Energy Bill [HL]

Lord Teverson Excerpts

Tuesday 8th February 2011 Grand Committee

Moved by

[Lord Teverson]

35: After Clause 97, insert the following new Clause—
“Geothermal power
(1) Within eighteen months of this Act coming into force, the Secretary of State shall, after a period of consultation with industry, geological experts, the devolved administrations, local authorities, energy producers and other interested parties, put into place for the United Kingdom a licensing system and regulations for the exploitation of heat from deep geothermal sources for both the direct use of that heat and for the generation of electricity.
(2) The licences shall relate to—
(a) individual geographically delineated areas on land;(b) the heat held by rocks greater than one kilometre below the surface.(3) Licences shall give exclusive exploration and production rights for the purpose of energy production from geothermal sources, both direct heat and electricity generation, to the licensee, for that area, and for a specific period of time.
(4) The Secretary of State shall lay down regulations for the method of allocation of licences to those organisations wishing to explore or exploit those resources, or both.
(5) The Secretary of State shall undertake the first round of allocations within six months of the licensing regulations under subsection (1) being approved.
(6) Any organisation already undertaking exploration or exploitation from geothermal sources within the United Kingdom, in that they have already undertaken, at the time the licensing regime comes into force, boring for the purpose of exploiting geothermal heat to below one kilometre, shall be entitled to hold the first licence awarded for that licence area, and any licence fee or other consideration for that licence area as a part of the licencing regime will then be determined by arbitration under rules determined by the Secretary of State reflecting the fees or other consideration paid for licences deemed to have similar potential.
(7) The holding of a licence for the exploration or exploitation of deep geothermal heat, or both, shall not convey any automatic rights in terms of planning permissions for surface development, or give any rights in terms of surface access.”

[Lord Teverson]

My Lords, we come to a specific issue here, which is around one of the older renewable technologies in many ways—geothermal or, in this case, deep geothermal. I do not wish in any way to give noble Lords a lecture, but I would like briefly to summarise the position of geothermal energy. It is a tried-and-tested technology in many parts of the world. In the volcanic areas of our globe, hot water rises naturally—it does not need persuasion or drilling—and is used for heating directly or for generating. That part of the technology has existed for some time in places such as Italy, Japan, New Zealand and Iceland in particular. It is a fundamental part of electricity and power generation in those countries. It is also possible to have a variation where there is drilling, often down to five or 10 kilometres, with cold water pushed down and hot water coming out at the top. That is the clever bit—the bit that needs to happen. In the oil industry and other industries, drilling technology is pretty proven.

A great deal of work is taking place on geothermal in Australia, the United States and Europe to make the technology work. The good thing about it—this is where I will end my sales pitch—is that it is the one renewable technology that can produce large-scale electricity, but it is also consistent in its operation. It is not intermittent, as so many other of the renewable technologies—tidal, wave, solar and wind—can be, which is important. In many ways, the United Kingdom led the field in the 1970s and 1980s. Then, as happened with so many of these technologies, with the crash of oil prices the research stopped taking place and progress happened elsewhere in the world. Various bits of the technology are proven; it is highly desirable in its characteristics; and it is available in the United Kingdom, particularly but not only in the south-west, so it could be an important part of our renewable energy mix. Indeed, two planning permissions have been granted in Cornwall for geothermal stations of a smaller scale than the large ones that there can be. Visually, they have a small footprint and do not have great impact either.

However, as noble Lords will understand, one of the areas that must be tied up for exploitation of any energy resource is certainty for investors and the engineers who make these systems work. Elsewhere in the world, in Ireland next door, Germany, Australia and various other parts of the world, licensing regimes have been introduced. What should not happen is that if there is a strike and a well is made that produces hot water— 200 degrees plus is the optimum—someone in the next field should not be able to exploit that resource and that heat for themselves because they have not had the risk or made the investment for exploration.

The amendment would do one simple thing. It would give power to the Secretary of State to consult and then put into place within a certain time period, which I will come back to, a licensing regime for geothermal. The industry feels that one key part of the jigsaw is to allow investment with some certainty on the return, so that investments can be made.

The amendment refers to 18 months in terms of the licensing regime. When I tabled this amendment for the last Energy Bill I thought it should be two years, but now that these types of agreement have moved on, I feel that 18 months is perhaps the maximum. The industry feels that it could go through this process within a year. Since the industry has said that it can cope, I would prefer 18 months.

That is why the amendment is so important. It fits very well in the Bill because it has a whole area on renewable technologies. It is something that the United Kingdom still has an opportunity to lead on. That may be difficult because other nations have got further ahead at the moment, but it is an important technology. It works in other parts of the world and we should benefit from it in terms of meeting our own renewable energy targets—not necessarily up to 2020, although it may make a small contribution, but certainly beyond that. I beg to move.

