Electricity Supplier Obligations (Amendment & Excluded Electricity) Regulations 2015

Baroness Worthington Excerpts

Tuesday 3rd March 2015 Grand Committee

[Baroness Worthington (Lab)]

My Lords, I am grateful to the Minister for introducing these three statutory instruments. The first was correctly described as a minor and technical amendment to enable the certification of biomass. We are fully supportive of that instrument.

Moving on to the second and third instruments, I have some concerns about the policy that is being introduced to exempt heavy industrial emitters from the costs of the CFD. It is not really fair to describe this as a small amendment when it has quite a wide significance. We have sat in this Room and the Chamber debating the significance of the EMR over many months on the Energy Bill. It is a significant intervention into the markets. It introduces a level of intervention into those markets which will cause rather large sums of money to change hands between suppliers and the recipients of contracts for difference. Now we see that the distribution of that cost burden is being moved far more on to consumers and away from heavy industry, and I have a concern about that.

It was only last week that we sat in this Room and discussed fuel poverty, and the outrage that so many people currently suffer from poorly insulated homes and are unable to pay their bills. The inequality of the economy exacerbates their poverty, meaning that they are classed as fuel poor. Any Government ought now to introduce a test so that any policy change is thoroughly scrutinised for its impact on poorer communities. In fact, I see in the impact assessment that some attempt at acknowledging this is made. It says:

“As low income households typically spend a higher proportion of their income on electricity, lower income households are disproportionately affected by an electricity price increase”.

This move to insulate heavy industry and shift the burden will have an impact, which will grow over time as the potential sums of money being spent under the CFD mechanism grow. I seek reassurance from the Minister about what is to be done to compensate for the impact of this policy by improving the level of intervention we are making on fuel poverty. There ought now to be a rule that anything which puts the burden of decarbonisation disproportionately on to consumers must take into account the impact on fuel poverty. I note that there was obviously a consultation exercise and that papers say that 47 responses were received. How many of those were from consumer groups or those associated with the fuel poor? What did they think of this policy mechanism?

I am of course not blind to the reason behind the proposal, which is to try to ensure that we do not see the flight of industrial manufacturing jobs from this country. That is because of the fact that they are facing increasing costs for a number of reasons, not least the financial crisis raising the cost of capital. It means that there is a potential that we will see more jobs lost in the heavy industrial sectors as we face the pressure of globalisation, coupled with the need to invest in our energy infrastructure. There needs to be a solution but I am not convinced that simply handing out exemptions and compensation payments for evermore is going to give us that answer. The answer has to be in providing incentives for heavy industry to invest in decarbonisation. One of the problems with energy policy, at the UK and EU levels, has been that we have focused so much on the power sector, almost to the exclusion of the industrial sectors. This has left them in a situation where they face increasing costs, as a result of carbon prices, but have no incentive to invest in decarbonisation. I am sure that those who can will invest in CFDs if they have on-site power generation, but if they do not and are simply receiving electricity or process emissions and have a heat load, few incentives are available to them. There is no equivalent to the RHI that allows them to invest in carbon capture and storage. We have been very slow to realise that carbon capture and storage is a technology needed as much by the industrial sector as the power sector.

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[Baroness Verma]

My Lords, I am extremely grateful for the contribution of the noble Baroness. Of course, she raises questions to which I need to respond but, as with all these things, if I do not respond today I will undertake to write to her.

The noble Baroness asked about the cost of EII exemption to consumers. To lay out the context, first and foremost we do not want to see our industry moving away from the UK because of what our policies will cost to other countries that do not take our commitment to reducing carbon emissions as seriously as we do. We have to make sure that we do not lose our heavy industry simply because we want it to be more compliant than industries in other nations. We want to make other nations follow what we are doing and ensure that they are helping to reduce carbon emissions on the same scale as us. I think that the noble Baroness understands that all of these things will have a cost implication if we are mindful to have a blanket look at trying to reduce our carbon emissions and work with member states to help them to reduce theirs.

