Baroness Maddock
Main Page: Baroness Maddock (Liberal Democrat - Life peer)
Lord Grantchester
I am grateful to the noble Lord, Lord Teverson, for his introduction to the debate on the demand side of energy. He is quite right to draw attention to this. Although other noble Lords may have been teasing in their remarks, the Second Reading debate highlighted that the Government are coming rather late in their thinking to these subjects, and our later amendments will explore all the different technicalities on the demand-side responses. Therefore, we are happy to support the wider recognition of the importance of demand-side response.
I turn to the proposed new paragraph in his amendment on making the efficiency measures EU-compliant. Again, we note the position that we are in at the moment and that the directive requires member states to set an indicative national energy efficiency target based either on energy consumption or on energy savings, or indeed on energy intensity, as the noble Lord, Lord Teverson, suggests in the amendment. We wonder how that might take account of the decarbonisation challenges that we will be facing. Also, we will be monitoring more than one change at a time to take into account GDP changes. Therefore, we would be very interested in knowing how the Government view this measurement of energy efficiency.
Turning to Amendment 55ZA, which concerns pilots, once again we note that the Government are coming rather late in their thinking to the demand side and that they therefore want to make provision to help their thinking to progress by running a pilot scheme. Clause 37 gives the Government powers to run a pilot scheme for electricity demand reduction. While the clause does not specify that this pilot scheme should take the form of a pilot capacity auction, it is clear from the consultation response that that is what DECC is considering.
However, the capacity market is primarily designed to ensure capacity throughout troughs in supply, and it will therefore reward only demand reduction projects that reduce the amount of generating capacity that is needed at such times and not those that reduce demand at other times. A capacity market therefore rewards energy efficiency only for its security benefits and not its other, much larger benefits in terms of emissions reductions and affordability. Therefore, we are aware that an additional policy is needed to enable small businesses and households, and not just large infrastructure projects, to be rewarded for saving energy.
Such “premium payments” were favoured by the majority of respondents to DECC’s consultation but were then dismissed by the department. A further explanation in this regard would be welcome. Therefore we support the call on Her Majesty’s Government to clarify whether DECC should bring forward multiple pilot schemes to include premium payments, a capacity market and perhaps other forms of incentives. This would demonstrate which scheme or schemes were most effective in delivering permanent demand reduction in practice.
Amendment 55ZA also mentions how these pilots might be financed. Clause 37 states that it will be paid out of government funds rather than through consumer prices. However, following the spending review, a figure of £75 million for investment in innovative energy projects was mentioned. I understand that DECC suggests that only about £25 million of this will be available for the pilot. In any event, those sums are dwarfed by DECC’s own assessment of the cost for full capacity auction. Amendment 55ZA would allow pilot reduction schemes to be funded at least in part from capacity payments either in advance or during a capacity auction period. Will the Minister clarify to the Committee where the Government have got to in their thinking?
Baroness Maddock
My Lords, I support my noble friends in trying to highlight the importance of demand reduction and the fact that this Bill came rather late to it, as has been said by others. I was somewhat confused by some of the earlier comments from those who said that they were in favour of energy efficiency but were not sure about demand reduction. If you increase energy efficiency, you reduce demand. That is fairly logical. I find some of the comments a little curious.
I emphasise the fact that if the Government are having only one pilot that will be only around the capacity market, that will not be good enough, which is why we have tabled these amendments. As regards the amendment in the name of my noble friend Lord Roper, if the Government were to take something like that forward, we could have a demonstration about which scheme or schemes are the most effective in delivering permanent demand reduction. In a sense, that ties in with the amendment of my noble friend Lord Teverson. There was a lot of criticism of my noble friend and talk about the difference between demand management and demand reduction. They are two different things. We have had some strange logic in today’s debate.
Unless we have several pilots, there will be no meaningful comparison and we will not be able to decide which are the most cost-effective and the most effective in reducing demand. I support my noble friends in their efforts to make demand reduction more of a priority in this Bill.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)
My Lords, I thank my noble friends for enabling me to lay out further a response to the amendment of my noble friend Lord Teverson, which aims to make energy efficiency a general consideration when carrying out key functions of electricity market reform. I also welcome the cross-party support expressed in this House for electricity demand reduction measures and energy efficiency generally.
