Baroness Worthington
Main Page: Baroness Worthington (Crossbench - Life peer)Energy Bill
Baroness Worthington Excerpts
Lord Jenkin of Roding
My Lords, one of the themes running through our debates on the Bill has been the need to ensure that the UK has sufficient generating capacity to meet likely demands and to avoid power cuts. It is what is meant by security of supply. This concern has been sharpened by last month’s worrying 2013 report from Ofgem on electricity capacity and the forecast of margins falling perhaps even by the middle of this decade to dangerously low levels. The central purpose of this Bill, through EMR, which is at its heart, is to address this issue, and the capacity market is one of its principal instruments.
I must say at the outset that in the circumstances in which the nation finds itself Ministers have been quite right to identify this as a solution to the capacity problem—or at any rate to try to find a solution. They were right, too, to bring forward the first auction for the capacity market to 2014. But to retain 2018-19 as the earliest date for any payment under the capacity market is a serious mistake. What matters to potential investors is not the date of the auction, but the date on which they can be sure of the first payment if they are successful in the auction.
What I suspect lies behind this four-year gap between the auction and the payment is an idée fixe—an idea somehow firmly held within the corridors of DECC that what it is addressing is really confined to building new plant, for instance to commissioning new generating plant such as a combined cycle gas-fired plant. Yet what we are faced with now is that the problem is on us sooner than anyone had anticipated. The Ofgem report has aroused a great deal of concern, which is not unjustified. The National Grid, supported as one might expect by Ofgem, has reacted by suggesting what I can only describe as a couple of temporary expedients, aiming to tide the system over until the EMR really begins to bite towards the end of the decade. My impression from the welcome briefings we have had, not least that of yesterday, is that these temporary expedients are what DECC is really basing its hopes on: that we shall not in fact have any power cuts. What is strange is that these temporary expedients had previously been rejected by DECC because of their potential adverse impact.
Ofgem’s electricity capacity assessment concludes that risks to security of supply are likely as early as 2014-15, driven by further reductions in electricity supplies from the withdrawal of installed generation capacity. The report also highlights that future policy and price uncertainty are continuing to limit investment in thermal generation. The assessment bolsters the case for bringing forward a mechanism to deal with the underlying issues contributing to generation inadequacy, which some commentators have described as the “missing money” as in a world of high renewables, thermal plant will run less and less often at suppressed prices. There is also the uncertain economic viability of conventional generation going forward.
Yet against that background, the grid launched what it called an informal consultation last month on two new temporary expedients. I think I need read only the title:
“Demand Side Balancing Reserve and Supplemental Balancing Reserve: Informal Consultation on the Development and Procurement of two new Balancing Services”.
What is needed is new capacity, not temporary sticking plaster. If the required plant is not in the system, it simply is not available for balancing anything. However, it is actually worse than that. The consultation document acknowledges in paragraph 32 on page 9—I have it here if necessary—that,
“security of supply is a function of the market which is underpinned by the energy policies under which the industry operates”.
It also says that it is not National Grid’s role,
“to ensure there is sufficient generation capacity available to meet demand”.
Yet the proposals aim to ask National Grid to do precisely this, by procuring capacity through the supplemental balancing reserve and demand-side balancing reserve.
The SBR is essentially a form of strategic reserve with last-resort despatch. As I intimated earlier, the strategic reserve was rejected by DECC, while acknowledging that such a mechanism does not address the missing money in the energy market but could even make the problem worse, in that investors might fear that the strategic reserve will be deployed before it is envisaged it would be—that is, when other capacity is available, albeit at very high prices. This would dampen the investment signal for players outside the strategic reserve, leading to what one might describe as a slippery-slope effect whereby no new investment is viable without an SBR contract. More and more capacity would then have to be procured within the strategic reserve. The result is that it simply displaces the ever-dwindling part of the market, with no intervention. What is needed is to bring forward not only the auction date under the capacity market but the date on which payments under the capacity market will be received. That is the purpose of my amendment.
At Second Reading, noble Lords may well remember that I drew attention to the substantial amount of mothballed plant held by some of the larger generators. They were mothballed because it is simply not economic to run them at current prices and in the light of uncertain futures. Some of this capacity could well be brought into production over the next six to 18 months, provided—this is what has to be hoisted on board—that capacity market payments can be made as soon as the plant is available and commissioned. That would happen if this amendment were to be accepted; both Ofgem and the grid recognise that the immediate problem is about capacity, not balancing. If my noble friend is unable to accept the amendment as it stands, perhaps she would agree to reflect on the situation I have described over the recess and consult further with those who are trying to help the Government to avoid the risk of serious interruptions of supply. The mechanism would be there but the implementation dates need to recognise the growing immediacy of the problem we face.
