Energy Bill

Lord Berkeley Excerpts

Tuesday 18th June 2013 Lords Chamber

[Lord Berkeley]

My Lords, along with many other noble Lords I welcome this Bill and think it needs support, but there does appear to be quite a lot wrong with it. It is going to be difficult to scrutinise. It seems that every clause refers to regulations yet to be identified. I have checked the Bill and its schedules, and the word “regulations” appears 403 times. I do not know whether that is a record, but it is not going to be easy to scrutinise this legislation if it has 403 regulations. However, it demonstrates the need for us to be given a lot more detail if we are going to do our job properly. My noble friend Lady Worthington asked for some details before we get to Committee, but it would be useful if the Minister could tell us when we are going to get information about the regulations.

I am going to concentrate my remarks on the industry structure, but before I do so, it is important to support my noble friend Lord Judd, the right reverend Prelate the Bishop of Hereford, and many others who have emphasised the need for greater support and encouragement for reducing energy consumption. We seem to have incentives to meet demand with supply; I think that is wrong. We should have incentives to reduce demand. It is the same with water. Why are the water companies not installing meters to reduce consumption and plugging the leaks? London is one of the worst offenders but, of course, they make more money that way. We really need to change our policies because there are good environmental reasons for reducing the supply of both water and electricity, and thus reduce demand.

I am both interested in and worried about the negotiations with EDF on nuclear power stations because we have a single supplier looking for some kind of firm contract for 20 or 30 years. I wonder whether these are what one might call balanced commercial negotiations: a single supplier and a single customer in the Government. The Government are up against probably the best international negotiators in the world. I compare that with what went wrong a year or so ago with the west coast main line negotiations on the franchise when Virgin exposed a number of serious mistakes in the Government’s handling of them. It is probably true to say that one of the causes was that soon after the general election, the then Secretary of State announced with glee that 30% of the civil servants were to be sacked and that they were not allowed to take any external advice, particularly legal advice. Therefore, it was a contract—rather larger than the contract to build one of our aircraft carriers, which I think is taking place at the moment—between a civil service that had lost a large number of its best staff and was not allowed to take external advice, and an international company that probably has some of the best lawyers in the world. I hope that that does not happen this time, but I do not have much confidence that it will not. If we do not get it right, the customers are, quite frankly, going to be screwed for the next five, 10 or 30 years.

I turn now to biomass. I have been looking into this quite a lot because it seems to be the short-term solution to the energy problem which the Government are proposing, and certainly before the nuclear power station gets up and running in 10 years’ time—if we get it. As noble Lords will know, biomass requires a large investment. For Drax and Eggborough, two of the power stations doing it, it has certainly been a big investment: there is the plant, the special handling facilities and the trains—I was involved as chairman of the Rail Freight Group. One possibility is to import biomass from north America into Milford Haven, which has some of the deepest water in the UK, and that will need 42 trains a day. That is a big investment, plus all the handling equipment at both ends and, of course, the ships.

I understand that Drax and Eggborough together will produce somewhere between 8% and 10% of our capacity. If the agreement with the Government on the selling price for electricity which is contained in this Bill does not go ahead, the investment will not go ahead. I also understand that this biomass negotiation cannot be completed until the nuclear one is completed. What is going to happen next winter and the one after that? According to Ofgem, last winter we had 15% spare capacity over demand, but apparently this coming winter it is going to go down to 3%. If Drax and Eggborough do not go ahead, I think we will need some candles; it is going to be quite serious. I hope that the Minister can tell me what the timescale is for the nuclear negotiations and for any relating to biomass because I think we ought to know. These companies are not going to hang on waiting for a decision for ever. Whether it is in this Bill or elsewhere I do not know, but it needs to be done soon.

The real problem is that the market structure that we seem to have ended up with is wrong. The big six generators also have retail ability. The Government policy is to deliver somewhere between 35% and 50% of generating capacity by independent renewals, which entrenches the dependency of the independent renewal energy generators on the large vertically-integrated utilities through long-term power purchase contracts. That is the big six. My understanding is that the problem for the independent retailers is that the big six will buy from the independent generators only if they cannot supply themselves. Therefore, the big six retailers always buy from their own generators as long as they have the capacity; otherwise, they buy from the independents. Apparently it has very little to do with prices. Perhaps the Minister can put me right on this, but I am not sure how the independent generators have the comfort of an open market, which they need to attract investment.

The problem is vertical integration, which means that the generators are also able to retail. In my book, it promotes monopolies, higher costs and poor services. It happens on the railways, which I follow a lot. On the railways, the Government’s policy, which I fully support, is a total separation of the train operators and the infrastructure manager. You cannot have fair competition on the railways if the train operator also runs the infrastructure, and the same applies to electricity. Vertical integration is wrong. It means that the market does not work properly.

I have information that similar things have happened in Germany, where the market does not really work. It has four big suppliers and there is not much competition at the consumer end, although it depends on which part of Germany you live in. However, the big four do very nicely and prices are high. It is interesting that the German Government are doing their best to make sure that that the vertical integration model still applies to the railways across Europe, so they clearly know something, but I hope we do not have to continue with it in the UK. There is a serious risk to investment by the independents, as the noble Lord, Lord Teverson, said, and I question what Ofgem is doing about it. I thought Ofgem had a duty to protect consumer interests but, as it stands, this seems to be a Bill to allow the big six to print money, which I am sure they will love. I do not see much competition. I see higher prices than there would need to be if there was a functioning market.

In the course of scrutinising the Bill, I hope that we will discuss how to break the dependency of the independent generators on the large, vertically-integrated utilities for long-term contracts. That would send a clear price signal to the market that would encourage as many new entrants as possible to participate. It would enable them to sell their power in an open market rather than coming second to the big six once they have got rid of their own electricity at whatever price. Otherwise, the independents will not be able to invest and we will be looking at such a reduction in supply that I suggest we all go out and buy candles for next winter.