EU: Energy Infrastructure (EUC Report)

Baroness Verma Excerpts

Monday 29th July 2013 Grand Committee

[The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)]

My Lords, I thank the noble Lord, Lord Carter of Coles, for enabling this debate, and I thank all noble Lords for their well thought-out and measured debate, which has been really informed. The Government very much welcome the committee’s report, which was well informed and laid out. The noble Lord, Lord Carter of Coles, asked me to pass on my appreciation to the Secretary of State for giving evidence to the committee, which of course I will happily do.

The report represents an important contribution to the debate on EU energy policy. It does a valuable service in raising the central challenge of ensuring that our future supplies of energy are low-carbon but also secure and affordable. There are a number of questions that I need to respond to. In advance of running out of time, I hope that noble Lords will accept that I will write on any outstanding questions that I fail to answer today. The report rightly asserts that investment in our future low-carbon energy infrastructure,

“could make a material and enduring contribution to European economic recovery”,

enabling our economies to take advantage of opportunities for green growth and maintaining our competitiveness.

Domestically, we are enacting the Energy Bill to ensure that the conditions are right for investment in infrastructure and technologies for both the low-carbon transition and security of supply, while delivering this at the lowest cost to the consumer. The Energy Bill sees the biggest reforms to the electricity market since privatisation. As we move to more and more sections of our infrastructure being electrified, the mechanisms that we are introducing will ensure that we remain leaders in an increasingly competitive global market.

The Treasury estimates that the level of capital investment in the energy sector this financial year will exceed £16.5 billion, and our low-carbon sector has seen significant growth in recent years. As the Secretary of State recently told the committee when speaking about the Government’s position on the EU’s 2030 framework:

“one reason that we wanted to come out early was to encourage others to be equally ambitious. If we had held back, we could not be an influencer”.

The Government are working with our European partners on a wide range of issues in pursuit of our long-term energy goals, but at the heart of our strategy is a clear and consistent call for action on two fronts: first, full implementation of the internal energy market, delivering well functioning gas and electricity markets that will contribute to EU growth and competitiveness; and secondly, a clear and credible long-term vision for EU energy and climate policy, providing predictability for investors and setting out how Europe will meet the challenges of decarbonisation while maintaining competitiveness and security of supply.

The Government are acutely aware of the challenge but also of the opportunity, and we are taking the lead in Europe. This was demonstrated recently by the Secretary of State’s work with his green growth group, which led to the joint statement by EU Ministers in support of backloading measures for the Emissions Trading Scheme. At the May European Council, the Prime Minister played a key role in ensuring the agreement of heads of government to a package of actions to facilitate investment in energy infrastructure. We support the implementation of the EU’s third energy package, and the closer integration of European electricity and gas markets.

We were the first member state to set out our vision for the EU’s long-term energy and climate policy in the Secretary of State’s speech in Brussels on 18 June, and in our response to the European Commission’s Green Paper on the 2030 framework for climate and energy policies. Our vision is for an ambitious emissions reduction target for 2030. We will argue for the EU to set a 50% target for greenhouse gas emissions reductions in the context of a global deal, with a 40% unilateral target for the EU, a point made by the noble Lord, Lord Carter, in his opening remarks. Equally importantly, this must be delivered in a flexible, technology-neutral way, supported by a robust and reformed emissions trading system, so that the EU can decarbonise in the most cost-effective way possible.

An EU-wide framework for 2030 will be essential in creating investor certainty and setting the right conditions to attract the unprecedented sums needed. The framework should be designed to achieve the most cost-effective emissions reductions, allowing member states to decarbonise in a way that best befits their national circumstances, providing flexibility to respond to technological change and encouraging the development of a full range of low-carbon technologies. This includes nuclear and CCS, which could make a significant contribution to reducing greenhouse gas emissions. I recognise the committee’s strong support for this technology, which matches the Government’s own commitment.

Energy policy inevitably involves a trade-off between decarbonisation, security of supply and affordability. A fundamental priority for the Government is to ensure that the UK continues to benefit from secure energy supplies. To this end, we are implementing the capacity mechanism to bring forward investment in gas generation, which will continue to contribute to our electricity mix over the coming decades.