The policy should benefit the consumer ultimately. Let us look at what the exemption does for heavy industry, and what its net cost is across the population. On balance, we think that this is the right approach. The noble Baroness was right to say that this was heavily discussed during the passage of the Energy Act. We need to put it in the context that it will be an increase of 0.3%, which is about £1.80 on bills in 2020. In overall terms, if we are to ensure that we do not lose heavy industry, keep competitiveness as part of the bigger equation, and ensure that consumers benefit and do not lose out, these steps have to be taken. I am as mindful of fuel poverty as the noble Baroness, and I know that both of us work closely to ensure that rising energy costs have the least impact on those who can least afford to bear those increases.

Ultimately we have to look at the market as a place of competition. During discussions on the Energy Act, the noble Baroness asked why coal was allowed to be part of the auction. It is because of energy security and the cost implications to the consumer. If we are genuinely serious about ensuring that the marketplace is open and offers best value, we have to take on board that, for at least the short to medium-term, coal will play a role. But the more we get the renewable sector to grow, strengthen and bring its prices down, the less dependent we will be on coal. We see it as eventually coming out of the marketplace. The noble Baroness is aware that we have been very supportive, through the measures taken in the Energy Act to ensure that the renewables sector has had the opportunity to work on a much more even keel alongside the more traditional fossil fuels. So I do not buy the argument that coal should not be there. It has to be there for the ultimate reason that I have always laid out: we cannot allow a focus not to be technology neutral. It has to offer the long-term benefit to the consumer in the end. That is the crucial point.

The noble Baroness spoke about carbon capture and storage, and we continue to support its development. We see it as very much part of the debate going forward. She is aware that £1 billion has been set aside to support it. I was desperately trying to remember the two projects that we are supporting following the competition that took place. Unfortunately, inspiration did not come forward and I cannot rack my brain to remember the names, apart from Peterhead. Again, I undertake to write to the noble Baroness on where we are with those two projects.

Overall, I think the noble Baroness accepts that these are difficult choices, but we have to make them on the basis that we constantly review what we are doing to make sure that the end-user—the consumer—ultimately gets the best value. If there are issues that she feels that I have not cleared up, I will read Hansard very carefully to ensure that I can give her a much more detailed response if she feels that I have not satisfied her thus far.

[Baroness Worthington]

What I am trying to get across is that we absolutely agree that we do not want to see the flight of industrial players in our economy. However, we cannot simply keep loading the responsibility for decarbonisation on to consumers and not put in place a positive policy for the decarbonisation of industry. The two CCS projects are Peterhead and White Rose, but they are power projects. I am talking about heavy industry: steel, cement, chemicals and oil refining. How will those enter into the CCS market? We need to get an incentive in to help them to do that and we need the EU to support us.

Overall, my fear is that the net effect of these instruments might be that we exempt green electricity from overseas, which will be able to come in without bearing any of the costs that we have in this country. We may see that UK plc simply bears the cost but does not see the investment that we need in our industries. I hope that we will continue this dialogue. This whole raft of policies and how they interrelate has to be kept under a close eye.

[Baroness Verma]

I agree with the noble Baroness that we have to keep a close eye on this. We constantly look at whether those policies have the positive impact that we expect them to have. I always have to restate the importance of balancing that with the fact that we need to make sure that we do not lose our industries to places that are less ambitious about the reduction of carbon emissions.

We need to work closely with business. We are working all the time to make sure that we are not disincentivising it from trying to make sure that it can reduce emissions. Ultimately, this is about what the public are prepared to pay. We have to be mindful of this balancing act of making sure that it is not a burden on the consumer, while making sure that we do not lose manufacturing and that we keep our manufacturing base strongly here, which generates jobs and allows the economy to grow. It is very much a balancing act, but I agree with the noble Baroness that this should be kept under review, and that we should constantly look at how we can ensure that the renewable sector plays a bigger role as we work towards a much more low-carbon economy.