Lord Jenkin of Roding
Main Page: Lord Jenkin of Roding (Conservative - Life peer)Energy Bill
Lord Jenkin of Roding Excerpts
Lord Jenkin of Roding
“(f) the desirability of promoting effective competition between persons engaged in, or in commercial activities connected with, the generation, transmission, distribution or supply of electricity or the provision or use of electricity interconnectors, wherever appropriate.”
Lord Jenkin of Roding
Colleagues may remember that I gave notice on Second Reading, during a passage when I spoke about the need for greater competition in the energy markets, that I would move an amendment to try to reinforce what is in the Bill. I will come to the amendment in a moment, but before I do, I ought just to say that it is perfectly clear that greater competition is at the heart of what the Government are aiming at. I have a letter here written by the former Minister for Energy, my right honourable friend John Hayes, to a company that has been seeking to break into the energy market. It states that,
“a competitive market is key to the Energy Market Reform programme”.
I agree with that, but his were not the only words. On 12 June, when there was the announcement from Ofgem of the opening up of the electricity market to effective competition, the right honourable Edward Davey, Secretary of State, said:
“I want our energy market to be as competitive as possible. An increased role and level playing field for independent suppliers and generators is precisely what will help drive the competition that delivers better value for consumers and businesses”.
That is what we are aiming at here. This is the first of what I suspect will be a number of amendments which have been tabled to open up greater competition in the energy industries.
If one looks back to the Electricity Act 1989—I see that an amendment in the name of those on the Labour Front Bench which has been grouped with mine refers to it—Ofgem is obliged to protect the interests of consumers and promote effective competition. However, there is nothing there or in the Bill which makes it clear that that, too, has to be a duty of the Secretary of State. Ministers have said that they want to promote more competition but there is nothing in the Bill that lays any kind of duty on the Secretary of State to do that.
We are moving to discuss the capacity market now, which, interestingly, used to be called the capacity mechanism. Happily, “market” begins with the same letter, M, so it has been transmuted into the capacity market. Even its name suggests the market has to be a competitive institution. Of course, we now know that there will be auctions rather earlier than had originally been envisaged. The auctions will happen next year but they are seen by many in the industry as a way not only to ensure greater security of supply—and there is no doubt that right at its heart, the capacity mechanism is all about making sure that we have the generating capacity to meet the demand from time to time—but to provide a way in for independent producers to join the market and to compete for contracts under the capacity mechanism.
This is the first amendment that we are dealing with under the general heading “Electricity Market Reform”. If one looks at Clause 5(2), listed there are the matters to which the Secretary of State must have regard when exercising his functions. My noble friend Lord Deben will no doubt be delighted to see that the first is,
“the duties of the Secretary of State under sections 1 and 4(1)(b) of the Climate Change Act”.
Secondly, there is a reference to the “decarbonisation target range”. Thirdly, there is,
“ensuring the security of supply to consumers of electricity”,
which is right at the heart of one of the three main aims of the process. The fourth matter is,
“the likely cost to consumers”,
and the fifth is,
“the target set out in … the renewables directive”,
for the,
“use of energy from renewable sources”.
There it stops, but the amendment in my name and that of my noble friend makes it clear that we need something more. We want an additional paragraph at the end to say,
“the desirability of promoting effective competition between persons engaged in, or in commercial activities connected with, the generation, transmission, distribution or supply of electricity or the provision or use of electricity interconnectors, wherever appropriate”.
The amendment perhaps goes a little wider than I indicated when I gave notice that there would be such an amendment in Committee. It has been the product of much consultation with firms which are anxious to play their part in the new electricity market but so far have found it extremely difficult to break into it. I will not repeat what I said at Second Reading about the wholly predominant role of the big six, all of which operate in one way or another with a vertically integrated operation that goes all the way from generation to supplying the final consumers. Other amendments on the Marshalled List seek to break into that and I shall be interested to hear what the noble Lord, Lord Berkeley, is proposing. He is not in his seat at the moment but he will be back, I am sure. There are other amendments as well, which we will come to later on.
