Lord Roper
Main Page: Lord Roper (Liberal Democrat - Life peer)
Lord Davies of Stamford
My Lords, I agree with the second part of the amendment proposed by the noble Lord, Lord Teverson, and the noble Baroness, Lady Parminter. It would be rather strange if nothing at all were said on the face of the Bill about the importance of energy efficiency, as it is quite clearly one of the criteria the Secretary of State must always have regard to in conducting a sensible energy policy.
However, I have a problem with the first half of this amendment, which reads:
“to give priority to demand side management and demand reduction measures in preference to increased generating capacity whenever and wherever this is economically appropriate”.
In improving this Bill we are drafting the law. The law has to be unambiguous. The law places obligations on the citizen; the citizen needs to know precisely what those obligations are if the law is going to be effective, dignified and respected. This provision could not possibly from part of a law in that sense. The phrase “economically appropriate” is so vague that it is almost impossible to know what it might mean and where one would need to decide, using this principle, between an energy-saving investment and an energy-generating investment. I notice that the noble Lord, in introducing this amendment, did not actually refer to “economically appropriate”: he used the term “economically sensible”, which he perhaps feels is a synonym. However, the use of a different word only adds to the vagueness and uncertainty, which should not come to rest in the corpus of the law of the land.
I suppose that what the noble Lord might have had in mind with the phrase “economically appropriate”, or even “economically sensible”, is the solution that has the highest economic return, but even that would be a very vague phrase to place in a Bill in the corpus of law. After all, in choosing between one particular project with a relatively high capital cost and a relatively high return and another with a lower capital cost and a lower return, or between a project with a high capital cost and a long payout period and another with the same capital cost and a different payout period, which one to be chosen would depend on the cost of capital, on which one was discounting the projected cash flows. If you wanted to make this a precise obligation, you would have to specify what the cost of capital would be. It would be and should be, of course, different according to the different risks for different types of energy projects, because they would have different risks. Therefore, I do not see any prospect here of reducing the unambiguous guidance that is necessary in law so that the citizen or, indeed, the Secretary of State would know precisely whether he was observing the law or not.
Lord Roper
My Lords, Amendment 55ZA in this group is in my name and that of the right reverend Prelate the Bishop of London. As has already been mentioned, when the draft Bill was published in May last year, there was a great deal of criticism that there was nothing in it on electricity demand reduction. Indeed, those of us who sat on the informal group with the noble Lord, Lord Oxburgh, drew attention to this in the document that we produced and suggested that it ought to be included. When this Bill was published last November, there was still no reference. Fortunately, at the same time, the department started a consultation into demand reduction, and on 21 May it published its response to that consultation. At the same time, it tabled an amendment, which was then proposed new Clause 12 and is now Clause 37 in this Bill, the clause that I wish to amend.
The interesting point in the response to the consultation is that the department suggested that its preferred route to delivering reductions in electricity demand is via a capacity market—I am talking here not of a demand-supply response but of permanent reductions in electricity demand. I have always had some difficulty in seeing how that could fit in to a capacity market. I therefore grabbed the delivery plan last night to read the section on the capacity market in order to discover how it should occur. I am extremely sorry to have to tell your Lordships that, having read that whole section overnight, I found no reference at all to electricity demand reduction, not even to demand-side response. I sometimes wonder whether there are two DECCs, one writing one thing and one writing another. I hope that I am not misleading the Committee in that view. The important thing is that Clause 37, which was introduced in the other place, suggests that a pilot scheme should be developed to look at it.
In our amendment, the right reverend Prelate and I suggest that we should aim it rather more widely. There ought to be a number of different pilot schemes and, if it is possible to envisage how it could be done, they ought to be included within the capacity market. Alternatively, we could look along other lines, including those discussed in Committee in another place, of finding some sort of premium for this. There are quite a number of problems with the use of the capacity market in dealing with the permanent reduction of electricity demand. There is of course uncertainty as to how big a capacity auction will be. Therefore, people who invest in permanent reductions are unclear from time to time as to what sort of return they will get for that reduction.
Lord Roper
My Lords, I am most grateful to my noble friend for what she has said, and in particular for drawing attention to page 15 of the plan which was published yesterday. However, it is interesting that the reference there to electricity demand reduction is,
“to enable permanent reductions in demand to form part of the Capacity Market”.
