Lord O'Neill of Clackmannan
Main Page: Lord O'Neill of Clackmannan (Labour - Life peer)Energy Bill
Lord O'Neill of Clackmannan Excerpts
Viscount Hanworth
My Lords, I, too, express my appreciation of the intentions of the noble Lord, Lord Teverson, and the noble Baroness, Lady Parminter, but I should like to pick holes in the amendment in much the same way as has my colleague, my noble friend Lord Davies. Whereas he considered proposed paragraph (f), I shall concentrate on proposed paragraph (g). It may well be that the amendment is more sophisticated than it seems, because it is possible that the noble Lord, Lord Teverson, is trying to strike a judicious balance between saying something felicitous and saying something that will get past the Minister.
Let me try to deconstruct what is being said in paragraph (g). It is an injunction,
“to progressively increase the energy efficiency of the United Kingdom as measured in terms of quantity of energy used per unit of GDP”.
That is most unlikely to impose a binding constraint. The fact is that the ratio has been decreasing monotonically since 1950, at least, so that in 2010, we used about half the quantity of energy per unit of real GDP as we did in 1950.
I want to make a bigger point than that. I think that we should approach most of what we read in the Bill in a spirit of cynicism and scepticism. I am sorry if that sounds strong, but if we analyse a great many clauses in detail and think of the circumstances in which they would be applied, we realise that they impose non-binding constraints and impose no particular behaviour by the Government that might staunch emissions, improve efficiency, or whatever. I do not fully understand the motives of the noble Lord, Lord Teverson, and they may, as I said, be more sophisticated than they seem but, if I may be forgiven for saying so, his amendment would perpetrate exactly such an ineffective provision. I hope that he will forgive me.
Lord O'Neill of Clackmannan
I follow on from my noble friend’s remark and say that Amendment 51N is pretty vacuous. It is giving us the excuse to have a debate, but it will not come to anything. It is certainly the case that the Government have been reasonably successful in demand reduction because of their economic incompetence over the past three years. We have been in recession, we have seen emissions fall and we have seen the demand for electricity change. That is the first point which has to be made.
Sooner or later, we will come out of this recession—and when we do, we are going to need far more than Amendment 51N would do regarding capacity changes. We are, I hope, going to have an economy growing in a manner which, in its early stages, will probably not be the most attractive for energy efficiency. In some respects, we want to get out of the recession as quickly as possible. Having to chase around for the most energy-efficient way of doing that when we are trying to find economic prosperity for our people would be questionable in the eyes of the public and their sense of priorities. Frankly, the quicker we move on from this amendment the better, because it is a waste of time, although the other amendment has a degree of merit. I am also always dubious about split infinitives in law at the best of times.
Lord Dixon-Smith
My Lords, I do not know whether my noble friend Lord Deben is getting up to speak or walking out. I did not realise that the noble Lord who just spoke would have such a potent effect that he would drive my noble friend nearly out of the Room.
I am bound to say that it is very dangerous to blame the state of the economy in the past three years for what has gone wrong. That is a bit like trying to compare last week’s weather with the global climate. When you look at matters affecting the global climate or, indeed, the national economy in the wider scale, the blame lies rather more out of the three years that we are completing. It has a great deal to do with what went on before, but that is not what I really rose to speak about.
I should perhaps explain that there was a time, quite a number of years ago, when I had the ultimate responsibility for the complete built estate owned by Essex County Council, which is a major operation. Among the things that we had to do, there was the little matter of energy efficiency. There was also the question of the quality of buildings, because there were some truly appalling buildings around in those days. It was a constant balancing act as to what we did. Two factors were vital. In those days interest rates, which fortunately we do not have to consider today, went up and down rather like a yo-yo so that schemes went into and out of our plans depending on those rates. The other factor was of course the price of energy itself. If your Lordships want people to take an interest in economising on energy, the quickest way to do it is to put the price up. That is a brutal reality and we should not forget it. Price will always be an important factor.
When we get into the question of demand management, I have my own view on smart meters. First, they are not very good at demand management; what they do is to move the demand around so that you can reduce the peaks and troughs on the supply side, to a certain degree. However, they do not actually reduce demand in total. We may as well bear that factor in mind. Secondly, we have to bear in mind that the idea that we might somehow reduce demand for electricity is unreal in the present context. We are looking at a period when we have to decarbonise the whole economy, in effect. That means that everything has to go down to zero emissions at the end of this period. In order to do that, we will be obliged to have an electricity generating market which is probably twice as big as it is today, if not even bigger. The idea that we are going to reduce demand for electricity, bearing in mind this evolution, is completely unreal.
