Lord Teverson
Main Page: Lord Teverson (Liberal Democrat - Life peer)
Lord Teverson
“(f) to give priority to demand side management and demand reduction measures in preference to increased generating capacity whenever and wherever this is economically appropriate;(g) to progressively increase the energy efficiency of the United Kingdom as measured in terms of quantity of energy used per unit of GDP”
Lord Teverson
My Lords, I shall have to be brief, as we are supposed to finish the Bill today, I think it says, so we will need to set quite a pace. The target for the day: to complete. The easiest way to do that is for the Minister to say yes—perhaps not; I suspect that will not happen.
I tabled Amendment 51N specifically under Part 2, Electricity Market Reform, under Chapter 1 entitled “General Considerations”. This is not just about the capacity payment or all the other bits that make up energy market reform; it is about energy market reform as a whole. Clause 5(2) contains a number of general considerations and it goes through those very carefully. Clause 5(2)(c) refers to,
“ensuring the security of supply to consumers of electricity”.
Clearly that is very important. It also mentions a number of things around cost.
One thing that everybody has agreed, particularly the Secretary of State and Ministers at the Department of Energy and Climate Change, is that as this Bill has been considered in its draft stage and by the informal group of this House, it emerged that it had a bias towards supply. That may have come from old thinking from many years ago and had not caught up with a new way of looking at the overall issue of energy provision within the United Kingdom. I very much welcome the fact that the Secretary of State and the Government have started to take this on board and there are a number of mentions within the Bill of the demand side of the equation, in terms of both demand reduction and demand-side response. Of course, the previous Energy Bill was all about energy reduction in terms of the Green Deal so this is an agenda that is live.
I still think it is really important within this Bill to put down as part of these general considerations the fact that the demand side must be taken into consideration in terms of the exercise of the various functions to do with electricity market reform. That is why I seek to add these two additional paragraphs; first,
“to give priority to demand side management and demand reduction measures”.
I have put very strongly,
“in preference to increased generating capacity”,
but I have made the constraint, which ties in with the whole cost area,
“whenever and wherever this is economically appropriate”.
We need to move our mindset on from being dominated by the supply side to ensuring a much more level playing field in terms of how the Secretary of State and future Secretaries of State have to look at the way in which electricity market reform is implemented. So it is a reminder. It is exactly the thing that needs to be in the Bill to make that clear so that in the future civil servants know that when they are advising Ministers about how this Act is applied, these issues have to be taken into consideration.
We had a long debate on the first day of Committee on decarbonisation targets but we never mentioned energy-efficiency targets. In many ways, this is equally if not more important in terms of the way that we plan our electricity usage and our energy usage within the economy more generally as we move forward.
Clearly, I understand that some of this comes within a European Union context, in that we have the energy efficiency directive, the non-statutory target of 20% energy efficiency for the EU as a whole by 2020—one of the three major targets to be met by that time. It is also important to bring that requirement into this Bill.
The Minister might say that I am absolutely right, and that the United Kingdom is one of the most energy-efficient economies in Europe and indeed the world. Part of the reason is that we have a relatively small but, I hope, rebalancing manufacturing sector. We do not have many energy-intensive industries, but we rely on our service sectors—commercial and retail—which are not energy efficient.
On the other hand, we have a housing stock and a building stock which are still very inefficient: in fact DECC estimated in its energy-efficiency strategy, which came out towards the end of last year, and which I welcomed at the time, that 14 million homes were not insulated to an acceptable standard, from a stock of 27 million. For those of you who can do maths—even if they could not do the equation we dealt with earlier this week—that is just over 50% of total housing stock. In fact around 40% of total housing stock was built before the end of World War II, and a significant proportion of that before the end of World War I. That shows the issues we have around energy efficiency in this country, some of it being dealt with, we hope, as the Green Deal becomes more effective as time goes on.
What I intend to do here is to rebalance this Bill in a key area of electricity market reform, where we set out what we are trying to achieve. We are not removing the supply side; we are adding demand as an equal factor. We are saying that there should be a preference for not spending rather than spending, but only where that makes economic sense. In the cost abatement curves shown in the many multicoloured DECC documents, energy efficiency always comes out on the left-hand side of the graph, which means it is the most cost-effective way to attack our energy needs and to shape how the energy market works in the future. I beg to move.
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 Teverson
My Lords, I thank noble Lords who have contributed to this debate. I am totally unapologetic about putting this amendment forward, because it is fundamental to what we are talking about. The electricity supply industry, over recent years, has operated at an average of 50% efficiency. It only operates 50% of the time. This is before intermittent renewables are significant within the energy mix. That is why there is a problem and why we cannot, or should not, build our way out of this issue entirely.
I entirely agree that we should not table vacuous amendments. However, this is not vacuous, because it concerns one of the general considerations that the Minister has to look at. It concerns a guiding principle.
