into the market, and some are setting up good companies and bad companies to bifurcate the process of where their investments go and where their profit centres are. That clouds the picture. Obviously, there is the effect of energy prices, particularly who has bought what, where and when, and what those prices now mean in terms of strategies that took place two, three or four years down the line.

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[David Mowat]

People can move profits around and have good companies and bad companies. What I am saying is that Centrica, which owns British Gas, has somehow turned the cartel that it is apparently operating —we will find out tomorrow so we are speculating—into a 40% reduction in its share price in the last five years. That is not a good performance in running a cartel.

[Dr Whitehead]

Indeed. As the hon. Gentleman underlines, that may be a factor of other processes at work in those companies and what investors think is their long-term security and future in the light of rapidly changing energy conditions. A whole series of factors is at work, and I hope that, in the report that the CMA will publish tomorrow, it has paid due attention to the complexity of those factors. I fear that some of that complexity was not fully reflected in its initial proposals.

A second complexity is transparency: who is buying what at what point round the curve, how companies are hedging their trading processes and whether they are trading with themselves and hedging advantageously compared with other companies down the line. One might argue that that is good practice or bad practice, but we do not know that because the market is not transparent at the moment.

Biomass Energy

Debate between Alan Whitehead and David Mowat

Wednesday 24th February 2016 Westminster Hall

[Dr Whitehead]

I thank the hon. Gentleman for that clarification, but perhaps I can also make a little clarification for him. He mentioned the NERA and Imperial College London report about system integration costs. That is an important report, but he should also know that a similar report from NERA and Imperial College London was produced about three months before the report that he mentioned. It so happened that the client for the other report was the Committee on Climate Change, as opposed to Drax. The questions that were asked in the two reports, which had identical authors at almost identical times, were slightly different and therefore produced fairly different results for overall system integration costs. Essentially, one looked at how biomass would relate to the system as it stands; the other looked at how it might relate to system changes.

One thing I am sure the hon. Gentleman would endorse is the extent to which system changes have to take place to ensure that those changes in the mix are integrated into the system as a whole—so, the periods over which energy is sourced, and what happens with transmission charges and how they may be levied in future for a particular location.

[David Mowat]

I hear what the hon. Gentleman is saying. Does he not accept, though, that it is a fact that intermittent forms of energy require back-up and that there is an associated cost that is not reflected in the CfD structure at the moment, which I think is the point that was being made?

[Dr Whitehead]

The hon. Gentleman is absolutely correct. There are system integration cost differentials between different forms of renewable energy. My point is that, depending on which report people read, those are not the same as they might appear to be between renewables. Indeed, what is undertaken in how the system works as a whole can substantially mitigate the different costs, so that, as we evolve the system, we can be in a much better position to ensure that the suite of different renewables—which, as my hon. Friend the Member for Ynys Môn mentioned, is so important for future low-carbon deployment—can properly be deployed happily alongside one another, as a suite of measures to ensure that we move towards a decarbonised economy.

I recognise that we have limited time this morning, so I want to turn briefly to the point the hon. Member for Selby and Ainsty made about the level playing field that is necessary for biomass. It is undoubtedly the case, given the measures that are in place at the moment for the enhancement of renewable energy, that there is not a level playing field. There is an overall problem with that suite of measures because of the levy control framework and the extent to which hardly anybody is likely to get a contract for difference for their project over the next period. Indeed, the hon. Gentleman will be aware that some biomass plants got contracts under the early investment decisions, prior to the new form of CfDs coming into being. However, when it comes to the efficiency of biomass, allying that with CHP schemes to ensure that biomass can get 15-year contracts under the CfD arrangements, even if the heat source is not there for 15 years, is an important change that would need to be made to CfD arrangements for the future.

As for the renewable heat incentive, the fact that there are no guarantees for tariffs between commencement and completion of a project if a biomass plant is trying to go for RHI seems to be an omission for the future that should be rectified as far as their admission to those arrangements—

Shale Gas

Debate between Alan Whitehead and David Mowat

Tuesday 30th June 2015 Westminster Hall

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

I congratulate the hon. Member for Thirsk and Malton (Kevin Hollinrake) on obtaining this debate. It is important because it goes to the heart of the distinction between what it is to drill an exploratory well and what it is to have a fracking industry in any particular part of the country. He clearly set out the safeguards that are needed as an absolute baseline for any fracking at all to take place, as well as the cumulative effects of fracking and the extraction of shale gas on particular areas and what impact that has on the community in the longer term, as well as the impact on the consequential things needed to keep that industry in place—whether that is the disposal of wastewater, consideration of the intensity of various fracking pads, or a range of other issues.

I shall concentrate for a moment on thinking about what fracking as an industry might look like in this country, as opposed to what an occasional exploratory well might look like. The proposition in front of us is not for occasional bits of exploration; it is “Go for it. Let’s have a substantial fracking industry. Let’s change the nature of how we obtain our gas supplies.” The argument in favour of fracking is that it is a substantial addition to our national security. Some of the further reaches of the argument relate to bringing prices down, but that is quite wrong and misunderstands the nature of gas trading in Europe. There would not actually be any great difference in gas prices unless the whole of Europe decided that it would frack everywhere in Europe.

The argument that a substantial fracking industry might be good for national security is the main argument put forward for it.

[David Mowat (Warrington South) (Con)]

It is true that there is no reason to believe that prices in Europe will come down by a factor of four, as they have in the United States, but it is also true that if we have more of something, the price is likely to come down. Increasingly, our strategy is to buy gas from Russia and liquefied natural gas from Qatar. That is not a viable way forward.