The capacity market will cost-effectively ensure security of supply by competitively establishing a price for capacity and allowing the market to bring forward the right mix of reliable and flexible capacity. The market is not expected to change the general picture that we see of a move away from coal. Coal plants will continue to close because of old age and environmental legislation, and we do not expect any unabated coal to remain operational by 2030. The Government are firmly focused on delivering the policies and frameworks, at both domestic and European levels, that will unlock the investment that we need in our energy infrastructure.

I turn to the points raised during the debate. As I have said, if I cannot answer them, I shall write to noble Lords. The noble Lord, Lord Carter of Coles, and a number of other noble Lords asked how the Government’s EU policy would attract investment. An ambitious greenhouse gas target for 2030 combined with a functioning Emissions Trading Scheme will give a very strong signal to investors. This approach is echoed in the response of the Institutional Investors Group on Climate Change to the Commission’s Green Paper on a 2030 framework. The noble Lord, Lord Carter, and others also asked what the Government’s position was on structural reform of the EU ETS. As I have said, we need urgent reform of the EU ETS to reduce the surplus of allowances in the system. We are analysing detailed options for structural reform and are working towards a more detailed government position, which I hope to bring forward in the autumn.

The noble Lord, Lord Carter, and others asked whether we supported the idea of an EU-wide carbon price floor. The UK carbon price floor is the first step in our electricity market reforms. It does not cover every sector in the EU ETS and is a separate, UK-only tax. There needs to be a clear justification for taking fiscal action at EU level rather than national or local level, but the UK is not alone in pursuing wider decarbonisation policies beyond the EU ETS, with the majority of EU countries pursuing policies to encourage investment in low-carbon generation.

The noble Lords, Lord Cameron and Lord Whitty, and others asked how the Government were supporting interconnection at EU level. The Government fully support greater levels of interconnection, as my noble friend Lady Parminter said—we debated this heavily in last week’s Committee on the Energy Bill. We are working in the EU to support a number of new interconnection projects of common interest. These projects will have access to favourable planning and regulatory treatment. We continue to discuss projects with other Governments as appropriate.

My noble friend Lord Maclennan asked whether the Government should consider a standing committee of the Council to exchange views and update member states on domestic issues affecting energy policy. That is an interesting suggestion which is worthy of further consideration, but such mechanisms already exist at working level—for example, the electricity and gas co-ordination group. There are usually around five Energy Council Ministers meetings each year, so a number of things are already going on. Still, I will take that matter back and give it further thought.

The noble Lords, Lord Carter and Lord Whitty, my noble friends Lady Byford, Lady Rawlings and Lord Caithness, and others asked how we could support the development of CCS at European level. The Government believe that the priority for CCS is for the European Commission to work with member states and industry to deliver the first full-chain European projects. In our response to the Commission’s recent communication on CCS we advocated that there should be reform of the ETS and an ambitious 2030 greenhouse gas target; that existing funding should be made available to CCS; and that there should be support for CCS research, innovation and development. It is true that there has been a recent increase in coal and lignite generation. However, a study commissioned by the Government has shown that the economic outlook for coal is poor. For example, in Germany three major energy companies have announced an end to new coal.

The noble Lord, Lord Cameron, asked what the EU is doing to support research and innovation. Total spending on energy research and innovation is likely to exceed €6 billion between 2014 and 2020 under the Horizon 2020 programme. The programme will bring all EU research and innovation funding into one place for the first time, with a focus on turning scientific breakthroughs into innovative products and services. The programme’s total budget of €71 billion will support research across every sector, not just energy. Energy spending under the programme will be more than double that in the previous period.

The noble Lords, Lord Giddens and Lord Kerr, and others have said that the EU ETS has not worked. Of course, we understand that there needs to be real structural reform to drive investment in low carbon. We are analysing options put forward by the Commission to this effect and aim to reach a firm position. As I have said, I hope to bring back the results of the analysis later in the year. We have called on the Commission to produce legislative proposals by the end of the year.

