Electricity Market Reform

Meg Hillier Excerpts

Thursday 16th December 2010 Commons Chamber

[The Secretary of State for Energy and Climate Change (Chris Huhne)]

Today, we begin consulting on the reform of the electricity market. This programme sits at the heart of my Department’s mission: to deliver secure, affordable and low-carbon energy. The case for reform is clear. We need significant investment in our energy infrastructure. As old coal and nuclear plants shut down, and demand for electricity grows, we must build the next generation of power stations. The electricity that they deliver must be both affordable and sustainable, helping us to meet our emissions reduction targets and keep the lights on.

The current energy market has served us well, but it cannot deliver long-term investment on the scale that we need, nor can it give consumers the best deal. Left untouched, it would lock carbon emissions into the system for decades to come. Investors and boardrooms around the world want to know whether the UK is a good place to do energy business, and today we are setting out our plans to make it one of the best places to do energy business.

The challenges and the opportunities are huge. Put simply, we face growing demand, shrinking supply and ambitious emissions reductions targets: demand for electricity could double by 2050 as we decarbonise the economy; 30% of our electricity must come from renewables by 2020—up from 7% today—to meet our contribution to the European Union’s renewable energy target; and in the next 10 years, a quarter of our existing power plants will need to be replaced, as nuclear and coal plants reach the end of their lives.

Without action, we will face a real and growing threat to the security of our supply. The reserve margin of spare generating capacity will fall over the next decade and the risk of interruptions to our energy supplies will rise, so we must build the next generation of power stations, and act to ensure there will be enough reserve capacity to meet our needs. Together with renewables, we will need new gas-fired power stations and new nuclear plant. We must attract more than £100 billion of investment in new power stations and grid connections by 2020—that is double the investment rate of the past decade.

We must rebalance our market framework to attract investment in the right technologies. At the moment, there is a bias towards low-cost, low-risk fossil fuel generation. Renewables, nuclear and carbon capture and storage all have relatively high up-front capital costs, but a more diverse, lower-carbon energy mix is better for our energy security, better for our economy and better for our planet.

Some measures have already delivered investment in new low-carbon generation—the renewables obligation and the EU emissions trading system—but we must go further and faster. To secure reliable, affordable low-carbon electricity, we must change the market structure. We must create the right framework to ramp up power generation and secure our supply and we must deliver cleaner, greener electricity for the 2020s and beyond.

Today, we are proposing new incentives to drive investment while protecting the rules for investments already made. The focus will shift permanently from conventional fossil fuel-fired electricity to low-carbon technologies—renewables, nuclear and cleaner fossil fuels. Our preferred package of reforms is designed to strike a balance between the best possible deal for consumers and giving existing players and new entrants in the energy sector the certainty they need to raise investment.

Reform will be gradual. We want to reassure industry that the rules for existing investments will be protected. By consulting on a process and principles for the transition to new market arrangements we aim to minimise uncertainty. The competitive market will remain at the centre of our energy policy, but the four elements of the reform package announced today will change incentives in the market and ensure both the security and decarbonisation of our power supply system while minimising costs to consumers.

First, there will be greater long-term certainty about the additional cost of running polluting plant, to make lower carbon investment more attractive. Proposals set out in the Treasury consultation to support the carbon price directly tackle the core problem, putting a better price on emissions, increasing the cost of fossil fuel-based generation and strengthening the carbon price for UK electricity generators.

Secondly, greater revenue certainty for low-carbon generation will make clean energy investment more attractive still. Through the proposed contract for difference feed-in tariff, the Government will guarantee greater revenue certainty for low carbon in the form of a top-up payment if the wholesale price of electricity is below the feed-in tariff and a potential clawback for consumers if wholesale prices go above the contracted tariff.

Thirdly, there will be additional payments to encourage the construction of reserve plants or demand reduction measures to ensure the lights stay on. Capacity payments will create an adequate safety cushion of capacity as the amount of intermittent and inflexible low-carbon generation increases.

Fourthly, there will be a back-stop to limit how much carbon any new coal-fired power stations emit. An emissions performance standard will reinforce the existing requirement that no new coal is built without carbon capture and storage.

