Net Zero (Economic Affairs Committee Report)

Lord Callanan Excerpts

Monday 16th October 2023 Lords Chamber

[Lord Teverson (LD)]

My Lords, I also declare my interest: it is in a company called Aldustria Ltd, which is into energy storage. I absolutely agree with the noble Lord, Lord Frost, that there are many issues around energy storage, particularly in the long term, on which I know the Government have done a number of consultations.

I congratulate my noble friend Lady Kramer on her introduction to this report. She is absolutely right: it has taken far too long to get it to the Floor of the House. As the noble Viscount, Lord Chandos, said, there have been three Prime Ministers since the report came out. The only thing that I would say is that it has actually managed to get to the end of its process slightly quicker than the Government’s Energy Bill, which started in the same month that this report was published but has still to be completed. I hope that that will happen before the end of this month. That shows the urgency that the Government wanted to put into their energy strategy but did not, particularly on electricity and carbon capture and storage.

I shall come back on energy costs for a minute, in response to the noble Lord, Lord Frost. The noble Viscount, Lord Chandos, is absolutely right about 2050. It is not about reaching net zero that year—you have to get it all the way through. I do not think that methane was mentioned in the report—I may be wrong—but that is one area where there may be some quicker wins.

I absolutely agree with the noble Lord, Lord Turnbull, about Rough storage, although I think that only a small amount of that facility is contracted to the Government. Centrica is hanging on to the rest of it, and there is no guarantee that it will be there long term. That is a real vulnerability.

As for new gas and oil and, particularly, coal facilities, I do not see any UK Government banning exports of those products. I do not see that ever happening, which is why I do not think that there is any effect on our energy security or, indeed, on global pricing for those new openings.

I shall come back on demand reduction in a minute in response to the noble Baroness, Lady Bennett, as it is an important area. But I just say to the noble Baroness, Lady Noakes, that I came up as a traditional economist, and it always seemed to me that it was really important to cost the idea of externalities into actual pricing systems. With carbon emissions we have huge externalities that are not priced into market competition—and that is why there have to be differences.

I also say to the noble Baroness that, of course, there is a huge kickback at the moment to the Government on contracts for difference through the Low Carbon Contracts Company, whereby at the moment actual market prices are hugely higher than strike prices. I would be interested to understand from the Minister—

[The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)]

It is not a kickback to the Government—it is a kickback to the consumer.

[Lord Teverson (LD)]

Yes, exactly. The Minister corrects me. That is even more to the point. I think it has got to several billion pounds in terms of coming back into that sector working the other way, which probably exceeds now the green costs that there were. That is quite an optimistic look at that.

It seems to me that one real problem in this area—because the world has moved on since last July—is with those recent announcements that my noble friend went through from the Prime Minister. They probably did not have as big an effect as some people said, but they did drive a horse and carriage through our international reputation, as indeed did the coal decision in Cumbria. Our being seen as a global leader in this area, which the report was keen to emphasise, has been trashed to a large degree, and has been seen as such by allies such as America and the European Union.

I want to come back to those announcements, one of which was to abolish the Energy Efficiency Taskforce. The Minister was chair of that, and I understand that four meetings took place. Whether you look at security or at cost, the most secure energy is the energy that you do not need. The energy-efficiency side is important in that area, as well as cost. I would be interested to understand from the Minister why he was made redundant by the abolition of that committee. The UK should be a real leader, and really move in this area. The report asks for an energy demand reduction strategy, and that is really called for. It is not just around buildings, as the Government’s response said that it was; it is around a much broader area, including appliances and other interests.

One thing that has been emphasised during this debate is private investment, which it is clear is absolutely essential to deliver net zero. I am not pessimistic about this. Most private investment takes place to reduce costs, not to increase them. Companies do not invest to increase prices; they invest to reduce prices, and that is what we should aim for with the net-zero strategy.