[Lord Oxburgh]

My Lords, I am happy to support the amendment, to which I put my name, and I support everything that the Lord, Lord Teverson, just said. The Government have very challenging targets for renewable energy by 2020. They will achieve those targets only if there is sufficient private investment. Investment decisions depend on assessment of risk.

In the case of geothermal in this country, there is a really no doubt about the existence of the resource. Indeed, a couple of decades ago, I was co-leader of the group that produced the first geothermal map of the UK. The resource is certainly there. I declare an interest as a technical consultant to one of the companies to which the noble Lord, Lord Teverson, just referred.

We know that we have the hot rocks at depth. The real question is whether we have adequate technology to extract the heat from those rocks. Therein lies the uncertainty and the exploration risk. There is a good chance that we can do that, but if an investor is going to invest in this he really wants to see the risks minimised. As the noble Lord pointed out, after the demonstration of a successful well in one place, there is a real danger of someone else coming in and drilling nearby.

At an earlier stage in informal discussions, the Government’s position was that that could probably be managed through local planning consents, but I do not think that that is the case. Modern drilling technology allows you to drill in one place, maybe 10 miles away, and then turn your well horizontal and go into anywhere within a pretty wide radius. In other words, if we are really to give investors the kind of security which I suspect they will demand in order to support this kind of investment, we really have to have a licensing regime which effectively pre-empts others who come in later and have not made the primary investment from tapping in on the risky exploration work that the initial company has done. I am not sure whether this amendment is in the exact terms that we need, but there will not be significant investment in geothermal in this country, I believe, unless something along these lines is done fairly rapidly.

What we have to bear in mind is that capital moves between countries and that any company interested in investing in geothermal will compare the opportunities in this country with those elsewhere. For example, I believe that Ireland has legislation in place to give the kind of protection that we are asking for here. Ireland has comparable geothermal possibilities; the same is true in other parts of Europe. If we do not do this, the capital will simply move elsewhere and this contribution to the 2020 target will not be realised.

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[Lord Oxburgh]

I am sorry. To repeat, 25 to 35 years is a plausible length of time for a field such as this to operate. There are various possibilities of rejuvenation, but it is too early to think of that.

The right reverend Prelate also asked whether there would be low-grade heat available as well. Yes, there normally is low-grade heat available after you have generated electricity. The aspiration is that a project such as this would wash its face commercially simply on the basis of electricity generation. If you can find a local use for low-grade heat associated with it, whether it is for agriculture or for district heating, that is an additional bonus.

[Lord Teverson]

I thank all noble Lords who have taken part in this debate. I should like to follow through on a couple of questions. The noble Lord, Lord Oxburgh, was talking about generation that was purely electricity or purely heat. If there is a demand for hot water, whether it be for market gardening or district heating, the most energy-efficient thing to do would be to use as much of it as you could for that purpose. This is primarily for electricity generation although you could theoretically have one or the other.

In terms of depletion, as I understand it—the noble Lord, Lord Oxburgh, knows about it far better than I do—that is a conservative estimate. It could be argued that there should be no depletion over time on very deep exploration; there is a chance for rejuvenation. The industry is rightly conservative regarding those estimates because ultimately the earth is being heated from the core upwards. Cornwall and Devon are particularly good in this respect because there is a layer of limestone over granite, which makes it a particularly good cocktail. I have probably got that slightly wrong. I see from the noble Lord, Lord Oxburgh, that I have. That is what someone from the industry told me, but there we are. It is not just Devon and Cornwall—this relates to other areas as well.

On remuneration, the two-ROCs regime is already in place, as the Minister said. The industry would like to look at the renewable heat initiative in terms of the hot water that comes out. That is probably an area of future discussion.

I am very encouraged by the Minister. I know that these things are not necessarily easy to achieve. Other countries, particularly in Europe, have these systems in place and they are the sine qua non. Without them, you will not get development of this technology. That is why it is important to get on with it. I would have thought that setting up a licensing regime from fresh would be a civil servant’s heaven—that there would probably be people queueing up in DECC to invent the British geothermal licensing system. That clearly has a cost in people power, but there is no ongoing cost to the department afterwards. Indeed, I hope that in due course revenues will come in from this technology, as in oil or whatever.

I am encouraged by the Minister’s remarks. I am sure that this will be a point of discussion between now and Report, and on that basis I am pleased to withdraw my amendment.

Amendment 35 withdrawn.

