Electricity

John Redwood Excerpts

Monday 15th June 2020 Commons Chamber

[The Minister for Business, Energy and Clean Growth (Kwasi Kwarteng)]

I beg to move,

That the draft Electricity Capacity (Amendment etc.) (Coronavirus) Regulations, which were laid before this House on 20 May, be approved.

Before outlining some of the provisions made by this draft instrument, I will briefly provide some context. The capacity market is at the heart of the Government’s strategy for maintaining the security of electricity supplies in Great Britain. It secures the capacity needed to meet future peak electricity demand, in a range of scenarios, through competitive technology-neutral auctions, which are normally held four years and one year ahead of the relevant delivery year. This draft instrument, together with capacity market rules changes to be made, performs two broad functions. First, it will ensure that the capacity market remains compliant with its state aid approval by giving effect to Government commitments recorded in the state aid approval decision. Secondly, it will make temporary modifications to support providers in the light of the effects of coronavirus.

The context of the capacity market state aid approval is, briefly as follows. The EU Commission state aid approval of the capacity market in 2014 was annulled in November 2018 by a judgment of the general court of the Court of Justice of the European Union. This introduced the standstill of normal operations of the capacity market until October 2019, when the European Commission completed its reinvestigation of the capacity market and granted state aid approval. On the back of this approval, the Commission state aid approval in October 2019 recorded the Government’s commitments to make technical changes to the capacity market design, to reflect recent market and regulatory developments, including reforms that the Department for Business, Energy and Industrial Strategy had already identified through the statutory five-year review of the capacity market in July 2019.

[John Redwood (Wokingham) (Con)]

I am glad that the Minister has started with the very important context, because, of course, an 80-page EU document explaining the history and the requirements should have been appended to our documents. Why, however, do we think it a good idea to comply with the proposition that our interconnector imported energy has to increase from 4% to 9% of our total by 2021, when we should be going for self-reliance and resilience?

[Kwasi Kwarteng]

I know that my right hon. Friend is a noted sceptic about climate change—or he was, certainly, until very recently—but he will know that any country that, like us, wants to reach the net zero commitment will necessarily be reliant on much greater interconnector capacity, from Europe in many instances and sometimes from countries such as Norway that are outside the EU, than is currently the case. That is exactly why we are proceeding on this path.

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[Kwasi Kwarteng]

All I can do is repeat the answer that I have given. These regulations reflect our past discussions about the operation of the capacity market. He and I and others in this Chamber will have plenty of time to debate a new system. I ask the hon. Gentleman to have a little patience. We have a White Paper coming up and it would be precipitous to have an extensive debate about these issues in legislation ahead of the publication of the White Paper. He has asked many questions about that, and I advise him to wait for the debate on the White Paper.

[John Redwood]

I do not know why the Minister referred to climate change in answer to my previous question. I was not talking about that and, as he says, it has nothing to do with the regulations, so may I have another go? Why have we agreed to more than double our importation of energy through interconnectors? Is it a good principle that we should be paying a capacity payment to foreign providers of electricity who want to sell us their surplus power, but who would not necessarily have it available when we wanted it?

[Kwasi Kwarteng]

In regard to climate change, my right hon. Friend will know that one of the big issues, or successes, that we have had in decarbonising electricity power generation has been through taking coal off the grid and having renewables. All the assessments that we have had and looked at show that an increase in interconnector capacity is part of that mix, just as nuclear is part of the mix, just as offshore wind and now onshore wind— the pot one auction—are part of the mix. All these things are part of the decarbonisation story of our power, and this is very important to us, which is why we have increased—or seek to increase—our interconnector capacity.

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[John Redwood (Wokingham) (Con)]

I am very concerned about the regulation, its provenance and whether it will limit our freedom of manoeuvre in ways we do not wish from the beginning of next year, when I hope we will be redesigning an energy policy that is fit for purpose to meet our three main priorities.

The Government have been very clear on their environmental priorities. They are not the subject of our debate today and I have no wish to go into them. They are an important matter that the Government have set forward, but the Government have always said that they have two other crucial priorities that matter a great deal as well. One is to have good value power—power that people can afford in their homes and which can make us more competitive in industry and commerce—where I think we have room for improvement. We also wish to pursue a policy of independence, so that we have resilience and reliability in our system. I therefore find it extremely worrying that we have responded to a state aid challenge upon us in the dying days of our membership of the single market, or its rules, when we are no longer a member of the European Union which sponsors it. We are setting forward a trajectory that says we will increase our imported power from 4% to 9%, mainly from the continent of Europe—from the EU—as part of our defence against historic allegations concerning state aid that would presumably go away from 1 January once we have left the European Union completely and once we legislate to make our own position clear.