Together, those four reforms make good on our commitments in the coalition’s programme for government. They will make the UK a prime location for low-carbon energy investment. They will ensure our energy supply is cleaner and more secure. They will protect the consumer—whereas prices will rise in the medium term, the additional impact of the reform packages will be small, and by 2030 consumer bills will be lower than they would have been if we had not reformed the market. They will lay the foundations for the sustainable economy of the future, bringing jobs up and down the supply chain.

The consultation that opens today invites everyone to tell us whether they think the preferred package of reforms is the right one and to provide the evidence to support their views. Final recommendations will be published in a White Paper in late spring 2011, and the reforms will be introduced before the end of this Parliament. We are also reviewing the role of Ofgem and the energy regulatory framework and today we are publishing the Government’s response to the call for evidence on the terms of the review.

We have a once-in-a-generation chance to rebuild our electricity market, rebuild investor confidence and rebuild our power stations. Like privatisation before it, this will be a seismic shift, securing investment in cleaner, greener power and delivering secure, affordable and low-carbon energy for decades to come.

[Meg Hillier (Hackney South and Shoreditch) (Lab/Co-op)]

I thank the right hon. Gentleman for early sight of his statement and for early notice that it would be made—ahead, even, of Government Back Benchers, for which I am grateful.

Let me be clear at the outset that the Opposition believe that the programme is absolutely necessary to secure energy for the future, and we will support fair and sensible mechanisms for reform. We agree with the Secretary of State that this is a once-in-a-generation opportunity to get it right and we hope that we can work with the Government and that, for their part, they will take on board the Opposition’s comments as they consult.

The issues that the Government must tackle are fourfold: security of supply, meeting renewable energy targets, finding the crucial investment for energy infrastructure—some £200 billion—and, as we heard in Question Time, keeping energy prices reasonable. It is crucial that the Government put in place the mechanisms to make new low-carbon investment attractive and they must bridge the looming energy gap without a rush for unabated fossil fuel generation. I am heartened by some of what the Secretary of State has said, but the Government must also provide energy security across a balanced and diverse energy portfolio and they must provide fairness and affordability for consumers.

We face this big challenge together, but we must not allow the consumer to bear the whole burden. The Secretary of State has dangled cheaper prices from 2030 in front of us today—jam tomorrow—but will he provide his modelling so we can be sure that the Government are doing everything they can to ensure that energy prices today are being tackled, too? We cannot allow increased energy costs to be an excuse for increased profit at a cost to our constituents.

The Government must seize this opportunity and act now to give investors the certainty they need and to meet the necessary time scales. Today, the Government have confirmed that the green investment bank is still under review. The Secretary of State has assured us that the Government are committed to low-carbon growth, but the question is: can he do it on time?

This is not the time for delay or dithering. Now is the time for action, and I hope that the Secretary of State will deem 2011 to be the year of decision. He rightly pointed out in his statement that if we do not take prompt action, “The reserve margin of spare generating capacity will fall over the next decade and the risk of interruptions to our energy supplies will rise.” Questions remain about whether new nuclear can be built on time and at the pace required and whether carbon capture and storage can be proven on an industrial scale and commercially applied to all fossil fuels on time. We also need to know the details about the funding of projects 2, 3 and 4. We also need to know whether agreements on energy storage with Norway or others will be on time, again, and sufficient in scale.

There are other questions, too. Although I recognise that many of them cannot be given definitive answers, I know that the Secretary of State’s officials will have modelled different scenarios. I ask, in the spirit of transparency and open debate, that the Secretary of State share as much as possible of his modelling and risk analysis for plugging the energy gap in the next few years with the House and with the Select Committee on Energy and Climate Change so that we can have a fully informed debate.

The Secretary of State today stresses a UK commitment to 30% of electricity from renewables by 2020. His commitment is clear and we support him. However, has he assessed the mood of the coalition’s colleagues in the European Parliament, who often seem to be at sixes and sevens and are certainly not four-square behind his stance? He is, we know, as we heard earlier this week, working closely with European partners. On Monday, he assured the House, with some feeling, that the Government are united on their position in Europe, but what is the true picture?

The statement is on electricity market reform, but given that we enter this winter with the worse gas storage for many years, does the Secretary of State also intend to make proposals on gas infrastructure and storage; and, if so, when?