My last point is that the same person has to pay, whether it is for energy or for the economy measures. There is only one customer. We do not want to fool ourselves that the Government have a fund of money to do this with. The Government have our money, and one way or another the customer is going to pay. It is a question of balance. I am all for getting all the efficiency that we can into the generating system and into the demand system. However, we should not fool ourselves—whichever way the equation goes, it is still the case that one person is paying. I am slightly pleased about the initial criticism of these amendments, because introducing a phrase such as “where economically possible” into the equation puts a bit of sense into it. If it were not there, you could start taking some very rash decisions which in fact were not economically sensible.
Baroness Worthington
My Lords, I thank the noble Lords, Lord Jenkin of Roding and Lord Roper, for tabling their amendment. We have tabled a very similar amendment—great minds must think alike.
Our Amendment 52A seeks to do almost exactly the same as Amendment 52, which is to make it a requirement for the Secretary of State to have the same duties as under the Electricity Act 1989, in which the protection of “existing and future consumers” is enshrined through the advancement of competition. We will discuss this in more detail when we come to the amendment in the name of the noble Lord, Lord Berkeley, who has come up with a much more precise way of tackling this problem.
These amendments seek to ensure that the Secretary of State has a duty to advance competition. Much has been said, very eloquently, about the need for that and how, if we are going to rely on a truly competitive market, that needs to be enshrined in this Bill. So much of this Bill relies on competition to deliver efficiency. There are many complexities in many aspects of this Bill, particularly in Part 2, where you have contracts for difference and capacity mechanisms, the interplay between them and the effect that that has on investment decisions, all of which is very complicated. The more transparent the market is, the less opportunity there is for gaming and the more successful this Bill will be in meeting its objectives. I fully support the amendment tabled by the noble Lords on the other side, and our own amendment seeks to do something similar.
Lord O'Neill of Clackmannan
I remember the birth of the 1989 legislation. At that time, due to what were deemed to be the fundamentals of competition, generation was split from distribution in England and Wales. In Scotland, the companies were vertically integrated. Throughout the 1990s it became a kind of adventure playground for takeovers. We are where we are now in large measure because a number of interested foreign companies, usually American, took over the distribution companies; they subsequently sold them and they were picked up by various people at different times. So we have six players, which by and large are vertically integrated, as well as Centrica.
A lot of wise words are being spoken about competition but I am not sure if these amendments go far enough. As soon as a company becomes big enough to be a threat or to be of interest to the large players, the oligopolists of the present structure, they are gobbled up. We have seen this fairly recently with the takeover of Ecotricity, a very interesting, predominantly Irish company that engages in renewable generation. I am not sure that these amendments are going to make an awful lot of difference.
When we go further and look at the break-up of the vertically integrated companies, there is the likelihood of the two remaining companies being taken over by other foreign players that have money that they wish to expend in the United Kingdom. Therefore, I am very sceptical about how we are going to achieve anything meaningful in the way of competition.
We have at the moment six players—seven if you include First Utility, but that is rather special because it is exclusively in the retail market—and by and large they do the same as each other. They confuse the tariffs, introduce difficult pricing schemes that we do not always understand—
Lord Roper
Does the noble Lord agree that because First Utility is only a supplier, it considers itself at a serious disadvantage against those that are vertically integrated and therefore have some compensation from their activities in the supply and generating fields?
Lord O'Neill of Clackmannan
I could not agree more with the noble Lord. The point that I am trying to make is that, while First Utility has had very dramatic growth—I have spoken to some of its senior executives, who paint a very interesting picture—I am not quite sure what the life expectancy of the organisation would be if the main shareholders were given an offer that they could not refuse by one of the big six. I do not think that there is really anything in the competition legislation of the United Kingdom or within the powers of the Secretary of State to do anything about that. That is why I am a wee bit sceptical about us jumping up and down and waving our arms on this issue because somehow there is something intrinsically attractive in a new form of competition. I am not sure whether it will be any different from what we had post-1989 and defy the laws of economic or financial gravity that have been applying in the intervening period.
While I wish my colleagues well in promoting the amendment, I am not very optimistic. In five years’ time, we might well be debating the same issue and trying to secure a greater degree of competition because of the inexorability of the forces that have been at work. I am not overdramatising it or going into neo-Marxist stuff. I am merely making the point that the six main players, who are big and who are not always as nice as they appear, certainly like competition as it is and do not seem to want anything else, and I am not sure whether many of the ambitions of this Bill will actually change the status quo that much.
