Meg Hillier
Main Page: Meg Hillier (Labour (Co-op) - Hackney South and Shoreditch)
The Secretary of State for Energy and Climate Change (Chris Huhne)
With permission, Mr Speaker, I would like to make a statement on reform of the electricity market. Since privatisation in 1990, our electricity market has served us well, delivering reliable, affordable electricity, but in the years ahead we face unprecedented challenges, which the existing market was not designed to meet. Over the next decade, around a quarter of our existing power stations will close, threatening the security of our electricity supplies. Some £110 billion of investment is needed to replace those plants and to upgrade the grid. That is twice the rate of investment of the last decade and the equivalent of 20 new power stations. At the same time, demand for electricity could double over the next 40 years as the population increases and as we increasingly turn to electricity for heat and transport. We also face ambitious carbon emissions and renewable energy targets as we seek to build a cleaner energy future for Britain and for the world. To achieve our goals, we need to take decisive action now to increase low-carbon electricity generation, including nuclear and renewable energy as well as carbon capture and storage.
None of these challenges can be met for free. We will have to pay to secure reliable, clean electricity for the future and we cannot ignore the long-term trends in electricity prices. Increases in wholesale costs and the carbon price are likely to lead to higher bills in future, even without factoring in the huge investment in new infrastructure that is needed. It is vital that we put in place market arrangements that deliver this investment as cost-effectively as possible. The current electricity market simply is not up to the job and cannot deliver investment at the scale and pace we need. Without reform, our reserve capacity—the power plants we can call on when demand surges—will fall to uncomfortable levels. We would face a much higher risk of black-outs by the end of this decade and we would also be locked into a worrying reliance on fossil fuel imports, putting us at risk of rising and volatile prices. Consumers could end up paying more.
That is why I am putting before the House today a series of measures to reform the electricity market, diversifying our generation mix and boosting investment in secure, sustainable and home-grown low-carbon technologies. There are five key elements to our reforms. First, the Chancellor announced in the Budget a new carbon price floor to put a fairer price on carbon, thereby reducing uncertainty for investors and providing a stronger incentive to invest in low-carbon generation now.
Secondly, we will send a clearer message that low-carbon electricity is a key part of our future energy mix. We will introduce a new system of long-term contracts to remove uncertainty for investors and consumers and to make low-carbon energy more attractive. Contracts for difference will be introduced for all forms of low-carbon generation, lowering the cost of capital and allowing clean technologies with high up-front and low long-run costs to compete fairly against traditional unabated fossil fuels. This will build on the carbon price floor, providing the additional clarity and certainty that investors need.
Thirdly, we will introduce an emissions performance standard to send a clear regulatory signal about the amount of carbon that new fossil-fuel power stations can emit. This will reinforce the requirement that no new coal-fired power stations are built without carbon capture and storage, while ensuring that vital investment in gas can take place. Carbon capture and storage is a key part of our plan to decarbonise electricity generation. It is the only technology that can potentially reduce emissions from fossil fuel-fired power stations by as much as 90%.
Fourthly, to ensure security of supply in the future, we will introduce a new contracting framework for capacity, changing the way we secure our back-up electricity. That capacity mechanism could mean centrally procuring capacity that is set aside from the market and used only when needed, or it could mean a market-wide mechanism, in which all providers offering reliable capacity are rewarded. Under both options, we plan to ensure fair and equivalent treatment between all the different ways of accomplishing what we seek—demand response, storage, interconnection with our European partners, and extra generation. Shifting or cutting demand for electricity is likely to be more cost-effective than simply building more and more power plants, and complements our work to drive down demand through energy efficiency measures such as the green deal and smart meters. Fifthly, we will put in place transitional arrangements to ensure that there is no hiatus in investment while the new system is set up, and we will create new institutional arrangements to deliver the reform package.
Together, the reforms will tackle the immense challenges facing the electricity market. They will put in place the framework to deliver the capacity and demand-side response that we need to guarantee future security of supply. They will encourage investment in proven low-carbon generation technologies, and will give investors confidence that there will be a market for electricity generated with commercial carbon capture and storage—confidence that will drive investment in both demonstration and commercial CCS plants.
Six energy companies supply around 99% of customers in the UK. Alongside action by Ofgem to improve liquidity, the reforms will boost competition within the market. They will make the UK a magnet for low-carbon investment, generating jobs and growth. That will help energy-intensive industries. However, we are also committed to bringing forward a package of measures to ensure our continued international competitiveness.