Today’s regulation is not well described in the explanatory note. If one reads the 80-page European Commission decision document, one can see exactly how thorough their investigation has been since 2014 of our capacity market, how detailed their intervention in it has been, and how detailed the Government’s response has to be in this and in other work they have done to try to conform to the EU’s wish to redesign our capacity market in a way that they find acceptable and in a way that is clearly designed to promote a much wider European integrated energy market. Now, that may well make sense for neighbouring states close to each other on the continent—between Belgium, France and Germany. That is their choice and I have no problem with that. But as we are an island nation which used to be able to generate all its own power, I have some difficulties with that. We have many great advantages to generate wind power, wave power, solar power, hydro power and other renewable power, as well as prodigious reserves of other types of energy where the Government wish to gradually reduce or clean their use. There may well be clean ways of burning some of that carbon, with carbon sinks and so forth, which they will need and want to use.

It seems that the proposal today is from another age when we were gradually being linked into a continental system, which, incidentally, is a lot dirtier than our own system and has been really struggling to reduce its dependence on coal and its very weak strategic position of chronic dependence on Russian gas. The last thing we want to do as a country is connect ourselves to an ever bigger possible dependence on Russian gas via power generated on the continent when we have a wish to do our own thing.

It is a pity that the explanatory note does not mention the phrase “state aid” or explain up front that the regulations arise because of a state aid case. It refers to “Commission Decision SA.35980”. Those who follow these things know that “SA” stands for “state aid”, but it is not as clear and transparent as it might be. The average Member of this House probably does not follow those matters in that much detail and is not aware that we are being asked today to pass legislation because of a state aid infringement that goes all the way back in allegation to 2014. We ran that market relatively successfully from 2014 to 2018, it was suspended from 2018 until the end of last year, and now there has obviously been some sort of deal to get it up and running again.

The explanatory note states:

“Part 1 amends the description of a DSR CMU to clarify that a DSR CMU cannot provide capacity primarily by using a storage facility which reduces its import of electricity”.

Is not that interesting? First, we have to translate it. “DSR CMU” is the process that the shadow Minister was telling us about. One of the responses to a capacity market auction is to bid in an offer to buy less power than otherwise would have been bought as another way of contributing to the stability and resilience of the system rather than offering to provide more power for those who want to buy it. It is curious that the proposal is linked to any proposal that might reduce the import of electricity in the way that it does. That adds to my worries about the nature of this EU policy and intervention against the broader background of the EU’s trying to create a comprehensive European energy market with us fully linked into it.

The shadow Minister said that perhaps we were found to have acted illegally. The Commission is clear that that was the case for the period 2014 to 2018. It states that in its view the UK unlawfully implemented the capacity market in breach of article 108.3 of the treaty provisions on state aid. It has now come up with a form of words at the end of its decision that says that if we do those sort of things, it will see its way to believing that we are now compliant.

I do not suppose that the House has the appetite for a serious debate about any of that today and I understand that we are considering a statutory instrument, not our wider energy policy, but we should not let this go without some things being said. First, the regulations are the direct result of the most enormous intervention and intrusion into British energy policy and I hope that from 1 January next year, we will proudly set out our own energy policy and not need that sort of intervention. Secondly, the thrust of the policy was to make us more dependent on a European energy provision system that is neither secure nor particularly green. I strongly repeat that dragging us into more reliance on Russian gas is the last thing we want.

[Craig Mackinlay (South Thanet) (Con)]

My right hon. Friend made a point about EU energy not being particularly green. Does he share my concern that we pat ourselves on the back and say we have burnt no coal or had no electricity derived from coal over 30 or 60 days, yet much interconnector electricity has been manufactured by those dirty forms of energy that we are trying to get out of our market in the UK?

[John Redwood]

That is exactly right. People like to claim that we are importing nuclear energy from France, for example, but we are importing European energy in a pretty unified system, which has surplus capacity because it has not only French nuclear but an awful lot of dirty coal, Russian gas and so forth, which should cause us concern.