There are other options, which are not on the table, and I will not waste the Committee’s time discussing them this afternoon. However, we have to be perhaps a wee bit more realistic than we are. In the light of past experience, even if British companies did not want to take over some of these smaller successful players, I am sure that there would be international players, who would have a bit of financial elbow room. They might even come in to see how a competitive market works, as the Americans did in the 1990s—they thought they were going to have liberalised markets in the United States, as the Germans thought they might have liberalised markets. In fact, what they have is a market with a number of players, but each of them is a regional monopoly. Therefore, when we talk about competition, we have to be quite clear that Britain is the exception as a competitive and liberalised market, not the rule, as far as energy utilities world wide are concerned.
Lord Deben
My Lords, I am driven to get to my feet by the wise words of the noble Lord, Lord O’Neill—he may be embarrassed by this. They lead me to believe that this is a very interesting and important amendment simply because it reminds the Government, at a crucial point, of their responsibility to the marketplace, where we are of necessity intervening in order to give it a sense of time. After all, what we are really saying is that these decisions are made not just for today and tomorrow; they have to be made, given the problems, over a very much longer period. That is why we are intervening in the market-driven mechanism. However, we have to think about some of the fundamentals of the market as well.
I agree with the noble Lord, Lord O’Neill, when he points to the oligopoly in which Britain is. He is right to say that other countries are in a worse position, but that does not mean that we should not try to improve our own position. One of the odd things about oligopolies and, indeed, large businesses in general is their lack of enterprise. The bigger a company becomes, the less likely it is to produce intelligent and quick-footed answers. What worries me is that we also take for granted that bigness is better. I have seen no evidence whatever that that is true; indeed, I see a good deal of evidence that it is the opposite. Bigness is convenient, and that is a wholly different concept. I think that the noble Lord, Lord O’Neill, pointed to that when he showed how, over the years, people have taken on companies which would otherwise, in competition, be embarrassing, inconvenient and difficult, and have forced them to think differently—all the things that one needs to ensure happens in a market.
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 O’Neill of Clackmannan
I have some questions for my noble friend. What he is suggesting has been tried before. We used to have the separation—I shall not say of powers—but we did not have vertical integration at the time of privatisation. That position prevailed for about 10 years. My noble friend has to show us whether things were better then. Were prices, independent of exterior energy costs, cheaper than now? Certainly the degree of obfuscation of tariffs was not as sophisticated as it is now, but whether that is down to the character of ownership, the nature of the industrial organisation or just the badness of some of the people involved in setting the prices is for others to decide.
The point I am getting at is that this is not new; we have had it already. I am not sure that consumers were any better protected then than they are now, or that prices were that much lower, when we take out the externalities that determine the price. I am not sure that when we take out the impact of the price of oil and gas on the energy market there is that much of a difference.
Let us not forget that one of the first things that the Labour Government did in 1997, which attracted no opposition at all, was to introduce the windfall profits tax because of the way in which a number of the utilities had been screwing the country as a whole. The Select Committee that I chaired thought that we made a sizeable contribution to a better understanding of the abuse of utility power at the time. Indeed, I always worried that such was the universal acclaim for the Labour Government’s windfall profits tax that they had probably got it too low. They probably could have got far more out, because people knew the degree of pain and had prepared themselves for it.
That is not the point that I am trying to get at here. If there are abuses of the kind that my noble friend suggests, would it be better to go through what might be a lengthy and costly process—I can imagine the lawyers salivating at the moment over the prospect of what they would get out of it—or would it not be more appropriate to try to deal with that market abuse by a radical reform of the regulatory process? The selective choice of international examples made by my noble friend is not really relevant, because in the case of France and Germany, we are dealing in the main with regional monopolies. Their markets are not like ours. We have an oligopolistic system where there is fantastic loyalty to the old electricity boards, and people still talk about them in that way. The reluctance of people to switch has been one of the great frustrations of the regulator and the advocates of the market, because people, by and large, like to stay with the devil they know and choose not to move, for whatever reason.
My real point is that I am not sure that the international comparison is that relevant because although the companies are vertically integrated, they are operating in different market structures. While this is an interesting debate to engage in, I am not certain that it will come up with the answers that my noble friend is looking for. In the 1990s, when we had something like this, it did not really work that well and there were an awful lot of other forms of market abuse. Indeed, that is why we had market reforms—the previous Labour Government had two bites at the cherry during their 13 years. I understand where he is coming from but I am not sure whether he would get where he wants to be by the mechanism he suggests, short of having a radical, tough regulator prepared to have a go, unlike the overly cautious regulators that we have been blessed with in the energy markets over the past 20-odd years. The Opposition have said that they would like to change drastically the character of regulation in this area, and that might be a more productive way of going about it.
