Energy Supply

Barry Gardiner Excerpts

Thursday 6th September 2012 Westminster Hall

[Barry Gardiner (Brent North) (Lab)]

I simply want to say that during all the time I have served on the Committee, it has always been aware of the Chairman’s interests, and at no time have any of us felt that those interests have in any way impeded or compromised the work of the Committee. He has been absolutely scrupulous in declaring those interests and making clear his position. I deprecate the journalism that has sought to besmirch the work of the Committee, which I believe is what journalists have tried to do, by suggesting that there has been any compromise. I welcome the fact that the Chairman has made such a statement.

[Mr David Amess (in the Chair)]

The House is very grateful for the hon. Gentleman’s contribution.

[Mr Yeo]

I, too, am grateful for that entirely unsolicited intervention from my colleague.

I also point out that I have been a strong and consistent advocate of greater investment in renewable energy for almost two decades—ever since I first took an interest in climate change when I was rather unexpectedly given ministerial responsibility for it in 1993. I believe that Britain needs investment in many forms of low-carbon technology, which of course includes nuclear power, and the suggestion that my views on the subject could possibly have been influenced by interests that I did not acquire until 2006 is simply absurd.

I warmly welcome the new Minister to his post. He comes in at a very challenging time in his Department’s history. We, as a Committee, look forward to working closely with him. We worked very closely with his predecessor, my hon. Friend the Member for Wealden (Charles Hendry). I would like to take this opportunity to pay public tribute to him as an exceptionally conscientious, straightforward, knowledgeable and trustworthy Minister. He will be much missed—certainly by me, and I think by the whole Committee—and his knowledge of the issues, at a time when rather complex legislation is going through the House, is something that I hope my hon. Friend the new Minister will also soon acquire. I wish him well in his task.

I also thank my colleagues on the Committee for their work in producing not just the report that we are debating, but an extraordinary number of reports over the past 12 months. I also pay tribute to our very hard-working staff.

It is almost a year since the publication of the report that we are debating, and the concerns that we expressed then are almost exactly the same as those that we would express now. Britain is, of course, very dependent on imported fossil fuels for its energy, and anxieties about the level of generating capacity remain. The concerns about the fact that much of our existing capacity, in the form of the old coal and nuclear plants, will retire very soon, and about the need for that to be replaced, are as acute today—if not more acute—as they were last year. Absolutely enormous investment is needed in new capacity, storage facilities and so on. In the past year, there has still been progress, albeit insufficient, on energy efficiency, and on carbon capture and storage.

Britain remains a big net importer of energy—the figure was 29% last year. We are very lucky to have Norway on our doorstep, which is a friendly and reliable supplier of gas, but it is still desirable that we try to minimise our dependence on imports. In my view, that supports the argument for exploiting our shale gas reserves, for which we look to the Department of Energy and Climate Change for early approval, as has been recommended by the Committee. We will soon return to that subject, and I hope that we get the go-ahead soon.

Norway is a friendly supplier of gas, but even that fact cannot insulate us from future gas price spikes. Those who advocate relying mainly on gas to generate our electricity must recognise not only that, without the so far unproven economic availability of carbon capture and storage, gas cannot possibly get us to the 50 grams per kWh emissions target set by the Committee on Climate Change for 2030, but that there is also a real danger, as the Asian economies continue to grow, that global demand for gas will drive prices up, meaning that Britain’s economy will become less competitive if gas is our principal source of electricity generation.

[Barry Gardiner]

I am sure that the hon. Gentleman recalls the “World Energy Outlook” report and our interview with its head, Fatih Birol that drew particular attention to the fact that as Russian gas from western Siberia is gradually going offstream, the eastern Siberian gas fields will then come onstream. The likelihood is that there will be a decrease in the gas from Russia that comes into Europe and that, as the countries of Asia—China and India—see a rise in their need for gas, the eastern Siberian stream will increasingly be pulled down there. The position of Russia will therefore put Europe in a very different situation vis-à-vis gas.

[Mr Yeo]

The hon. Gentleman—in terms of the Committee’s work, he is probably my hon. Friend—is absolutely right about that point. The situation will get much more serious from Europe’s point of view in relation to its reliance on imports from Russia. I commend the work of the International Energy Agency, and especially of Fatih Birol, who has a particularly mature and perceptive view of long-term energy trends. The IEA’s work gives us a lot of warnings.

