Energy Bill

Lord Grantchester Excerpts

Tuesday 18th June 2013 Lords Chamber

[Lord Grantchester]

My Lords, after much anticipation, the Energy Bill is before your Lordships’ House. I thank the Minister for her remarks explaining that the Bill is intended to establish a framework for delivering secure, affordable and low-carbon energy. I also thank the noble Lord, Lord Oxburgh, for his chairing of the cross-party seminars on the Bill, which have been extremely helpful.

These are vital moments for the transformation of Britain’s energy market. At the core of the Bill is the necessity, as older power plants become obsolete, for Britain to have enough power at a competitive price, with new infrastructure that could cost more than £100 billion, while mitigating the effects of climate change. It is always difficult to meet more than one target at once. All elements must therefore be taken into account in a multifaceted market where all technologies will be needed. While these supply-side solutions necessarily take up much debate, efficiency measures, together with management and reduction of demand, must not be allowed to slip from consideration.

The main players for 2050 are well known. I will first address nuclear. As my noble friend Lady Worthington said in her opening remarks, the Energy Bill has been characterised as a nuclear-led Bill. Nuclear has huge up-front costs, which are then fixed for life. However, on the negative side, it can be undercut by gas. By nature it is a base-load player, as it is not very flexible. I am concerned about the lack of detail in the Bill and the wide-ranging enabling powers it gives to the Secretary of State. How will a strike price be set that is fair in the long term—measured in decades—strikes a balance between risk and reward, and is a good deal for future citizens? We do not know, because the Bill is silent on power/price comparability, between price reductions from the progress in renewable technologies, with set returns to be guaranteed to nuclear.

Into this mix comes the impact of shale gas. We have yet to determine the extent of possible supplies and its environmental sustainability, which must be strictly adhered to with regulation. It can be safely said that falling prices are a long way off. At best, it seems that shale gas may achieve only a delay in price rises, rather than being a game-changer. The effect of shale gas in the US is to provide excess coal for export that is now being used as base load. Industrial emissions targets for coal and gas have resulted in the energy performance standard. However, there are a number of concerns about these proposals. First, the level proposed is very generous and would not require gas stations to constrain their emissions until 2044—the last possible moment that could be compatible with the UK’s legally binding target. Large amounts of unabated gas would not be compatible with the kind of decarbonisation targets the Committee on Climate Change suggests are necessary to take the country on a cost-efficient path to the target.

Secondly, it does not apply to old coal-powered stations that decide to fit new filtration equipment to allow them to operate post-2023. Old, inefficient coal stations may remain indefinitely on the system, unconstrained. That could not be compatible with carbon budgets or decarbonisation targets. A similar backstop to the one now proposed for new coal is needed for old coal. The Government may well look at this for marginal back-up, as peaking plant, and may provide capacity payment via the capacity mechanism, rather than being able to base-load. Thirdly, in support of the Carbon Capture and Storage Association, CCS plant may need a three-year exemption from the EPS while CCS equipment is being commissioned.

The further challenge concerns the position of renewables by 2050 and how they can be encouraged to be a rightful part of the UK’s energy mix. We can have renewable power only when we have them. Some say they are largely useless because of their inherent unreliability. However, they are vital because the resource is there and free. Will all technologies in the Bill be equal on the starting line? Indeed, should the Bill get all renewable technologies to the starting line?

There is widespread agreement that the Energy Bill must empower a wide range of new entrants to enter the electricity sector. If a more competitive, innovative and diversified electricity sector is to be part of the energy mix, all contributions must be encouraged to take part. However, the Bill delivers top-down solutions that favour centralised generation, reinforcing current patterns of ownership. Yet in Germany, myriad new types of investor are entering the market, often for lower returns than large utilities expect. In Britain, however, independent generators find themselves challenged to ensure that the Energy Bill is viable for them.

