Energy Bill
Debate between Alan Whitehead and Mark Reckless
Dr Whitehead
I trust the hon. Member for Edinburgh West (Mike Crockart) will support a number of later amendments on demand-side reduction and routes to market for independent generators and community energy. He put his finger on some of the problems that several people have been grappling with as the Bill has made its way through the House.
It is very odd that when the Bill first made its way to this House in draft form it had no target in it, and yet it was all about low-carbon electricity, routes to market for low-carbon energy generators, the future of large-scale low-carbon energy and how that might be supported to play a much increased role in our energy mix over the next few years, and how the whole electricity market would be decarbonised over the next period in line with what DECC had previously published as its plans for a radical decarbonisation of the electricity market over that period. The Bill was the embodiment of how those changes would be made—how, over the next period, our energy markets, particularly our electricity market, would radically change how they move forward and how they supply energy to us. The Bill also contains emissions performance standards that reduce the emissions that plant may make, also in line with the decarbonisation of our energy over the coming years.
It is blindingly obvious that a Bill of that kind should have a target at the front in order to underpin all the other things that it is doing. Not having that target is rather like someone carefully strapping a belt around their waist and then sallying forth having forgotten to put on the trousers that the belt was supposed to be supporting in the first place. When the Bill first arrived, the lack of a target was a puzzle to a large number of people. In a sense, the hon. Member for Edinburgh West has started to unpick some of that puzzle. As my hon. Friend the Member for Rutherglen and Hamilton West (Tom Greatrex) outlined, we know from what the Secretary of State has said to the Energy and Climate Change Committee on more than one occasion that he was very keen on having a target in a Bill and was engaged in work on that target, the details of which he could not yet vouchsafe to the Committee.
In fact, the Secretary of State was engaged in discussions with the Treasury about what might go at one end of the Bill and what might be negotiated away at the other end to secure the things that he thought were quite important, relating particularly to supporting low-carbon energy in the way that I have described. The result, as we discovered fairly recently, is the announcement of the extension of the levy control framework from 2015 to 2020, with a figure increasing from the current amount of £2.3 billion to, allegedly, the whopping figure of £7.5 billion in 2020.
We need to be rather careful about immediately jumping for joy about that aspect of the negotiation, because as soon as we unpack the figures we realise that each year the levy control framework takes along with it the accumulated underwriting of whatever has been commissioned in the year before. That means that by the time we get to 2020, the accumulated contracts for difference, or ongoing renewables obligation certificates, that are caught up in the £7.5 billion make up a good proportion of the total. The actual amount of support contained in the levy control framework up until 2020, per year for new entrants—that is the key thing to look at in terms of the development of low-carbon energy, particularly round 3 offshore wind and the like—turns out to be not much more than is being undertaken at the moment. The idea of its ending up at twice the current level is rather belied by the figures in the levy control framework. Nevertheless, the Secretary of State felt that he had got a good deal.
It is not, however, a particularly good deal and it is clear that the inclusion of a target in the Bill was sacrificed. A belt and trousers had not previously been available, but on 5 February—halfway through the Committee stage—the Secretary of State came along with the belt that had resulted from the discussions. As hon. Members have said, as a result of the discussions, although the Secretary of State could not set a target before 2016, he could set a target at various levels that could be considered then. Indeed, the Minister has made great play of the argument that we will need to have all the facts at our disposal with regard to the future state of the universe in order to decide how we might set a target.
A couple of important things need to be considered during the intervening period. First, the gas strategy set out by the Department of Energy and Climate Change over a number of years assumes a relatively low level of gas over the long term and, while it views gas as essential, it sees it as a back up for other, renewable forms of generation. The recent gas strategy includes an option to reverse that approach and puts gas at the centre of a future strategy. It includes gas plants running at maximum capacity, grandfathered for a long period and playing the main role—not the back-up role suggested by the low-carbon strategy exemplified by the Bill—in energy generation.
Explicit within that gas strategy is the need to take a decision in 2014. The strategy specifically says that, depending on what happens in Europe, a decision will have to be made as to whether to increase the carbon target. Accommodating the strategy could therefore result in a target of about 200 grams of emissions per kWh by 2030, rather than the 100 to 150 grams envisaged previously by the Department and endorsed by the Committee on Climate Change. A significant decision might be taken in 2014—way before 2016—which could blow the potential 2016 target out of the water.
Secondly, regardless of the negotiated outcome, the levy control framework has been extended to 2020, but we have not heard what will happen beyond then. There has been no indication of what support might be given to low-carbon energy after 2020. There is a cliff face.
Mark Reckless
Is not the reason for that that the levy control framework and the contract for difference required to back it up are really aimed at meeting the 2020 target of the European renewables directive, rather than the 2015 carbon target?
Dr Whitehead
The hon. Gentleman makes an interesting point. It may well be the case that the specific mechanism of the levy control framework relates to meeting that target.
As I have said, I am not sure that the framework as it stands addresses the target in the way we might think. Nevertheless, in order to achieve the target, those companies investing in new, renewable, low-carbon plants, offshore wind and all sorts of other low-carbon arrangements that are at the heart of the Bill have to start on the work now on projects that will come on stream in six, seven, eight, nine and 10 years’ time. However, those companies, which are at heart of the engine of this Bill, will not do that under the current circumstances, because they have to take decisions now and if they see that they will face a cliff face of some height in 2020, they may well decide that they do not want to use their initial investments for that purpose because there will be no business for them after that time.
