Lord Deben
Main Page: Lord Deben (Conservative - Life peer)
Baroness Liddell of Coatdyke (Lab)
My Lords, in supporting Amendments 62, 64 and 65, I draw attention to my entry in the register of Members’ interests. I will be very brief because the noble Lord, Lord Jenkin, has very much encapsulated the nature of the debate around the offtaker of last resort and the issue of certainty.
I would perhaps be kinder than the noble Baroness’s noble friend as I think that the noble Baroness probably does get the issue that we are seeking to articulate here. It is about giving a degree of certainty to companies that are of necessity much smaller than the big six and have difficulty raising finance because in many cases they are involved in infant industries. In the front of my mind is the generation of renewable energy in the islands of Scotland; for example, in the Western Isles, Orkney and Shetland. I know there is to be a consultation on that, but there are opportunities throughout the United Kingdom to access the various kinds of renewable energy that will be available through the activities and investments of independent generators. However, independent generators need to go to the market to raise their funds and if there is not certainty that the Government are really committed to the offtaker of last resort—that it is not a programme for a situation that exists in extremis but is integral to the operation of the market for that 8% or perhaps even less that exists—not only will the market become unbalanced but we will fail to give support to industries and generating capacity that already have the potential to be world leaders.
The noble Baroness’s words at the Dispatch Box will be looked at very carefully by the industry and the funders. Those who have deep pockets and will be prepared to invest in the sector and allow it to move on to a harmonious future need certainty. I will not delay the House any longer but I urge the noble Baroness to think very carefully about what she says. The noble Lord, Lord Jenkin, is right. I suspect that the lawyers have had a lot to do with what her right honourable friend Michael Fallon has being saying and what she has been able to say. I have no doubt that she understands from her own business background that the issue of certainty for investors is what lies behind these amendments, which I support.
Lord Deben (Con)
My Lords, perhaps I might help my noble friend on this issue. There is a win-win solution, which is to recognise what has happened very recently in Germany. The big generators always start off being unhappy about the competition. However, RWE in Germany is expected to announce, after decisions made very recently, that it has concluded that it is no longer possible to take that attitude towards other generators in the German market. The Germans have been so tough about the provision for smaller generators. As I have said before in this House, it is remarkable that 50% of the very significant amount of renewable generation in Germany is done by municipalities, co-operatives and individuals.
Until recently, the big generators have fought that because they felt that their own business model was being undermined. It is quite clear from the latest evidence that RWE will take a different view, that it ought to become much more a facilitator of this rather than an opponent of it. If we get the way this is phrased in this Bill right, we will be able not only to help the independent generators but to help the bigger ones to move rather faster in understanding that this is going to be a multiple market in the future.
Therefore, I hope that the Minister will be able to discuss this again with her colleagues because it is a very fast-moving situation. This is not something that is the same today—literally—as a fortnight ago because we did not know the RWE movement then so we did not see, although we hoped, that that was what was going to happen elsewhere. If we can take advantage of learning from other people rapidly, this excellent Bill can be made that much better. I hope that she will find it possible to be a little stronger in what she says now and will take this away and discuss it with her colleagues, as my noble friend Lord Jenkin suggested, because there is now a new circumstance in which she will be able to be stronger in her support.
Lord Cameron of Dillington (CB)
My Lords, I support all the amendments in this group, as well as the amendments to which I have put my name. Last week we had our debate on the need to open up all sectors of the electricity industry to more competition. We on our side of the amendment were surprised at the reluctance of the Government to acquiesce enthusiastically to what we were proposing. We were even more surprised when later in the week the Secretary of State for Energy and Climate Change went on the “Today” programme and also spoke in the other place about how greater competition was at the heart of the Government’s electricity market reform. I have to admit I had the surreal feeling that there seemed to be one Government at that end promoting competition and talking about its importance and a completely different Government at this end seemingly trying to ward off competition. I hope that this week we have one pro-competition Government in both Houses.
In my short remarks in the debate last week, I linked the need for competition with the need for investment and spoke about how the two are closely intertwined. The UK’s aging energy infrastructure needs some £75 billion invested in new, largely renewable, generation facilities by 2020, and the Government are relying on independent generators, or at least their investors and financial backers, to produce some 35% to 50% of this—that is, £27 billion to £38 billion—before 2020, so this is not a marginal problem. Only by solving it will we ensure that we get the investment we need along with the much needed competition.
Of course, there is a problem. In an ideal world, an independent generator would want a backer for 15 years, because that is the normal length of any form of mortgage agreement for such a scheme, but no supplier is going to gamble on a 15-year PPA because the demand for electricity could reduce over 15 years and a supplier could find itself having bought more power than it could sell. Indeed, already four out of the big six suppliers are not buying power at all from independent generators, while the other two are charging up to 15% or 20% commission on even short-term contracts, which for the independent generator makes for an unviable PPA.