The reforms will achieve our aims at least cost to the consumer, with bills for households and businesses likely to be lower and less volatile over the period to 2030 than if we had left the market as it is. They will enable us to build a flexible, responsive electricity system, powered by a diverse and secure range of low-carbon sources, en route to a cleaner, greener future. The reforms insure us against fossil fuel price shocks, end 25 years of policy dithering, and will keep the lights on, and bills down.
Alongside the electricity market reforms, I am also publishing today the renewables road map. For too long, discussion about renewable energy has focused on barriers. Now, for the first time, we have set out a detailed, step-by-step plan to overcome those obstacles. The road map sets out a comprehensive action plan to accelerate the UK’s deployment and use of renewable energy. It puts us on the path to increase our renewable energy consumption fourfold by 2020 while driving down the cost over time. Growth on that kind of scale will be challenging, but necessary.
The road map identifies eight technologies that have the greatest potential for the UK, such as offshore wind, where we have abundant natural resources and already have the world’s largest market. Subject to further value-for-money assessment, the Department is setting aside up to £30 million over the next four years to support technology development programmes to improve the efficiency and reduce the costs of offshore wind. With industry, we are setting up a taskforce to drive the work to achieve cost-competitive offshore wind. The recently published microgeneration strategy also outlines the actions that the Government are taking to tackle the non-financial barriers that could prevent microgeneration from realising its full potential. Together, the renewables road map and the microgeneration strategy, which has already been published, will reduce costs for consumers, and enable mature renewables to compete against other low-carbon technologies in the longer term.
I am also publishing today the final report of the Ofgem review. The review reaffirms the Government’s commitment to a strong, independent regulator, able to give confidence to investors, protect consumers and help meet our energy and climate targets. The summary of conclusions was published in May; the final report provides further detail on how the Government will seek to strengthen the regulatory framework.
The package of reforms that I have announced today will yield the biggest transformation of the market since privatisation. They will create an enduring framework for future investment, and will secure our electricity supplies for the future, providing our consumers with the best deal possible, helping us meet our ambitious carbon targets, and putting us at the forefront of low-carbon technological development, ready to lead the world in the next energy revolution. I commend this statement to the House.
Meg Hillier (Hackney South and Shoreditch) (Lab/Co-op)
I thank the Secretary of State for advance sight of his statement. We are pleased that he agrees with his predecessor, my right hon. Friend the Member for Doncaster North (Edward Miliband), about the need for reform. The Government have already sent some signals about the future shape of the UK energy market.
The Secretary of State should be congratulated on standing up to the fuzzier elements of his party with his U-turn on nuclear, which he no longer happily describes as a “failed technology” but says is an essential part of the UK's getting off the “oil hook”. The Government’s eventual acceptance of the recommendation of the Committee on Climate Change in its fourth carbon budget was largely welcomed by most people, even if his colleague the Business Secretary was described as “squirming in his seat like a schoolboy” at the Cabinet meeting which discussed it.
However, the Government have failed to deliver on many fronts since the Secretary of State for Energy and Climate Change took office. Recent ill-judged Government intervention in the energy market has already led to a hiatus in energy investment and uncertainty across all sectors. The solar feed-in tariffs fiasco destabilised the solar sector and sent shockwaves through other renewable sectors. Companies, including RWE, are considering pulling out of the UK because of the uncertainty caused by the Government in the investment landscape. That was underlined by the Pew Environment Group’s report, which showed that the UK dropped from fifth to 13th in a global ranking of countries for green investment. We have seen a green investment bank failing to deliver the necessary investment now and being criticised by the CBI director general, John Cridland, who warned that the bank
“certainly won’t work if it needs the Treasury’s permission to blow its nose.”
There is a question mark over whether the Secretary of State’s proposals will deliver. The track record is not good. We believe that the Government must meet some key tests if reform is to work. A new market needs to be greener and to create certainty for industry, room for innovation in emerging energy solutions, and crucially, a good deal for consumers both as users of energy and as taxpayers, and it must deliver the necessary investment in the UK energy sector for security of supply.
In the White Paper, we have a mixed bag of measures. There is an emissions performance standard—a policy that the Energy and Climate Change Committee considers, at the level set,
“would have no material impact and is therefore pointless.”
I could say rather uncharitably that that sounds a little like a summary of Government green policy. Certainly, it is not popular, and already industry is puzzled about exactly what it will achieve. If we are to have an emissions performance standard, the Secretary of State needs to explain to us why it is any more than green window dressing. How will the transition to carbon capture and storage be accommodated within this measure, when we are still awaiting not only the sign-off on project 1, but the future Treasury and European funding for projects 2, 3 and 4?
