Lord Jenkin of Roding
Main Page: Lord Jenkin of Roding (Conservative - Life peer)Energy Bill
Lord Jenkin of Roding Excerpts
Lord Jenkin of Roding
“( ) for payments under capacity agreements to be commenced by the settlement body within six months after the national system operator has run a capacity auction;”
Lord Jenkin of Roding
My Lords, one of the themes running through our debates on the Bill has been the need to ensure that the UK has sufficient generating capacity to meet likely demands and to avoid power cuts. It is what is meant by security of supply. This concern has been sharpened by last month’s worrying 2013 report from Ofgem on electricity capacity and the forecast of margins falling perhaps even by the middle of this decade to dangerously low levels. The central purpose of this Bill, through EMR, which is at its heart, is to address this issue, and the capacity market is one of its principal instruments.
I must say at the outset that in the circumstances in which the nation finds itself Ministers have been quite right to identify this as a solution to the capacity problem—or at any rate to try to find a solution. They were right, too, to bring forward the first auction for the capacity market to 2014. But to retain 2018-19 as the earliest date for any payment under the capacity market is a serious mistake. What matters to potential investors is not the date of the auction, but the date on which they can be sure of the first payment if they are successful in the auction.
What I suspect lies behind this four-year gap between the auction and the payment is an idée fixe—an idea somehow firmly held within the corridors of DECC that what it is addressing is really confined to building new plant, for instance to commissioning new generating plant such as a combined cycle gas-fired plant. Yet what we are faced with now is that the problem is on us sooner than anyone had anticipated. The Ofgem report has aroused a great deal of concern, which is not unjustified. The National Grid, supported as one might expect by Ofgem, has reacted by suggesting what I can only describe as a couple of temporary expedients, aiming to tide the system over until the EMR really begins to bite towards the end of the decade. My impression from the welcome briefings we have had, not least that of yesterday, is that these temporary expedients are what DECC is really basing its hopes on: that we shall not in fact have any power cuts. What is strange is that these temporary expedients had previously been rejected by DECC because of their potential adverse impact.
Ofgem’s electricity capacity assessment concludes that risks to security of supply are likely as early as 2014-15, driven by further reductions in electricity supplies from the withdrawal of installed generation capacity. The report also highlights that future policy and price uncertainty are continuing to limit investment in thermal generation. The assessment bolsters the case for bringing forward a mechanism to deal with the underlying issues contributing to generation inadequacy, which some commentators have described as the “missing money” as in a world of high renewables, thermal plant will run less and less often at suppressed prices. There is also the uncertain economic viability of conventional generation going forward.
Yet against that background, the grid launched what it called an informal consultation last month on two new temporary expedients. I think I need read only the title:
“Demand Side Balancing Reserve and Supplemental Balancing Reserve: Informal Consultation on the Development and Procurement of two new Balancing Services”.
What is needed is new capacity, not temporary sticking plaster. If the required plant is not in the system, it simply is not available for balancing anything. However, it is actually worse than that. The consultation document acknowledges in paragraph 32 on page 9—I have it here if necessary—that,
“security of supply is a function of the market which is underpinned by the energy policies under which the industry operates”.
It also says that it is not National Grid’s role,
“to ensure there is sufficient generation capacity available to meet demand”.
Yet the proposals aim to ask National Grid to do precisely this, by procuring capacity through the supplemental balancing reserve and demand-side balancing reserve.
The SBR is essentially a form of strategic reserve with last-resort despatch. As I intimated earlier, the strategic reserve was rejected by DECC, while acknowledging that such a mechanism does not address the missing money in the energy market but could even make the problem worse, in that investors might fear that the strategic reserve will be deployed before it is envisaged it would be—that is, when other capacity is available, albeit at very high prices. This would dampen the investment signal for players outside the strategic reserve, leading to what one might describe as a slippery-slope effect whereby no new investment is viable without an SBR contract. More and more capacity would then have to be procured within the strategic reserve. The result is that it simply displaces the ever-dwindling part of the market, with no intervention. What is needed is to bring forward not only the auction date under the capacity market but the date on which payments under the capacity market will be received. That is the purpose of my amendment.
At Second Reading, noble Lords may well remember that I drew attention to the substantial amount of mothballed plant held by some of the larger generators. They were mothballed because it is simply not economic to run them at current prices and in the light of uncertain futures. Some of this capacity could well be brought into production over the next six to 18 months, provided—this is what has to be hoisted on board—that capacity market payments can be made as soon as the plant is available and commissioned. That would happen if this amendment were to be accepted; both Ofgem and the grid recognise that the immediate problem is about capacity, not balancing. If my noble friend is unable to accept the amendment as it stands, perhaps she would agree to reflect on the situation I have described over the recess and consult further with those who are trying to help the Government to avoid the risk of serious interruptions of supply. The mechanism would be there but the implementation dates need to recognise the growing immediacy of the problem we face.