My noble friends Lady Byford, Lady Rawlings and Lady Parminter, and the noble Lord, Lord Giddens, and others mentioned shale gas. There is of course great potential in UK shale gas and we are keen to see if it can be commercially produced. Existing EU legal frameworks are adequate to ensure environmental protection. There is a need to ensure that we do not unnecessarily restrict sustainable development of shale but I agree with noble Lords that it is really important that we have public consent and that local communities are properly informed, and that they are able to see the benefits of the exploration. However, that is at its very early stages and, therefore, it is right that we continue to be fully engaged with local communities and understand the concerns that they will raise.

The noble Lord, Lord Giddens, asked about the Government’s views on Germany, to which I think I alluded briefly. It is not for our Government to comment on other country’s reforms, although it is clear that the UK and Germany are facing similar challenges in reforming their energy systems. The UK’s priorities are to provide secure and affordable energy as we decarbonise, which our electricity market reforms aim to ensure.

I should like to inform the Committee that I have been given figures which indicate that new coal projects in Germany face a difficult set of political and economic conditions. While there are six coal and lignite projects currently in planning, two have already been abandoned. An additional 15 large coal and lignite generation projects have been put on hold, postponed or abandoned over the past five years as a result of steeply rising capital costs and fierce local and environmental opposition to coal. Sometimes, having to look at it in greater detail gives a more informed picture of what is going on in member states.

My noble friend Lord Caithness asked what progress the Government had made in Europe towards a 40% greenhouse gas target. One of the reasons that the Government set out our position on a 2030 greenhouse gas target was to encourage others to be equally ambitious. The Secretary of State has set up the Green Growth Group of like-minded member states that are ambitious on climate change. Most member states are still considering their positions and we expect to have a clearer picture in the coming months. In the mean time, the Government are working hard to make the case for 40%.

My noble friend also asked whether extra money for environmental and social policies would go on to consumer bills or be a tax. Of course, as my noble friend knows, taxation is a matter for the Chancellor and his question is way above my pay grade. But we are focused on policies to deliver a low-carbon transition and security of supply at the lowest possible cost to the consumer.

My noble friend also asked about PV in China. I think I need to write to him on that because the response needs to be a little more detailed than I am possibly able to give to the Committee today. But he is right to raise the point about support for particular technologies. Since we remain uncertain about future costs and prices, we need to be flexible to allow the markets to pursue the full range of low-carbon technologies.

The noble Baroness, Lady Howarth, asked if other countries were looking at our electricity market reforms and adopting them. Of course, different circumstances apply to different countries. However, lots of countries have shown an interest in what we are doing here. We are of course influencing them by taking a lead in many of the areas that I know the committee is very interested in, and I am sure that they will take a keen interest in the committee’s report, which is very informative.

The noble Baroness, Lady Worthington, asked about the decarbonisation target. We had a lengthy debate on this in Committee. As I said then, and will say again today for the benefit of the members of the committee, the noble Baroness is right that we need to look at decarbonisation and how we do it. The Government are setting a target range in 2016 in the context of the fifth carbon budget, but I know that we will have further debates on this and it would be wise to allow those debates to happen during the passage of the Energy Bill.

The noble Baroness also asked why we were reviewing our carbon budgets in 2014 when EU decisions are not going to be made until 2015. The European Council is scheduled to consider proposals on EU climate and energy packages for 2030 in March 2014. It is crucial that the EU takes a position on this in 2014 in advance of the global climate talks in 2015. The EU’s long-term trajectory is also indicated in the Commission’s low-carbon road map to 2050, but the noble Baroness is right that there is a need to set carbon budgets with a view to what other economies are committed to.

I have been told that I need to wind up. In conclusion, the Government will continue to work with investors, stakeholders and our EU partners to drive the low-carbon transition and deliver secure, sustainable and affordable energy. This has been a most illuminating and informative debate. I will read Hansard very carefully and if I have missed anything in responding to noble Lords, I will undertake to write. I look forward to the committee’s continued valuable contributions to the debate on the future of our energy policy.