While I support the sentiment behind the amendment, we consider energy efficiency to be more than just about the efficient use of electricity, on which the amendment appears to focus. Therefore, the danger of this amendment is that, in focusing on efficiency of electricity use, it risks diverting attention from the wider importance of energy efficiency, on which we are already committed to progressing. When exercising capacity market functions, proposed new paragraph (f) would require the Secretary of State to give priority to demand side management and demand reduction measures over increased electricity generating capacity wherever this was economically appropriate.
The capacity market is being designed to allow demand-side response and permanent electricity demand reduction measures to participate in the capacity market. This is a proven way of delivering electricity demand reduction and is already working successfully in the United States. The auction process is a fundamental pillar of the capacity market and all resources that can contribute to security of supply. Demand-side response, permanent demand reduction and generation are able to compete against each other for support in the long term. This will ensure that demand-side measures that deliver the same level of security of supply benefits as generation at a lower cost will always be rewarded at the expense of generation. Accordingly, I hope that my noble friend will see that proposed new paragraph (f) will not add to the practical effort of what is already envisaged for the capacity market.
Proposed new paragraph (g) of Amendment 51N would require the Government to measure the energy intensity of the UK economy per unit of GDP and to improve this progressively. Again, while I recognise the intention behind this amendment, it would duplicate the existing domestic and European policies, to which my noble friend referred, in the recently adopted EU energy efficiency directive, which is aimed at driving improvements in energy efficiency across the EU and contains, among other measures, two key targets for member states, to which my noble friend also referred. The first is a non-binding national energy efficiency target for 2020, which is equivalent to reducing primary energy consumption by 20% by 2020. The second is a binding target to save 1.5% of additional energy per year, to be achieved between 2014 and 2020, through the deployment of an energy supplier obligation and/or equivalent policy measures.
The UK recently submitted its target to the European Commission under Article 3 of the directive. Under the target, the UK is projected to reduce final energy intensity by 26% between 2007 and 2020, maintaining our position as one of the least energy-intensive economies in Europe. In terms of domestic action, this Government have shown their commitment to supporting every opportunity for energy-efficiency measures. The policies that we have put in place, such as the Green Deal, will help households and businesses reduce demand by installing energy-efficiency improvements, with some or all of the cost paid for from the savings on their energy bills. In addition, the energy efficiency strategy sets out our plans for realising the significant untapped potential that remains in this key sector. Between the measures that we have put in place domestically and the new targets established through the directive, there is already considerable momentum that is contributing to making the UK economy more energy efficient.
Amendment 55ZA in the name of my noble friend Lord Roper, which aims to make an electricity demand reduction pilot compulsory, raises an issue that has come up a number of times at Second Reading: namely, that multiple pilots are necessary in order to test a variety of approaches. While I support my noble friend’s aim of ensuring that we test variations of the key elements associated with demand reduction projects, the Secretary of State already has the ability to design and run a pilot, or pilots, to test different approaches.
Clause 37 is simply a spending power to authorise the spending of money for such a purpose. I appreciate the concern that this amendment demonstrates about ensuring that sufficient funds are available for a demand reduction pilot. However, since it depends on the arrangements for the capacity agreements made in Clauses 22 and 24, funding the pilot in this way would have to wait until the affirmative regulations implementing the capacity market are in place. We considered this option but discounted it because the process would delay considerably the start of a pilot, and, as I have said, the Government are committed to taking forward a pilot with funds that are already available to it.