Part of the purpose of my amendment was to suggest that that was not the only way in which one could look at permanent demand reduction.
My noble friend also referred to the situation in the United States. It is interesting that in the United States, as I think I am right in saying, only 3% of capacity payments have gone to energy efficiency. For example, in the state of Massachusetts, which has had one of the most developed of the schemes, only 7% has gone to electricity demand reduction. A good deal more needs to be examined in this area, and I hope—although my amendment will not be considered today—that we may be able to come back to this on Report.
Lord Roper
My Lords, my name is attached to this amendment but I shall be very brief because my noble friend Lord Jenkin has made the case for this amendment very strongly.
We are considering here electricity market reform, and we are very anxious to ensure that, in spite of fairly substantial interventions both through the contracts for difference and through the capacity mechanism and in other ways, competition will be maintained and increased.
We have had an opportunity over the past few months to talk to the independent generators and independent suppliers. In both cases, they see that there are aspects of the changes in the structure which could in some circumstances be disadvantageous to them and significantly advantageous to the larger players in this field. In that circumstance, it seemed to me—and as my noble friend Lord Jenkin said—imperative that we should make it explicit that it is a duty of the Secretary of State to take these actions to promote effective competition between all those involved in these areas.
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.
Baroness Verma
My Lords, I start by thanking the noble Lord, Lord Davies of Stamford, for his amendments. Like my noble friend Lady Maddock, I say from the start that we are putting consumers and fairness to new entrants at the heart of the Bill. It is important to note that the Government confirmed on 27 June our intention to initiate the capacity market, with the first auction taking place in 2014 for delivery from 2018, which would provide an insurance policy against any future blackouts. I reassure the noble Lord that it is the Government’s clear intention to implement the capacity market through regulations as laid out in this chapter. That can be delivered without a statutory requirement in the Bill, so the may/must argument does not need to be fought at the moment.
On Amendment 53ZZB, although the noble Lord’s intention behind the amendment is laudable, we believe that the Bill already makes sufficient provision for driving energy efficiency. The Bill lays out how the capacity market is intended to involve permanent electricity demand reduction in Clauses 29 and 37. The inclusion of electricity demand reduction in the capacity market is of course complex and, as such, its impact needs further examination and assessment. Because of that, we intend that an electricity demand reduction pilot will be carried out to assess the viability of incentivising demand reduction in the capacity market.
Secondly, the Government are already doing a large amount of work to encourage increased electricity efficiency of homes and small businesses—for example, through the Green Deal energy company obligation and smart meters. I urge the noble Lord to consider those measures available to low-income and vulnerable families. I also remind him of how the number of tariffs rose under his Government. When they were in power, it rose to 4,000 tariffs. Fuel poverty nearly doubled during the last five years when they were in power. We are addressing a long-term, deeply embedded problem. Passing the amendment without the result of the pilot being known would risk duplicating existing policies for the promotion of energy efficiency and could lead to contradictory or inefficient regulations.
Although I have been rather brief, I think my explanation should reassure the noble Lord that the Government are doing everything possible through the Bill to answer his concerns, and I hope that he will withdraw his amendment.
Lord Roper
My Lords, with reference to the regulations being referred to here and elsewhere, will my noble friend give the Grand Committee some indication as to how likely we are to have details of them before we come to Report?
Baroness Verma
My Lords, I will not be able to give my noble friend an answer now but, if he will allow it, I will write to him and to the Committee.
Viscount Hanworth
My Lords, this amendment is the result of a representation to us by the Combined Heat and Power Association. It is designed to allay the impression that a demand-side response is simply a matter of staunching demand. It points to the fact that much wasted capacity can be saved by rescheduling the demand for electricity within the days, within the weeks, and even more widely within the year, so as to diminish its variability.
A proper definition of what constitutes a demand-side response is provided by this amendment, whereas as it stands the Bill lacks such a definition. In the course of being alerted to this lacuna, we have also been advised of some of the hazards that might arise. The association fears that in the process of assimilating demand-side responses to the capacity mechanism, there is a risk of creating a mechanism designed around a traditional large-scale generation plant. Such a design risks limiting or even excluding the demand-side response of small-scale embedded generation.