The proposals also include a carbon floor price, although we knew about that because it was announced in the Budget independently of these proposals—a running theme for the Department, which most of the time seems to be run by remote control from 11 Downing street. The Department has only just woken up to the impact that this tax grab on industry and its potential to export businesses and their emissions overseas will have on the UK industrial landscape. Better late than never, but it is catch-up.
Two measures are being consulted on. A contract for difference will pump public money into supporting more expensive energy production—a mechanism which we hear from the Secretary of State will encourage other users into the market, but with such complex administration, we worry, as do many businesses, that small suppliers and new investors will struggle to keep up. We also see proposals for a capacity mechanism and energy auctions, the devil of which will be in the detail. The right hon. Gentleman should expand on which technologies will deliver most benefit, what the costs to the UK will be, how the consumer will afford it, and how we will avoid expensive stranded assets in a new dash for gas.
Investors need confidence, certainty and clarity. The White Paper could help, or it could herald an era of overly complex and overlapping measures, paid for by the taxpayer, that will lead to higher than necessary energy bills. Customers are currently getting a raw deal, so any change must support the consumer. The existing big six energy companies will undoubtedly need to provide in this era of new energy generation, but we need to free up the suffocating oligopoly that stifles real competition from new energy investors. The prize is driving down the cost of new energy generation and prices and increasing real choice for consumers. The Secretary of State, who has been insouciant in the face of rising energy bills, should stop worrying so much about his next meeting with the big six chief executives and start worrying a bit more about the consumer.
Will the Secretary of State please tell us exactly when the legislation will come before Parliament and when he expects the reforms to be implemented? We already have the delayed Energy Bill circling Parliament and a renewables road map announced today: he cannot keep stacking up policies like waiting aircraft. I am pleased that he is convening a group to look at decentralised energy, but can he give us more details on that? So far his Department has been rolled over by the Treasury at every turn, so could he tell us what these changes will cost the taxpayer and what he is doing to protect the public from unreasonable price rises? How will the Government decide when to conduct energy auctions, and how will he ensure that all players will be able to bid in order to reach this new dream world he talks of? Apart from the now delayed green deal, what is his strategy for reducing energy demand?
Mr Speaker
Order. I am sure that the shadow Secretary of State is bringing her remarks to a close, because she has exceeded her time.
Meg Hillier
We cannot afford the dithering, delay and postponement that has characterised Government policy so far. We want to support and work with the Government to achieve these outcomes, but we need answers on those points from the Secretary of State.
Chris Huhne
We are certainly having to play catch-up—I make no bones about it—because after 13 years of Labour Government we inherited a situation in which the UK was ranked 25th out of the 27 European Union member states on installed renewables. The hon. Lady talks about the speed and dynamism exhibited by the Opposition when they were in government, but not a single new nuclear power station has been consented to since 1986, so the reality is that the track record of which she boasts is entirely mythological, like some Grecian beast seen far off in the mists that suddenly vanishes.
We are confident that there will be enormous benefits for small suppliers as a result of these changes, because it is precisely the long-term contracts that will encourage new entrants into the market and ensure that they have certainty about price, which they cannot rely on if they do no understand the market as well as the big six. That will make our market more competitive, which is a fundamental way of ensuring that we get a better deal for the consumer in the long run.
The hon. Lady asked which technologies will benefit more. We are not attempting to pick winners, unlike the Opposition, evidently. We want a level playing field for all low-carbon technologies, because we recognise the genuine uncertainties about the development of such technologies. As we learn more about which technologies will be the most effective and have the lowest cost, we will invest more in the winners, and that will be discovered through normal market processes.
When it comes to consumers, we have been clear about the need to reduce the complexity of tariffs and insist that every energy bill shows the lowest tariff available from the supplier, and we have had a clear review of the retail market from Ofgem. We want greater competition and are encouraging new entrants through all these means, in addition to the support of a 67% increase in the social discount budget, compared with the money set aside under voluntary agreements by the previous Labour Government. We are helping in particular those who most need help with their energy bills, because they are the most vulnerable, and Government Members can be proud of that.
New legislation will be introduced at the beginning of the next Session, in May 2012. The working group on decentralised energy will attempt to tackle all the different barriers to decentralised energy, ensuring that it is able to play its full part in diversifying our supply. The key to auctioning, which I very much want us to adopt, is that there should be greater certainty about costs so that those who are participating in the auction are able not only to see that they have a reasonable chance of winning but to identify their costs.
The hon. Lady asked what measures we are taking on the reduction of energy demand. The most significant of those is the pioneering measure in the Energy Bill—the green deal. We are the first of any of the leading G20 countries to introduce this measure, which we continue to maintain is on course for launch in October 2012, when it will be a roaring success.