Despite all that, in what I hope will be a diversified mix of energy sources—gas, nuclear, low-carbon and renewables—gas will remain important in the next 15 years. We cannot do without it, so I hope that the Government’s gas strategy will include a further expansion of gas storage capacity, which is currently only a fraction of that routinely maintained by Germany, Italy, France and the United States.

Our report also recommended that the Government should set up an independent central agency to manage Britain’s strategic oil stocks, so we look forward to progress on that. We distinguished, although not everyone does, between independence and security. Independence of energy supplies is not attainable for Britain in the foreseeable future but, in any event, security is more important. Security means much more than just reliable sources and supplies of energy, although that is a pre-requisite, as it makes storage and interconnection important factors, too. It means having adequate generating capacity and a mix of generation that delivers value for money to consumers and protects consumers in the event of a much higher carbon price, which may well emerge—indeed, it is likely—in the 2020s and 2030s.

I note en passant, and with approval, the continued spread of emissions trading as a policy instrument. It has been adopted in a growing number of countries, although that trend that was not apparent three years ago. We now see it in countries in Asia, in Australia and in parts of America, and pilots are taking place inside China, as we reported recently. That points to the use of emissions trading and the possibility of a rising carbon price in 15 or 20 years.

--- Later in debate ---

[Barry Gardiner (Brent North) (Lab)]

I am delighted to speak in this important debate, and I am particularly delighted to welcome the Minister to his position. His work within his previous skills portfolio was much respected, and I think that many of us hope that he will bring not only the dedication that he showed in that role, but his focus on developing green skills, into this new portfolio, where he is considering the UK’s energy supply. It is a difficult time to be taking on the brief, and I think that we all sympathise with him for taking over at this juncture, with so much on his ministerial plate. I assure him that the Committee—both sides of it, I think—will seek to co-operate with him to ensure that he gets his feet under the ministerial desk as quickly as possible and can take the brief forward.

I do not want to go over the ground that the Chairman of the Committee and the hon. Member for South Thanet (Laura Sandys) have already covered—I entirely agree with most of what they said, particularly the hon. Lady’s call for certainty in policy. She is absolutely right; that is one of the key things that will hold back—is already holding back—the investor community from pressing ahead with the sort of investments that we need, if we are to see the £200 billion investment come on stream and ensure that we have the continuity of a secure supply of energy over the next decade.

I want to focus on subsidy and the importance of getting subsidy right. Earlier this summer, there was a contretemps between the Treasury and the Department of Energy and Climate Change on the subsidy for onshore wind. The debate was not phrased in that way; it was phrased, “How much can we cut from that subsidy?” Should the subsidy be cut by 10%, which is the Department’s public position? Or should it be the far more severe cut of 25% proposed by the Treasury? Interestingly, the Department won the day in that political debate. In a straight fight between the Chancellor and the Secretary of State for Energy and Climate Change, most people in most circumstances would back the Chancellor, but in this case the Department won.

We need to consider the economic case for onshore wind. The new Minister has previously commented on onshore wind. We subsidise the technology, which operates intermittently. Wind does not blow all the time and cannot provide the base load of electricity supply. On a number of occasions, the Minister has remarked on the way in which the technology adversely affects communities in the countryside.

Long-term subsidies are not good. I think we can all agree with that. In my view, we should not subsidise any energy in the long term. Subsidies should never be a permanent feature of any market. Subsidies should be introduced only to address market failure and they should be withdrawn gradually as such market distortions are addressed. I hope even the Chancellor and the Treasury accept the economic rectitude of those remarks. Whether they can square that with this country’s ongoing fossil fuel subsidy is an entirely different matter.

Last year, the OECD estimated that, in 2010, UK subsidies for coal, gas and petrol amounted to £3.6 billion. Additionally, the Chancellor announced in his 2012 Budget further exploration and production subsidies of £65 million to develop the west of Shetland fields. The market failures addressed by those subsidies are unclear. On the contrary, fossil fuels appear to have an entrenched subsidy culture in which such taxpayer handouts are regarded as a right, rather than a means of addressing an otherwise unlevel playing field.