[Dr Whitehead]

The hon. Gentleman is right to say that we buy some LNG from Qatar, but only about 0.5% of the UK supply comes directly from Russia. Buying gas from Russia is really not an issue for this country, although it is for some other parts of Europe. My point was that the international trading arrangements for gas have three nodes across the world—the far east node, the north American node and the European node—and gas is traded and pipelined within those nodes. The product of shale gas in this country would simply go into one of those nodes and be traded across them, and the price would even out. That is my point about whether a shale gas industry would mean a substantial reduction in price.

I want to concentrate on what a shale gas industry in this country would look like. We have only one serious document sponsored by the Department of Energy and Climate Change that looks at the consequences of a serious industry. My concern is that that document, a strategic assessment produced by AMEC a little while ago, estimates the output from shale gas wells to be 3.2 billion cubic feet per well over 20 years. As an average output for wells in the UK, that would equate to the best level ever obtained in any well in north America. Conditions for shale gas in the UK are very different from those in the United States, and the likelihood is that the output per well would be far lower than the very best output in the US. On top of that, the current average US well output is about 0.8 billion cubic feet—far lower than the best ever output—and, more to the point, there is a rapid rate of depletion per well.

In fact, a shale gas industry in the UK would see relatively low gas output per well, with a fairly rapid depletion rate and the necessity for re-fracking, probably once every seven or eight years, were the well to be retained in production over 20 years. It is not a question of a well pad being drilled and then the equivalent of “nodding donkeys”, such as we have at Wytch Farm, nodding away quietly in the countryside. The process of trucks, waste water and re-fracking would have to be repeated every few years on that well pad in order to keep it going. Even then, the depletion rate is more rapid after the second re-fracking, after which the well goes out of business.

[Dr Whitehead]

The hon. Gentleman is absolutely right: the location of various wells would require either that the gas was stored in tanks near the well and then transported or that new pipelines be constructed to take it away. A pipeline could not be organised in the same way as for the North sea.

On the basis of the scenario I have outlined for what a shale gas industry would look like in this country, the estimates are that, in order to divert, let us say, 10% of our gas supply from conventional gas into shale gas and remove part of the need to have gas from Qatar or Russia—10% is a modest diversion—we would need to drill somewhere between 10,000 and 18,000 wells, and they would have to be re-drilled over a period. Of course, those wells would not be evenly distributed throughout the country—Members would not have around two wells per constituency; wells would be concentrated in the two areas of the UK where there are reasonable shale plays. Those shale plays are geologically faulted and difficult to get at; nevertheless, they are the main areas: Bowland shale in the north-east of England and across the weald in the south.

We are looking at 10,000 to 18,000 wells concentrated in two parts of the country. As the hon. Member for Thirsk and Malton said, that would probably result in the very intensive geographical concentration of fracking in those areas, with a substantial geographical concentration of take-off facilities and of the need to remove waste water, 7 million gallons of which per well will have to be removed and disposed of fairly safely as hazardous waste. We do not currently have the ability to do that in this country. We can do it for the occasional well, but we would not be able to do it very easily without substantial new facilities for such a concentration of hazardous waste, which would be repeated as the wells were re-fracked.

We need to ask whether all that is a realistic prospect compared with the gain that might come from extracting the additional gas. It seems to me that, if that is what we want for our energy strategy, there will be a very high price to pay throughout the country for a marginal gain. Are we really, seriously committing ourselves to that? Recent events in Lancashire demonstrate that it is rather difficult to get two wells into the ground, let alone 18,000 over a longer period. I am worried that we are setting ourselves up by assuming that some of our future energy supplies are going to be pencilled in for this particular route, when either there are unacceptable costs to reaching that goal or, to make the industry work, we will have to build a whole lot of infrastructure on the back of what we already have.

Having considered at how a UK shale gas industry might look, it might be interesting to look briefly at an alternative industry: green gas, which is the production of gas by anaerobic digestion plants and associated methods. It has been projected that, by using most of the available feedstock that could go into anaerobic digestion plants, we could probably divert between 5% and 10% of our domestic gas supply requirements. When I say “divert”, I mean literally divert, because green gas AD plants can now inject gas directly into the mains.

There are eight green gas plants currently operating in the UK. I recently visited one in Poundbury, which, at certain times of the year, injects gas into the mains grid. People living between, roughly speaking, Lyndhurst and Weymouth will receive green gas from the Poundbury anaerobic digestion plant at various times of the year. There is direct substitution of the existing gas going into the mains. An AD plant would probably produce some 6 million cubic metres over 20 years. A well could produce rather more at some 20 million cubic metres, but it would have to be re-fracked several times. After that, the well would be capped and the operators would walk away. Because plants and animals continue to produce feedstock, AD green gas plants would simply continue. If we are considering changing from gas imports to domestic production for national security purposes, it might be a better idea to build a large number of AD plants and have one at the end of every lane.

[David Mowat]

I support green gas and anaerobic digestion. The hon. Gentleman said that the gas could be injected directly into the mains gas system. Is he implying that the characteristics of shale gas or other unconventional gas mean that they cannot be put directly into the grid? I do not follow.

[Dr Whitehead]

I am sorry if I unintentionally misled the hon. Gentleman. Shale gas can of course be injected directly into the grid. AD-produced gas has a slightly different calorific value, but with minimal treatment it can actually go directly into the grid in the same way as shale gas, so there is a direct comparison in production and in end use between the two processes. I suggest that if we want an industry that diverts substantial amounts of gas from import, building up AD plants and injecting green gas into the system might be a more environmentally sound and less intrusive way of doing so which might be more acceptable to the communities affected by any potential intensive fracking.

I appreciate that a farm AD plant at the end of a lane is not exactly the prettiest sight in the world, but it produces gas at a near zero overall net carbon cost, because it simply recycles what has captured carbon in the first place, and produces a different pattern of use. In the long term, it is potentially—