Energy Bill

Lord Broers Excerpts

Monday 28th October 2013 Lords Chamber

[Lord Jenkin of Roding]

My Lords, this amendment stands in my name and those of my noble friends whom I shall mention in a moment.

The House will realise that this is an exceedingly complicated Bill. Anyone coming to it for the first time would recognise that. At the heart of it are the Government’s proposals for electricity market reform. The objectives were mentioned in the previous major debate. They are security of supply—the lights must not go out—support for low-carbon generation and affordable prices for consumers. From the outset, Ministers have been determined to say that to achieve these objectives, tougher competition is going to have to come. It is true that the regulator, Ofgem, has had some responsibility for this, but the general perception has been that it has not been as effective as it might have been.

My right honourable friend the Secretary of State, Ed Davey, mentioned a problem on “Newsnight” the other day. He said, “We need more competition … We think the big six have been a real problem”. I have the figures. The big six have no less than 92% of the supply to consumers. The remaining small companies have a mere 8%. Generation is nearly as bad. It is an oligopoly. That is what we are faced with. I do not believe that existing arrangements for dealing with competition are strong enough, so there was a very positive welcome when my right honourable friend the Prime Minister said in the Commons the other day:

“So I can tell the House today that we will be having a proper competition test carried out over the next year to get to the bottom of whether this market can be more competitive. I want more companies, I want better regulation”.—[Official Report, Commons, 23/10/13; col. 293.]

And so say all of us. That is obviously necessary. We await with interest what my right honourable friend the Secretary of State is going to say in his statement later this week, or perhaps even tomorrow. What is this review going to involve? It is already clear that it is likely to take some time and involve not only Ofgem, the regulator, but the Office of Fair Trading and the Competition and Markets Authority. I will return to this towards the end of my remarks.

Three amendments in this group are tabled in the names of my noble friend Lord Roper, the noble Lords, Lord Berkeley and Lord Cameron of Dillington—a very cross-party group—and me. Our purpose is to make the determination to have tougher competition explicit in the legislation and that it should apply, where appropriate—it certainly is to the bit of the Bill I shall be coming to—to the Minister as well as to the regulator.

The part of the Bill with which I am chiefly concerned is Chapter 3 of Part 2, which introduces the capacity market. I briefly describe that as a managed-auction system to give clear incentives to generators to invest in new capacity. This can mean keeping open plant that might otherwise have been closed, bringing into production plants that have been mothballed—there is a good deal of that at the moment—or building new plant. It can also include measures to reduce demand.

The capacity market offers a real opportunity for Parliament to give the industry the opportunity to get more competition. That is what the Prime Minister was talking about when he said he wanted new companies—he was absolutely right—new entrants and smaller independent generators. They struggle to compete with the big six. Unlike the big six, which have strong balance sheets, smaller companies have to raise funds from the market for their investment. Unless they can see a reasonable prospect of a decent profit, they will not be able to do so. Investors will not come forward. That is the purpose of the capacity market; it is to give them the incentive to do that.

One would have thought that if everyone really wants more competition, it would be in the Bill. Yes, it is; there is quite a lot in the Bill. When you look at other clauses in the Bill—in particular Clause 47, dealing with power purchase schemes, Clause 127, dealing with the strategy and policy statement and Clause 132 on the modification of supply licences—they are specifically for the Secretary of State, and in all that, he has to promote competition. But when the Bill comes to the capacity mechanism, for some reason—and I have to confess that I had some difficulty understanding what it is—the competition duty does not apply to his role as the official with responsibility for the capacity market. That is the only instance in the Bill where there is no obligation on a Minister to be responsible for promoting competition. Yet the Secretary of State is in overall charge of the capacity market. Why? What is the difference?