I make just one final point. This is not primarily about improving access to the market—other amendments will address that—but about reducing the risk of blackouts. I repeat what I have said previously; if the country faces interruptions in electricity supply, it is Ministers and the Government who will be held responsible. I, like everyone else, wish to avoid that. I beg to move.
Baroness Worthington
My Lords, I am extremely grateful to the noble Lord, Lord Jenkin of Roding, for tabling his amendment. We discussed the capacity mechanism in the previous session, when our focus was on the interplay between existing generation, more supply coming on and the demand side of the capacity mechanism. This amendment gets to the heart of how the capacity mechanism is proposed to work. One of my major concerns about the Bill relates to this mechanism because it is quite a dramatic intervention into the market, yet we still have very little in the way of detail as to how it is proposed to operate. I urge the Minister to give us some reassurances that we will see the draft statutory instruments pertaining to this part of the Bill as early as possible. It is one of the most unworked-through parts of the Bill and it is only when the SIs are drafted that we will be able to answer some of these important questions raised by the noble Lord, Lord Jenkin of Roding. Can we therefore have some reassurances about the timetable for publishing the draft SIs for this part of the Bill?
Lord O'Neill of Clackmannan
My Lords, I am at a wee bit of a loss here. My understanding was that markets operate on the basis that if there is a shortage and there is a demand, the price rises, and that plant which is presently idle will be brought into play.
The noble Lord, Lord Jenkin, made no reference to those plants which are either under construction or for which planning permission has been granted, and which may well be up and available, if not running, in the period between 2014 and 2018-19. I think that he is taking the long overdue siren noises from Ofgem of June a bit too seriously. Most people just said, “It’s typical of Ofgem”. It has taken so much longer to wake up to the fact that all this capacity is going out because of European directives and the like that there is going to be a problem. So his new-found urgency here I find somewhat unconvincing, because of his dependence on Ofgem's latest edict. I am not sure whether we need to wait four years, but I do not think that six months is necessary. It would be helpful if the Minister could give us some idea; it would be nice if we could get what was going to be in the SIs in the autumn, but not necessarily that. Perhaps she could give us some idea of the estimates and what the nuancing is of the information. As far as I can see, there is idle plant which, if the price was to rise, would become attractive to operate. Furthermore, there are a number of schemes which are either in the course of construction or would be accelerated once the process started. You do not build a power station in six months; you build it in about three and a half years. I suspect that that is the reason for the four-year timeline. So I am not sure that we need the amendment at all, but it would be helpful if the Minister could give us a clearer idea of the forecasts from DECC and others on the availability of plant, which would allay some of the anxieties.
Lord Jenkin of Roding
I remind the noble Lord of some of the figures that I gave at Second Reading. I have been provided by some figures by one of the companies that have mothballed plant; its national estimate is that there would be mothball capacity that could be brought back into production within three to six months of 2.6 gigawatts; between six to 12 months, a further 1.4 gigawatts; and 12 to 18 months, 2.6 gigawatts. That is not in the least bit inconsequential; these are important figures. If nobody is going to get any payment until 2018-19, that is how they will stay—mothballed—because they will not see what their payment is going to be.
Lord O'Neill of Clackmannan
If this plant were to become necessary, the price would rise—but the “if” involved in the “were” of this plant becoming necessary is still open to doubt. The noble Lord has taken the worst possible scenario and tried to build the case on it for something that will be extremely attractive and very convenient for the companies that have been lobbying him. It might suit their purposes but it might not suit everybody else’s—and it may not even be necessary in the first place. That is why I have doubts about this sort of stuff, which is almost built on the back of Daily Express scaremongering. We know that there is going to be a terrible winter next year, as there is going to be every year—and, we are told, there are going to be blackouts. Well, we have had terrible winters and, so far, we have not had any blackouts. It is getting worse because the generating capacity is diminishing, but it is not yet diminishing at the rate that would necessarily require us to do what the noble Lord asks us to do.
Baroness Verma
My Lords, I will try to get the passion back into my voice. I was responding to my noble friend Lord Jenkin. If I can just give him a word of comfort: the current Ofgem and National Grid consultation will most likely focus on ensuring that some plant is held in reserve. I know that my noble friend is concerned that there will not be enough capacity in reserve. This is a short-term intervention to bring back already mothballed plant. The capacity market is a medium-term intervention that we hope will incentivise investment. We want to ensure that the market itself stands on its own in the coming years. We are trying to assist enough capacity on the grid.
