Electricity System Resilience (S&T Committee Report)

Lord Howell of Guildford Excerpts

Tuesday 3rd November 2015 Lords Chamber

[Lord Howell of Guildford (Con)]

My Lords, I was not a member of this excellent committee. I declare an interest as an adviser to Mitsubishi Electric. Like others, I agree that this is an extremely valuable report. In fact, I would go further and say that it casts a much-needed beam of light on an area where in the past we have not been told the full facts or what it is going to cost us. So the report is excellent, and its message is quite appalling. That reliability of power supply should be even an issue in one of the world’s leading industrial nations—the nation that founded the Industrial Revolution based on steam and power—is quite amazing and deplorable. It makes one ponder what has gone wrong and what has happened. This report helps enormously in beginning to answer that question.

Of course, the lights will stay on in the short term. That is obvious, and we are right about that. Thanks largely to the immense skills of National Grid, which is a brilliant company, and various devices, which I will come to, on the supply side and the demand side, in the short term, in the next two or three years, we will have adequate power, even at the most difficult times, unless something really catastrophic happens. It is going to cost us; it is going to be expensive, and I will come to that, too.

Then we come to the medium-term future. The issue is the capacity margin, however you define it: the derated margin or the full-capacity margin. That is a central issue. Here I have one slight quibble with the report, although I think that the noble Earl, with his excellent chairmanship and his excellent speech, clarified this. Paragraphs 23 and 71 state that the additional capacity that would be brought forward by the capacity market is 49 gigawatts. That is true, but it does not quite tell the story, which is that in terms of new capacity the auction so far has brought forward miserably little: 2.7 gigawatts, which consists of only one single combined-cycle gas turbine, the Carlton Power one, which admittedly is quite a big one, and a lot of small capacity. The larger figure of 49 gigawatts comes not from truly additional new capacity but from existing companies in the power game crowding in and seeking to get contracts for capacity payments to add to theirs so that they can get capacity revenues on top of market revenues. That is natural; any one of us would do the same.

So that is terrific: except, as my noble friend Lord Ridley reminded us, in 2018-19 it is going to cost just under £1 billion—£956 million, to be exact—which will all be piled on to the consumer, and I think that he mentioned an even higher figure for 2020. These are enormous sums of money, and what are they buying? We are going to need at least 20 to 25 new gigawatts of capacity in the late 2010s and early 2020s to compensate for the fact that our coal stations are being closed at a great rate, thanks to the European directive for larger combustion and the fact that our nuclear fleet is ageing and some of it will have to be closed as well. So that is the scene up to 2018.

In the short term, as I said, the national grid will be able to cope. It will use all sorts of devices such as the supplemental balancing reserve, which will cost a bit, and the demand side balancing reserve, which may involve what we used to call in the old days of gas supply interruptible contracts, where a firm agrees that it could bring on its own local generation or somehow manage to do without for a time if there is a crisis—all of that, of course, at more expense. As one of the reports before us today reminds us, domestic bills have doubled since 2004. Paragraph 217 of this excellent report tells us that up to last year green policy costs had added 15% to bills; by 2020 that figure will be 27% and by 2030 the figure will be 29%. There is a case for subsidy. I am not against the idea of infant industries being encouraged, but only up to a point.

The report reminds us that the policy of the last seven or so years, at the end of the Labour Government but particularly under the coalition, which was largely under the guidance of our then friends the Liberal Democrats, went too far, too fast. Many good things emerged from the coalition but, frankly, our energy policy was not one of them. It was a bad legacy. I heard one of your Lordships say in last Thursday’s debate what a wonderful success energy policy had been under the coalition, and I did not know whether to laugh or cry. In fact, on almost every front that success has turned into a miserable failure; my noble friend Lord Ridley put it in even more graphic terms. It was of course a policy inherited from Labour, particularly from Mr Miliband when he was at the Department for Energy and Climate Change. It was called the trilemma and someone was going to solve it, but in reality it has been a complete failure on the three fronts.

What are those three fronts? The first is affordability. That has gone out of the window: we have some of the most expensive electricity in Europe. We have households having to go to fuel banks in order to get tokens to get enough money to stay warm, which is an incredible situation in this country. We had a story graphically put before us by the right reverend Prelate the Bishop of Sheffield about the impact on our steel industry, which is appalling, and where energy costs have undoubtedly played a major part. So affordability has been a failure.

The second aim was supposed to be reliability. Well, here we are, talking about reliability and security; I think that we will get through, but it has been quite a narrow margin and will continue to be.

The third front was decarbonisation. There are different views on this. If you look only at the production of energy, it is true that CO₂ has fallen quite dramatically, partly because of the recession and flat demand, and partly because of various measures taken. Of course, carbon does not come only from the production of energy; it comes from a huge range of sources, and carbon per head is consumed in vast quantities by imports as well as by the whole carbon leakage process that other speakers have described. This is a scene that leaves one—“sad” is the right word, but I shall say almost “depressed” that so many policy errors have been made and applauded that have led to such an appalling situation.

We have been saved for the moment by the national grid. I think that later we will be saved to some degree by the interconnectors: we should be able to get up to 5 gigawatts from interconnectors in the middle of the next decade, which will be—this will please the climate change lobby—mostly green electricity. There will be volcanic from Iceland, if we build a wire to there, and hydraulic storage from Norway, while the Danes will supply us with wind power; they have such a surplus that someone suggested that they would actually pay us to take it. We will also be saved a bit by prolonging the life of the old warhorse, AGR reactors. They can go on a little longer into the 2020s, so that is another possibility. We will be saved if the storage technology develops fast, and may be saved a bit by the development of local power of various sorts—small modular reactors and so on.

I do not know about fusion, which the noble Lord, Lord Broers, referred to. When I was Secretary of State, the late Walter Marshall came into my office to try to explain it to me. He began by saying, “It’s like trying to put the sun into a bottle”. That was his description and it rather left me without words. As my noble friend Lord Lawson said, it all looks very much the thing of the future, but somehow it never arrives.

For the longer term, we have to have a safe system. We cannot go on living with this constant worry about margins for the next 10 or 20 years. We need a new, less expensive and more realistic policy, frankly explained and costed. This report does a marvellous job in helping in that direction—but, my goodness, we certainly need it.