Energy Bill

Lord Oxburgh Excerpts

Tuesday 18th June 2013 Lords Chamber

[Lord Oxburgh]

My Lords, I declare an interest as honorary president of the Carbon Capture and Storage Association and a director of 2OC. I shall confine my remarks to electricity market reform or EMR.

National Grid figures show that unless new power stations are built by 2015, we shall be more vulnerable to loss of supply than we have ever been. To give an example, if in 2015, at a time of high demand, three power stations were to drop out unexpectedly—as they did three weeks ago—we shall be into rolling blackouts. The situation is serious.

Why are no new power stations being built? Everyone has known for a long time that the electricity market would have to be reformed. Potential investors are simply holding back until they know more about the market into which they will have to sell their electricity. The main aim of EMR is to use market mechanisms to achieve a secure, decarbonised electricity supply at the lowest possible cost. That might have been possible if this Bill had been presented two or three years ago. Then there would have been time for the contracts for difference and the capacity payments—central elements of the new market—to be thoroughly considered and properly auctioned. Today, Ministers make decisions by administrative means when they should have been the outcome of strategically planned competitions. These fundamental infrastructure decisions will determine how we generate electricity for decades to come and how much we pay for it. Nevertheless, recognising our present vulnerability, Ministers must move as fast as possible to seek bids for contracts to guarantee generating capacity. If they act rapidly, there should be just enough time to bring in new capacity for when it is needed.

What kind of electricity generation do we need? In this debate we shall certainly hear from proponents and opponents of different technologies, as if they alone could satisfy our requirements. There will be wind enthusiasts and wind-haters, and nuclear enthusiasts and nuclear-haters. In reality, every means of generation has its own cost structure and its own operational limitations that have to be taken into account in building a generation system.

For example, most of the cost for both nuclear and wind is fixed up front at the time of construction. Their costs of generation should therefore change little over time and they should offer something of a hedge against inflation. Both have low carbon footprints. However, the weakness of both is in their operational inflexibility. Nuclear is not able to ramp up and down fast enough to match the daily variation in demand, and wind is completely insensitive to demand. This is not fatal for either; it simply means that if they are used they have to be part of a system that takes advantage of their strengths and compensates for their weaknesses. By comparison, fossil fuel is dispatchable—it can be turned up or down relatively quickly to meet changes in demand. On the other hand, it is both exposed to the vagaries of international fuel prices and, unless abated by carbon capture and storage, carries a substantial carbon penalty. Other key elements of energy systems have their own costs and limitations.

The requirements of our system can be met in many ways with different technology combinations. However, the addition or removal of one component has consequences for all the others and for the system as a whole, including for transmission. A workable system will have a number of complementary elements that play different roles, add to its robustness through their diversity and have different implications for cost. With the powers that it is assuming in the Bill, central government takes full responsibility for the shape of our system. This is not necessarily bad, but we should certainly recognise that it is happening. The Government’s decisions over what CFDs and CPs to offer will determine whether we achieve an affordable and workable system that also meets its stated policy objectives. It is very easy to get this wrong.

What, therefore, needs to be done in this House? I emphasised at the outset that the highest priority must be to secure investment in new plant. Investors have choice over not only what kinds of project they invest in but in which country to do so. The Government’s stated strategy is to achieve a massive decarbonisation of UK electricity generation. In the short term, this is not the path of lowest cost. Given the long-term nature of energy investments, investors have to be confident that the Government will stick to this path and continue to reward low carbon in the future. For these reasons, the Government’s vigorous opposition to the cross-party amendment tabled in the other place, which would have included a reference to the 2030 emissions reduction target of the climate change committee, was particularly unhelpful. It has certainly been read externally as a weakening of government resolve. To make our energy system investable, we have to consider the reintroduction of that amendment in this House.

Secondly, we shall need to scrutinise the details of the CFDs and CPs, some of which have not yet been fully worked out. Consideration of the Bill in the other place had to be completed without this detail. The workings of the present electricity system are complex and in some respects less than transparent. We are promised more of this detail during the passage of the Bill through the House and this will need to be discussed as it becomes known. In parallel—as has been pointed out—there are important proposals from Ofgem for changes in regulating the market.

There are two important elements of any energy system on which the Bill is silent and which will have to be considered alongside the generation mix: namely, the interconnectors through which we can import and export electricity to our neighbours, which is always a possibility if we cannot generate ourselves; and secondly, our national provision for gas storage. This House has discussed gas storage on a number of occasions in the past, primarily in the context of security of supply in the face of declining North Sea production. We have noted that while our domestic gas storage is measured in days, our neighbours measure theirs in months. This concern has been alleviated—but only somewhat—by the construction of UK terminals to receive liquefied natural gas bought on the international market.

Today, however, storage can help UK consumers in another way. Storage would make it possible to buy gas in summer when prices are low and use it in winter when prices rise. This is a benefit primarily to consumers rather than suppliers. Suppliers simply pass on increased gas costs to the consumer, who has no choice but to pay them. The Government should carefully consider whether this potential consumer benefit can be captured, possibly by offering a capacity payment for gas supply at a guaranteed price and guaranteed time.

Finally, we also need to consider whether in future we can avoid the acute energy difficulties in which we now find ourselves. These are entirely attributable to successive Governments’ culpable neglect of energy and the absence of any overarching strategic energy policy. Energy capability and competence within the Civil Service was over the years run down. The responsibility for energy was shuffled between government departments, and folk memory and experience were largely lost. To make matters worse, ministerial appointments were treated in a similarly cavalier fashion, with few individuals in post long enough to shape policy. At a major energy conference in Oxford attended by several Members of this House a few weeks ago, one speaker asked,

“exactly who is to make and implement the key decisions? Government per se does not have the expertise”.

Those words received universal acclaim and a standing ovation.

Speaking in an earlier debate, I raised the possibility of establishing a senior expert advisory group within DECC that reported to Parliament and contained both internal and external members. The external members would have long tenure and provide both technical and commercial expertise, and would bring a strategic overview and degree of continuity that has been conspicuously lacking. I am consulting both inside and outside the House to see whether we can come up with any proposals that might ease the present situation, which is no longer acceptable.

I have already commented on some of the imperfections of this Bill, but we need it urgently. Our top priority must be to give investors the confidence to invest in power generation in the UK. Our longer-term objective must be to ensure that a situation such as we find ourselves in now does not arise again.