As has already been explained, this situation scares the independent generators and, above all, their investors, so no truly independent generator is going to invest without some form of compromise in the long-term marketplace. Equally, no aggregator is going to enter the fray with the big six oligopoly holding all the cards. We desperately need these independent generators to invest and, as the Government—well, the Government at the other end—keep telling us, it is only by encouraging more competition that we will achieve that investment.
The department has gone for an offtake of last resort—an OLR—to solve this problem, which is fine, but as it stands, the solution in the Bill is completely useless, as Clause 44 is so hedged about with “may”s rather than “must”s that no self-respecting financier would put any trust in it at all. The Minister’s letter of 26 July, I think it was, does not give them any encouragement either. It is a political cop-out rather than a financial foundation on which to build a competitive electricity industry. The words “political cop-out” may be a bit harsh, but the clause is clearly written from a political perspective, rather than the drafters putting themselves in the minds of an investor or a mortgage company and thinking, “What can I put in this Bill that will really reassure these much needed investors that we the Government say we desperately want?”. They just have not done that.
I hope we all agree that this is not a marginal issue. That is why it is vital that these amendments are adopted. It is vital that OLRs are available from day 1 of CFDs. It is vital that they are operational the moment—well, within seven days—of a generator finding itself squeezed out of the marketplace without a commercial PPA. It is vital that the price on offer is evidently—I stress that word “evidently”—going to be enough to reassure a financial backer that lending money in this new and uncertain marketplace is not going to be a wasted investment. There is an enormous amount hanging on getting this right, so I hope that the Minister will be able to reassure us.
Lord Oxburgh (CB)
My Lords, I, too, support these amendments. We have to recognise that the Bill has been a long time in gestation. What has changed since the Bill was originally conceived is that the bottom has dropped out of the coal price. It is very important to point out to the noble Earl, Lord Caithness, that in fact cheap coal does not mean cheap power: it means big profits for the owners of coal-fired power stations. As the noble Lord, Lord Teverson, pointed out, the electricity price is effectively tied to the gas price because of the operation of the mechanisms. As things are at present, it is effectively the low coal price that is driving the operation of coal-fired power stations and giving very substantial profits to those companies that have them. Indeed, roughly half that capacity is owned and operated by the big six.
I will not draw on your patience longer, but simply say that I understand the point made by the noble Lord, Lord Jenkin. There is effectively a chicken-and-egg situation here. Unless we give the market the certainty that these amendments would give, we shall not see the investment in gas that is needed to maintain the attainability of our longer-term targets.
Lord Deben
My Lords, the noble Lord, Lord Jenkin has rightly pointed to the crucial problem, which is: how do we deal with that period in which there is fear that the lights will not stay on? That is a proper fear to have and should be the first fear of any Government, because there is a responsibility to keep the lights on. There ought to be a second fear, too: namely, that we keep the lights on in such a way that the next generation has an even worse position, because we have polluted the atmosphere further and made the fact of dangerous climate change even greater. We naturally have to look at this very carefully.
However, on this occasion it seems that those who are most concerned with keeping the lights on, and I certainly put myself in that category, and those who are also concerned with climate change, and I put myself in that category, too, are in fact pushing at the same door. If we do not have a mechanism whereby it is sensible to invest in gas, that bit of the transition will not take place. That would seem to most of us to make it more difficult to provide affordably for the energy that we need.
The noble Lord, Lord Oxburgh, as so often, put his finger on one of the other problems. When we talk about these things, let us not confuse the cost of production with the price at which it is sold. Those of us who, like me, have represented constituencies, know how many people are close to the edge when it comes to warming their homes. The whole question of affordability is utterly crucial. However, the idea that if we burnt coal we would get cheap power is not so. We need to have a mixture—a portfolio of means of generation—in which gas will play its part.
We have heard a lot recently about the opportunities that shale gas will give us. I find both extremes unacceptable—from those who think it means the end of the world at one end to those at the other who feel that it will be a game-changing matter. They are both wrong, but there is a place for gas. If that gas were produced at home, that would contribute considerably, not to a lowering in cost because it would have little to do with that, but to greater energy sovereignty, which is worth while.
The question is how we move from a situation which we hardly imagined, because the bottom had not fallen out of the coal market, in which we have to provide for the transition from coal to gas to one in which we do provide for that transition. The difficulty is that I suspect both those who tabled the amendments and the Government are on the same side—both groups want to achieve this. The real question is that there is a kind of fear of letting go of nurse’s hand—that is, the coal—in case we do not get the gas. I would like to turn it around the other way: if we do not do this, I am not at all sure that we will get the gas. That is crucial. I hope very much that the Government will enable us to have a situation in which we provide for that transition.