I make just one final point. This is not primarily about improving access to the market—other amendments will address that—but about reducing the risk of blackouts. I repeat what I have said previously; if the country faces interruptions in electricity supply, it is Ministers and the Government who will be held responsible. I, like everyone else, wish to avoid that. I beg to move.
Baroness Worthington
My Lords, I am extremely grateful to the noble Lord, Lord Jenkin of Roding, for tabling his amendment. We discussed the capacity mechanism in the previous session, when our focus was on the interplay between existing generation, more supply coming on and the demand side of the capacity mechanism. This amendment gets to the heart of how the capacity mechanism is proposed to work. One of my major concerns about the Bill relates to this mechanism because it is quite a dramatic intervention into the market, yet we still have very little in the way of detail as to how it is proposed to operate. I urge the Minister to give us some reassurances that we will see the draft statutory instruments pertaining to this part of the Bill as early as possible. It is one of the most unworked-through parts of the Bill and it is only when the SIs are drafted that we will be able to answer some of these important questions raised by the noble Lord, Lord Jenkin of Roding. Can we therefore have some reassurances about the timetable for publishing the draft SIs for this part of the Bill?
Baroness Worthington
“( ) Electricity capacity regulations must make provision for capacity auctions to be conducted so as to prioritise the lowest carbon providers.”
Baroness Worthington
My Lords, this is very much a probing amendment, designed to enable us to discuss again the detail of how the proposed capacity mechanism might work. One of the biggest problems with the mechanism is that, on the one hand, it purports to be technologically neutral by somehow treating all capacity as if it were equivalent; yet, on the other, interventions are proposed that go against that principle—the debate that we have just had is an example of that. Deciding to host the first auction in 2018-19 is not a technologically neutral decision; it is a decision designed to enable CCGTs to compete—so, already, we have a conflicting message coming from government.
Another aspect of that lack of technological neutrality is the proposed differing lengths of contracts. Again, this is explicitly stated as a way of trying to rig the market in favour of a certain outcome. In this case, it is offering potentially 10-year contracts to CCGTs and is designed as a kind of carrot to get those plants built. Similarly, three-year contracts might be made available for plant which is seeking significant refurbishment—again, another intervention to try to achieve a certain outcome. Unfortunately, the proposals will not work. The confusion between a desire to be technologically neutral and these interventions is creating a great deal of uncertainty.
My concern is that insufficient attention has been paid in the department to what I would call scenario planning in relation to the current two big market drivers, the cost of coal relative to the cost of gas. Here, while I do not fully agree with the noble Viscount, Lord Ridley, on everything, there is a real issue about the relative future prices of fuel. They are an essential component regarding whether this capacity mechanism will be needed. At the moment, gas prices are very high and gas plant is losing money, hence it being mothballed. That is neither environmentally desirable, nor is it desirable for security of supply. I can therefore see why the Government have come to the conclusion that a capacity intervention is needed. However, my concern is that the way that this is being done will not achieve the desired outcome.
The reasons for that are multiple. One is that we are in a situation of oversupply. Even though we have lost 7 gigawatts of old coal capacity, we were at historically high levels before those closures. We are still in a situation where the wholesale price is not sending a signal to either keep more expensive plant in the system or build new plant. That signal is further diluted by the fact that we are about to intervene in the market to create contracts for difference for significant volumes of new capacity. The net effect is that if you are sitting there with a consented gas plant and deciding on whether to invest hundreds of millions of pounds in it, there are significant, real-world hurdles before you would say yes to that project. The way that the department is approaching the capacity mechanism is not going to address that real-world problem.
My concern relates to the fact that existing plant in a capacity auction that is pretending to be technologically neutral, if we have an oversupplied market, will always squeeze out new capacity because the existing capacity is already on the bars and has none of the costs and risks associated with new capacity. The legacy plant will be bidding in the intervening period. While that legacy plant might be useful for keeping the lights on, it creates an environmental problem. The technology-neutral approach that the Government have chosen, although they are not consistent in that, poses a problem. Coal plant is making an enormous amount of money, far greater than the returns being made by gas plant. These coal plants are capable of running for many, many decades and are at a point when they are considering whether to continue operating under tighter air-quality restrictions. These plants have the capability of operating for many years to come and at high load factors if they decide to fit new filters, new scrubbers, to make themselves compliant with the requirements of the integrated emissions directive, the IED.