Thirdly, can we in future have an honest and clear explanation so that more Members of Parliament might understand what is going on and think it is a matter of some concern? I do not think that most of our colleagues realise that we are talking about resilience—our ability to keep the lights on in difficult conditions that might arise in future. We are talking about the pricing of electricity and these very big strategic issues. And finally, we are talking about whether this country is now going to have its own energy policy, or whether we are hastily legislating so that we can, for the foreseeable future, still be effectively under EU state aid rules, edging ever closer to integration with EU energy policy.

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

The Minister is keen to keep reiterating that the capacity market is integral to the security of supply and that these regulations allow the capacity market to continue to operate, thereby providing that security. That is fine and I agree with that sentiment, but I think that also means that there is a reluctance to look at the wider issues. If we are talking about the security of energy supply and how important the capacity market is, there is an argument that we should look at some of the bigger pictures.

I welcome the fact that the changes result in compliance with state aid and allow the capacity market to function. On another positive, I welcome the move to reduce the minimum capacity threshold in the capacity market from 2 MW to 1 MW. The chief executive of the UK’s REA—the Association for Renewable Energy and Clean Technology—stated that this will

“make it easier for cutting-edge clean technologies to compete.”

That endorsement is clearly very positive. However, will the Minister explain what measures are in place to ensure that we do not get more diesel generators bidding into the capacity market with the lowering of the threshold? What we want is more reliable renewable energy.

Has an assessment been undertaken as to whether grid pinch points could cause any restrictions for these potential newer forms of renewable generation, particularly in Scotland? That is also critical, given that these regulations allow for multi-year contracts, in terms of the demand-side response. We need to make sure that there are no pinch points preventing new renewables coming on-stream.

Paragraph 7.3 of the explanatory memorandum details changes from the regulations with respect to capacity market units not getting paid by simply not charging batteries. In terms of managing demand, does the Minister think that it is acceptable that EDF was recently paid a reported £50 million to halve output from Sizewell B for four months? Surely there is a better way to manage long periods of low demand for energy. Has he assessed how fit for purpose the energy market is for future pandemics or long periods of low demand? It is not just about security of supply at the upper end—we need it at the lower end as well.

On the bigger picture, what is the Minister doing to facilitate the co-location of large-scale storage alongside renewable energy sources such as offshore wind? This and the removal of the capacity cap in contracts for difference options would complement the capacity market. That needs to be reviewed as well. I stress that pumped hydro-storage is a perfect way to manage fluctuations in high and low demand and thereby provide security of supply. When are the Government going to assist in a route to market for the big projects that are in the pipeline in Scotland? Pumped hydro-storage is much more effective than nuclear and it is much more cost-effective, so we need to forget the white elephant of nuclear and in particular the desire to get small modular reactors up and running.

I turn back to the demand-side response, which, as outlined, is an accepted use within the capacity market, and there are some changes in the regulations in this regard. What assessment has the Minister made in the reduction of overall energy demand if the Government set and implemented a proper energy efficiency programme to ensure that all properties achieve energy performance rating C by 2030? Does he accept the research findings of the UK’s energy research institute, which said that this could reduce energy demand by 25%? That 25% reduction in demand is the equivalent of six Hinkley Point C stations, so why, again, is there the obsession with nuclear? A reduction in demand would make a massive difference and minimise the need for the over-reliance on the capacity market to keep the security of supply.

On energy efficiency and reducing demand overall, the Committee on Climate Change stated that the UK Government should match the ambitions of Scotland, and the Business, Energy and Industrial Strategy Committee reports that as well, so energy efficiency is critical to lower demand.

[John Redwood]

I was interested by what the hon. Gentleman was saying about pumped-storage schemes, which are crucial to flexibility. I was interested that he also thinks they can be very good value. Has he got some in mind? How are the Government responding to his idea of pumped storage?

[Alan Brown]

There is an extension at Cruachan, and I forget the name of the other one up in Scotland that is in the pipeline. SSE is bringing them forward. The difficulty is with getting an agreement on a pricing mechanism, a bit like the stumbling block that has happened with tidal lagoons and talk about a regulated asset base for nuclear, even though I am against nuclear. It needs a review of that kind and a long-term support mechanism for supply. Clearly pumped-storage hydro provides security of supply over a long period of time, rather than, say, 15 years for renewables. I am asking the Government to look at finding that support mechanism.

[John Redwood]

Pumped storage is also very important for the short term, because, as the hon. Gentleman knows, it can be switched on very quickly when there is a short-term peaking issue, as with the Dinorwig scheme. It has a lot to recommend it in that respect.