I would like to follow that up with a lot more specific amendments on energy efficiency. I have not, however, because as my noble friend has said, there are a number of provisions within the European framework although in paragraph (e) there is a reference to the renewables directive, so perhaps we should also have one to the energy efficiency directive and treat the two equally. That is why I tabled the amendment.
I say to my noble friend Lord Dixon-Smith that electricity demand is clearly due to rise very greatly, because the only way that we can decarbonise much of our economy is by moving to electricity. That makes it even more important that we should make sure that the electricity we generate is decarbonised and is produced and dealt with in a balanced way to try to make that demand reduction. That is why those two new paragraphs are there: because there is that need for balance under “General Considerations”.
I have some sympathy with the comments of the noble Lord, Lord Davies of Stamford. I do not think that the phrasing, “economically appropriate”, is exactly how one would like it in the Bill, although as for its fuzziness, paragraph (d) states:
“the likely cost to consumers of electricity”.
That is a similarly fuzzy phrase that is already in the Bill, so the amendment is in sympathy with the way that the rest of the clause is written.
The Minister mentioned my amendment in relation to the capacity payment. I stress again that it is not just about the capacity payment but about electricity market reform generally under “General Considerations”, before we move to the provisions covering capacity. However, I thank my noble friend for going through that and reassuring me in a number of areas about economic efficiency.
Clearly, the economy has got more and more efficient in terms of GDP. I would like us to do what Japan did in the 1980s, which was more or less completely to decouple the high growth rates that it then had from energy consumption. On that basis, I beg leave to withdraw the amendment.
Lord Teverson
I hope that the noble Lord will not mind me intervening. I thought that the noble Lord, Lord O’Neill, asked a very interesting question about the decade when there was effectively this separation. Does the noble Lord, Lord Berkeley, have any thoughts about whether it was better then, or does he have any other answer to that? It is quite an interesting issue that came out of the debate.
Lord Berkeley
I do not think that it was particularly perfect then. We thought that it would get better, but what is probably different between then and now is that the technology has moved on. We are able to trade and the physical network has got a lot better, so I am not sure that the situation is quite the same. However, I am sure that my noble friend will have more to say on that.
Lord Davies of Stamford
My Lords, I am grateful for the contributions to this short debate. On the issue of “may” versus “must”, nothing has been said to persuade me that I was wrong. On the contrary, everybody who has spoken has persuaded me that I am right to make a point about this. If a nonsense is systemic, that is no reason for not combating it and trying to get it right. I shall now feel even more emboldened when the word “may” comes up. I shall feel very sceptical about it; I shall look at it and may very well—not just in this Bill, but in others—put forward amendments of the kind I have today. I hope colleagues who also think that the present system is pretty nonsensical will be emboldened to do the same.
In a free society permissive legislation is otiose. Anything in a free society which is not specifically prohibited is allowed. Therefore, there is no purpose in passing a Bill with a clause saying somebody “may” do something. The issue is whether they must or must not do it. Those are the only things worth including in a legal obligation.
Turning to the more substantive issue, I reiterate that I was in no way suggesting that people had not been talking about the requirements of small businesses or of families and households. I am well aware that the Government have addressed, as the previous Government did, the issue of fuel poverty. We are all conscious of the importance of that, given that energy prices are bound to rise in real terms as a result of our very necessary policies. However, it is extremely important to draw the attention of everyone in this debate to the need to make sure that these new smart methods of monitoring the price of energy through the day, from minute to minute, are available not just to big sophisticated companies and energy users, but to households and small businesses. Only in that way will we get the full benefit of these new technologies, reduce energy demand in the way we need to do, and address the fairness problem and the lack of a distinction between smaller and larger businesses which are substantial consumers of energy.
On the relationship between the capacity market and demand reduction, all I say to the Government is that they had better get on with it. They have got the timing the wrong way around: I repeat, they cannot know what additional capacity they need to meet peak demand, plus a safety margin, until they know how successful the demand reduction efforts are likely to be. The two things are related all the way along: they are reciprocals, as I have said from the beginning. They need to get started with these energy demand methods and pilots very rapidly; they have taken far too long to do it. That is my main message to the Government.
Lord Teverson
I completely agree with the noble Lord over this. However, one thing which happened quite recently was that the National Grid set out to really get moving in this area of demand management in relation to major companies. Smaller ones have, if you like, to be aggregated. That process has started to some degree. The sad thing about it was that the press reported it as being a necessary response to what they saw as a symptom of the crisis in energy supply, rather than as a positive move to get the mental side of supply in line with demand reduction at certain times. That was combined with a number of other government moves at that time. It is not quite as black as that, but the noble Lord is absolutely right to press for even more.
Lord Davies of Stamford
I think that we are all very much agreed. I am grateful to everybody who has contributed. I am grateful to the noble Lord and I am delighted I gave him the opportunity to make that intervention. A very similar message going out from both sides of this Committee about the urgency and importance of these matters is exactly what I wanted.