As I have said, Clause 5(2) makes no reference to this matter. It would add a great deal more weight to the obligation on DECC to take into account the needs of independent generators and new entrants if we added a new provision that makes explicit the objective of promoting competition. The capacity mechanism is one of the ways in which the authorities intend to intervene in the market. Indeed, having seen to what extent this is under the control of the Secretary of State—certainly in the initial years—one might say that it is more than intervening; it is, in fact, running it. However, this is one of the ways in which the authorities are intervening, and the amendment has been deliberately phrased in general terms to mirror the requirement under the Electricity Act 1989 that I read out at the beginning.
Lord Jenkin of Roding
My Lords, I am extremely grateful to those who have contributed to this very important debate. As I listened to the noble Lord, Lord O’Neill, voicing his warnings about this, my mind went back to when I instituted the privatisation of British Telecom in 1982. The chairman of BT was Sir George Jefferson, who sadly died earlier this year. He was constantly in and out of my office, very much supporting the privatisation. However, when I had to say very firmly that BT was not going to be allowed to take a majority position in any of the new mobile telephone networks that were coming up, Sir George was extremely angry. He felt that it was a very unfair restriction on BT. I said to him that he had a virtual monopoly of land telephony and perhaps he ought to concentrate on that, and that in the mean time the new mobile telephone industry should develop without BT having a monopoly position in it.
Years later, when I attended a farewell reception for Sir Christopher Gent, the retiring chairman of Vodafone, which by then was worth some £82 billion, somebody asked him, “To what do you attribute the huge success not only of the mobile telephone network but of your company in particular?”. He said, “That is very easy. It was one thing: the decision of the Secretary of State at the time that BT would not be allowed to compete”. I went up to him afterwards and said, “I don’t know if you are aware that it was me who took that decision”. He said, “Oh, that’s very interesting”. I said, “Where’s my dividend?”. Of course, no such dividend was forthcoming.
I do not think I need lectures from the noble Lord, Lord O’Neill, or anybody else about the importance of—
Lord Jenkin of Roding
Perhaps I might finish my sentence before I give way. I wish more people on the “Today” programme would say that to the interviewers. I find it absolutely intolerable that they start asking a second question in the middle of the interviewee’s answer to the first question.
Lord O'Neill of Clackmannan
The point that the noble Lord makes is a good one, but he has chosen the easy one, where there was a technological change that worked in favour of Vodafone and others. If he were to look at the behaviour of BT in relation to the spread of broadband, he would find a very different story. BT’s monopolistic bullying of the broadband industry by one means or another has meant that we have some of the slowest speeds in the industrialised world, and it is all down to the inadequacy of the regulatory system that the noble Lord allowed to be created.
Lord Jenkin of Roding
If I may say so, my regulatory system was RPI minus X. I had an interview with a very senior American economist who was one of the world’s experts on regulation. He said that RPI minus X was the best and simplest regulatory instrument that anybody had ever seen. I took some comfort from that. I have not been responsible for competition in the telecommunications industry since then, so I am not in a position to comment on what the noble Lord has said.
Coming back to this amendment, my noble friend Lord Deben is absolutely right: every capitalist wants to have a monopoly. It is the job of the competition authorities to ensure that competition exists, and in this country we have very well established competition laws through the Office of Fair Trading and so on. I will read my noble friend’s reply to the debate very carefully and consult those who have been advising me on this. What I want to see is a very clear duty on the Secretary of State to promote competition.
My noble friend said, “It is in the Bill already and we do not want to duplicate it”. I can tell her that those who have studied this Bill perhaps even more carefully than I have say that actually it is not. We are going to need to look again. I will look very carefully at what the noble Baroness has said and see whether we can come to some understanding on this between now and Report.
I am quite convinced that Ministers—I will not repeat the quotations; indeed, I have given most of them to Hansard already—want to see a more competitive industry. Ofgem wants to see a more competitive industry. At Second Reading, I quoted from its June press release entitled, Opening Up Electricity Market To Effective Competition. Those with whom I, Ministers and officials have been talking feel that there needs to be a duty on the Secretary of State very clearly to promote competition. That is what we are attempting to achieve. I will study my noble friend’s speech and see whether we need to come back to this on Report. In the mean time, I beg leave to withdraw the amendment.
Lord Jenkin of Roding
Lord Jenkin of Roding
My Lords, my intention in tabling this amendment was to draw the Committee’s attention to the need to plan for very timely electricity distribution investment to supply the needs of the City of London, and indeed central London generally.