[Alan Brown]

I think we are in agreement across the Chamber for once. Obviously the pumped aspect can use electricity when there is low demand, so electricity can be taken at a cheaper price and used to pump water up to fill the hydro, and then the hydro can be used when there is peak demand, so it works both sides of the equation.

Paragraph 8.1 of the explanatory memorandum references the European Union, but then is silent on the issue of leaving the EU, because it states:

“This instrument does not relate to withdrawal from the European Union”.

However, I would suggest that the operation of the capacity market does relate to withdrawal from Europe. Paragraph 7.1 confirms that capacity is also provided by “interconnection with other countries.” The right hon. Member for Wokingham (John Redwood) has given his view on that interconnection. The regulations do still relate to leaving the EU. Will the Minister tell us what the current position is? Once again, it looks as though there will be a possible no-deal crash-out on 31 December. How will the UK participate in the single energy market?

Today, I checked the UK Government guidance on trade and energy from 1 January 2021 onwards. It was last updated on 6 November 2019, but basically it puts all the onus on the energy operators. The Government advise:

“Although it is a matter for individual businesses to work out what steps they need to take, the government anticipates these may include…interconnector owners/operators will need to continue to work with their stakeholders and regulators to prepare alternative trading arrangements and updated rules…interconnector owners/operators will need to continue to engage with the relevant EU national regulators to understand their processes for the potential reassessment of their Transmission System Operator certifications.”

Given how important energy is for us and that interconnectors are an agreed integral part of the capacity market, why is the latest UK Government guidance still effectively saying that traders are left to their own devices looking ahead to this critical deadline of 31 December 31/1 January? What discussions has the Minister had with energy suppliers? Where are we on a free trade agreement for energy, looking forward?

It seems to me that the regulations are yet again part of a drip-feed approach to energy policy. This has been touched on by the shadow Minister, and the Minister alluded to the White Paper coming forward, but we need definitive timescales for when we are going to see the White Paper. It would be good to get a better feel for what the White Paper is going to be. Given that year delay, it would be nice to at least have a forewarning or an understanding of what is going to be in it.

We know that the economy has taken a massive hit because of coronavirus. Despite the title of the regulations, they only skim the effects of coronavirus. It has been rumoured that the White Paper will cover that, so it would be good if the Minister could say, “The White Paper will cover the effects of coronavirus and how we are going to re-stimulate the economy.” Hopefully, that will be with a green industrial revolution. I suggest that will need to include more onshore wind, more offshore wind and greater support for floating offshore. I have mentioned pumped hydro storage, hydrogen production and carbon capture, which are all vital strategies that we need the Government to get on with. I hope that we hear a bit about that and that the Minister can answer some of the questions I have raised. There is effectively nothing wrong with what has been brought forward, but it is just not enough; we want to see more.

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[Kwasi Kwarteng]

Forgive me; the hon. Gentleman has raised some very specific points about our future energy policy, and I wish and hope that we can have a wider discussion on those specific points.

If I may reach a conclusion, these regulations are absolutely necessary to ensure the continued security of electricity supply. All our stakeholders in the market—the generators—say they want some security. The suspension of the market as a result of the judicial decision last year was very damaging and created a great deal of uncertainty. The SI deals with a lot of that uncertainty and is welcomed not only, I understand, by the hon. Member for Southampton, Test but across the sector.

[John Redwood]

rose—

[Kwasi Kwarteng]

I give way one more time.

[John Redwood]

But will the Minister confirm that we can legislate now for 1 January next year and have the system we want? This is only a very temporary thing if the Government come up with a sensible policy.

[Kwasi Kwarteng]

It is of its nature temporary. As my right hon. Friend will know from his long experience in Parliament, the last time we had an energy Bill was in 2013. The Government may well wish to introduce another energy Bill but, whether that is the case or not, there will be ample opportunity after 1 January 2021 to debate the future of our energy system. All the issues raised with regard to flexibility will be relevant, and I am sure that he and others will engage fully and enthusiastically in that debate.

The regulations are necessary to ensure continued security of electricity supply. They will also ensure, obviously, that the capacity market continues to comply with its state aid approval, which was granted last October but does not necessarily bind us forever and a day. The regulations also provide support for capacity providers during the coronavirus epidemic.

On those two grounds of state aid and dealing with the coronavirus pandemic, I commend the draft regulations to the House.

Question put and agreed to.

Resolved,

That the draft Electricity Capacity (Amendment etc.) (Coronavirus) Regulations, which were laid before this House on 20 May, be approved.