EU: Energy Infrastructure (EUC Report)

Lord Kerr of Kinlochard Excerpts

Monday 29th July 2013 Grand Committee

[Lord Kerr of Kinlochard]

My Lords, I need to mention that I am on the boards of a mining company that digs up coal and uranium and a power company that sells gas and electricity, and I was on the board of an oil and gas company.

I wish I could say it is a pleasure to follow the noble Baroness, Lady Parminter, but I would be lying because her expertise shows up mine, which does not match my stated interests. I greatly enjoyed this report and I am grateful to the committee for producing it and to the noble Lord, Lord Carter, for his masterly introduction. I am also grateful to the Government for what seems to be a rather thorough and clear response, which helps our discussion.

I am particularly grateful to the noble Baroness, Lady Rawlings, for she is, I think, apart from me, the only non-member of this committee who is speaking in this debate. I approached it with tremendous trepidation, surrounded by all this expertise, experience and knowledge. She of course sailed straight in with style, panache and daring, so I am following in the wake of her battleship.

I want to say something in general about energy policy, then concentrate on five points in the report, and then come on to shale gas and comment on what the noble Lord, Lord Giddens, said. My general point is that if the three aims of energy policy are to cut costs, cut emissions and keep the lights on, the country seems to be doing quite well on the second, rather badly on the first—partly because we are setting the pace in Europe on the second—and risking serious trouble on the third, as far as I can see and as far as Ofgem seems to be telling us, because of lack of investment.

I have to admit that I am not convinced that the Energy Bill, on which the Grand Committee is working so hard, will change the picture much. It seems to maintain the current balance between the three objectives and is a bit of slow-burner, with capacity payments—whether or not they are a good thing—not coming in for another five years. Nor do I believe that achievable changes in EU energy policy would make a great difference either, although some of those proposed by the committee make obvious good sense; for example, it is clear that the ETS badly needs reform and that the most obvious reform is the backloading of the auction of allowances, which I really hope will be agreed second time round.

However, there is not a great deal that the EU can do given that the treaty makes it clear that each country’s national energy mix is a matter for it alone. Like the committee, I think that there could be rather greater stress on interconnection in energy grids and energy pipelines, for oil as well as for gas and electricity—the report is curiously silent about oil, which is likely to remain the principal transport fuel for Europe for some considerable time to come. If you look at countries such as Bulgaria, which, as the report points out, is still 100% dependent on Russia for its gas, and the Baltic states, where most links still run back to old Soviet suppliers, it is clear that interconnection should be a priority. It increases competition, reduces costs and volatility, and increases security, in political as well as security terms, if you look at things from Vilnius, Tallinn or Riga.

I hope that the Commission will not stop trying to encourage member states to overcome their reluctance to accept common carrier obligations. Europe’s fractured energy market would be much more efficient if pipelines and grids were subject to the same sort of rules as apply in the UK domestic market or in the EU transport market.

In general, however, I would not want the Commission to be too ambitious this year. The committee is rather more expansive, and the points that I shall now make on the report are where I think it is asking either for a little too much or for the wrong thing. Sometimes, its enthusiasm has run away with it. I give five examples: first, paragraph 54 recommends that the Commission should require member states to submit obligatory annual reports on national energy policies and should assess those reports for the compatibility of such policies with the EU’s state aid rules.

It would be very good if the EU did have a single market in energy rather than 27, as the noble Lord, Lord Whitty, pointed out, but it does not. If energy were widely traded across national frontiers, it would be reasonable—indeed, essential—to apply the competition rules assessing the fairness of national support schemes, but I am not sure that member states, including the UK, are quite ready now for the Commission to step in. For example, with regard to the announcement last month that the strike price for offshore wind in the UK might be as high as £155 per megawatt hour, would we want the Commission to tell us that that was potentially a breach of European competition rules?

The point is that it is no accident that the treaty says what it says now, which results from a long process of negotiation and is as far as the member states were prepared to go. They have not conferred on the Commission the power to run a real energy market. I therefore agree with the Government’s rather guarded response to this recommendation, and I think that the Commission is quite right to be pretty reticent about applying the rigour of state aid rules in the energy sector.

[Lord Giddens]

I thank the noble Lord for giving way. There is an interesting discussion to be had about having a parallel to the European semester in energy. The European semester appears to have achieved quite a large rate of acceptance, obviously because it originated in the eurozone, but it is not completely implausible to suppose that you could have some kind of analogue to that which would be to everyone’s benefit, precisely because we are, or we want to be, using interdependent energy, and it would make sense to get the same kind of information-sharing that the European economic semester provides.