Energy Bill
Debate between Alan Whitehead and Mark Reckless
Dr Alan Whitehead (Southampton, Test) (Lab)
I rise to speak to my amendments 48 to 50, which, as we have heard from Minister, are concerned with the development of a capacity market intended to ensure that we have the range of capacity that we will require over the coming years and decades. Not to put too fine a point on it, it is intended to ensure that the lights stay on and that there is a decent margin between what people demand and what we supply.
A capacity market is a choice. It is not the only option available to secure the necessary capacity for the future. It seems to me that that choice needs to be based not just on whether the right capacity margin can be maintained. We should also ask at what cost it can be done, with what reliability and at what risk. I suggest that the choice of mechanism for maintaining capacity that is being made in the Bill fails on all those counts.
I have not invented that conclusion; the Department itself produced an impact assessment on the two choices that it had considered for securing capacity—a strategic reserve arrangement and a capacity market arrangement. Among other things, that choice is about ensuring that the amount of money that can be obtained through the sale of power into the market at times when capacity is tight stays within reasonable bounds. The impact assessment suggested that, in future, those reasonable bounds might get larger and larger. At the moment there is a maximum of about £1,000 per megawatt-hour, but it could go up as high as £10,000, in which case the consumer would be paying an enormous amount for their electricity under certain circumstances. The whole idea of keeping the costs of the capacity market under control would be completely overthrown.
The question then arises: which method best suits the need both to keep the right capacity and to keep it at a reasonable price and with reasonable reliability? Hon. Members will not be surprised that costs of the capacity market option over the period 2010 to 2030 have been assessed at two and a half times those of the strategic reserve option, and the effect on bills at 11 times higher. At first sight, that is not a good sign of the capacity market’s ability to provide a good deal for consumers.
According to the impact assessment, the reason why the Department eventually chose the capacity market idea was the entirely theoretical one that a reliability market
“limits the scope for generators to receive scarcity rents.”
However, the fact is that by introducing a capacity market and auction system in the way that we are, we will effectively provide guaranteed free money for a long period for people who are building conventional generation that provides capacity.
It may come as a surprise to some hon. Members that by introducing an auction market for capacity, we are ensuring that there is a subsidy across all aspects of energy generation, not just some. There is potential for gaming of that arrangement. The Government will have to decide how tight the capacity is after considering what the market will look like four years ahead, and then they will have to create an auction. That choice will be necessary for the auction to take place at all, and it will determine how much money there is in the auction. If the market is gamed so that the capacity looks much tighter than it is, the amount of money will be larger and the price will be even higher.
It is no coincidence—I think that is the best way I can phrase it—that we already see the capacity market tightening. A large number of gas plants are going into either deep or shallow mothballing in advance of 2014, and the Government’s decision about what capacity will look like will be informed by that mothballing. Were I an energy company operative, I would be rather pleased about that, because I would imagine that I would do rather well out of a capacity market in the future.
Mark Reckless (Rochester and Strood) (Con)
Surely an even more important reason for the tightening of capacity to which the hon. Gentleman refers is the shutting down of several large coal-fired power stations under the relevant EU directive.
Dr Whitehead
Yes, indeed. A number of plants are to close down over the next few years, and given how the energy market works, which I have described, one would expect the ability to obtain rents at the margins of the market to encourage the development of new plant. The statement made by the development of a capacity market auction is that that mechanism will not exist, so a permanent underwriting of new plant development needs to be auctioned to allow that to take place.
The strategic reserve option, which works quite well in a number of parts of the world, is that certain plant—perhaps mothballed plant—is taken out of the market and then placed back into it at times of stress on the market. As a result of that action, rents are reduced. Indeed, the fact that there is a strategic reserve that can be put back into the market at stressful points damps down the possibility of rents being obtained. That option comes at a much lower cost and
“should be relatively simple to set up and administer as it is a relatively small intervention in the market”—
not my words but those of the impact assessment. It
“could avoid gaming in the capacity market if there is a plentiful supply of mothballed plant”,
as indeed there is right now. Overall, it
“has the potential to be the smallest intervention in the market and accordingly has least overall policy design and implementation risk associated with it.”
The capacity market, on the other hand,
“has a higher overall level of design risk given the relative complexity of the model…a Capacity Market, if not well designed, could create opportunities for gaming the new capacity auctions; and…is the more costly mechanism to set up and run and it puts a greater administrative burden on businesses who will participate in the capacity market.”
Again, those are not my words but those of the departmental impact assessment of the choice between a strategic reserve and a capacity market.
Yet a capacity market was chosen to underpin the entire energy market reform and the Bill. I imagine—in fact, I am pretty certain—that that is what we will eventually go for. However, I modestly suggest that it might be a good idea to put in the Bill the idea that if that does not work very well, as I also modestly suggest it probably will not, the Minister has the option of moving towards a strategic reserve arrangement. That would keep the costs down and damp down the gaming of the capacity market auctions that may well take place over the next few years. That would be helpful for our ability to run a coherent energy policy over the next few years, and I tabled my amendments in the spirit of that helpfulness and to ensure that, whichever way we decide to go, we do not shut the door on something that is cheap for consumers in the long term, better for the energy market overall, and will keep our energy supplies in good shape for the future.