One problem with the Prime Minister’s announcement, and all the other issues that have happened, is that we have a wobble with investor confidence—absolutely we do. Those messages that go out to industry and the investment sector say that we are no longer reliable on our government policy or on the foundation of confidence going forward. That has an even bigger effect when we have the Inflation Reduction Act in the United States and the EU green deal industrial plan on the other side of the channel. I would be interested to understand from the Minister when the Government will really respond to that huge financial challenge, which really prejudices how we can deliver net zero through the private sector in future.

I will make one or two further points, as I am sure the House will want to move on. The noble Baroness mentioned the UK Emissions Trading Scheme. I have been very hopeful—not because I am pro-European but because of liquidity and various other areas—that there should be a tie-up between the UK Emissions Trading Scheme and the EU equivalent. I understood that that was a government objective, but now we have a huge divergence in prices. The UK ETS a year ago was about £100 per carbon tonne; it is now down below £40. In the EU, it was around €100 per tonne a year ago but is now down to about €80. A huge difference has opened up. I would be interested to hear the Minister’s reaction on how the carbon border adjustment mechanism will affect that, as Europe starts to develop it over the next few years. That price signal is so important in terms of taxation and disappearing incentives for investment in our economy.

I am glad to see the noble Lord, Lord West, is here, because one of the key issues in energy security at the moment is defence, which has not been mentioned in this debate. In Finland, we have seen potential interference with the explosion of one of its energy pipelines and we have seen Nord Stream 1 and 2 destroyed. We know from our intelligence that the Russian Federation is keeping a very close eye on our undersea energy and communication networks. The Minister may not have an answer to this, but it is one of our major concerns in energy security as we move forward and have more interconnectors offshore. I am sure he agrees that this is a major thing we must look at.

Finally, coming back to consumers, the energy companies and Ofgem estimate that, as we reach the end of summer and enter winter and higher bills, the outstanding energy bills from consumers will be about £2.6 billion. Are the Government happy with that? Do they think it is sustainable for low-income families? Do they intend to do anything about it? This is probably the biggest challenge of all. Although the noble Lord, Lord Frost, talked about the importance of gas, which will be important for many years, the gas price has driven inflation and the high costs to families of keeping warm. It has led to inflation, which has led to the failure of those offshore wind projects. It is important that we restart that, but the problem is not the technology and the price coming down in real terms; the problem is inflation. What will happen to families over this winter?

[Lord Lennie (Lab)]

My Lords, I thank the noble Baroness, Lady Kramer, and, through her, the noble Lord, Lord Bridges, and other members of the Economic Affairs Committee for producing this weighty report. July 2022 was also when the Government first announced their intention to legislate for the country’s future energy needs in the Energy Bill. The Energy Bill has now expanded to some 400-plus pages, has still not become an Act of Parliament and is due for further consideration by the other place later this week.

[Lord Callanan (Con)]

It would not if the Government acted as Parliament recommended.

[Lord Lennie (Lab)]

There is a process to go through. The amendments we made were to the benefit of the Bill rather than to take away from it.

There is some crossover between the Economic Affairs Committee report and the legislation but, sadly, nowhere near enough. The starting point of this report was back in February 2022, when the Economic Affairs Committee launched an inquiry into how the Government could support investment in UK energy to achieve greater security of supply, improve affordability and meet the UK’s net-zero targets.

The committee considered how the Government planned to achieve the following two separate but related objectives. First was the commitment in law to achieve net zero by 2050 alongside the target to decarbonise the system by 2035. The committee considered how this target might be achieved while ensuring the UK’s energy supply was “affordable and reliable”. It argued that encouraging private sector investment was the key to achieving net zero. However, the committee said there was

“a gap between the Government’s ambitions and the practical policy that is needed to provide confidence and clear market signals to investors”.

The second was the Government’s plans to mitigate the effect of rising energy prices exacerbated by Russia’s appalling invasion of Ukraine in 2022.