Before I ask my noble friend to withdraw his amendment, I will refer back to a few points raised during the debate. First, the noble Lord, Lord Cameron, referred to smart meters. I agree with him that increasing developments in new technologies—and the smart meter is one example—will ensure that consumers will have more control over how energy is being used. It is one of a number of measures that we are taking. He also asked why we are not getting on with a pilot. At the moment, there are a number of uncertainties. We are working out how a pilot would lead to a better understanding of the potential benefits of a financial incentive and of the market appetite for such an approach. We are considering detailed elements of how the design of that pilot, its monitoring and its location would work. The noble Lord also mentioned that Germany has 33% of its grid powered by solar. I respond to that by saying that Germany also has much higher energy costs than the UK, of both gas and electricity. We are delivering a low-carbon energy mix, at least cost to the consumer: this is at the heart of what we are trying to achieve through the Bill.
My noble friend Lord Roper asked why DSR and EDR were not in the draft delivery plan. Proposals on demand-side response were detailed in the capacity market framework publication of 27 June. On electricity demand, we are committed to a piloting approach, as I have said already. This commitment—to the pilot—was included on page 15 of the draft delivery plan.
Baroness Maddock
My Lords, I support the noble Lord, Lord Whitty. As I have declared before, I am vice-president of National Energy Action, which has been working with Ofgem on this because there is the potential to reduce prices for vulnerable customers in fuel poverty. As the noble Lord said, it is rather surprising that the distribution network operators have not been specifically mentioned with regard to electricity demand reduction because they have the ability to reduce the cost of network reinforcements, which would reduce prices.
We are always talking about what is going to add to the cost of fuel but this amendment would reduce prices. If we are moving to more people having domestic electric heating, it is particularly important to find ways of reducing the cost. There is quite a lot of work going on here. Indeed, NEA has been working with Ofgem on some of these proposals. I give my strong support to this and I hope that the Minister can indicate that the Government recognise that this is an important part of what we are all trying to achieve.
Baroness Verma
My Lords, I thank the noble Lord, Lord Whitty, and the noble Baroness, Lady Worthington, for tabling these amendments, which highlight the important role that the distribution network operators play in our electricity system, including in supporting electricity demand reduction. Amendment 52B seeks to ensure that distribution network operators take account of government policy as set out in Clause 5. Amendment 55ZZC would insert a requirement in Clause 37 for the Secretary of State to take account of the role of distribution network operators in a pilot scheme to permanently reduce electricity use.
Ofgem regulates through a licensing system and electricity distribution network operators need to obtain licences from Ofgem to participate in the energy market. An important aspect of this system is Ofgem’s power to set regulatory price controls, and its price control framework. This, as the noble Lord pointed out, is known as RIIO, and is well aligned with the Government’s energy policy, including the requirement for network companies to invest efficiently to ensure continued safe and reliable services, to innovate to reduce network costs for current and future consumers, and to play a full role in delivering a low-carbon economy and wider environmental objectives.
As we have previously debated, the Government are providing even greater clarity, as Clauses 119 to 126 will enable the Secretary of State to introduce a new strategy and policy statement for Ofgem to help improve alignment with government policies. In addition, my department works closely with DNOs and the wider industry, through groups such as the Smart Grid Forum, to satisfy ourselves that strategic investment decisions are being made.
On the specific issue of efficiency and reducing demand, DNOs have a licence condition on them to reduce losses, and they have been required to set out in their business plans how they will reduce losses, and to publish annual reports on what loss reductions they planned and what they actually achieved. A discretionary reward of up to £32 million will be made available by Ofgem, over the price control period, for efficient and innovative loss reduction initiatives.
In future price control reviews, when more reliable data may be available through smart meters and smart grid technology on the networks, Ofgem expects to introduce further incentives. Furthermore, Ofgem has recently extended the scope of its Low Carbon Network Fund to enable DNOs to carry out electricity demand reduction projects, which will complement the Government’s larger-scale pilot.
To reiterate the points made in our earlier debate on the electricity demand reduction pilot, while I support the noble Lord’s aim of ensuring that we test variations of the key elements associated with demand reduction projects, the Secretary of State already has the ability to design and run a pilot—or pilots—to test different approaches.
Clause 37, as I said earlier, is simply a spending power; it authorises the spending of money for EDR pilots. Our intention is design the pilot in a way that encourages projects to be delivered by a variety of organisations, including DNOs, provided the projects meet the criteria that we develop.