Finally, will the Secretary of State give certainty to industry and to people who are already paying inflated energy bills that this programme will be enough to encourage energy companies to invest in the UK, to create the jobs that this country needs and, importantly, to protect customers from unaffordable energy bills?

[Chris Huhne]

I thank the hon. Lady for her comments and particularly for the helpful way in which she couched them. Of course we will be open to Opposition comments on the details of this matter through the consultation period and further on into the legislation. We shall need £110 billion of investment in electricity infrastructure and a total of £200 billion in energy, and one of the most valuable things we can tell investors is that there is, although I do not want to overstate it, substantial cross-party consensus between the coalition parties and the Opposition. That is very valuable in attracting big foreign investors in particular because it means that in the period over which there can be a payback of investments, which might be 20 years, foreign investors can be assured that there will be real stability of policy. I very much value that consensus and very much want to work with the hon. Lady to make sure it is there.

Let me deal with the hon. Lady’s concerns about consumers, which are absolutely appropriate. We have to make sure that business consumers and households in Britain get the best possible deal in supplies of energy—in this case, electricity. A fundamental part of the policy proposal that I hope she will welcome is that by providing investors with the certainty of a feed-in tariff, with a contract for difference, we will attract investment from the big six electricity companies and attract into the market other players—new entrants—to make it more competitive. We will also unlock the pools of capital that various Members have been concerned will not be available without this framework. It is very much part of our thinking that in trying to deal with the underlying problem of a more competitive market we should get more players into the market, because that will ultimately give the best assurance to consumers that we will get the best possible deal.

The hon. Lady asked about the shorter-term view. I made it clear in my statement that this package will deliver lower-cost electricity for consumers than would otherwise be the case on a 2030 view. We will redo the estimates for overall energy policy in the annual energy statement. As far as I can see, on the current basis there is no reason to expect that to change. In the summer, we said that with the overall package of policies we had set out, if one takes into account the energy efficiency packages and the likely reduction in bills as a result, consumers would pay about 1% more in 2020 than would otherwise be the case. That figure involves a fundamental assumption that the oil price will be $80 a barrel at that time, with a corresponding gas price, but oil prices might be substantially higher; obviously, spot oil prices are substantially higher today. The break-even point for consumers is $100 a barrel, and if the price goes north of that the policy framework we are setting out will leave British consumers paying less than if they were reliant, over the relevant period, on the volatility of the world oil and gas markets. That is fundamental. We are dealing with conditions of considerable uncertainty about the future, particularly in the oil and gas markets. We have heard today that the US Attorney General is taking a case against BP as a result of what happened in the gulf of Mexico. We know that there are rising risks and costs in extracting fossil fuels and we have to take that into account when we set a policy that can protect British consumers from the vagaries that might come.

The green investment bank is going to be a clear part of our thinking in dealing with the enormous investment challenge, and Ministers are reviewing the exact market failures that we are attempting to address with the bank. It is a long-term project and the most important thing, when we talk about decarbonising the UK economy, is not to get up and running for 1 January next year a green investment bank that might be half-baked, but to get it right. This institution has to be with us for the long term, right through to 2050, providing lending to help decarbonise the economy over the long haul, so I would much rather get it right than do it early and get it wrong.

I take on board the hon. Lady’s point about the need to deliver. I shall not rub salt in the Opposition’s wounds about the 13 years they were in power, but I remind her that we have inherited the position of being 25th out of 27 EU member states on renewable energy. [Interruption.] The hon. Member for West Ham (Lyn Brown) might chunter about that, but these are the facts. I am not making any comments about them, but am merely saying that we are 25th out of 27 EU countries and we need to improve that position.

The hon. Member for Hackney South and Shoreditch (Meg Hillier) also asked us to make available our modelling basis and I am very happy to do that. Indeed, the models that we used for the 2050 pathways study are already available on the Department’s website. Any Member of the House will find that function very user-friendly; it is Professor David Mackay’s favourite executive toy. Users can decide they want more renewables, a little less nuclear, a little more nuclear or a little more clean coal, put the change in and find out what the consequences would be. We aim to be extremely open and transparent in our whole process.

On the European Parliament, the reality is that we will determine these matters in this Parliament, not the European Parliament. I note that we have an overwhelming majority, judging by the recent vote on the regulatory justification for nuclear, for the sort of package that we have set out.