I am concerned that this capacity mechanism is not going to work because, in trying to bring on CCGT and reach that Nirvana of new investment, you are necessarily going to be paying a high price for capacity. That will provide a windfall to existing coal operators, which, if it were not for the carbon floor price, would certainly want to run for decades to come. The carbon floor price is the only thing holding them back because it is that which lowers their position in the merit order.
The capacity mechanism—you will not find this in any of the literature, advice or information that has been provided—could provide in the region of between £50 million and £75 million per year, per plant as an up-front payment. If a plant that is considering a life extension can win a three-year contract, it will then receive between £150 million and £240 million in guaranteed payments. I posit the problem—and I would like the Minister to respond to this—that that might be enough to nudge them in favour of investing in those air quality filters and would be sufficient to give them comfort that they should upgrade the plant and continue to operate. No one can predict the future, but the sums of money involved in the capacity mechanism are such that it could well be a material influence on decisions about what to do with those coal plants.
My fear is that the Government have no back-up plan for if that happens. Previously in Committee, we have discussed measures that could apply—an emissions limit for carbon for coal plants seeking life extensions—and they have been rejected. We have also tabled suggestions that suppliers ought to have a decarbonisation obligation. They have been rejected. It is almost as if the Government are not really committed to decarbonisation. I am sure they are, but if you look at the Bill at the moment, it is very possible that this will see a large number of coal plants opting in to the ID, refurbishing and staying on the system well into the 2020s. That is not compatible with a strategy for building CCGT because it will simply squeeze out the capacity that is expected to be brought on.
Combined with that, we have a demand profile that is flat, or falling, and the peak is falling, so not only are the demand profile and the whole not rising, but the peak is softening as demand is shifting. If we had a rising demand profile, one might be able to argue that that is where CCGTs will bid in. We would still have all the old coal, we could bring back the mothballed gas and there would still be room for CCGTs, but with a flat or declining demand profile, there is simply not the room. What scenario planning have the Government done for a situation where a larger number of plants than expected opts into the ID, fits filters and stays on the bars? What impact will that have on our emissions profile, our carbon intensity and the cost efficiency of the whole EMR package?
The EMR is meant to be about trying to transition to a low-carbon economy. We should be seeking to do that in the most cost-efficient way. It is evident that the most cost-efficient way is to switch from high-emissions coal to low-emissions gas. That is what we did in the 1990s and it delivered all our targets to date. We can obsess about tiny micromanagement of renewables and try to get nuclear on the bars, but if we get the coal to gas ratio wrong, we will be running to stand still. We will not see emissions or carbon intensity coming down. In the interests of consumers and the environment and security of supply, we have to get the capacity mechanism right. At the moment, I am very worried that it is not.
I have one or two specific questions. I have been trying to dig down to where the Government’s optimism about the closure of coal comes from. It is obviously partly because they have great faith in the carbon floor price. I do not share that faith. It is a highly political policy with only two years of forward planning. For me, it is not a politically bankable policy. There is also some analysis underpinning this. There is a reference to research done by Redpoint. I can give the reference. It is mentioned on page 30 of National Grid EMR Analytical Report. I would like to see that analysis. It seems to be the crux of the Government’s assumptions about the impacts of ID. We should see that because it is so crucial.
I could go on and talk about the falling costs of the air scrubbing equipment and the fact that there are flexible options now arriving in the market which mean that you can fit a low-cost version of SCR and still comply. There are lots of ways of trading once you are in TNP that give you flexibility, but I do not want to bore the Committee with the detail. The main point I am trying to make is that there is a great possibility that the Government’s modelling does not match what is happening in the real world.
I would like to see far greater emphasis on scenario planning that looks at the relative impact of coal. I am supported in this; the EMR panel of technical experts, in its final report for DECC, said:
“It might be helpful if DECC considered best practice from the private sector by adopting a light-touch Scenario Planning methodology. In this, the models play an important but more limited role compared with exogenous guidance. We believe that this could lead to greater realism and enhance plausibility. Most importantly, we believe this or a similar methodology could promote deeper discussion and broader consensus on the key market drivers”.
