Low Carbon Energy Generation

Mark Lazarowicz Excerpts

Thursday 26th February 2015 Westminster Hall

[Mr Yeo]

I agree with the hon. Gentleman, and I am sure he will enlarge on that point when he speaks in the debate, should he catch your eye, Mr Brady—there does not appear to be overwhelming competition for that. However, it is an important point that we need to bring out in the debate about nuclear. I welcome the fact that there are competing technologies that want to get started in the UK, but in deciding which ones we might “go nap” on, we need to focus on value for money. There will perhaps be an opportunity to choose between a number of them, and those that have been tried and tested elsewhere first may have a cost advantage that we should not be afraid of identifying.

Let me move on to renewables, on which there has been excellent progress since 2010. In stimulating new investment in renewables, the regime established by the electricity market reform process and all the accompanying legislation, which some of us have laboured for many hours to improve, is now one of the best in the world from the point of view of investors. Today’s news about the contracts for difference allocations confirms that. There is a lot of interest in investment in renewables here in the UK, and I warmly welcome the success of the CfD regime.

There is, however, a clearly topical issue in this regard that relates directly to my concerns about value for money. The strike prices announced today remind us—much more clearly than the previous, somewhat opaque renewables obligation certificates system ever did, certainly to the layman—of the relative costs of different renewables technologies. Of course, it is great news for consumers that the cost of solar is falling and the strike price is now significantly lower. The rapid and considerable fall in the cost of solar is partly a reflection of the enormous expansion of the solar industry in China, and that has had direct benefits for British consumers. It is now clear that solar can reach grid parity before long, even in this climate.

I am also delighted that today’s announcement makes it clear that a significant amount of new capacity will be provided by onshore wind. I am aware that it is an extremely controversial technology, particularly among many of my hon. Friends, but as we can see today, the truth is that onshore wind offers good value for money, relatively speaking. Of course, there are some—perhaps many—places in which onshore wind turbines are simply unacceptable, for environmental and other reasons, but I would regret it very much if, as a matter of policy, we turned our back on onshore wind altogether. That would turn out to be an expensive mistake, because even with prices for offshore wind falling—again, I welcome the strike prices announced today—onshore wind remains substantially cheaper.

My anxiety about offshore wind is that I do not see the potential for the huge fall in cost that occurred with solar. A large part of the cost of offshore wind is in the installation process of planting and anchoring a turbine in deep and rough waters. There may be a limited number of days on which the process can even be carried out, and the cost of the equipment needed on site is very high. That places a limit on the potential further reduction in the cost of offshore wind. I hope it will come down somewhat—I am sure it will—but I do not envisage a dramatic collapse in cost.

[Mark Lazarowicz (Edinburgh North and Leith) (Lab/Co-op)]

I also welcome today’s announcement, particularly in relation to the Neart na Gaoithe wind farm in the firth of Forth. I take the hon. Gentleman’s point about cost, but surely he would agree that only through a substantial increase in the volume of offshore wind will there be any possibility of the price falling. I also take his point about consumption, but savings can be made there as well, through advances in technology. It would be wrong to give the impression that offshore wind will not be an important part of the package in future, particularly given our obvious advantages because of our geographical situation.

[Mr Yeo]

I accept the hon. Gentleman’s point. I am not suggesting that we should rule out offshore wind, but I am suggesting that we should be mindful of the fact that at the moment it requires a much bigger subsidy than some of the other renewable technologies, and we need to be hard-headed about what proportion of our available resource we devote to it.

Britain is of course the leader on offshore wind worldwide, so we have already achieved a great deal. Interestingly, there are some relatively shallow waters in Guangdong province in south-eastern China, and quite a big push is being made on offshore wind there as well. That may help the process of bringing the price down. Offshore wind will remain an important part of the energy mix, but I am concerned to ensure that we do not allocate too much of the resource available through the levy control framework to offshore wind.

Last year, we had an announcement about the final investment decision enabling contracts, which I think were announced last April and used up just over half the available resource under the levy control framework. A large chunk of that was allocated under contracts that were at higher prices than those today. Things are always easier with the benefit of hindsight, but looking back, I think that in our anxiety to get the process under way, we may have gone a bit further than we needed to at that early stage and are locked into some relatively expensive contracts. Be that as it may, the benefits of competition and the continuing fall in costs are reflected in today’s strike prices. I therefore urge the Government to be as technology-blind as possible in the future. They should leave local objections to individual proposals or projects to be resolved through the planning system, and try to help the best value for money technologies to continue to cut costs and to flourish.