I forgot to respond to the noble Lord, Lord O’Neill, and the noble Baroness, Lady Worthington, about the consultation on the SIs. We intend to consult from October on the detailed implementation of EMR. This will give noble Lords an opportunity to scrutinise the detail of the EMR ahead of Report. Further detail of our plans for secondary legislation can be found in the memorandum that we recently sent to the Delegated Powers and Regulatory Reform Committee. I hope that having given my noble friend that extra response, he now feels that he can withdraw his amendment.
Lord Jenkin of Roding
My Lords, I began my speech a few minutes ago by saying that I found the Minister’s response very disappointing, and I do not think that anything she has added since then alters my reaction. I am grateful to all those who took part in the debate, and particularly the points made by the noble Baroness, Lady Worthington, that it is very difficult to know how this will work until we have details of the statutory instrument that will implement it. I entirely endorse her demand that this must be available before Report so that we can make sense of it. She also agreed that we may be seeing more mothballed plants by 2020. That is an estimate that I am not in a position to either endorse or deny. She is also absolutely right that we have to get the demand side response appropriate, and I know that the Government are working on that.
The Minister said something with which I entirely agree: there must be no payments in advance. We cannot ask customers to pay for something before it actually happens. I never suggested that. If she looks at Hansard eventually she will see that I indicated, “provided the market payments can be made as soon as plant is available and commissioned”. That disposes of that argument entirely. I am not for a moment asking that payments should be made in advance. That is not how the system is supposed to work as I understand it. My noble friend also seemed to imply that we could not have different auctions for different years. For the life of me I cannot understand why it should not be possible to have an auction for people who would be able to bring back mothballed plant within, say, 18 months. If that were the conditions of the auction, the firms that have mothballed plant and could bring it back within 18 months would be able to bid for it. That does not mean that there would not be another auction, even perhaps operating in parallel. There will not be many takers in the early years. We were told the other day that contracts for CFD might be over a period—was it 60? That is the sort of numbers we are talking about. It should be perfectly possible to have different auctions for different periods with the payments made appropriate to the date of the auction. This needs to be examined more carefully and we should not just accept my noble friend’s assertion that it would simply muddle up the whole auction process. I do not believe that for a moment. We can be a great deal more subtle than that.
Baroness Verma
My Lords, let me assure my noble friend that mothballed plant will be able to participate in the capacity auction.
Lord Jenkin of Roding
Yes, but it will not be able to get any money until 2018-19. That is the point of this amendment. If they can bring the plant back and have capacity available for meeting the demand and operating under the SBR before that, and it is available and commissioned, why should they not get their money? Why do they have to wait another two years?
Baroness Verma
My Lords, let me again assure my noble friend that those who are successful in the capacity auction held four years out will receive a capacity agreement which guarantees them a steady payment in the delivery year.
Lord Jenkin of Roding
That is completely new. Does the Minister mean in advance of 2018-19? No, she is being advised from behind her. She may not have got that quite right.
I think that there is sufficient confusion on this that we must wait until we have the full details of how the scheme is going to work. That will require our having the details of the statutory instrument that implements it. I reserve my right to return to this matter.
Lord Deben
Can I underline what my noble friend has just said? It is extremely difficult to discuss these issues without having the details, and all the details have come very late. I have to say that it is extremely hard for us who may instinctively wish to support the Government if we do not have the information. This is another example of that. Either we have the information and can have a Committee stage or we do not have the information and have to spend our whole time making it difficult for the Minister, who herself does not have the information because she does not know—and it is not her fault—what will be in the statutory instrument. I therefore ask the Minister to go back and make sure that we can feel we are in charge of the facts, so that we can have a proper discussion.
Baroness Verma
No, my Lords. I have pointed out that we intend to consult from October on the detail of implementation. I have also referred to the secondary legislation. Further detail of our plans for secondary legislation is in the memorandum to which I think noble Lords have access.
Lord Jenkin of Roding
What my noble friend Lord Deben has said merely reinforces the condition that we will have every right to return to this matter on Report, because we are having to debate it in Committee with less than half the necessary information. I still think that there is a perfectly valid way through this, which is to have different auctions for different periods between the auction and the payment. For the life of me, I cannot understand why that could not happen. But it needs to be examined: there may be absolutely indisputable objections to it; at the moment, they have not been pointed out to me. However, I think that we have said enough and I beg leave to withdraw the amendment.