It went on to relate a whole series of advantages that would come from this light-touch scenario planning, as opposed to the pure quantitative modelling approach, which I am fearful underpins some of the Government’s assertions and plans.
Lord Deben
My Lords, this is an occasion when the Committee in the House of Lords is particularly valuable to the Government, because this is the moment when, perhaps, unexpected things in legislation can be found. There was a time when that used to happen in the House of Commons; it does not happen any longer, because of the way in which it has changed its mechanisms for dealing with these things—I think rather shamefully. So it is in our hands.
My noble friend will probably be pleased that we have debated this subject, because it is something that causes very considerable concern outside. If the mathematics stacked up, we might find ourselves supporting the very thing that we do not want to support. No one is suggesting for one moment that the Government intend that, but the consideration of the Bill leads one to discover those things. I remember sitting in the Minister’s position in the House of Commons, on a number of Bills, when one was very grateful for a discussion because issues were raised which made you think again about how you were going to do things, simply because one had not thought about that particular outcome. Although no doubt she will have some answers to this, I think that there is a real issue here that might be solved in a whole range of ways, which is why the noble Baroness is moving this probing amendment.
I do not think that many would call me a Thatcherite, but the idea that we were spending money to keep in operation entirely outdated systems would rather run against the grain of what I understand to be the view of the present Conservative-led coalition. I do not think that anybody in the coalition, whether from the right or the left, can possibly think that it is a good idea to continue with a mechanism that is manifestly unacceptable. I am sure that the Minister does not intend to do that.
I hope that the Minister will accept that there is sufficient doubt about how this might work out to make it important between now and Report to see whether there is a mechanism powerful enough at least to assuage those doubts. That is all the Committee can reasonably ask at this moment, but it is certainly something that we ought to ask and ask very strongly. If we cannot end up with that we may have to do find something ourselves at Report, but it would be very much better if the Government could reassure us and, if not, find something that will reassure us.
Baroness Worthington
I thank the noble Lord for his intervention. I want to clarify that I am not in any way saying that we should keep coal out of the capacity mechanism. I am stressing that we need to think very carefully about the design of the capacity mechanism so that it does not produce unintended consequences. I am also suggesting, as I have done in previous discussions, that there should be a back-stop measure to prevent the base-loading of coal should all the extra scenarios line up to make that the thing that they economically choose to do.
This is not about saying no to the capacity mechanism or to coal within that and I would not want to see coal closing unnecessarily. I want to see its role constrained to providing peaking and backup power rather than base-loading as it is today because it is so profitable.
The Earl of Caithness
My Lords, I could not help but smile when I heard my noble friend Lord Deben start his peroration to us because my mind went back to the 1980s when House of Lords Committees were doing exactly the same as they are doing today in a very effective way. My noble friend happened to be a joint Minister with me on a couple of Bills. He did not like what we did then I seem to recall. I am very glad now that he thinks we were right all along and doing a very good job in the 1980s as well as in 2013.
Turning to the amendment, I was interested by what the noble Baroness said because that was not how I read her amendment at all. She said, particularly when she intervened just now, that she did not want to drive coal out. But the effect of her amendment would be to drive coal and gas out and rely solely on renewables. The way that she phrased things at the end was much more balanced. She is a great crusader for renewable energy, but having read her amendment, I thought, “Well that’s great: the nuclear industry has the best advantage now. We can build a whole lot of nuclear plants because they have no carbon and that would be extremely good”.
I have always supported the nuclear industry. It is a pity that the previous Government did not support it more fully. We might not now be in the potential difficulties that we face, which my noble friend Lord Jenkin outlined in his amendment. Given what the noble Baroness said later in her intervention, I look forward to what the Minister has to say.
Baroness Verma
My Lords, as I said in my speaking notes, I and my officials will be happy to meet noble Lords. The invitation, of course, goes out to all noble Lords who are here today. I will make sure that that is extended to the Lords informal scrutiny committee.
Baroness Worthington
My Lords, I am very disappointed. If the noble Baroness cares to read Hansard, she will find that far from being an insane debate it is the Government’s position that risks looking insane. As you read over your own notes you will see the inconsistencies. You are saying that it is the least-cost way to get to our targets, which is what we all want to achieve. Yet, you are rigging the market in favour of new-build CCGTs, which by your own admission are not as effective as keeping on existing plant. That is the inconsistency and where the confusion comes from. There is lack of clarity from the Government and that is why the rest of the market has no idea what to do. Everyone who owns a coal plant is sitting, waiting to see whether this mess will ever be cleared up. You continue to operate in this way by refusing to acknowledge genuine concerns. This is not my personal agenda; I am merely reflecting back what I am being told by industry.
