Energy Bill

Lord Jenkin of Roding Excerpts

Tuesday 18th June 2013 Lords Chamber

[Lord Jenkin of Roding]

My Lords, I start with a word of thanks to my noble friend Lady Verma and the noble Lord, Lord Oxburgh, for the several extremely useful meetings that we have had about the Bill over the past couple of months. I have found it invaluable to see what the departmental view is. We have had the opportunity of talking to many of the Minister’s officials.

I also have another source of advice. I try to talk as much as I can with the companies that would actually have to make this system work. At a breakfast meeting chaired by the noble Lord, Lord Oxburgh, it emerged in our discussions with the wind industry, the CCS people and the nuclear industry that the Bill is essential if there is to be any hope of attracting the capital that is needed for the huge investment that many noble Lords have talked about. Somebody went on to ask a rather awkward question: if we get the Bill in the form that the industry would like—and there is plenty of evidence that they like much of what they see—will we get the investment? The noble Lord, Lord Oxburgh, will remember that there was a long pause, then all the parties said, “No, we cannot guarantee that”. We have to have the Bill because without it there is no hope of getting the investment, but even with it, there is still no guarantee. I endorse totally what has been said by a number of noble Lords during the course of this debate, that the greatest danger is uncertainty. People, firms and companies will not invest when they are faced with uncertainty. We have been going through quite a period of uncertainty in this country and it has resulted in a considerable downturn in investment in the generation of energy. Somebody said a moment ago that they hope that that period is now ending. We shall have to wait and see.

I certainly support the principle that we have to get this Bill through. I hope that we will be able to finish the Committee stage before the long Recess. I foresee four or five weeks of pretty hard work. I have tried to cancel as many of my other engagements as I can to make room for it. I have been refusing things left, right and centre for the last couple of weeks.

One point by the noble Baroness, Lady Worthington, that I very much support is that this is in some ways a skeleton Bill that eventually will be filled in with various things, including a large number of regulations. I make a very firm plea: we may not get these regulations in Committee, but we must know what they are by the time we reach Report in the autumn. It will be impossible for the House to debate this in any meaningful way if we do not have a greater degree of certainty as to what is actually going to happen.

I started by thanking my noble friend Lady Verma. Having listened to the speeches, I do not envy her the problem of having to wind up this debate. It is a task that I did for various things over a number of years, and it is very difficult to do. After having listened to so many diverse views, often based on great experience and expertise, I do not envy her.

There is a general view that we face a very considerable problem. There is likely to be a 40% increase in demand for electricity by 2050, but we are facing the closure of about 30% of our existing generating capacity by 2025. Wind power is becoming more intermittent. In the opposite direction, the nuclear programme is less flexible. However, it is equally essential and we must have it. I believe that we are bound to face higher electricity prices for a variety of reasons. I do not think that we are going to find ourselves imitating the Americans. Even if we are able to develop our shale gas deposits, nobody knows how much is recoverable. We also have our environmental obligations, so these are very great challenges.

I find myself increasingly worried about security of supply for the next four or five years. Somebody mentioned the closure of power stations. I have been given a list of power stations that were running on 12 December 2012, but all of which are now closed: Didcot A—a huge one, Fawley, Littlebrook, Cockenzie, Kingsnorth, Uskmouth and Tilbury. That is a huge reduction in our generating capacity. Some have talked about a number of plants being put into mothballs. The problem with mothballing is that it takes time to start up again. The figures I have been given suggest that of 9.2 gigawatts of UK gas capacity that is now mothballed, 2.6 gigawatts are unlikely ever to operate again because they have been effectively dismantled. Of the rest, it will take anything from three to 18 months before they can become operational, because one has dispersed the labour force. The thing has been wound down, and it takes time to start up again. I have anxieties about this and I hope that my noble friend may be able to offer us some reassurance.

In the debate on the gracious Speech, I raised the question of the future competitiveness of our energy industries. In particular, I asked about the Ofgem letter that had been sent out in February to all the bodies concerned—a very wide distribution—proposing what it called “future trading arrangements”. The answer came in a paragraph of that long letter written by my noble friend Earl Howe after he had wound up that day’s debate. I have no doubt, however, that this particular paragraph was drafted by my noble friend’s department. I quote this letter of 3 June:

“The government welcomes Ofgem’s actions to improve competition by addressing poor liquidity in the wholesale electricity market. We agree that liquidity, especially in the forward markets, needs to improve and this Government is pleased to see Ofgem indicate a strong preference for intervention with a decision expected by Summer 2013”.

It may not feel like it, but we are nearly there. However, perhaps we have had a decision on this—I will come back to that. I am puzzled about the concept of liquidity, so I asked for advice on that from the department, which defined it as,

“the ability to quickly buy or sell a desired asset, commodity or financial instrument without causing a significant change in its price and without incurring significant transaction costs”.

I am not sure how much wiser that leaves me. I prefer to look at this in terms of competition. If there is a market—and much of this Bill is based on the proposition that there will be markets operating, albeit in the future—then we start from the position, as many noble Lords have already mentioned, of having the big six. They have a 98% share of the domestic retail market, a 78% share of the industrial retail market and a 93% share of the commercial retail market. Estimates typically show that the big six have a market share of 65% to 70%. They are an enormously dominant force in our electricity industry. I have had a number of meetings with the independents and those who support them, and they constantly complain about how difficult it is to break into this market. These big vertically integrated companies have enormous power.

However, it may be that help is on the way. Many noble Lords will have seen the announcement by Ofgem less than a week ago opening up the electricity market to effective competition. I quote from the Ofgem press release:

“Ofgem proposes to establish a more level playing field so independent suppliers can compete effectively with the big six … Big six suppliers and largest independent generators must trade fairly with small suppliers or face financial penalties … Wholesale energy prices to be more transparent with big six required to post prices two years in advance … Ofgem’s proposed reforms build on progress made by the industry, but seek to increase competition and address issues of fairness and transparency”.

That is a beacon of hope in an otherwise quite difficult situation. Will the Government support it? They always talk about having more competition in the industry. If they support it, will that require further amendment of the Bill or will it be covered by the powers that were added in the other place—now Clauses 43 to 45? I think that something more is required: a requirement to promote competition actually needs to be written into the Bill. I give my noble friend notice that I am contemplating an amendment to the clauses on the capacity market to add a requirement; in addition to the objectives of the capacity market set out in Clause 21, they should have an objective to promote and encourage competition in the generating market.

I hope that I am pushing at an open door. My right honourable friend Michael Fallon had a meeting the other day with a number of people who have been arguing for this. A report of the meeting states that:

“Michael Fallon noted that he expects a number of amendments to be tabled to the Energy Bill during its passage through the Lords, and did not have any objection in principle to the recommendation for a clause stating that one of the objectives of the capacity market should be to encourage competition”.

Again, I hope that I am pushing at an open door and I look forward to hearing my noble friend’s reply.