The amendment is backed by a considerable amount of research commissioned by the City of London Corporation on future power supplies for the capital. Some pretty high-level discussions have also taken place in an electricity regulation working party, which includes Westminster City Council, London First, the Greater London Authority, the Mayor of London’s working group, the City Property Association and Westminster Property Association—it is an impressive array of sources. The message that they have all delivered is that long-term strategic planning needs to be enhanced to ensure new electricity connections to key development sites in central London, and that this must be available as projects are completed.
To give that assertion a little context, some office developments in the City have extremely large electricity requirements, which can take the electricity network operator for London, UK Power Networks, up to three years to plan and build. The problem that my amendment is intended to address is that the City of London Corporation has been advised in discussions with Ofgem that the regulatory framework actually prevents strategic investment ahead of need; in other words, when it comes to electricity supply, it is very much a question of providing for what is currently required as opposed to what is going to be required.
It would be quite wrong for me to give the Committee the impression that I think that the need for forward planning is somehow not accepted by the Government; of course it is. There has been a very productive exchange of correspondence, of which I have seen all the copies, between the City’s policy chairman, Mark Boleat, and my noble friend Lord Deighton, Commercial Secretary to the Treasury. The City has a way of going to the top. I entirely accept that we must avoid a situation in which supply need is assessed by reference to purely speculative projects which do not come to fruition. But to have a situation in which forward planning is so legislatively constrained seems to lean too far in the opposite direction.
My Amendment 53ZA proposes that electricity capacity regulations under Clause 21 should include provision that takes account of projected as well as existing needs. It gives 10 years as the forward planning period, which is based on technical advice. It is a halfway point in the 20-year horizon that is generally adopted by the Mayor of London’s London Plan, which deals with planning and development as well as other high-level strategic matters, but it is certainly a timeframe that should enable the necessary electricity distribution facilities to be planned and built.
Lord Deben
My Lords, this is a very important amendment, not least because there are other aspects of planning that should lead one to take this seriously. My noble friend has talked about the commercial and industrial needs of London, but there are also the housing needs. It is estimated that we could build 2 million homes in London with the aim of dealing with our housing shortage. There is no doubt that the sustainable way of development is to use land that has already been used, that we really should try not to build on greenfield sites and that we should do our best to ensure that our cities are increasingly the centres that they ought to be of people living together and of great enterprise. It is very difficult to say whether cities or civilisation came first, but there is no doubt that the two are intimately connected. I believe that there is a real issue about the supply of electricity.
Lord Jenkin of Roding
Perhaps I may interrupt my noble friend for a moment. Somebody is operating a mobile phone, and it makes the induction loop system very difficult for those of us who rely on it to hear what is going on. I do not begin to know who it is, but I recognise the sound. It is not my noble friend but somebody else. I beg pardon.
Lord Deben
I thank my noble friend for explaining what it was that I said that was so damaging.
I would like the Minister to be concerned not merely with the commercial activities, although they are very important, but with what most of us think ought to be the way in which we develop housing in future, rather than across green fields. That means that we have to make it possible to develop on once-used land. One problem that is always brought to me when this comes up is the availability of utilities in general and, of course, electricity in particular.
Secondly, when we decarbonise our electricity system, the availability of electricity becomes even more important, as someone said earlier, because that is what we are trying to shift to. Unless we can put in place what is needed in advance, we will not be able to carry through the whole purpose of decarbonisation. When one looks at the present circumstances, we really are an 11th hour nation. We really do things at the very last moment. I have every sympathy with those who object to the present circumstances, in which nobody does anything until the situation is so disastrous that something has to be done or the whole thing will collapse. That is not a way to plan anywhere. Although no doubt my noble friend will tell me that it will all be dealt with—and here I declare an interest in that the consultancy I chair gives advice on sustainable development—my experience is that is not always like that. It is not always easy to have ready access to electricity supplies, in particular.
I commend my noble friend’s comments, but I hope that they will be taken in a wider sense—this is not just about London, there are other great cities where similar circumstances exist. We do not want people to build, develop and grow in places which are much less suitable simply because the electricity supply is not immediately available. That is a mistake that we have made in the past; I hope that we will not make it again.