By contrast, the total subsidy paid to onshore wind amounted to less than £400 million in 2010-11, or £6 on the average household’s annual bill. That gives a better sense of the subsidy onshore wind currently enjoys against the £3.6 billion in consumption subsidies that fossil fuels enjoy before factoring in the cost of carbon emissions.

[David Mowat]

I am interested in the make-up of the £3.6 billion. Are we talking about tax reductions, or am I missing something?

[Barry Gardiner]

I hesitate to speak for the OECD, but my understanding is that the £65 million is composed of production subsidies, VAT subsidies and other things. I am sure information on the figures is available from the OECD, because they are the OECD’s figures, not mine.

[David Mowat]

I am sorry, but I do not understand that answer, because £3.6 billion is a very large amount of money. The hon. Gentleman makes a powerful point if that figure is a true reflection of the situation, and it is reasonable to ask how the money is being transferred at that rate to the energy companies and, presumably, their shareholders, because that had previously passed me by.

[Barry Gardiner]

Members of Parliament are not noted for admitting ignorance, but I am happy to do so. I cannot give the hon. Gentleman a detailed breakdown, but that figure has been given by the OECD. As I said in response to his previous intervention, my understanding is that the subsidy is accounted for in VAT subsidies and in other production subsidies, such as the ones I mentioned. I cannot go further than that. I do not claim to be the economist or accountant who worked out the figures published by the OECD, to which I refer him.

The real market failure is that the environmental, economic and social costs of greenhouse gas emissions are not properly factored into our fossil fuel price. The Government recognise that and have tried to attribute a price to carbon emissions through the EU emissions trading scheme. Unfortunately, the carbon price has neither been stable enough, as the Chairman of the Select Committee mentioned earlier, nor high enough to redress that market failure, even for the 40% of UK carbon emissions covered by the ETS. Fossil fuels are operating in a market tilted distinctly in their favour. Those who support renewables such as onshore wind that do not produce polluting carbon emissions are perhaps entitled to claim that there is clear justification for that level—albeit a very low level, as I have shown—of subsidy.

Bringing new technologies to market can be difficult, and many technologies have died in the valley that lies between demonstrator a prototype and full commercial development. If the UK is to develop world-leading renewable technologies, such as those mentioned by the Chairman of the Select Committee, particularly marine technologies, we need further subsidies to enable renewables to make that transition from prototype to full commercial scale. The renewables obligation subsidy introduced by the previous Government was designed to do that to some extent and supported new wind generation as the technology successively improved and economies of scale reduced production costs. It is worth noting that it is onshore wind’s positive trajectory in reducing costs that led the Department to argue that the subsidy could be reduced by 10% in the first place. As the technologies become cheaper, it is right to scale down the subsidies. That trajectory has led some in the industry to project that onshore wind will be cost competitive with gas by 2020, which brings another element to our discussion. Indeed, the hon. Member for Warrington South (David Mowat) highlighted that differential and the possibility of seeing cheaper gas in the UK because of shale gas in the United States.

Clear social and environmental costs are associated with shale gas in the United States, and the Committee flagged them up in its report on the potential for shale gas in the UK. However, at every point we should aim to factor the cost of pollution into the true cost of the fuels that we use. That is really how we should evaluate the cost. We do not, for example, factor into the cost of fossil fuels the cost to the health service of people with bronchial or asthmatic conditions caused by carbon emissions from diesel and petrol engines. If we want to get a far better handle on our energy needs and supply, and the security of that supply, let us compare the true costs of the separate parts of our energy mix, and not simply look at the market cost.

I want to go off slightly on a tangent and mention, in response to the shale gas debate, one other aspect that I think it important to draw to the attention of the House. As shale gas provides the USA with increasingly low-cost fossil fuel, there will be a substantial shift in American foreign policy, which has been fixated on the middle east—for good reason. Its fossil fuel supply has substantially depended on stability in the middle east providing continuity of supply. The discovery and exploitation of shale gas in the United States significantly changes that perspective, and when we look to the future of European and UK energy we need to factor that in too. The drivers that caused the US to be so involved with middle east countries will shift. We need to recognise that, as much as we recognise the shift happening in the gas fields in Siberia, and the rise in demand from India and China.