I have been trying very hard during these debates to remain entirely independent because all I have spoken are the words that the Committee on Climate Change, which I chair, has put forward. The committee has made it clear that it feels that this kind of transition needs to be facilitated in this way. I do not want to make this a great division because I do not think it is one; it is a question of how we do this safely in the new circumstances to which the noble Lord, Lord Oxburgh, referred.
I very much hope that my noble friend will be able to give us confidence in the Government’s answering of this question if she is unable to accept the amendments that are put before her. If we do not do one or other, we will find ourselves unable to guarantee reasonable prices or the continuance of the lights being on because we have not made the transference that is essential in any case and which I thought everyone supported.
Baroness Worthington
My Lords, I was pleased to add my name to Amendment 74, and I support the other amendments in the group. At the start of this process way back in 2010, the Government said in a consultation document:
“The objective of the EPS is to ensure that while coal continues to make an important contribution to security of supply, it does so in a manner consistent with the UK’s decarbonisation objectives”.
The way that the EPS is drafted does not achieve that aim. The EPS was a response to the Kingsnorth protests against the building of a new, unabated coal plant. It was borrowed, but not fully, from similar regulations in California. The Minister, Greg Barker MP, can take credit for introducing this policy. However, in California they are clear that the limits that are placed on coal stations apply in the event of a coal station seeking a life extension. That is what this amendment is designed to do: to complete this process by adding that important missing element.
New coal was never the most carbon-intensive source of electricity; old coal is. The world has moved on since Kingsnorth. Low coal prices and high gas prices have caused higher operating levels at coal stations now than ever before. As a result, as the noble Lord, Lord Teverson, mentioned, we have seen UK emissions going up, not down, and our carbon intensity increasing last year, not decreasing. How are we going to hit decarbonisation targets if we do not have a tool in our armoury to do something about this issue? We could have a policy of carbon pricing, as the noble Lord, Lord Stern, has mentioned. However, carbon pricing policy has not addressed this issue, and will not. We need regulation.
Turning to the security of supply, 8 gigawatts of old coal capacity has recently shut. This has brought down our historically high overcapacity to a more modest level, yet our carbon intensity is stubbornly high, at around 500 grams per kilowatt hour. This is because the 12 coal stations that are still operating, representing 15 gigawatts of power, are base-loading. They are no longer providing back-up power in the winter peaks but are operating throughout the year and making their owners a considerable amount of money. The Committee on Climate Change has been clear that were we to get the merit order of existing plants right, we could shave almost 200 grams off that figure overnight without having to build a single brick or power station.
The 12 stations that I have mentioned have tightening air quality regulations in front of them, which will affect their operating post-2016. However, they have a range of options for what to do in the face of those tightening regulations. One is not to refurbish; they will then be required to close by 2023. Another option is to convert to biomass. The final option is to fit the filters that would enable them to comply with the air quality standards. They could then remain open indefinitely. In that situation, they would certainly wish to continue base-loading, since they would have made new capital investment on which they would want to seek a return.
The new air quality standards start in 2016. I am sad to say that Defra, the lead department, is in danger of not complying with those regulations because it is failing to provide enough detailed information about what these power stations are planning to do. This can be only because it is intent on giving the maximum flexibility while the details of the Bill are worked out, because the Bill contains another very important element that changes the fortunes of coal: the capacity mechanism payments. The capacity mechanism will give existing coal plants an up-front cash injection just at the time they need it to make those refurbishment decisions. Plants will be eligible for three-year contracts. We cannot be certain how much those contracts will be worth, but it will certainly be in the range of £80 million to £100 million or more over the three years. The cost of fitting the filters is a surprisingly similar number of around £100 million for a 1 gigawatt plant.
If they decide to make these capital investments and tip into this compliant state, this will reduce their thermal efficiency even further. Are the department and the Minister aware of how inefficient these stations are and quite how much of the heat is escaping as lost energy into the atmosphere? That is quite apart from the carbon load that is also being added. Fitting these filters would also increase the operating costs of these plants. The chemical plants necessary do not operate for free.
The Government’s policy is not to support the application of an EPS to coal seeking life extensions, and no doubt we shall hear some of the reasons from the Minister. Other noble Lords have touched on the security of supply issue. As long as this question over 15 gigawatts of coal is allowed to remain unanswered, how can any investor in replacement capacity move forward? If you are not sure how many plants will be operating and whether they will be base-loading, you will find it very difficult indeed to make the case for investment in new capacity and to bring mothballed capacity back on. I will not go into too much detail on this but we have all had representations from gas investors saying that they support this amendment. We should just remember that, in a carbon-constrained world and under a carbon-budgeting system, every coal station that remains on the system displaces two gas stations because gas can operate with half the emissions of coal