Lord Grantchester
Main Page: Lord Grantchester (Labour - Excepted Hereditary)
Lord Grantchester
I am grateful to the noble Lord, Lord Teverson, for his introduction to the debate on the demand side of energy. He is quite right to draw attention to this. Although other noble Lords may have been teasing in their remarks, the Second Reading debate highlighted that the Government are coming rather late in their thinking to these subjects, and our later amendments will explore all the different technicalities on the demand-side responses. Therefore, we are happy to support the wider recognition of the importance of demand-side response.
I turn to the proposed new paragraph in his amendment on making the efficiency measures EU-compliant. Again, we note the position that we are in at the moment and that the directive requires member states to set an indicative national energy efficiency target based either on energy consumption or on energy savings, or indeed on energy intensity, as the noble Lord, Lord Teverson, suggests in the amendment. We wonder how that might take account of the decarbonisation challenges that we will be facing. Also, we will be monitoring more than one change at a time to take into account GDP changes. Therefore, we would be very interested in knowing how the Government view this measurement of energy efficiency.
Turning to Amendment 55ZA, which concerns pilots, once again we note that the Government are coming rather late in their thinking to the demand side and that they therefore want to make provision to help their thinking to progress by running a pilot scheme. Clause 37 gives the Government powers to run a pilot scheme for electricity demand reduction. While the clause does not specify that this pilot scheme should take the form of a pilot capacity auction, it is clear from the consultation response that that is what DECC is considering.
However, the capacity market is primarily designed to ensure capacity throughout troughs in supply, and it will therefore reward only demand reduction projects that reduce the amount of generating capacity that is needed at such times and not those that reduce demand at other times. A capacity market therefore rewards energy efficiency only for its security benefits and not its other, much larger benefits in terms of emissions reductions and affordability. Therefore, we are aware that an additional policy is needed to enable small businesses and households, and not just large infrastructure projects, to be rewarded for saving energy.
Such “premium payments” were favoured by the majority of respondents to DECC’s consultation but were then dismissed by the department. A further explanation in this regard would be welcome. Therefore we support the call on Her Majesty’s Government to clarify whether DECC should bring forward multiple pilot schemes to include premium payments, a capacity market and perhaps other forms of incentives. This would demonstrate which scheme or schemes were most effective in delivering permanent demand reduction in practice.
Amendment 55ZA also mentions how these pilots might be financed. Clause 37 states that it will be paid out of government funds rather than through consumer prices. However, following the spending review, a figure of £75 million for investment in innovative energy projects was mentioned. I understand that DECC suggests that only about £25 million of this will be available for the pilot. In any event, those sums are dwarfed by DECC’s own assessment of the cost for full capacity auction. Amendment 55ZA would allow pilot reduction schemes to be funded at least in part from capacity payments either in advance or during a capacity auction period. Will the Minister clarify to the Committee where the Government have got to in their thinking?
Baroness Maddock
My Lords, I support my noble friends in trying to highlight the importance of demand reduction and the fact that this Bill came rather late to it, as has been said by others. I was somewhat confused by some of the earlier comments from those who said that they were in favour of energy efficiency but were not sure about demand reduction. If you increase energy efficiency, you reduce demand. That is fairly logical. I find some of the comments a little curious.
I emphasise the fact that if the Government are having only one pilot that will be only around the capacity market, that will not be good enough, which is why we have tabled these amendments. As regards the amendment in the name of my noble friend Lord Roper, if the Government were to take something like that forward, we could have a demonstration about which scheme or schemes are the most effective in delivering permanent demand reduction. In a sense, that ties in with the amendment of my noble friend Lord Teverson. There was a lot of criticism of my noble friend and talk about the difference between demand management and demand reduction. They are two different things. We have had some strange logic in today’s debate.
Unless we have several pilots, there will be no meaningful comparison and we will not be able to decide which are the most cost-effective and the most effective in reducing demand. I support my noble friends in their efforts to make demand reduction more of a priority in this Bill.