Baroness Verma
I am very aware that the noble Baroness is very passionate about this. I am also very aware that industry—I speak to industry regularly, like the noble Baroness—says that the means by which we are travelling through this Bill is absolutely right.
Baroness Worthington
Clearly, we speak to different people. Can you please answer me on whether we can see the Redpoint analysis on the impact of the IED on capacity? What I have found very frustrating throughout this process is that we have perfectly rational, interesting and varied debates in which people put forward their point, but they are then completely ignored by the Minister in response because she simply reads her notes. She is not even listening to me now. That is a reflection of the fact—
Baroness Verma
My Lords, I am listening very carefully. I am able to listen and also try to get some responses to the points the noble Baroness is raising.
Baroness Worthington
It would be helpful if they could come from you, would it not? But there we are. I am sorry this has become so annoying because you started this by making party-political points and by starting off by calling the previous debate, which was a perfectly rational debate, “insane”. I am afraid you have created a very poor feeling in an otherwise good debate.
Baroness Verma
My Lords, I think the noble Baroness has completely misunderstood the point I was trying to make. If she reads Hansard tomorrow, she will understand that the points I was trying to make were that we are all on the same sheet on this. What we are trying to deliver in the Bill is decarbonisation through a means that we think is right, and that must be at the least cost to the consumer. I am sure the noble Baroness would agree with that.
Baroness Worthington
I apologise for my lack of respect in referring to the noble Baroness, but, as you can see, this has got off to a very bad start. I hoped this would not happen because there is a very serious issue here to do with the degree of scenario planning that the Government have undertaken and the degree of rigour that they have applied to their analysis. I am very sorry that now we have lost sight of that very important point by what has just happened. I regret that deeply. I reiterate that this is a huge intervention into the market, and if you get it wrong, all sorts of unintended consequences will happen. It is simply not good enough to say that our models tell us that it will all be fine. We need to go out and talk to people in the real world, as I have done, and see what they are projecting for coal under the scenarios that we have in today’s market, the flexibilities that enable them going forward and building in the significant amount of money that is being redistributed to them through this mechanism. That is what I am seeking to explore. I have been very disappointed that there is not even an acknowledgement that this is an issue. I heard the noble Baroness’s offer of working on the detail of this over the summer; I will take it in good faith and hope that we can work through the detail.
In conclusion, it is quite wrong of the Government to pray in aid least cost to consumers. This Government introduced the carbon floor price, which has disadvantaged the UK relative to the rest of Europe for virtually no perceived outcome at the moment. We are already paying the carbon floor price. It is already impacting on our businesses and consumers. This is a Treasury money-raising exercise. If you are the party interested in keeping costs low for consumers, that is the policy you should be looking at, not the very sensible suggestion of trying to ensure that the capacity mechanism does not have unintended consequences in terms of carbon. It is absolutely clear that the quickest and cheapest way to decarbonise the economy is to switch out of coal and into gas. You can shake your head if you want to, but you need to go back to history and look at what has happened. You can build as many renewables as you like, but if you get coal and gas wrong, you will not get to those low-carbon intensities. That is the issue I am trying to get to, and for you to use least cost and cost to consumers as excuses for doing that is really deplorable when you think of the carbon floor price. I think you need to go back and think about that. I beg leave to withdraw the amendment.
Baroness Worthington
“( ) The Secretary of State must ensure that any price designated for the purposes of 2(a) incentivises uptake of contracts by eligible generators.”
Baroness Worthington
My Lords, the amendment would add a new subsection to Clause 6. We now come to the meat of the Bill: the contracts for difference, which it is proposed will restart investment in low-carbon energy. I think that this is the bit of the Bill that we all share a desire to see succeed and do exactly as we hope.
The reason for my tabling the amendment, which, again, is very much a probing amendment, is for us to have a brief debate about the transition from the current support mechanism for the renewables obligation and the proposed contracts for difference. We will have an opportunity to discuss this further when we come on to the parts of the Bill that deal with the transition, but I have put the amendment here because it is important to highlight how important the strike prices will be in the new mechanism for supporting renewables.