The Government have done very well trying to spell out to the industry the complex details of the structure of electricity market reform: the contracts for difference, the capacity market and all the other features. They are not all quite there yet, but they are nearly there. The object of the exercise is quite clearly to create conditions where investors, particularly smaller and independent investors, can raise money in order to invest in the additional capacity which we certainly need and which will help consumers because it will bring more competition. It is not quite true that they have yet succeeded in doing that. The terms set out for the operation of the community charge—I perhaps do not need to go into detail—have been described to the Minister, who has been very good and met the people concerned, but they are not yet sufficient to enable them to do that. They will have the objective of doing it, but nothing will be achieved. Therefore, there have to be changes.

I have heard it said that the changes will have to be for the regulations, but as the House well knows, if regulations come before the House, they cannot be amended. They can be either rejected or accepted. That is not very satisfactory. Therefore, we must have clear authority imposed upon the Secretary of State to run the regulations in such a way that they generate the competition they want. That will require some changes in what has already been distributed and made clear to the industry. Ministers must be under a clear statutory duty when exercising their responsibilities for the capacity market to do so positively to promote competition. That is the simple purpose of Amendment 4, which adds to Clause 5 a sixth duty to promote effective competition in the several activities set out in the amendment. The other two amendments we have tabled, Amendments 42 and 43, specifically make this duty effective for the purposes of the capacity market set out in Chapter 3 to make it explicit that the duty for promoting competition covers Ministers as well as the regulator, Ofgem. Taken together, these amendments would enable potential investors to insist that the regulations and rules are drafted so they really will enable independent generators and new entrants to raise the funds they will need to invest in the new capacity in competition with the big six. Last week, the Prime Minister said he wanted new companies. This is the way to get them.

I referred a moment ago to the proposed high-level review. The first auction for the capacity market happens next year. For that to go ahead, the regulations have to have been finalised and approved by Parliament, and must be in force. The review we have heard about will be over the next year and it will be too late. I hope that when my noble friend replies to this debate, she will not take refuge in the review as a substitute for what we are asking here; it is not. I suspect that my noble friend, who is very bright on these things, has fully taken that on board.

We need these amendments now. I ask my noble friend to accept the amendments as they are tabled, or undertake to bring forward her own amendments, which have the same impact, when we reach Third Reading. I beg to move.

[Lord Broers (CB)]

My Lords, I wish to speak in support of this amendment. I recognise that the noble Lord, Lord Jenkin, is applying it mainly to the capacity issue. I wish to address a very specific, simple point with respect to the operation of contracts for difference. In order to attract investment, this Bill allows—almost encourages—electricity suppliers to pass on to consumers the difference between the strike price and the reference price should the strike price exceed the reference price. However, there is nothing in the Bill to ensure that the suppliers return money to consumers should the reference price exceed the strike price. This might well be the case should the price of gas continue to rise, as several noble Lords, including my noble friend Lord Oxburgh, have suggested it may.

The Minister kindly discussed this with me and said it was the Government’s position that intervention was unnecessary as the market should ensure that suppliers reduce their charges in order to remain competitive. I am not fully convinced of this and favour a specific requirement that suppliers should return what might be described as a windfall profit to consumers if the reference price exceeds the strike price. The noble Lord’s amendment at least requires the Secretary of State to have regard to the desirability of promoting effective competition wherever appropriate. In this case, it would surely be appropriate. How else can we protect the consumer?

[Lord Deben]

My Lords, I very much like the thrust of this amendment and I hope the Government will take it seriously. I would like it to have included the issue of how one generates more competition. Interestingly, at least half of Germany’s renewable energy is generated by municipalities, co-operatives and individuals. That means that there is very widespread support for renewables, leading to some real competition. That is why the big boys are increasingly angry about renewables—they are bringing the price down and they are serious competition.

My concern is that it is difficult to see, as the Government have admitted, the sort of competition among the six that we would expect. I notice that the Opposition are now seeking to make significant changes on this, but one must admit some of the things that have gone wrong are the very changes they made last time. I think there is a certain cross-party understanding that things are not as they ought to be. The Prime Minister, I understand, has said he wants the six to become 60, and I notice that the Minister for Energy wants 600. That is certainly much closer to what I would like because this is a way in which the public as a whole could have a greater say in the way electricity is produced and would be more supportive of a much more competitive market.