Lord Jenkin of Roding
My Lords, I do not for a moment suggest that Clause 26 should not be in the Bill. I have adopted the device of having a debate on it in order to explore its intention a little more. I remind noble Lords that at one point we expected that we would reach this point last week. We have been a little delayed. I could have tabled an amendment. I would have been perfectly simple: “Page 17, line 1, leave out subsection (3)”. So I wish to ask my noble friend some questions about subsection (3).
What is the use of the four powers which the Government are proposing to take to require generating plants to operate differently? They relate to: the manner in which functions are to be exercised; restricting the use of generating plant; the way in which a plant may participate in a capacity auction; and the inspection of plant or property. These are very broad points. I am given to understand that some generators are increasingly apprehensive that the becoming involved in the capacity market could well have undesirable operational strings attached to it. There is no indication that any of the powers would be limited even once they had ceased to be part of the market. I have to warn my noble friend that I am told that this could potentially undermine the appetite of generators to become involved, which manifestly is not the Government’s intention. Here again, we have a clause which is drafted in very broad terms and we have to wait until we see the regulations and subordinate legislation that will come from it. I do not want to repeat what has been said so often, but in advance of our seeing the draft regulations, it would be helpful if the Government could explain how they intend to use the powers, especially those relating to the use of generating plant or the manner of participating in an auction. They want to ensure that generators which may be looking to participate in the capacity market can understand and have confidence in what it may mean for them in terms of plant operation once the Act comes into force.
We have heard a great deal in these debates about the problem of uncertainty and the need to engender confidence. That is hugely important if you are going to attract the necessary investment. I always come back to the meeting that we attended some weeks ago chaired by the noble Lord, Lord Oxburgh, when a lot was said by different categories of potential investor. We have got to have the Bill otherwise we will not get investment. At the end, the question was asked: if we have the Bill, will we get the investment? That was followed by a long silence. Nobody is able to guarantee this. Therefore, we must do our very best to make sure that any cause of uncertainty, any anxiety about the likely consequences, is treated as very important.
Clause 32 again gives the power by regulation to amend or repeal existing legislation. I shall not read it all out because everybody can see what is in it, but I am particularly worried about paragraph (d). Here again we have regulations that will give very wide powers of direct legislation—in a sense, Henry VIII provisions—if they are connected to the development of a capacity market, including the annual reports made by the authority on the security of electricity supplies and the report on the security of energy supplies as a whole. As I said, paragraph (d) provides for wide amendment of existing enactments. It is very broad and, here again, concerns have been raised by the industry—I am sure that it has made its views known to my noble friend’s officials—that it may take effect unpredictably. Therefore, there is increasing uncertainty and, to that extent, reducing confidence.
My amendment is simply to ask my noble friend to give an explanation. What are the likely uses of this power? How widely would it range, bearing in mind that it includes amendments to primary legislation and is consequential on provision which itself is made in secondary legislation. I understand the desire of the Government to cover every possibility, but the more they seek to cover with very wide powers of this sort without adequate explanation of how they are going to be used, the more they increase the uncertainty which undermines the possibility of investment. I hope that my noble friend will be able to give us some further information which may help to reduce that uncertainty and increase confidence.
Lord Jenkin of Roding
My Lords, I start by saying that what my noble friend has said in response to the amendments about parliamentary scrutiny will be very welcome indeed. The noble Lord, Lord Grantchester, is nodding vigorously in agreement, so I am delighted with that.
I tended to examine this from the point of view of the people whose investment is being sought. This is right at the heart of the Bill. Others, perfectly properly, have concentrated on the Delegated Powers and Regulatory Reform Committee, and my noble friend Lord Crickhowell spoke on the constitutional implications of the proposals. Of course, everyone will now want to study carefully what my noble friend has said, and some comfort may be found in that. We hear that it will be only consequential amendments. We will need to wait and see. I come back to the same point that we have made again and again: by Report we must know what is to be in the regulations.
I hope that my noble friend will take very seriously what my noble friend Lord Crickhowell said. If we get to the Floor of the House and find ourselves still having to make this kind of speech, the Minister will find herself in considerable difficulty. That is the last thing I want to see. I hope that her officials will take note. It may affect the date that we deal with it in October; we do not have any dates yet for Report. Getting the detail clear to everybody before we start debating clauses and amendments on Report is of the highest importance. I make no apology at all for having raised this matter at this stage. It is a hugely important issue and I know that my noble friend has taken it on board. It may be that some of her officials will have to cut short their holidays—poor them. I am sorry for that, but we are dealing with what appears to a lot of people to be legislation being made up as it goes along. That is hugely damaging from the point of view of any department which launched into this without knowing what would come out at the other end. When we come to final parliamentary scrutiny of the Bill, which will be at Report and Third Reading in this House, we really need to know what we will be talking about. With that admonition, if it may be so described, I am happy to withdraw the objection and agree that the clauses should stand part of the Bill.