The noble Lord, Lord Whitty, asked why we cannot deliver eight year-old DNO plans without details under EMR. We have set out clear policy intentions—for instance in the renewables road map published last year, and in our various announcements on EMR—to move to a low-carbon energy mix. This informs the development of the DNO plans.
The noble Lord also asked why we had moved to an eight-year period. This was to encourage DNOs to work more strategically and to invest over a longer term, instead of making short-term investment decisions.
I hope the noble Lord is reassured that I recognise the important role that DNOs are already able to play in helping to realise reductions in electricity use. I hope that on that basis he feels able to withdraw his amendment.
Lord Davies of Stamford
My Lords, I will deal briefly with the first of my amendments, which would replace “may” with “must”. I think that there is far too much use of the word “may” in this Bill. If Parliament thinks that something is important, it should, in my view, be decisive about it. If we decide that we ought to give an instruction to Ministers, we should give them a clear instruction and not just a vague exhortation, such as is encapsulated in a subjunctive word such as “may”. In fact, as I said earlier in a different context, it is very important that the law generally should be precise and unambiguously comprehensible. If you give someone an instruction which is not an instruction, you are not producing good law. That is the simple reason why I want to change “may” to “must”, and it is a theme that applies to many other instances in the Bill.
I now come to my more substantive second amendment. By way of introduction, when I read the Bill I was quite surprised to see in Clause 21 the capacity market dealt with jointly with the issue of demand reduction. Of course, the whole Bill is really about demand reduction—how you can get the price mechanism generated by concepts such as the decarbonisation principle and contracts for difference and so forth to force people to be more efficient in their use of energy and to bring down our carbon emissions. That is the whole purpose of the Bill.
The capacity market is rather specialised; it concerns how we provide ourselves with a margin of safety over periods of peak demand so that there is not a serious danger of the lights going out. I thought that that would require and deserve separate treatment in a specialised section of this Bill. There is an aspect, of course, of demand reduction that is intimately related to the capacity market. It is intimately related in an inverse sense, in the sense that when you have more of one, you have less of another. That is the issue of demand reduction in the sense of modulation of demand—or what I prefer to call intelligent management of demand so as to reduce the aggregate volatility of demand for energy, particularly for electricity, in the economy—to reduce the peaks, and reduce the peaks that perhaps raise the troughs; to reduce volatility. There are many ways in which modern technology enables one to do that, which was extremely well described by the noble Lord, Lord Cameron, as regards dealing with smart meters and so forth. I do not need to go back over that.
The Minister has already referred to this approach several times and the Government in principle are entirely signed up, which is why it is in the Bill. There is a certain logic in dealing with the capacity market and demand reduction as reciprocals in the same part of the Bill. However, it would be a great mistake if we held up progress on intelligent demand management and demand reduction until we have a capacity market up and running. I should have thought that we should do things the other way around. It will be very difficult to know how much additional capacity we will need—that is, what we need by way of a capacity market and a definition of what the task of a capacity market is—unless we know the potential for demand reduction and specifically for the reduction in the volatility of electricity demand in the economy. Until we have experimented with some of these new systems, and have seen whether people and the market respond to these intelligent meters and so forth, we will not really know how much we need in terms of additional capacity as a safety margin in the electricity market.
It is clear that the general principle is universally acknowledged. My amendment would make sure that we do not neglect smaller businesses and households in all this. From what I can gather, all the discussion up to now has been with big generators or big consumers of electricity. It is extraordinarily important that we do not ignore, on grounds of fairness and economic rationality, smaller businesses or private individuals and families. If the Minister says that the Government are not ignoring them at all and that they are absolutely in the front line of their concerns, the substance of my amendment very largely would be achieved. That is why I am very explicitly putting forward this matter today.
I deliberately mentioned that there are two principles behind my amendment. One is fairness and the other is economic efficiency. The fairness point is that unless small businesses are encouraged to have equal access to these new smart meters and other means of monitoring price in the market so as to make sure that they can modulate their consumption of electricity to maximum advantage from their point of view, there will be a terrible distortion between the smaller people and the larger people. It will be much more difficult for small businesses, which have to cover many issues and risks with limited management, to be up to speed with new technologies of this kind. I suspect that regulations may be required in order to make sure that they get an equal crack of the whip. That is the way in which I want the Government to think about this. Certainly, small businesses should be equally sensitive, or perhaps more sensitive, to the price of energy than big businesses. They need this as much as possible.