The report produced by the committee recommended that the Government should take the following measures over the next three to five years—now two to four years. First, they should publish a net-zero delivery plan which would detail how the UK could achieve net zero in an orderly way. Secondly, they should publish an energy demand reduction strategy which would include measures to increase incentives for investment in energy efficiency measures for buildings and to support the development of resilient supply chains and workforce skills—as the noble Lord, Lord Teverson, pointed out, this has not happened. Thirdly, they should increase the deployment of renewable energy sources to reduce the UK’s dependence on gas markets, including onshore wind, which it describes as

“one of the cheapest and fastest ways to increase renewable energy generation”,

despite the reservations of the noble Lord, Lord Frost. Fourthly, they should maintain existing energy generation in the immediate future while extending the life of nuclear power stations over coal power stations, as this would result in lower carbon emissions. Finally, they should seek to reach agreement with other European countries to manage energy supply emergencies. Have any of these measures been taken on board?

The committee also recommended that the Government should take action to increase investor confidence to make more private capital available to support the transition to net zero, by setting out a cost analysis of their targets to achieve 24 gigawatts of nuclear capacity. As the noble Baroness, Lady Kramer, pointed out, this figure is more than double the capacity assumed by the Climate Change Committee. Can the Minister explain the variance between the two? It also recommended they provide more detail on the capacity, timeframes and expected costs of increasing long-duration energy storage, outline the market structures and mechanisms that would be used to support increased hydrogen production and support carbon capture and storage by fulfilling their commitment to develop four low-carbon industrial clusters. They should also design “market models” to provide information to investors on the types of technology required, to give potential investors greater confidence in the long-term viability of carbon capture and storage. Is there any sign of this happening?

Since the report was published, a number of government changes have affected energy policy. The Energy Bill was introduced in 2022 under Prime Minister Boris Johnson. It included measures intended to leverage investment in clean technologies, protect customers and maintain the safety, security and resilience of the energy system. It reached Committee on 7 September 2022 and was thereafter paused by the new Prime Minister, Liz Truss. Following Liz Truss’s resignation, in December 2022 Committee started again and, under Prime Minister Rishi Sunak, the House of Commons is now scheduled to consider Lords amendments on 18 October. In February 2023, BEIS was replaced, with responsibility for energy policy transferred to the Department for Energy Security and Net Zero. Grant Shapps served as Secretary of State for Energy from February to 31 August; currently, the Secretary of State is Claire Coutinho, but for how long is anyone’s guess.

Chris Skidmore published his review Mission Zero: Independent Review of Net Zero on 13 January 2023. It concluded that the UK was not on track to meet all its targets towards achieving net zero and stated that the Government needed to do more to make the most of the economic opportunities arising from the transition to net zero. The Government have published a series of policy updates on their plans. In March 2023, Powering Up Britain was Secretary of State Grant Shapps’s launch of the new Government’s energy strategy. In the same month, Mobilising Green Investment: 2023 Green Finance Strategy updated the previous green strategy. In this, the Government committed to commissioning an

“industry-led … review into how the UK can enhance our position and become the best place in the world for raising transition capital”.

Has it happened?

On 20 September 2023, Rishi Sunak, still the PM, gave a speech in which he announced some changes to government policy on achieving net zero. While working towards meeting their overall 2050 net-zero target, he said that policies including the ending of the sale of petrol and diesel cars and vans, plus the sale of new gas boilers, would be pushed back by five years to 2035. How does this help achieve net zero? Its effect has been to deter investment by undermining the commitment and consistency required by business, as the noble Lord, Lord Teverson, and the noble Baroness, Lady Kramer, said.

This is the framework in which the Economic Affairs Committee report is being considered. Of its 38 recommendations, only a small handful have been taken forward. However, the Government’s initiatives to secure private capital by certainty and leadership are woefully inadequate. In the meantime, more changes have been confirmed. Alok Sharma, chair of COP 26, is standing down. Chris Skidmore is not going to contest his seat in the next general election. The offshore wind auction attracted no bids because the strike price was wrong.

Tony Blair once said:

“I’ve not got a reverse gear”.