[Lord Kerr of Kinlochard]

I entirely agree with the noble Lord. An exchange of ideas of the kind that the noble Lord, Lord Maclennan, was talking about, would be highly desirable and moderately helpful. However, the committee’s report talks about the application of the state aid rules. We are moving on from something like the European semester on economic policy to something like the entity talked about in the French-German paper at the end of May, which would have fiscal rules enforceable with sanction powers. That is not likely to happen in the short term, but I do not think that full application of the rigour of state aid rules is either necessary or desirable at the present stage of the development of EU energy policy.

Paragraph 98 deals with nuclear power. The Commission is trenchantly urged by the committee to address outstanding issues, particularly liability, waste and, again, state aid. Why? Is it plausible that the Commission could find a solution that would satisfy the nuclear French and the now anti-nuclear Germans? What are we supposed to do? I do not understand the purpose. Do we need a single common answer? Provided that safety rules and high safety standards are enforced across the whole of the Union so that safety is assured—remember that the closure of their Chernobyl-style plants was a precondition for accession countries joining the European Union—subsidiarity should apply. I do not see why there need be an EU regime for waste or a particular EU level of liability rules, let alone state aid rules. I note that the Government’s response passes over this recommendation in silence. I find that silence sensible and eloquent.

On the subject of border taxes, I know that what we are talking about are global border taxes, but that seems like the argument that a financial transaction tax would be fine if it was global, when we know that it is not going to be. Paragraph 133 talks about the idea that imports from countries with low energy costs and environmental policies that we deem inadequate should be subject to an import tax in order to reduce carbon leakage. The Commission opposed this, citing huge administrative complexity. I agree, and I would also cite higher costs for our businesses and consumers, the certainty of retaliation against our exports and the probability that the precedent would prove interesting to those on the French left, for example, who regularly call for restrictions on imports from countries where labour costs are low.

[Lord Deben]

Does the noble Lord not also agree that this particular recommendation is often used by those who do not want to improve what we have but who always seek something that in their mind would be perfection, which we do not have; and that this is a dangerous route to go down because it normally means that we do not do either?

[Lord Kerr of Kinlochard]

The noble Lord is a great expert on such things. I will only say that I agree that it is a mirage. If we were to do it not as part of a global agreement, we would damage ourselves very seriously. If we believe in free trade, open borders and low tariffs, we need to be very careful of well intentioned exceptions.

My fourth point is that I am uneasy—I am getting into deep theological territory—about the call in paragraph 126 of the report for binding EU-level 2030 targets on energy consumption. What growth assumptions would underpin that target? If a member state of the European Union managed, by the skill of its economic policies and the energy of its population, to achieve an astonishingly high growth rate and therefore higher energy use, what would we do about the binding target? Would it mean that the state would have to be fined? If so, we would need to amend the treaty to give ourselves the power to do that. Let us not go there. Again, the Government’s response seems to be wisely silent on this recommendation.

Lastly—and here I am probably taking a step too far and pushing my luck too hard—I am not sure that I buy even paragraph 103, which has a marvellous ex cathedra ring to it when it states:

“Member States must be under no illusion: failure to agree a 2030 framework will restrict investment”.

I am in favour of a 2030 emissions target, but I am not 100% convinced that whether there is one will have much effect on the quantum of investment. Such targets undoubtedly have an indirect effect on the energy mix in member states. The mechanism is peer pressure from colleagues in the Council.

In fact, energy mix decisions probably owe more to what national electorates want or are prepared to wear, but there is no doubt that targets have some effect on energy mix. However, I doubt whether they affect the quantum of investment because companies do not base investment decisions on such targets. They are moved to invest or not invest by the clarity, consistency and credibility over time of the policy regimes in force in member states, and by whether profits will be permitted. Companies like profits. If they are going to invest, they want some kind of assurance about profits.

What deters investment is uncertainty, not targetry. What deters investment in this country is in part the hypocrisy of doubling the social and environmental costs paid by the energy consumer through his utility bills—the carbon taxes, installation costs, smart-metering costs and other energy-efficiency costs that have doubled in the past 12 months—while at the same time supporting and encouraging populist criticism of the industry for putting up prices. Of course it will put up prices if it has to charge all the levies in its bills. I find it objectionable to make the consumer rather than the taxpayer foot the bill for environmental policy. That seems to me to be socially regressive. But if you do not allow profit, you will not get investment. For the investor, long-term targets are neither here nor there. That may sound cynical but it is true.