Solar power currently finds itself in a very difficult position. Investment has stalled following the EU-China trade dispute. Furthermore, all solar projects of more than 50 kilowatts are severely constrained by the very modest capacity limits. When these modest limits are exceeded, support reduces. The Energy Bill requires support for solar to be either through feed-in tariffs or contracts for difference. Given the severe constraints on FITs, this needs to be looked at again. The generation profile of wind and solar is very complimentary. If taken together, there are fewer extremes in capacity; intermittency need not be an unmanageable problem. A multifaceted energy mix must not end up in a mentality of silo solutions. A more inclusive approach, whereby everybody is aware of their energy needs and is encouraged to participate, could encourage up to 30% of the UK’s energy needs to be met by community schemes and small businesses; for example, farming and rural enterprises. That could be necessary for their own long-term survival.

An important aspect of how the Bill will bring forward different technologies is contained in the levy control framework, with a cap on the total amount of additional charges that can be added to consumer bills. The limit to this spending review period is £7.6 billion, which dictates the total value of CFD contracts that the Department of Energy and Climate Change can enter into. Yet the Bill is unclear about how the control framework and CFDs will work together. For example, when will the projects that have assigned contracts start to be counted towards a control framework? How equal and rigid is the allocation of support to different technologies and what will happen in the event of underallocation in one technology?

Will money be carried forward into future spending rounds or will it be lost if it is not spent? The existence of a cap encourages early application, yet what happens when a technology’s allocation is used up? Lastly, renewable projects can apply either for the renewable obligation or the CFD. Will projects essentially be forced to opt for the CFD, for fear of the cut-off deadline in the RO and being at the back of the CFD queue with no guarantee of funding? The Treasury appears to be trying to control low-carbon spending, while allowing uncapped spending on new centralised capacity on the grounds of security of supply, since money allocated under the capacity market mechanism is proposed to be outside the control framework.

There are concerns that the complex design of the capacity market means that only the large energy suppliers are likely to participate. To achieve the full potential electricity savings identified by the Minister’s department, it is vital that savings from SMEs and homes are captured too. The capacity market rewards energy efficiency only for its security benefits, not for other, much larger benefits. A variety of policy instruments is vital to encourage innovative solutions to all the targets. An additional policy is required to ensure access to market, where funding for payments is decoupled from the capacity auctions and sits outside the control framework.

Rewarding alternative energy efficiency would reduce the level of capacity payments needed for security of supply. This can be explored in Committee, along with ideas for more technology-neutral policies, in order to set clear objectives to decarbonise. It is certainly easier to get smaller projects away than to finance the huge construct. These rewards are necessarily focused on the supply side. As the Committee on Climate Change said in its pre-legislative scrutiny report, the draft Energy Bill was,

“fundamentally flawed by the lack of consideration given to demand-side measures, which are potentially the cheapest methods of decarbonising our electricity system”.

I am therefore pleased that the Government eventually brought forward measures on demand-side reduction, through amendments on Report in another place. However, as with much of the Bill, the new clauses leave us little clearer on the Government’s plans in this area, amounting to no more than an order-making power for the Secretary of State to embark on pilot projects. However, the idea to allow “negawatts” to compete against traditional megawatts is welcome. There are concerns, though, that the capacity market will remain the only solution to access to market. It would be vital for the department to undertake a number of pilots using other mechanisms to allow diversity and innovation. So far there has been little opportunity to debate these proposals, but they can now be Peer-reviewed in your Lordships’ House in Committee.

This side of the House welcomed the previous Energy Bill, which had energy efficiency at its heart. It introduced the Green Deal to bring about energy improvements to buildings and houses, cost savings and a reduction in demand. It is a great concern that investment has not been forthcoming, leading to a massive drop in jobs in the sector. The figures expected on the situation on 27 June underline the work that needs to be done. On Report in the other place, the key element of interconnectors to and from the European market was introduced. This will enable a strategic rethink of the levels and efficiency of supply-side generation. It will have the benefit of increasing the geographical spread of balancing energy, as was so well argued by the noble Lord, Lord Oxburgh. As before, much detail has to come forward for assessment of how this can be made effective.

The Bill is welcome. My noble friend Lady Worthington has outlined the approach that we on this side of the House will take. Once again, we will work constructively to clarify and improve many aspects contained in the Bill.