It is a pity the same cannot be said of Rishi Sunak. The report rightly states that the Government cannot be expected to accurately predict what is going to happen in the future. Surely, though, we can expect more than what is currently on offer.

Labour would establish Great British Energy. It would invest in order that Britain can lead the world in carbon-free energy and technologies. Labour will ensure that we have the grid we need to rewire our country. Our public investment will stimulate private investment to bring prosperity to every part of Britain.

[Lord Callanan (Con)]

First, I add my thanks to the noble Baroness, Lady Kramer, for securing this debate, as well as thanking noble Lords for their insightful contributions.

It was a bit rich for the noble Lord, Lord Lennie, to criticise us for not getting the Energy Bill on to the statute book. The reason we have not done that is because the Opposition—despite saying that they support it—have supported largely irrelevant and superfluous amendments to the Bill. If the noble Lord is so keen to get it on to the statute book, he has the opportunity to prove it next week when it will come back to this House. I hope the Opposition will agree with the passage of the Bill, rather than just saying that they support it. We will then be able to get it on to the statute book and proceed to the secondary legislation, which will result from the primary powers, on things such as hydrogen, CCUS, et cetera.

[Lord Lennie (Lab)]

I think it is a bit rich for the Minister to say that the Opposition parties are responsible for the delay to the Energy Bill. It was paused by the Government for three or four months, when they went absolutely silent. We were knocking on the door asking what was happening with the Energy Bill, but nothing was forthcoming.

--- Later in debate ---

[Lord Callanan (Con)]

We would have had the Energy Bill on the statute book by now if it was not for the amendments the Opposition had supported. My point remains.

As the Prime Minister made clear in his recent speech, it is extremely important that we chart the fairest credible path to net zero, bringing people with us through democratic debate. As several noble Lords have mentioned, we have shifted to less drastic targets on phasing out fossil fuel cars and boilers because of the potential for sharp upfront costs to families already struggling with the cost of living.

The 2035 target for decarbonising the power sector, however, remains in place. Why is that? It is not just because this a critical bridge to net zero by 2050—which, I remind the House, we have a legal obligation to deliver —but, in response to my noble friend Lady Noakes, because wind and solar are the cheapest forms of electricity, which is also the reason why I, as a fiscal conservative, am in favour of them.

Against that, and as the noble Lord, Lord Turnbull, noted, international fossil fuel markets are volatile as they are driven by geopolitics, and our own reserves are now declining. Yes, the price of offshore wind has now risen from a historic low, but it remains well below that of gas, nuclear or gas with CCUS. In response to my noble friend Lady Noakes, we are going hard for clean electricity because it is not in tension with cheap electricity; nor is there tension in such electricity having the security of being produced domestically. It is, if you like, electricity with a UK flag plastered upon it.

The UK energy system in 2035 and beyond is going to be a mixture of tried and trusted technology and new innovation. We have connected approximately 40 giga- watts of renewable electricity—primarily wind and solar—to the grid since 2010. The point made by the noble Lord, Lord Teverson, is completely valid: with the high price of electricity, driven primarily by gas, the vast majority of those contracts for difference are now paying back into the system and subsidising consumer bills. It is not the case that the amount of renewables we have on the grid is contributing to the high price. It is driven entirely by international gas prices, and the problem is that we do not have enough of it connected to the grid. If we had more, prices would be lower.

On the nuclear side, Hinkley Point C and Sizewell C are under development, and we have set up Great British Nuclear, whose first objective is to support small modular reactor development, which my noble friend Lord Howell will, no doubt, be pleased to hear.

My noble friend Lord Frost raised an issue about wind and solar. Wind and solar are clean, cheap and homegrown. Of course, my noble friend is right to say that they currently rely on unabated gas as back-up. UK gas usage has declined in the past decade as wind power has proportionately increased. Of course, it is true to say that we need a portfolio of technologies to replace unabated gas, including power CCUS; hydrogen; short- and long-duration storage; renewables, such as tidal and geothermal; interconnection; energy efficiency; and demand side flexibility. We need all these technologies. My noble friend Lord Frost and the noble Lord, Lord Teverson, will be pleased to hear that there is currently nearly 38 gigawatts of electricity storage in its various forms in the planning pipeline.