Lord Grantchester
Lord Grantchester
My Lords, we return to the demand-side provisions in the Bill. We spoke earlier today about how this element of the Bill has been quite a late afterthought from the Government. Indeed, it was all initiated by the Government’s response to the consultation this May regarding some of the demand-side initiatives. Amendments have been introduced only on Report in the other House. From this, it is easy to deduce that DECC is developing its thinking on these matters and has perhaps been too dogmatic in trying to insist that the department’s design of the capacity market should be maintained. As evidence of this, I contend that new documents are arriving with ever increasing ferocity on our desks, as the noble Lord, Lord Jenkin, surmised. We on this Committee are endeavouring to keep up with the DECC officials who are trying to keep up with the thinking, and it is a fair challenge. We have put down these probing amendments just to try to understand whether DECC has more to contemplate during its enjoyment of the parliamentary recess.
In DECC’s own document in reply to the criticisms of your Lordships’ Delegated Powers Committee, it reveals on page 11 at paragraph 57, regarding the meaning of “reducing demand for electricity”, that it understands that,
“it includes both temporary actions by electricity consumers to reduce their demands at times of system stress (known as ‘demand side response’ or ‘DSR’) and projects by which electricity consumers permanently reduce their consumption (known as ‘electricity demand reduction’ or ‘EDR’)”.
While its intention is,
“to enable DSR providers to participate in capacity auctions from their inception”,
there is nevertheless some concern that the department has yet to appreciate the full impact of what could be achieved with judicious re-engineering.
It is very important that the Bill is future-proofed and made to be seen to be relevant to future developments and technologies. Many in the DSR market feel that the Government are yet to appreciate the specific needs of their technologies and the relative immaturity of the market. Many would like to see a separate auction of sufficient volume to grow the market until it can compete with supply-side options. Amendment 53A seeks to define demand-side actions to provide capacity services to the market and gives powers to the Secretary of State to ensure that a certain amount of demand-side resource is procured. What does the Minister’s department want to deliver in Clause 21? Providing a reduction in capacity through DSR must have a value put on it.
Amendment 53B would require the prioritising of demand reduction providers in any future capacity market. The principle is that demand reduction over additional supply is clearly in the interests of consumers. It is far more cost-effective and energy-efficient. There is some need for clarity from the Government that demand reduction is not simply an afterthought to a capacity market designed around the provision of supply by large-scale plant but is prioritised in any capacity auction. There is also the question of determining what capacity is required once demand has been reduced. Is there a risk of overprocurement and distortion, as well as overpayment made through the capacity market? Can the Minister clarify how she sees the current plan working in respect of demand reduction?
We have tabled these amendments because there is clear concern within the sector that the capacity market is being designed with no meaningful consideration of the role that the demand side can play as distinct from the role that demand-side reduction and storage could play. DSR is unlikely to participate in the four-year auction because trying to analyse this forward for four years would be beyond its capabilities.
The Minister’s department will take some capacity off the four-year auction and put up it for a one-year auction in which DSR could participate. How will this operate? How will the department avoid inefficiencies? Does her department recognise that the market must be made to work effectively, not merely allow actions to happen?
Currently, Clause 21 defines “providing capacity” as either,
“providing electricity or reducing demand”.
It makes no mention of the demand-side response, or storage. The Government should be looking at how the demand-side response can be deployed in times of system stress to respond to capacity demand. A hospital or business turning down air conditioning or running standby embedded generation in response to a signal from the system can be a highly effective and cost-efficient way of providing additional capacity, rather than investing in keeping more plants on the system than would be needed.
The Minister is indeed correct to identify the role and experience of the demand-side response in the United States. The US experience is important, as the inclusion of DSR in a capacity market for PJM, a major US utility company, is credited with saving consumers $11.8 billon in a single delivery year; that is, approximately $200 per customer. DSR has been proven to be more reliable than traditional generation, delivering a higher percentage of committed capacity over a given period of time.
The transitional arrangements the Government have brought forward are intended to allow the system operator and market participants to gain experience of how DSR will operate in a capacity market and allow for improvement in the market’s design when it is eventually rolled out. However, the CHPA and other DSR providers have said that the proposals put forward by DECC risk losing the UK’s decentralised generation capacity participation in the transitional arrangements of the capacity market. This is because it appears that enduring arrangements are being designed entirely around large-scale power stations and that DSR still risks being a secondary concern.