There is one further thing I want to comment on: the fourth pillar of the Government’s proposals on electricity market reform—the emissions performance standard, the carbon floor price and the way in which they interact. Is not it strange that the emissions performance standard was set at 450 grams per kWh? Whom did the Department think it was fooling by setting that figure? It is clear that it was set because it excludes dirty coal without carbon capture and storage, but it has a beneficial effect on investment in nuclear, boosting the price.

In the past year and a half, the Committee has spent a lot of time talking to the investment community, which has been generous with its time and views and has made clear the way in which the risks associated with different technologies and energies manifest themselves. There are planning, construction, operational and price risks and, particularly with the nuclear industry, a decommissioning risk. The key matters on which the investment community focused in discussions with the Committee were construction risk and the period during which capital is exposed in the construction of new nuclear, as opposed to new gas, technology, and the different lengths of time needed to get production in place and price coming through. The investment community made clear to the Committee its belief that without Government subsidy—not covert subsidy by way of price subsidy through the EPS but real subsidy in relation to those risks and the extra cost of capital—there will not be the level of nuclear infrastructure development that the Government have said they want.

I come back to where I began on the question of subsidy: without a much more transparent understanding of the subsidies going to fossil fuels, and the lack of accounting for their cost in damage to health and the environment, and pollution; without factoring those things in; without a clear understanding of the subsidies necessary as technologies develop, and the reduction in subsidy necessary as they become more cost-effective; and without transparency about the real subsidies that the Government are offering the nuclear industry, and the structuring necessary to get the development we need, we will not have a successful energy policy.

[Several hon. Members]

rose—

--- Later in debate ---

[Tom Greatrex (Rutherglen and Hamilton West) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship, Mr Amess. This is a welcome and timely debate. Debates on Energy and Climate Change Committee reports are, by their nature, wide-ranging and touch on a number of issues. As the hon. Member for Warrington South (David Mowat) said, the report is relatively short, but issues of energy security and energy independence touch on a wide range of Government policies, not all of which are the responsibility of the Minister. I commend the speeches by the Chair, the hon. Member for South Suffolk (Mr Yeo), and other members of the Select Committee for touching on some of those issues. Given the time available, I do not intend to repeat points that have already been made, but I will perhaps come on to some other recommendations in the report.

I congratulate the new Minister on his appointment and welcome him to his post. As other hon. Members have said, he takes up his post at an important time for energy policy. He follows the hon. Member for Wealden (Charles Hendry), who had the respect of hon. Members across the House and the entire industry for the diligent way in which he undertook his duties, and for the accommodating way he would listen to and engage with different views from across the political divide on the areas for which he was responsible. I wish him well in whatever he does next. I wish the Minister well, too. He was well regarded for the seriousness with which he engaged with the skills agenda, his previous portfolio. As my hon. Friend the Member for Brent North (Barry Gardiner) made clear, the skills agenda is perhaps even more important in the energy sector. I look forward to discussing these issues with him in the House in the months, and possibly years, ahead.

Energy security cuts across many areas of Government policy, so there are many challenges for the Government as whole. As the hon. Member for South Thanet (Laura Sandys) said, this is an ongoing issue, not a new challenge that has suddenly arrived. It is to the detriment of government and governance when a difficult challenge gets left and is pushed along a bit on the agenda. There is a danger in the timing of such things. As the hon. Member for Warrington South said in a slightly different context, people keep waiting until it is almost too late, and sometimes the decisions are not necessarily the right ones and the costs associated with fixing them do not necessarily provide the best value for the taxpayer.

On page 43 of the report, the Committee described energy security as

“keeping the lights on, buildings warm, vehicles moving, businesses operating and electrical appliances running”.

That is a good, practical encapsulation of energy security. Although it is not the most glamorous subject and does not always attract attention in the same emotional way as other aspects of this brief, it is important to the economic future of our country. It is difficult to overstate the importance of those factors, because a safe and secure energy supply is vital to our economic recovery, both in creating jobs, which are desperately needed for millions of people throughout the country, and ensuring that businesses can rely on the energy supply.

I want to mention a couple of recommendations in the report. The report is almost a year old and makes points about the Government’s electricity market reform policy proposals. Since it was published, the Committee has undertaken pre-legislative scrutiny on the draft Bill. It is striking, however, that much of the criticism from the first report, even after pre-legislative scrutiny, remains valid. I am sure that EMR issues are high in the Minister’s in-tray and that he looks forward to responding to the Committee’s report on the draft Bill before it is introduced later this year. The EMR process is a key feature in securing the UK’s energy supply for the future, in terms of securing investment and setting out the certainty and predictability, as hon. Members have mentioned, which are important in getting investment in place.