Baroness Verma
My Lords, I thank my noble friend Lord Jenkin for his amendment. Amendment 53ZA proposes that providing capacity should take account of projected growth over a 10-year period. I understand that he has proposed it because of concerns about the long-term capacity of electricity networks and the ability of distributive network operators to make strategic, long-term investment decisions. I should make it clear from the outset that the capacity market is not intended to drive investment in network capacity. Rather, it is designed to ensure that there is sufficient longer-term investment in electricity capacity, including generation and other forms of capacity, such as demand-side response.
In March, Ofgem published its strategy decision for electricity distribution network price control. That explained that price control had been designed to encourage distribution network operators to provide a high level of service for connections while maintaining a reliable network and delivering value for money for existing and future customers. The decision also explained that flexibility has been provided for DNOs to submit a case for strategic investment in their business plans on a project-by-project basis. Similarly, the Electricity Act 1989 already provides some flexibility for early investment—for example, the distribution network operator and its customer can make an agreement that allows an upfront user commitment agreement between the DNO and a customer who wants strategic investment. I understand that, in the case of UK Power Networks and its customers in the City of London, this is already happening.
It is vital that investment in our networks continues at a pace that supports our future energy needs. None the less, we must be mindful that there will be a balance to be struck to ensure that consumers do not pick up the costs of unused or underused assets. For this reason, it is right that Ofgem and the network companies continue to consider carefully where investment ahead of need is proposed.
My noble friend also makes an important point about ensuring that decisions on capacity of electricity supply are made with due regard to the long-term outlook. As such, for the capacity market, the Government have committed to publishing a delivery plan every five years and producing annual updates to that plan. These plans will include long-term forecasts of electricity demand and supply, and will inform the amount of capacity contracted through the capacity market.
I hope that my noble friend finds my explanation reassuring. Before I ask him to withdraw his amendment, I shall respond to the noble Baroness, Lady Worthington, on her questions about how the capacity market works and how it is envisaged. A forecast of future peak demand will be made for four and a half years ahead of the delivery year in which it must be available. The amount of capacity needed to ensure security of electricity supply will be acquired through a competitive central auction four years ahead of the delivery year. Generation and non-generation approaches such as demand-side response will be able to participate in the capacity auction. All generation plant, including existing plant, will be eligible to participate in this auction, with some exceptions such as low-carbon plant receiving CFDs.
Providers of capacity successful in the auction will enter into capacity agreements committing to providing electricity when given notice in the delivery year in return for steady capacity payments or will face financial penalties. The costs of the capacity payments will be shared between electricity suppliers in the delivery year. That is a brief outlook of how it will work but I hope that the noble Baroness is reassured that there is plenty of detail. She also referred to the Delegated Powers Committee. As she is aware, we have submitted extra information to the committee and it is now looking at that. We will then look at its recommendations but until that point it would not be right for me to comment on them. With that, I hope that my noble friend will withdraw his amendment.
Lord Jenkin of Roding
I am very grateful to my noble friend for her careful reply to the amendment. It is clear that she understands the nature of the problem but somehow there has to be a greater understanding between those who represent the interests of developers and other business people in the City and elsewhere, and those who are concerned, as she said very properly, not to add additional costs on consumers unnecessarily. I hope the discussions will continue because it seems to me that my noble friend has spelt out the problem very clearly as the Government see it. As I have said, we have had the consultation with my noble friend Lord Deighton. It is also clear from what my noble friend Lord Deben said that this is a wider problem than just the City and the commercial districts. There is something here which needs to be looked at. Those who have been advising me on this will certainly read very carefully, as I will myself, what the noble Baroness has said.
On the wider question asked by the noble Baroness, Lady Worthington, I have had an invitation, as I suspect have others, to a briefing to discuss the document published yesterday, the Consultation on the Draft Electricity Market Reform Delivery Plan. I think this will be on Monday and I am very much looking forward to it. In the mean time, I mentioned that I had not had the full printed copy and, mirabile dictu—sorry, one is not allowed to use Latin—or, amazing to say, it turned up on my desk. I am extremely grateful to the official who made that possible, so I will have some interesting reading over the weekend. Having said that, I am very pleased to withdraw the amendment.