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.
Baroness Verma
My Lords, I thank the noble Lord, Lord Grantchester, for his detailed explanation of his amendments. The Government have already made it clear that the demand-side response and electricity storage will be eligible to participate in the capacity market. We have announced that these technologies will be supported by transitional arrangements to help develop their capability and enable them to compete on a level playing field against generation. However, while we agree that these are two important aspects of providing capacity, the subsection already allows Secretary of State to make further provision for the meaning of “providing capacity”.
The definition in this subsection is not intended to be exhaustive, nor would it be if these amendments were accepted. There are other existing technologies, such as interconnectors, which may, at some point, play a part in the capacity market, along with other new technologies in the future. This clause seeks to maintain the flexibility to include this full range of technologies, including demand-side reduction and storage in the capacity market, while leaving it open to incorporate novel technologies, should they emerge in the future.
Amendment 53B is intended to ensure that demand-reduction providers are given priority over other providers in the awarding of capacity agreements through capacity auctions. There are a number of reasons why the Government do not see this approach as desirable. First, the capacity market seeks to encourage genuine competition by placing all forms of capacity provision on a level playing field. This is the best way to ensure value for money for consumers, and the reason why no capacity quantity will be ring-fenced for any particular technology type.
None the less, we recognise that certain technologies, such as demand-side response and storage, have different characteristics from generation. That is why we have announced the transitional arrangements. In addition, we have designed the enduring capacity market to ensure that demand reduction and storage can participate effectively by running capacity auctions both four years ahead and one year ahead of when capacity is expected to be required.
As we have already debated, the Government are also proposing an electricity demand-reduction pilot to inform the future entry of EDR into the capacity market. Holding an auction four years out ensures that there is sufficient time to build and commission new generation plants as necessary. However, demand-reduction providers have told us that opting into capacity agreements so far in advance of the delivery year would not be possible for most of their projects. This is why we are giving demand-side response and storage the option of participating either in the auction held four years out or in a further auction held one year ahead of delivery.
It is currently risky for demand-side response providers to predict the amount of demand reduction they will be able to provide four years ahead of a delivery year. This risk is significantly reduced in a one-year auction and we would expect them to be awarded capacity agreements at this stage. This is because we envisage them being able to provide cheaper capacity than generating plants.
In summary, this amendment would not be compatible with a technology-neutral approach. Furthermore, it risks either forcing demand-side response providers into taking on unacceptably large risks to align with the timescales required for building new generating plants or negating the possibility of new plants participating in the capacity market, risking a significant shortfall in electricity supply and the very real possibility of regular blackouts.
Amendment 53C would require the Secretary of State to modify the Electricity Act 1989, adding an additional licence condition authorising a person to store electricity. Storage of electricity is not presently an activity that requires a separate licence, although some storage providers may be generation licence holders. I therefore reassure the noble Lord that electricity storage would be able to participate in the capacity market without this amendment. The Government have already confirmed its eligibility and this is irrespective of its licence status. This is because Clause 22 does not restrict participation in the capacity market only to licence holders. It also allows the Secretary of State to define further who may be a capacity provider in regulations.
The noble Lord, Lord Grantchester, also mentioned electricity storage. We agree that storage technologies are still developing and further innovation is needed to bring down costs and find ways of scaling up. We are supporting two innovation competitions, the first winners of which were announced in May. In the large-scale storage competition, 12 winning projects were given £17 million of funding for the first feasibility phase. Decisions on which projects will proceed to the demonstration phase are expected in September. The component research and feasibility study competition has four projects so far.
The noble Lord, Lord Grantchester, asked about a separate set of rules for DSR within the capacity market. We do not envisage a separate set of rules. We envisage that the rules and regulations will cover all technologies eligible to participate in the capacity market, although the transitional arrangements for DSR will be incorporated. He also asked about baselining for on-site capacity. This will be covered in the detailed capacity market regulations and will be the responsibility of the national system operator.
The noble Lord asked what I visualised as success, given his previous question on the Green Deal. I view success in the long term as a programme that will last many decades. In reference to the Green Deal, I am already witnessing success. We had more than 44,000 assessments up to the end of June and 115,720 installations under ECO. That is what I would call successful.
Turning to Amendment 53AA, tabled by the noble Viscount, Lord Hanworth, which proposes a definition of demand-side response to be added to Clause 21, the Government have already made it clear that demand-side response and electricity storage will be eligible to participate in the capacity market. As I made clear in response to the questions of the noble Lord, Lord Grantchester, we have announced that those technologies will be supported by transitional arrangements to help them to develop their capability and enable them to compete on a level playing field against generation.
I hope that the noble Lord, Lord Grantchester, and the noble Viscount, Lord Hanworth, have found my explanations reassuring, and I hope that the noble Lord will withdraw his amendment.