Both reports touched on the capacity mechanism. I am sure that the Minister will be keen to deal with that as soon as possible. In the evidence to the pre-legislative scrutiny report in March, Ian Marchant of SSE commented—I do not agree with everything that he says, but I agree with this—that the

“the biggest issue at the moment is…uncertainty…the Government has created”,

for want of a better phrase,

“a known unknown.”

Knowing that there will be a capacity mechanism but not exactly what it will be, people will wait and see what the mechanism is, so there is a danger of creating a hiatus in investment. It is vital that we deal with that matter as soon as possible.

The Committee considered the relationship between Government and industry, specifically in relation to the oil and gas offshore industry and the impact that that can have on investment in the UK. It concluded, in reference to the measures announced in Budget 2011, that there is a need for a constructive relationship to restore industry confidence and maximise the benefits from the UK continental shelf. That is important.

I appreciate and acknowledge that since then the Department has done work to reinvigorate PILOT, the industry-Government body, and on establishing the fiscal forum, which is important. Although any Government have the right to adjust their fiscal policies to meet circumstances, the way that the changes were announced at the time—almost without any prior warning or degree of consultation—highlights the possibility and danger of an adverse impact on investment and, therefore, on revenues coming in. Various statements were made at the time about the impact of those changes, but because it is such a long-term industry those will not yet be known for certain. However, the report touches on that important point.

My previous point feeds into the wider, broader issue of certainty. Government decisions in the past couple of years serve to underline the degree of uncertainty. Oil and Gas UK claimed at the time that the UK was regarded as one of the

“most unstable…provinces in the world by many investors”.

Thinking about some other environments, that is quite an alarming statement. I hope some of that damage has been or is in the process of being undone. Similarly, in relation to other measures, including the feed-in tariff, renewables obligation and the banding review, about which there was movement backwards and forwards, sometimes such public discussions and squabbles send a signal to the wider investment community that they cannot necessarily rely on what the Government will do. That is a dangerous position to get into. I hope that the Minister, in his early weeks and months in his new role, seeks to provide the appropriate amount of certainty and predictability.

The hon. Member for New Forest East (Dr Lewis) mentioned the refining industry. The Government have committed to undertake a refining strategy, which is timely, and they will publish it later this year. However, that is too late for people employed at Coryton refinery. It is worrying when a fully functioning refinery with high environmental standards—perhaps one of the best in the UK—is closed with the loss of an estimated 850 high-skilled and high-paid local jobs that made a significant contribution to the local economy. The strategic issues in relation to our refining capacity are serious, as is our ending up importing refined product as a result. I hope that the Minister and the Committee will consider those issues. The Committee has a full agenda, but it may wish to consider these issues and keep an eye on them, because Select Committees can bring a degree of vigour and impartiality to such discussions.

During pre-legislative scrutiny the Committee criticised the draft Energy Bill for not including any measures on demand reduction. Hon. Members have mentioned demand reduction. It is hard to disagree with the Committee’s saying,

“It is completely unsatisfactory that DECC's work was not completed in time to be published alongside the draft Bill. This suggests that DECC is still failing to give enough priority to ensuring that demand-side measures contribute to our energy policy goals.”

Over the summer the McKinsey report, published for further comment, highlighted 11 key barriers to capturing the potential of energy reduction. Other hon. Members may have missed the Secretary of State’s saying that he was intending to graft some demand-reduction measures on to the draft Bill—that was at a Liberal Democrat summer school, so the attendance and attention might not have been huge—but I note the Committee’s warning that

“adding last-minute measures to an already pre-determined structure of a Bill may severely limit what can be achieved on demand reduction”.

That is important.

[Barry Gardiner]

The Committee said, in its recent report on climate change, that only 60,000 of the 330,000 solid wall insulations, which the Government indicated were necessary, had been installed. That is an important indication of how serious the situation is.

[Mr David Amess (in the Chair)]

Order. I am worried that the Minister will have little time to respond to the report. The Committee Chairman would also like to say something.