Lord Oxburgh
My Lords, I support the general thinking behind the amendment, which is different from the amendment that we debated a week ago about a higher-level advisory committee. I am not sure that I agree with the noble Viscount, Lord Ridley, in his pessimistic approach to this. I do not see the amendment as taking power away from Parliament or diverting interest in that way. It could provide the kind of information and scrutiny that makes Parliament’s role easier.
The one point that I would make, which has not yet been made on the amendment, is that the most important thing about a panel is not just its expertise but its continuity. At the moment, there is very little corporate memory within DECC, and bodies such as an expert panel can indeed provide continuity. I agree that it has previously been very important to solve things in this way. I therefore hope that the Government will take on board the broad intention of the amendment.
Lord Jenkin of Roding
My Lords, my mind goes back to the group set up last year under the chairmanship of the noble Lord, Lord Oxburgh, to look at the draft Energy Bill. My recollection is that as a result of the evidence we received, which was very good and knowledgeable, our main worry about the contents of the draft Bill was the huge powers being given to Ministers. Some of that has now been modified. For instance, there is now an infinitely better counterparty arrangement than existed previously in the draft Bill, in which there was almost nothing. There have also been other changes.
However, certainly in the initial stages of the operation of this contract for difference, one is going to be almost entirely in the hands of Ministers. They are of course accountable to Parliament, and I entirely accept the point made by my noble friend Lord Ridley that that is the main avenue of accountability. What worries me is the question of whether the panel that has been proposed by the noble Lord, Lord Whitty, would actually make any difference. When you have so much power concentrated in the hands of Ministers—and one has to say that there is not all that much public faith in Parliament at the moment or in whether parliamentary accountability would be effective—one is running the risk of endless cases of judicial review. The growth of judicial review in our system over the past 20 years has been absolutely colossal. Everyone finds it possible in some way or another to take a complaint against authority to judicial review. Some of it has no merit at all but is enormously time consuming, very expensive for those who have to defend it, and a great absorber of the judicial power of the courts. I worry, given all these powers in the Bill, whether accountability to Parliament will be enough.
I listened carefully to the noble Lord, Lord Whitty, and there are obviously some attractions in what he was saying. On the other hand, the point made by my noble friend Lord Ridley about the way that any panel such as this could be got at is not without substance. We are all familiar with situations of that sort. In relation to another amendment, which I may not be here to move because I shall not be here in August and we will not reach it tonight, the power of very large corporations such as the big six generators and distributors, when contrasted with the power of very much smaller bodies that might be affected by their activities, is something of which people are very well aware. What is your remedy? You can go for judicial review, and a panel of the sort suggested may be subject to the same pressures.
All this is inherent in the nature of the new electricity market reform, which is the main purpose of this Bill. I agree with those who say that there is a great deal of hope about it on the part of the Government that it will work. I studied the paper sent to the Delegated Powers Committee of this House, in response to its request for more information, and wondered how anybody could make that system work. That is my great anxiety on this issue—and I am not sure that a panel would have any impact.
For the remainder of the time we have to scrutinise the Bill, we must do as much as we can to try to get the regulations in a form in which the authorities can be made accountable to Parliament as to whether they are in breach of regulations or not. Everybody has to do their best to make it work, but I shall listen with great interest to what my noble friend the Minister says in answer to the suggestion of a panel. I think that we shall hear what we heard before—that there are a great many advisers already in the department and they do not want any more, thank you very much. I understand that argument. But the more I hear about how the system is intended to work, the more we have these huge volumes of paper that are churned out by the department, which is doing its best to keep us informed. It fills me with great foreboding. I hope that I am wrong, but I have a horrid suspicion that things are not going to turn out quite as has been hoped for by everybody who has expressed themselves, as I have, in favour of this Bill.
I shall listen to my noble friend on the question of whether a panel would help or not. At the moment, my mind is not yet clear on this.
The Earl of Caithness
Given that the noble Lord, Lord Whitty, wants to formalise this proposal and put it in the Bill, does he anticipate that members of the panel, and the staff, should be paid? If so, is that going to be pensionable? If that is the case, where is the money coming from?