There is a clear fairness point in terms of households. I thought that most of us in this country were concerned—although I am not quite sure about this increasingly Thatcherite Government, with the invention of the bedroom tax and so on—about the potential impact of the very necessary decarbonisation targets and increase in energy prices on poorer households in this country. In so far as that is the case, we should want to make absolutely certain that these new technologies of the smart meters and so forth are available to all families and households, but particularly to poorer families. Poorer families will have what I think would be known technically as a very high price elasticity of demand for energy. That is to say, their demand will vary quite a lot depending on the price.
To put it in terms of a graphic, the demand curve will be sloping—everybody requires some electricity for cooking, heating or what have you—but not too steeply. At the other end of the spectrum, I do not suppose that bankers, lawyers, Premier League footballers, movie stars, Russian oligarchs or Arab sheikhs are at all sensitive to price in their consumption of electricity. Their demand curve is almost certainly vertical or as close to vertical as makes no difference. Between those two extremes, there is a vast number of people with different demand curves. Overall, there will be very substantial opportunities for people to save on energy if they are given the opportunity to do so and if it is clear to them where the price advantage of doing so is.
On the grounds of both fairness and efficiency, in maximising this process of intelligent demand and consumption of electricity in the future, we need to ensure that households and small businesses are kept to the fore of the attentions of the Government, the regulator, the big beasts—the big six generators—and all the other players in this market. Without some very specific regulations, I suspect that things will not work out that way. That is the purpose of my amendment and I hope that the Government will be able to assure me that my amendment is unnecessary because they have already embarked on that very necessary course. I beg to move.
Baroness Maddock
My Lords, I do not think it is absolutely true that we have not talked about small businesses and households at Second Reading and in Committee.
Lord Davies of Stamford
I was not suggesting that we had not talked about small businesses. Of course people have talked about small businesses. What I am concerned about is the extent to which the Bill enforces on the Government an obligation to have particular regard to small businesses and households, which are inevitably less sophisticated and need more help in adopting some of these new technologies. That is my point.
Baroness Maddock
I totally agree with the noble Lord, but he gave the impression, I think, that we had not concerned ourselves with this subject. I apologise if that was not what he meant but it was the impression I got. We have done that and the Government have shown that they recognise some of the problems by bringing forward a clause specifically about fuel poverty and a fuel poverty strategy. I agree with the noble Lord that these are important issues but he has slightly distorted how the passage of the Bill has gone, and the Government’s interest. But I support him in trying to ensure that this is at the heart of what we are doing and share his hope that the Minister can reassure him that we do not need the amendment.
I talked about small businesses and domestic customers particularly in the context of demand reduction pilots. I cannot remember whether it was in Committee or at Second Reading but several of us went into that in quite a bit of detail.
The Earl of Caithness
My Lords, I congratulate the noble Lord, Lord Davies of Stamford, on producing an amendment that is probably the most regular identical amendment to come before your Lordships’ House. It is not an amendment that he would have found in the other place but “may” to “must” was something that I defended hugely for 10 years against attacks from the Opposition. As soon as the Opposition got into government and I put down a “may” to “must” amendment, they defended it with exactly the same arguments that I had used. I expect my noble friend the Minister to repeat those arguments of 30 years ago, and we will listen, as we have always listened, and come to the conclusion that “may” is still the right answer.
I hope that my noble friend will dismiss the second amendment. The principle is absolutely right but it is completely otiose. It is already well covered in the Bill. In fact, Clause 21(3) covers the point fairly adequately. It was pointed out to us in Sub-Committee D when we prepared our report on energy that the best way to reduce energy demand is energy efficiency. It is not just for households and small businesses, it is for all businesses. To identify small businesses in the Bill would be quite wrong and give a totally wrong impression.