As I said, I am grateful to my noble friend for raising the issue because it is important that we consider it, although I am not quite convinced that past experience or the evidence that he has adduced are necessarily unduly relevant to the objectives that he is trying to find.
Viscount Hanworth
My Lords, I support the amendment of my noble friend Lord Berkeley. If his amendment were adopted, and indeed if the policies that it prescribes were implemented, I believe that many of the problems that afflict our electricity industry would be overcome—notwithstanding what my noble friend Lord O’Neill has just said, which I shall consider at some length.
The amendment would radically alter the oligopolistic environment in which the big six vertically integrated companies dominate the generation of electricity and its supply to industrial, commercial and domestic consumers. There would then be some chance that a genuine economic competition could ensue. The vision of the free-market fundamentalists, who inspired the radical restructuring of the industry through a privatisation that occurred a quarter of a century ago, would come closer to being realised than ever it has been.
Having said that, I confess that I greatly regret the demise of the state-owned electricity industry. Mine is not a doctrinaire position, as some might imagine, albeit that much could be said to justify a doctrine of state ownership. An attitude in favour of state ownership of the electricity industry needs no further justification than a reference to the example provided by the French electricity industry. Although the dominant French company Électricité de France, or EDF, sometimes adopts a cunning commercial concealment, it is state-owned, excepting a very small proportion that is attributable to shareholdings which are predominantly in the hands of other companies closely allied with the French state.
I am an admirer but not a friend of Électricité de France. A testimony to its success is the fact that, apart from being one of the aforementioned big six companies dominating the English market, this company owns virtually all of Britain’s nuclear generating plant. Over many years, Électricité de France has worked in close collaboration with the French Government to realise the latter’s strategic objectives regarding the provision of the nation’s electrical power. Only recently, with the advent of François Hollande, has there been any significant difference of opinion between the politicians and the management of EDF regarding the investment strategy.
An investment strategy is precisely what the Bill is about. The danger we face is that the industry’s dominant firms will have no interest in providing the investment in the UK that would serve to avert the risk of a serious electricity shortfall. Although the free-market economists might deny this reality, the fact is that these are multinational companies, often with head offices in other countries. This implies that their primary interests and loyalties are not with the UK. When they are seeking profitable investment opportunities, they are liable to look much further afield.
There are some minor players in the UK electricity market that are based predominantly in this country and have few interests abroad. These are the independent electricity generators which are concentrated in the renewables sector. It is perhaps inevitable that the Government should look to these companies to provide a substantial proportion of the new investment in renewable generating capacity. Notwithstanding the fact that they currently account for only a small proportion of the generating capacity, it is hoped that they will provide something between 35% and 50% of the new investment in renewable plant.
The truth of the matter is that these companies are in trouble. They are being squeezed out by the big six, which have an increasing proportion of renewable capacity in their own portfolios and a declining reliance on the independent generators to fulfil their renewables obligation. The eventual suspension of the renewables obligation in 2017 will spell the doom of these companies, unless measures are adopted to safeguard their position. This is what the present amendment and subsequent amendments being spoken to today propose. It may well transpire that the measures proposed in subsequent amendments represent the only viable ways to protect the interests of the small generators and ensure that they continue to have a market into which to sell their produce.
Lord O'Neill of Clackmannan
I just want to make the point to my noble friend that, of the six companies that currently exist as vertically integrated companies, two of them started off as vertically integrated companies because of the difference between the jurisdictions in Scotland and England and the desire of the Secretary of State for Scotland to have vertical integration. Therefore, we have always had that vertical integration for two of the companies. The interesting thing is that one of the two is still British-owned, whereas all the other companies are now in the hands of foreign owners. Scottish and Southern Energy is located in Perth; it may have major shareholders across the world but it is still a Scottish company, or a UK company based in Scotland, which is something that we tend to lose sight of.
Lord Berkeley
I am grateful to my noble friend. He is absolutely right. It is good to have Scottish companies. It is also good to have companies that all pay their tax, wherever they are based, although that is probably a slightly separate subject. My concern is whether the companies, whether they are Scottish, English, British or whatever, are behaving fairly with the generators that do not have access to the retail market. As I said, it would be perfectly possible to have a Chinese wall rather than total separation if that could be worked. I am not sure what the disadvantage of that is but it is only one small cog in the whole jigsaw puzzle—I am mixing the metaphors nicely—of making fair competition that works and which is for the good of the consumer. I beg leave to withdraw the amendment.