I will turn to where the noble Lord, Lord Giddens, took us and talk about gas. The report sees it as a transition fuel and the committee worries that investment in gas could be at the expense of investment in renewables. I prefer to go with Energy Commissioner Oettinger who argues:

“Without gas, renewables have no chance”.

I do not mean just the intermittency problem. The fact is that when the EU economy takes off again, if emissions are to stay down, we need to replace coal with gas. That would cut emissions by 50%, which is the biggest single thing that we could do.

Poland today is 90% dependent on coal burn for its electricity generation. No wonder Poland leads the way in shale gas, with more than 130 concessions already granted. Coal-burn generation is increasing across the EU and in this country. Seaborne Appalachian coal is back on the market here, driven out of the US power market by shale gas. The speed of the shale gas revolution is striking. I think that the committee may have slightly underestimated its scale and effects. I am not talking principally about indigenous UK reserves or even EU reserves, although that story is quite dramatic.

At paragraph 74, the report quotes the British Geological Survey estimate of UK reserves of 150 billion cubic metres. However, last month the British Geological Survey raised its estimate from 150 billion to 37 trillion cubic metres, which is more than 500 times our current annual gas consumption. I do not expect us to exploit the Bowland shale nearly as quickly or efficiently as the Americans are exploiting Eagle Ford and the Bakken, or as quickly as the Chinese are already starting to, and will, exploit theirs.

I am talking about—as was, I think, the noble Lord, Lord Giddens—the effect on global markets and the new ability to access tight gas, coal-bed methane and shale gas. In the US, gas prices for industrial users fell between 2005 and the end of last year by 66% in real terms. In Europe, there was a 35% increase. That is because the US has shale and we do not yet. US emissions went sharply down. It is a delightful irony that just as the US Administration were angrily rejecting the Kyoto targets, the USA’s emissions were peaking. The US has easily met the targets that it rejected—because it has got shale. Therefore, it is burning less coal.

The US will export. I predict that the US chemical industries’ efforts to prevent exports will not succeed. The LNG price at European ports will therefore fall. Already, the Nigerian, Angolan and Qatari LNG intended for the United States is coming here because our price is three times the US price, or heading for Japan, Korea and China, where it is six times the US price. Clearly, these disparities will not last. World prices will fall.

Already, the Nigerians and the Dutch have had to give up pipeline gas prices linked to the oil price. The Russians are being forced to follow.

[Lord Gardiner of Kimble]

My Lords, I apologise to the noble Lord and I am very conscious that he has had to deal with some interventions. But we are getting to a point where he is receiving the amount of time that is for openers and winders. The Companion refers to 15 minutes for other speakers and 20 minutes for openers and winders. I apologise to him but I thought that it was only courteous to the rest of the Committee.

[Lord Kerr of Kinlochard]

I apologise to the noble Lord. I did not see on the Order Paper any reference to a time limit.

[Lord Gardiner of Kimble]

That is precisely why I have referred to the Companion for those timings for those debates that are not subject to a time limit.

[Lord Kerr of Kinlochard]

Very good. I have a paragraph to go. May I complete my speech? I bow to the opinion of the Committee.

[Noble Lords]

Hear, hear!

[Lord Kerr of Kinlochard]

Thank you. The Russians are being forced to reduce their prices too. Shale is extremely bad news for Gazprom, which is why Mr Putin plays up the environmental fears. The intriguing table at appendix 7, which shows that gas and nuclear are already the best buy, underestimates the extent to which gas will be the best buy. The data are DECC data, and therefore probably reflect the Government’s view that in the medium term gas prices are likely to remain at about their present level. I am pretty sure that they are actually going to fall, and therefore I think that the advantage of gas is understated in that fascinating table. I do not think it is just a transition fuel; it is a destination fuel. It is transformational, as was said by the noble Lord, Lord Giddens.

I am glad that the Commission is producing its framework proposal or communication, because I understand from the Commission that the purpose is to encourage the member states to get on with shale. That is a good idea, although I am sure that we will get on much more slowly than the Americans have done. I hope that the Government will give full support to the Commission. I am a little surprised that the committee was so cagey about shale gas, which seems to me to be a real game-changer.