I have already mentioned that I think that solar will reach grid parity. I think that onshore wind also has the potential to reach grid parity, and if that happens and a local community are happy to see some turbines in their neighbourhood, why should they not be allowed to construct them?

Let me move on to gas, which is not everyone’s idea of a low carbon technology, although compared with unabated coal, it certainly is a lower carbon technology. The problem for Britain with gas is that our reserves are running down, so we are importing a great deal of gas. Luckily, a lot of it comes from our friendly neighbour, Norway, and we are not dependent to any meaningful extent on Russian gas for our consumption. However, we are importing a lot of liquefied natural gas. Interestingly—this came out in the debate that we had a few weeks ago on what was then the Infrastructure Bill—David MacKay’s report in September 2013 pointed out that net greenhouse gas emissions from imported LNG are actually higher than those from shale gas extracted by fracking, so if we continue to use large amounts of imported LNG instead of exploiting what may be significant domestic reserves in the form of shale gas, using fracking, which my Select Committee has reported on twice and regards as potentially a safe technology, we are locking ourselves into a slightly higher emission pattern.

I believe that, no matter what, in the next 15 to 20 years gas will remain an important part of our energy mix. It is completely unrealistic for people to assume that we can get by without consuming a great deal of gas, so we should now press on with exploiting our shale gas reserves. To do that, or even to determine how great those reserves may be, we need to start drilling. I regret the fact that there appears to be continued delay, caused in part by local opposition, to embracing that opportunity.

Britain could be the leader in Europe on shale gas. If we get on with it now, we could write the European rulebook on shale gas. There would be benefits for contractors, supply chain companies and others. There would be an economic advantage for the UK if we delayed no further and pressed on with shale gas, as other countries would then follow our lead. They would overcome their current caution and follow us down the shale gas route. I therefore hope that we will not miss that opportunity. It is just as unrealistic to assume that we can do without lots of gas in the next 15 years as it is to assume that if we close down all our nuclear power stations, they can be replaced by low carbon renewables.

Of course, the lowest carbon energy of all is the energy that we do not use. In this context, I again urge the Government to promote demand-side response. There is still a great deal of misunderstanding about demand-side response. Many people think that it means imposing power cuts on consumers without notice and against their will. It means nothing of the sort. Demand-side response today involves harnessing the latest technology to facilitate voluntary cuts in consumption at peak periods by consumers who are paid for their ability to switch off their power at very short notice. The prize, if we embrace demand-side response, is enormous. It means that we can cut the total electricity generating capacity that has to be maintained. At the moment, we have to have high levels of capacity available even though it might be used only for a few days in the whole year. That is an incredibly wasteful arrangement. If we have a vibrant demand-side response sector, we will not have to have so much capacity. Every consumer will benefit from that, because at the moment every consumer is subsidising capacity that is scarcely ever used.

[Mr Yeo]

I agree, and I am glad that Britain is at least a world leader in research on some of the marine technologies. It is welcome that we are also, I believe, going to go ahead with experimental tidal lagoons in the west country. The potential from those is enormous, but it would be greatly facilitated if we embraced more demand-side response. It would also, of course, be greatly enhanced if our research on storage were successful in finding cheaper ways of storing electricity. That is another very urgent and hitherto somewhat overlooked area.

[Mark Lazarowicz]

I was going to make the point that the hon. Gentleman made. As well as the issue of investment in advanced technologies for storage, there is the fact that there are some very tried and tested technologies for storage that are not fully made use of. Does he agree that that also needs to be ramped up by the Government?

[Mr Yeo]

The hon. Gentleman is right. Storage generally, quite apart from new technologies for storage, has been under-emphasised by successive Governments. One of the problems is the mindset. There is a 20th-century mindset, dating back to the old days of the Central Electricity Generating Board. The overriding aim then was to ensure that people never had a power cut, so vast amounts of surplus capacity were maintained at all times. The answer to every anxiety about whether we were going to be short of capacity was, “Let’s build some more power stations.” That was a 20th-century answer; it is not the 21st-century answer. The 21st-century answer is, “Let’s use this more efficiently. Let’s make sure we can avoid the peaks in demand.” We may well not need any net increase in total capacity ever again.

It is therefore, in my view, unfortunate—I put it no more strongly than that—that the Government’s principal adviser on these decisions is a privately owned company whose profits are made for its shareholders by investing in more transmission capacity. The National Grid, in my view, is seriously conflicted in this matter. Quite understandably, it has a regulated UK domestic business, the profits of which are directly increased if Ofgem signs off investment programmes involving more transmission, and more transmission is obviously needed if there are more power stations. Its profits, in the UK market, could go down if we make a sufficient success of demand-side response. We cannot hide from that conflict. I do not cast any aspersion on the integrity of National Grid’s management. They are doing an absolutely straightforward and proper job for their shareholders within the regulatory framework. However, we must not allow that to have an influence on how we see the capacity market develop.