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Thirdly, all this is at a time when world energy prices might be on the rise again. However, that is part of another debate, even though I accept that it cannot be easily separated out in the public bar in Burton upon Trent. A further refinement, which is not a footnote, is the totally different price elasticities of demand for different types of energy. On the face of it, again because of social problems, price elasticity is very low in home heating simply because there is a limited range within which people need to heat their homes—all the electricity propaganda says it should be between 65 and 70 degrees Fahrenheit. Therefore, doubling the price of home heating would simply double the household expenditure on that element, whereas petrol taxes are far more price elastic. Unlike home heating, they will, in practice, be coupled with people at the bottom end.

[Lord Teverson]

In terms of home energy costs, surely price elasticity is directly related to the income group that you are relating to. In a fuel poverty area, price elasticity is extremely high, which is one of the big problems of the energy crisis that the noble Lord is talking about. At the higher income levels, price elasticity is remarkably low, which I should think is the thing that affects price elasticity rather than the particular source of energy.

[Lord Lea of Crondall]

I think that the noble Lord is wrong. On reading the literature, heating is inelastic because people do not want to freeze to death, whereas they can drive less in their cars. This is the difference between the two elasticities.

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[Lord Teverson]

I say this as a really serious point. One of the biggest obscenities in this country is that people die because they do not heat themselves sufficiently. It is a real issue and I am sure that others share my concern. Statistically, when the temperature goes down in this country, we get a significant increase in deaths, which is because people will not put on the heat.

[Lord Lea of Crondall]

I am comparing the price elasticity of home heating with the price elasticity of petrol for your car. That is my main point. It is precisely because people do not generally in this country freeze to death that price elasticity is different.

It is necessary to note that, in practice, the people at the bottom are stopping motoring. There is another statistical problem, or fallacy, built into the ONS statistics. Because they have disappeared from the statistics, it does not look as if the detailed distribution for motorists is as bad as it was. It is rather like saying, “The working class can no longer go to the Costa Brava for their holidays. We do not want that riff-raff going there anyway”. They are out of the statistics and they are out of the motoring statistics. This is another problem with the idea that we can easily use the price mechanism to determine consumption, even though in an ideal world it might be somehow very nice if there was a big reduction in motoring or airline expenditure. As I said in an earlier intervention, the logic is to have the same market externality carbon price, whether it is for aviation or for anything else. But how do you deal with the poverty effects on home heating?

I have three other points. At Second Reading, I used the phrase, “hypothetical hypothecation”, which will not get wider circulation in the bar in Burton upon Trent. We need a statistical picture which would be revealed by hypothetical hypothecation—I will not use the word again I can assure you—but would be quite separate from the actual amount of recycling of revenues within the system to deal with the actual regressiveness.

On the consultative forum, people will ask themselves intuitively, “Where is all this money going?” There is an extent to which we want to say that it is obvious how we are going to spend it. My noble friend Lord Prescott always used to say, “It doesn't matter if someone is charging £50 to drive 100 yards down Piccadilly in a Rolls-Royce. You can throw £50 notes out of it and that will satisfy the Rolls-Royce driver”. But Ken Livingstone or somebody like that would put it all into new buses. That is hypothecation. There is implicitly some undercurrent of the need for hypothecation—with a less fancy word—in what we are talking about. We need a statistical picture that would be revealed by hypothecation even though that is separate from the actual amount of recycling of revenues.

Finally, on fiscal arithmetic, there is a price floor for carbon, which is currently £15 per tonne. The power industry argues that the price needs to be about £35 a tonne to provide a viable return and the noble Lord, Lord Stern, for his part, is in a different fantasyland with an assumption of £75 a tonne at 2010 prices to make his scheme work.

Putting all that together, we have to take a crack at what I am saying in my first amendment so that there is no doubt that we have an agreed statistical basis. Who is going to agree it? That is the second amendment. A consultative body, I might be told by the noble Lord, Lord Marland, is not going to be flavour of the month with a coalition Government who is scrapping public bodies right, left and centre. However, I will make a practical point that even the Government’s own philosophy on the Public Bodies Bill is that it is not supposed to be the slaughter of the innocents. It is supposed to be ostensibly the slaughter of those who are not fit for purpose. I radically disagree with some of the conclusions that they make about that, but fit for purpose this would be. It would have a very clear purpose to get agreement, understanding and therefore some ownership of buy-in on behalf of their constituents—in every sense of that word—and all the different stakeholders in the country.

We have got to a point where this will literally begin to make sense in the bar in Burton upon Trent. It is those people who will complain about the price of heating, petrol, congestion taxes, parking taxes or whatever. This is where the regressiveness issue provides a bridge with the consultative stakeholder forum I referred to on Amendment 37B.

I should leave it there. I thank the noble Lord, Lord Marland, for his co-operation in getting some of these statistics sorted out with the department and the Treasury. I beg to move.