Electricity Market (EAC Report)

Lord Kerr of Kinlochard Excerpts

Monday 17th July 2017 Lords Chamber

[Lord Kerr of Kinlochard (CB)]

My Lords, I need to declare an interest as a director of a power company. I also need to join the declarations of respect for the noble Lord, Lord Hollick, for his admirable chairmanship of the committee and of loyalty to the Jacobite takeover by the noble Lord, Lord Forsyth.

I had intended to make a number of extremely important and useful points, principally about Hinkley Point and capacity margins, but they have all been made already, so I will make a smaller number of probably less interesting points. Why did we get into this mess? When, in 2013, Mr Cameron agreed the strike price deal for Hinkley Point, the expected lifetime subsidy cost to the consumer was £6 billion. Since then, forecast wholesale power prices have come down and therefore the subsidy has risen to the number that astonished the right reverend Prelate and astonishes us all—£30 billion—and that is not the end. It will go on going up because the wholesale price of energy in the European market is set to go on going down. There is absolutely no doubt about that. The United States is now exporting shale gas LNG to Europe. There will be a Nord Stream pipeline across the Baltic bringing more Russian pipeline gas. There will be Yamal LNG from Siberia. There will probably be Iranian Pars LNG from the Gulf as well as Qatari LNG. The US is already the largest producer of natural gas in the world, and it will shortly be the second-largest exporter, following only Qatar. That is bound to drive down the price of gas in Europe. Already we can see that the cheapest way of meeting the trilemma would be combined cycle gas turbine gas plus wind power. We can already see that the price of wind is coming down, as the noble Lord, Lord Howell, said. The next auction for offshore wind will probably settle at a price lower than the Hinkley Point price, and that price will go on going down.

I do not know why Whitehall has assumed throughout the last 50 years that the price of natural gas in the world will go up. It seems that Whitehall still does, judging by the response to the report. I do not understand that; perhaps the Minister can explain. I share the right reverend Prelate’s feeling, and indeed the feeling of a number of noble Lords, that it cannot be right that future consumers—my grandchildren and those of the noble Lord, Lord Forsyth—should be forced to take on the ever-escalating cost of this project. There must be something that we can do. If we are seriously concerned about intergenerational fairness, or the unfairness of regressively recovering costs from the consumer, we have to do something.

I take the points made by the noble Lord, Lord Howell, that thousands of people now have their lives tied up in this project and that the Chinese dimension is important. Actually, my reading of the Chinese dimension is slightly different: I believe that the Prime Minister’s instincts were correct and that she would have cancelled this project last September but for people persuading her that it would be very upsetting to the Chinese if we did so. I did not feel that at the time. I thought that if the Chinese had been told we were cancelling for political or security reasons—that we did not want Chinese involvement, therefore we were cancelling—they would indeed have taken serious umbrage. However, if we had gone to the Chinese and said, “We are cancelling because the economics of this project make no sense at all”, I think the Chinese, who are hard-headed about these things, would have agreed. I ended up being very encouraged by what the noble Lord, Lord Howell, had to say: maybe the Chinese have recognised the point and are already thinking of a possible answer. However, we cannot just do nothing; we cannot let the juggernaut run ahead.

It may be that the EDF dimension of the problem will solve itself for us. If we do nothing, the project may well implode anyway. Of the four current EPR projects that EDF is running, the two in China are a couple of years late, Flamanville is six years late and the Finnish one is now nine years late and three times over budget. This year, Piquemal of EDF has gone, as the noble Lord, Lord Forsyth, reminded us. EDF’s share price was €80 a decade ago; it is €9 today. President Macron’s Government have just told EDF that 17 of its fleet of 58 nuclear stations in France must be closed. The noble Lord, Lord Hollick, mentioned the most recent escalation, and it will not be the last. He mentioned the latest delay, which is another 15 months out to 2027, and only an incurable optimist would expect no further delay.

This brings us to the capacity margin. National Grid tells us that it is running at about 4%, which is very tight. National Grid also tells us that it expects to see 9 million electric vehicles on UK roads by 2030 and, by 2050, a peak demand of 18 gigawatts—that is, six times Hinkley Point. Yes, we can expect problems of peak demand to be evened out by then due to improvements in battery technology and storage, smart charging and smarter domestic use, but the margin of supply over demand is really tight and we are already resorting, as the noble Lord, Lord Forsyth, said, to some extremely suboptimal ways of dealing with it. Paying heavy industry to switch off at peak times really does not help with the national productivity problem. Encouraging the resort to small, mobile, diesel-fired generators in large numbers outside hospitals and factories is good for neither environmental nor economic policy.

We all know that Brexit—if it happens—will deter inward investment. Being unable to guarantee secure power supply 24/7 all year round is a further disincentive that we do not need. Yes, there is ongoing investment in interconnection but, as the noble Lord, Lord Darling, hinted, talking of 2006, interconnection can be a bit unreliable. My cynical answer to the right reverend Prelate’s question about how good a guarantee would be is that I cannot see EDF switching off the lights of Paris to keep those of London burning. That seems to me unlikely. Leaving the emerging EU energy market will mean that we lose reassurance that we might have got that way—although I do not think that we would have got much.

The noble Lord, Lord Hollick, has drawn attention to the increasing age of the nuclear fleet, which is important. Of the 15 stations that produce 20% of our power, all but one will have reached the end of its design life by 2023. Yes, life extensions have been agreed, and no doubt all the right checks were done, but there will inevitably be more temporary shutdowns of the kind that plagued EDF’s French operations last year.

Looking at the capacity margin and those uncertainties ahead, I find the Government’s response to our report’s arguments disconcertingly complacent. I was a civil servant myself, so I recognise tosh when I see it, but I find it astonishing that Mr Jesse Norman, who has a reputation as an intellectual, should have put his name to this stuff.

My last point is more genial. We need a plan B—not just a Hinkley Point plan B, where I very much agree with the noble Lord, Lord Howell—but for what we do if there is delay or cancellation by someone else. We need a national plan B. Last month’s NAO report provides ample reason, if our report did not, for the Treasury to look again.

What happens if there is a similar problem in Cumbria at Moorside? It looks to me very much as if there is—for totally different reasons. The problems of Toshiba and NuGen suggest that one must, at the minimum, expect major delay in that project. That is also 7% of our expected electricity production: 7% from Hinkley point and 7% from Moorside. We need to know what the Government intend to do if these risks arise. It is not good enough to say, as the response to the committee’s report does, that all we do now is nothing: “We wait until late 2021 and then, if any gap in capacity is emerging, we can have a quick auction and, in four years’ time, fill the gap—no problem”.

Short-term, piecemeal policy-making precludes batch orders, prevents sustained production runs and leads to grossly uneconomic procurement. It is a crazy way to approach these risks—to say, “Let’s do nothing and, if there’s a gap, okay, we can have an auction in four years’ time to fill the gap that would have arisen in 2025”. It usually makes better sense to have a plan, so the committee’s first recommendation—for a plan B for what we will do if there is a gap as a consequence of Hinkley Point—deserves a proper answer. It has not had a proper answer from the Government so far. The House and the country deserve an answer, and I look forward to hearing from the Minister.