Traditional large-scale generation comprises baseload generation by large power stations running at or near capacity, accompanied by intermittent generation by peaking power plants—“peakers”, as they are known colloquially—which run only when there is high demand. The power that they supply commands a much higher price per kilowatt hour than the baseload power. The peakers are typically run with much lower thermal efficiencies than baseload plants and they often use obsolescent equipment that is close to its retirement.
Small-scale embedded generation, which the Bill is in danger of neglecting, is carried out by small businesses, hospitals, university campuses, et cetera, and not by sophisticated electricity-generating companies. Small organisations have fundamentally different needs from the large-scale generators. If they are to participate in the capacity market, the system must be designed around their requirements. At present there are no proposals to support the trading of small volumes of electricity capacity within the market. The provisions cater to large plants, which typically trade hundreds of megawatts of power, and these provisions risk excluding those who trade, as we have heard, just 2 megawatts or 3 megawatts. We alert the Minister, therefore, to these facts, in the hope that they will be accommodated within the primary or secondary legislation in this Bill.
I will take this opportunity to describe some of the realities of electricity demand. The statistics of electricity usage are readily available. The leading page of the National Grid’s website displays graphically the electricity demand over the preceding 24 hours. It also shows demand over the previous eight days. At the lowest point last week, Monday night, the demand in Great Britain was 56% of the highest demand, which was recorded in the late afternoon or early evening of Wednesday. This kind of variation is greatest in winter. In September the minimum demand, at around 4.30 am, would be a mere 50% of the peak demand, at around 3.30 pm. These figures point to a huge potential for flattening the profile of demand.
Other interesting facts can be garnered from DECC’s literature. The report from the Building Research Establishment on the impact of changing energy use patterns in buildings on peak electricity demand in the UK is particularly revealing. It points to the surprising fact that 50% of our electricity is consumed within buildings for heating and lighting, and by appliances of one sort or another. Apart from being fascinating in their own right, such pieces of evidence convey an important message: if we are to manage our electricity demand in a meaningful way, we must do more than simply assimilate the large-scale generators to the capacity market by means of differential tariffs and incentives. We need to study in detail the components of electricity demand in order to understand the scope for demand reduction, and more particularly for demand smoothing. That is another point we want to emphasise.
Lord Roper
My Lords, I am very sympathetic to the first three amendments and, to a more restricted extent, the fourth because they cover quite a number of the points that I raised earlier with regard to Amendment 55ZA. In moving his amendment, the noble Lord, Lord Grantchester, pointed out the complexity of the range of topics that come under the slightly blurred title of demand-side reduction and electricity demand reduction. For instance, in Amendment 53B, the idea of having a separate auction for the demand side is very interesting. It is easier to involve classic demand-side reduction into the general auction; on the other hand, it is still rather difficult to see how what one might call permanent demand reduction is included in any normal auction. One may need to look at some other market principle to cover that.
Perhaps I may draw attention to one other aspect of energy demand reduction. At a lunch two or three weeks ago, I learnt about the significant contribution of the work of the voltage management and optimisation industry group. It does a rather specific thing in enabling people to reduce their demand permanently by introducing important technologies. That is done in universities and hospitals, and in quite a number of areas of social housing. I hope that when we are thinking about this general area, we do not overlook that important contribution.
Lord Teverson
My Lords, I welcome any amendment that emphasises the demand side of this issue. I particularly like the fact that we have started to bring in the factor of energy storage. Whenever you talk about energy storage, the technologies are always just about going to be there but they never get down to the commercial level by quite a way. But I hope that that will not be the case in the long term. This is an important point that needs to be taken into consideration.
The really important point is around capacity auctions and the ability of the demand side to compete equally with that. I would be interested to hear from the Minister whether she is confident that the demand side will be able to compete or bring forward sensible bids at the early four-year period. While I understand entirely that there is a fallback to the previous year, a lot of the market has already gone. Clearly, the best solution, the nirvana solution, is that all capacity payment is filled with demand-side reduction. That is the best outcome that there could be. I am sure that that will never be the case but it is how we make sure that we do not restrict it. I am interested in the Minister’s views on how the Government feel that the demand side can effectively come forward four years in advance. It would be very useful to understand the Government’s thinking on that.