Resilience comes from having diversified sources of supply and strong relationships with trusted partners and allies. We will work closely with the EU and bilaterally on both short- and long-term energy security. As the noble Viscount, Lord Chandos, will be pleased to hear, I was delighted recently to launch a UK-German hydrogen partnership with German State Secretary Nimmermann, where we are working on a broader energy and climate partnership.

Of course, investing in energy security is about demand as well as supply. We have made great progress in upgrading what is probably the oldest housing stock in the world. Despite what the noble Baroness, Lady Bennett, would have us believe, residential emissions in this country have fallen by something like 31% since 2010; that is the second biggest improvement in the G20.

The noble Lord, Lord Teverson, was concerned about the decision to discontinue the Energy Efficiency Taskforce. The body was formed very much around Dame Alison Rose as my co-chairman and, without her, we believed it was better to streamline its function into existing work. We remain extremely grateful to the members of the task force, who produced some excellent work and recommendations; I continue to meet them regularly and we will continue to listen to their wise and trusted advice on the importance of energy efficiency.

The noble Lord, Lord Lennie, mentioned demand management. I can inform the noble Lord that the National Grid is planning to run its demand flexibility service again this winter—subject to Ofgem approval—as it proved so successful last winter.

The noble Lord, Lord Teverson, asked about the UK ETS, and that remains a cornerstone of our climate policy. It remains the fact, though, that the price is set as a market mechanism. The UK ETS is a separate market to the EU ETS so it is possible, as we have seen, that prices will fluctuate and differ, although both do have similar levels of ambition. The noble Lord will have noted that in the summer, we decreased the cap and aligned it with our net-zero ambitions. This means that the number of permits we issue in the future will continue to decline in line with our net-zero ambitions.

A number of noble Lords raised the important issue of nuclear, and our current nuclear fleet is of course ageing. While the Government have no direct involvement in the decision to expand lifespans, we are pleased that extensions are happening where the technology is performing above original expectations, and I am pleased that the noble Baroness, Lady Kramer, is in agreement on this point. On new build, we are continuing towards taking Sizewell C to final investment decision this Parliament.

The noble Baroness, Lady Kramer, did however note her personal opposition to Rosebank, as did a number of other noble Lords. Notwithstanding the shift towards renewables, it is important to remember the total UK energy use in 2022 was still 77% oil and gas. Following extensive scrutiny by regulators, including environmental impact assessments and a public consultation, we have granted new licences, including for Rosebank. As the noble Lord, Lord Turnbull, alluded to, domestically produced gas is around four times cleaner than imported liquid natural gas. Oil and gas production also provides around £17 billion to the UK economy each year and supports around 200,000 jobs.

Let me address directly the point made by the noble Baroness, Lady Bennett. New licences will merely slow the already inbuilt decline in UK production levels, rather than see them increase above current levels. Even with continued exploration and development, oil and gas production is expected to decline by 7% per year. This decline is faster than the average global decline needed to align with the UN 1.5 degrees centigrade pathway. Even with new licences, the amount of oil and gas produced in the UK sector will continue to go down as these fields come to their natural end.

I will deal with the point on the AR5 auction round. It was successful in broadening contracts to both tidal and geothermal projects, but, of course, we were disappointed by the lack of offshore wind bids. That was because developers were experiencing unprecedented economic conditions. However, as we have now moved to an annual process, in less than a year AR6 will open, and we will of course incorporate the lessons learned and ensure that AR6 reflects the most recent evidence.

As stated, we remain committed to the challenging but deliverable target of decarbonising the power sector by 2035, while at the same time, and most importantly, maintaining security of supply, which is absolutely critical. The Government are supporting investment, innovation and regulatory reform across the full range of technologies that will need to be developed and deployed in concert.