The first round of auctions in the capacity market produced, I have to say, a pitiful allocation to demand-side respondents. This issue is extremely urgent. I know that DECC is looking at it, and a review is taking place of how the auction will work at the end of this year. It is very urgent that we ensure that the next auction has a much more level playing field, so that demand-side respondents are able to bid into this market and get a bigger share of it.

It is a shaming outcome that the principal beneficiaries of the capacity market auction appear to be the most polluting technologies, such as diesel farms and coal-fired power stations. That is exactly what we hoped to avoid. The review of the capacity mechanism is of great importance. Allied to that, we should ensure that as smart meters and other smart technologies are rolled out, they incorporate mechanisms that allow time-of-use pricing to be introduced widely in a way that consumers can easily understand, and that does not penalise poorer consumers. Time-of-use pricing, allied to the demand-side response contribution, has the capacity to cut costs for consumers and reduce the need to maintain excessive amounts of capacity at all times.

Let me give a plug to the importance of the carbon price. The biggest factor, in the long term, in investment decisions favouring low carbon technology will be a significant carbon price, which might be brought about through carbon taxes or through emissions trading. Personally, I have a preference for the latter; a cap-and-trade system has the great merit of making total emissions predictable. If there is a cap, there is a cap. If we rely entirely on carbon taxes, no one can be sure about the elasticity of the market’s response to a particular carbon tax.

I am pleased that the UK Government have been on the side of those arguing for faster and more radical reform of the EU emissions trading system. Unfortunately, it is a work in progress, and there is still a lot to be done to try to make sure that the system is capable of driving a significant carbon price before 2020. A carbon price across the EU ETS will not penalise any one country, because every country will have to face the same imposition. Those who fear that a higher carbon price in the form of a domestic carbon tax would simply drive industry to other countries would not have that fear if the price were driven through the EU ETS.

I hope that the British Government will be among the leaders in the promotion of linkage between the EU ETS and emerging emissions trading systems in other parts of the world. My Committee published a report earlier this month, “Linking emissions trading systems”. We are encouraged, and even impressed, by the progress made over a short space of time by the emissions trading systems in China. We are also encouraged by the establishment of an emissions trading system in California, which is already linked to one of the Canadian provinces.

Emissions trading is an idea that now has critical mass, even though five years ago it seemed to be faltering. If China rolls out a national system during the 13th five-year plan, as I am confident that it will, a third of the world’s population will live in areas covered by emissions trading. If emissions trading spreads in the US, as I think it will, more than half the world’s GDP will come from places where emissions trading operates. The goal—in my view, the wonderful goal—of a global cap-and-trade system starts to come into view. I hope that that will be kept in mind at the Paris COP meeting at the end of the year.

The fifth and most recent assessment report from the Intergovernmental Panel on Climate Change proposed the concept of a maximum level of greenhouse gas emissions that can safely be allowed if the world is to keep within the target of an average rise in temperature of no more than 2° centigrade. A maximum safe level of emissions leads naturally to the idea of a global cap-and-trade system, with that maximum as the cap. Although that dream will not be realised in the next five years, we should keep it in mind. The danger is that we will lock ourselves into systems that are incompatible with the achievement of that goal.

In conclusion, I believe that if Britain decarbonises its electricity generation system, our economy will become more competitive, not less. International concern over climate change will intensify quickly over the next few years. That will lead to a significant carbon price, either from emissions trading or from carbon taxes. Countries, industries, companies and perhaps even households that have taken the lead in decarbonising their economies, business models and patterns of consumption will enjoy greater prosperity, not less. Decarbonising electricity will also promote security of energy supply and accelerate the cutting of greenhouse gas emissions. I hope that Britain will continue to be a leader in that process. In the way in which it achieves that leadership, I hope it will keep clearly in mind the importance of getting the best value for money in each decision that is made to achieve decarbonisation. I emphasise the fact that the decisions we make today have a long-term effect.

I believe that the Government can claim to be the greenest Government ever because of what they have done in the past four and a half years and, importantly, because of their ambitions for the future. The truth is that the benchmark for the accolade of “the greenest Government ever” is not a demanding one, because no previous Government could really claim to have been particularly green. The next five years will, therefore, be judged against a benchmark that is slightly more demanding, and that benchmark will become progressively more demanding in future. I look forward very much to the reply by my hon. Friend the Minister, and I hope that he will indicate that he and the Government share my hopes for the future.