The renewables obligation, which this replaces, had within it a mechanism that created a demand for renewables—an obligation on suppliers to go out and source renewable obligation certificates. That was seen as an essential part of moving us into a low-carbon system at a time when we had a perfectly well functioning system of high carbon. It was accepted that, to create the space for these new sources of power, we needed there to be an obligation to drive that market. We are moving away from that to a system whereby the contracts will be offered and strike prices published but there is no obligation on anybody to come forward and bid for them.
I am very grateful for the information that has been provided by the Minister recently, showing that a number of applicants have come forward for the financial investment early decision contracts. I think that 50 projects have come forward, with 18 potential gigawatts of capacity. So clearly the draft strike prices are driving interest and have given people a reason to come forward with projects, which is very encouraging. It would be useful to have something in the Bill that ensures that that is the situation going forward. It has been mentioned on a number of occasions that one problem we have is that, beyond 2020, there does not appear to be very much certainty for investors in renewables. There are a number of reasons or that. It is partly because the legally binding renewables targets set at a European level stop in 2020. Let us be honest in saying that that is what drives the majority of interest from the Government in seeking renewables, although I also acknowledge that the benefits that renewables bring in diversity of supply and potential cost reductions for consumers are also sought by government.
It is true—and I do not think that it would be particularly controversial to say—that there appears to be some mixed messages coming from the Government that some parts of government are less enamoured of the benefits of renewables than others. So there is this potential issue post-2020. The levy control framework will dictate a large part of how the contracts of difference work, and that, too, only has a time horizon to 2020. So there is understandable nervousness in the industry. I do not want to go over old ground, but we have had lengthy debates about the need for decarbonisation targets post-2020 to try to give back some confidence. In the absence of such targets, we are reliant at the strike prices being set at a favourable level to bring forward interest. That is why we have tabled this amendment—on the off-chance that there should be a moment in future when the Government are slightly less enamoured or, potentially, more hostile to renewables, and that there will not be the ability to kill off this market by simply offering very low and unattractive strike prices. That was not possible within the RO, because it had an inbuilt mechanism to keep demand growing for those technologies. Here we are very much more reliant on a planned, administratively and government-controlled mechanism. For that reason, we have sought to clarify that the purpose of the strike prices is to ensure that they are sufficiently attractive that investors will come forward.
This amendment also gives me an opportunity to comment on the strike prices. Those that were published are subject to consultation, and I am sure that the Government are busy receiving evidence from participants in the market and potential investors. I have heard that the offshore renewable community do not consider the proposal for offshore wind to be sufficient. Again, I think that that highlights how important the strike prices now are. The concern is that the length of contract is too short, that the digression in prices kicks in too soon and that the cost reductions expected are just not realistic. That further underlines why we need to get the strike prices right.
The amendment needs to sit alongside the amendment that we will come on to debate about an expert panel. I know that an expert panel is already in existence and has been helping the Government, which we acknowledge has been a useful part of this process. We will come on to discuss how that could be maintained and even enhanced by making it a more visible part of the infrastructure of the Bill.
I also take this opportunity to say—this is slightly technical so I apologise in advance—that the way in which the supply obligation created in Clause 9 also interplays with the strike prices is important. I am stretching the amendment a little too far, maybe, to talk about this here, but it is worth noting that how you construct the obligation on suppliers to pay towards the strike prices could have quite an impact on the incentives that the suppliers have to then go forward and seek CFDs. If you constrict the supplier obligation in one way where the suppliers are directly exposed to the prices set in CFDs, they will have a greater incentive to go forward and seek those CFDs. If, however, it is a levelised, averaged-out cost to which they are not able to hedge their position through their own participation, it dilutes that signal.
I apologise, but that is all wrapped up in our concern to get the strike prices right. We will, I hope, soon discuss the technical expertise needed to make sure that that happens. I have mentioned why I think something should be in the Bill because it acknowledges the different system that we are moving to from a situation where the RO had an in-built guarantee that there would be demand for these projects to one where we are very reliant now on getting the price right. I beg to move.
Viscount Hanworth
My Lords, we know that strike prices will differ across various technologies but I query whether that degree of flexibility is sufficient. There may be a case for varying the strike prices to cater for the different components of the same technology. I am thinking, for example, of the differences within the technology of gas powered LGC generation between the base load CCGT plant and the plant that is devoted to satisfying peak demand, which may be OCGT.