There is a substantial risk to the trading of small volumes of electricity capacity within the capacity market. Decentralised participants could be locked out. Large plants that trade hundreds of megawatts of power risk excluding those, such as hospitals or universities, which trade 2 megawatts or 3 megawatts. The whole system appears to be based on plants responding to electricity market price signals. However, demand does not operate in the wholesale market and therefore cannot respond to signals it does not see. No clear mechanism has been proposed for ensuring that the demand side can see the market signals.
One or two issues remain unresolved. One of these is proposing the “baselining” of on-site capacity. Current proposals do not consider on-site generation as providing capacity to the system when in operation. This proposal is different from the treatment of power stations, which will be considered as having provided a capacity service if they operate during a period of system stress, irrespective of whether they were operating beforehand.
The hospital making 2 megawatts out of its total 3 megawatt usage is excluded from reward but can avoid penalties only in its baseline. As well as DSR, electricity storage features nowhere in the capacity market clauses. Amendment 53C requires the Secretary of State to provide for additional licence capacity authorising storage of electricity. As our system includes more variable renewable generation, it will become increasingly important to encourage electricity storage.
The Government are currently directing £50 million into grid scale research and demonstrations in electricity storage. However, without a route to market, that money would be wasted. Electricity storage has the potential to provide savings of more than £10 billion per year by 2050—that is £400 per household—but no savings at all if the capacity market takes no account of this contribution. It would be interesting to hear whether the Government support the Electricity Storage Network’s target for an additional 2 gigawatts of storage installed on the system by 2020.
The present licence categories treat electricity storage as generation, which it is not, and the standard licence conditions do not allow for an overlap between the licence categories for generation, transmission, distribution and supply. This inhibits the deployment of electricity storage on our current system, as licence conditions generally restrict activities in more than one segment. Distribution network operators can own electricity storage. However, presently, some operators may infringe their distribution licence conditions, which restrict generation and supply activities, as the DNO needs to buy and sell electricity in order to operate the electricity storage plant.
I will make a comment later in support of the amendment of my noble friend Lord Hanworth but I conclude with a few questions. First, as the Government have said that they consider DSR and storage to be a part of the future capacity market, can the Minister say what level of DSR and electricity storage within the capacity market the Government would deem a success? I remember asking the Minister, when we were welcoming the final provisions on the Green Deal, whether she could perhaps map out to us what success looks like. What I am trying to get at is: can she be more specific than saying that she wants it to happen or that she thinks it will be a success? Perhaps I can challenge her to try to be more specific in mapping out to the stakeholders, who will take note outside, how she views this part of the Government’s operation. A supplementary question to that is: do the Government recognise the need for a separate set of rules for DSR within the capacity market? In recognising that, it is imperative that they undertake a review of the current rules, as there is widespread industry concern that they do not facilitate DSR.
My second question concerns the design of the capacity market and these trial auctions, which do not provide any long-term income stream for new electricity storage to be planned, installed and operated. The Electricity Storage Network and the Liquid Air Energy Network say that their members will not be able to finance projects on the basis of the proposals. How do the Government intend to address these barriers?
I am very grateful to the Committee for indulging me for a moment longer so that I may come to the amendment of my noble friend Lord Hanworth, which follows on from some of the challenges under the amendments in this group. Providing a reduction capacity through DSR must have a value put on it. Explicit recognition is required that DSR has extra value in adding value at certain times of the day, which my noble friend will no doubt address. I beg to move.
Lord Grantchester
My Lords, that is excellently timed as the clock strikes six. I thank the noble Baroness for her responses. Needless to say, we will all be looking forward to the recess and studying her words very carefully. I noticed that she said that her department is trying to make its definitions not exhaustive and maintain flexibility to include the participation of novel technologies in future.
It was not my intention that the amendments should not be compatible with a technology-neutral approach. They were merely focused on the different markets that might arise, rather than a different technology approach. I am slightly anxious that the noble Baroness may have misunderstood some of my remarks, so I will study her words carefully but, in the mean time, I beg leave to withdraw the amendment.