The cost profiles of the two varieties may be very different as will the wholesale prices commanded by their outputs. Should they be subject to the same market reference price and the same strike price? I am asking that question, in all innocence; it is not a tendentious question. But I have observed that the Minister has indicated or implied that there may be special accommodations within certain technologies for interconnection. If I am making any assertion, it is that we need a lot more detail and I am not sure that it has yet come forth. We need a lot more detail that would address the realities of electricity generation.
Baroness Worthington
I thank the Minister for her response. I am glad we have restored our equilibrium. We have had a very good working relationship throughout this and I apologise for my—I slightly put it down to the heat, if that is okay.
I am grateful for the response. This was a probing amendment, and we recognise and welcome the Government’s efforts to have input into strike price setting. It is important to the functioning of this EMR package, and we hope that it does what it hopes to do. I acknowledge that there will be, I hope, opportunities to review those strike prices should it turn out that the first prices do not do what we expect.
The Minister mentioned strike prices for non-renewable technologies. I have seen from documents that we might expect some more information on strike prices for CCS and nuclear in early August. If confirmation of that could be included in the letter, that would be fantastic. I beg leave to withdraw the amendment.
Baroness Liddell of Coatdyke
I should reassure the noble Viscount that the wind farm that I inaugurated was offshore, so he is to be congratulated if he managed to get some money out of it.
Baroness Worthington
My Lords, I am grateful to my noble friend Lord Berkeley for tabling this amendment for no other reason than that we found out that very interesting fact. We cannot support this amendment. I have great sympathy with the concerns that have been raised that 25 years may be too long, but the way this amendment is phrased means that it would capture all renewable technologies. There is a great range of technologies that the strike prices are seeking to bring forward, and at the moment it seems that the majority of them might be conversion to biomass. I do not think you would want to lock that in to 25 years. I support the spirit behind the amendment of questioning and trying to understand the different lengths of contracts. That is something that we could discuss, but I do not think this amendment should make its way into the Bill.
We now have the draft delivery plan and the strike prices for renewables. The plan contains some suggested lengths for contracts, but I do not think we yet have anything similar for CCS and nuclear. We are expecting some more information on that in early August, when we will all be having a much deserved and well earned rest. It would be helpful if the Minister were to say something about that in her response.
Baroness Verma
The amendment moved by the noble Lord, Lord Berkeley, seeks to ensure that renewable technologies in receipt of a CFD have a contract life of at least 25 years. As the noble Lord is no doubt aware, we have recently published more detail on the contract terms, building on the operational framework of November 2012. This reconfirms our position that the appropriate contract length for payments to renewable technologies receiving a generic CFD remains 15 years.
In determining the length of the CFD, we considered a number of factors. The 15-year length is based on a trade-off between value for money for consumers, affordability within the levy control framework and bankability for investors. For the purpose of setting the contract lifetime, we have assumed that investors will require debt to be repaid within the CFD life. Therefore, having too short a contract length could impact on the cost of debt finance, given the increased exposure to wholesale price risk. Our analysis also indicates that investors discount very heavily the last few years of revenue from a project, particularly when compared to the social discount rate. Taking all these factors into account, extending the length beyond 15 years would not necessarily be significantly valued by the investor but would come at a cost to consumers.
In addition, the noble Lord may be aware that guidance from the European Commission states that support must be less than the accounting life of the asset. Extending the lifetime duration as the noble Lord proposes would extend a CFD beyond the asset life of a number of renewables technologies, which are generally less than 25 years. All these factors suggest to us that a contract life of 15 years is still appropriate.
I should also make clear that just because there is a generic contract, that does not prevent the Secretary of State directing the counterparty to issue a contract which differs on certain terms where that is considered appropriate. We have retained the ability to do this and would look to treat such occurrences on a case-by- case basis.
The noble Baroness, Lady Liddell, asked about the uncertainties of risk, mitigating them and ensuring appropriate rates of return. The strike price provides certainty on levels of support for the length of the contract. There will also be some change in legal protections. More details on the CFD terms will be published in early August, as the noble Baroness, Lady Worthington, said.
The noble Baroness, Lady Worthington, asked about nuclear and CCS. As she knows, we are currently in negotiations on a nuclear project, so I am not able to comment further on that point. On CCS, it may be better if I write to her. I hope that the noble Lord, Lord Berkeley, will withdraw his amendment.