Michael Fallon
Main Page: Michael Fallon (Conservative - Sevenoaks)Government Levies on Energy Bills
Michael Fallon Excerpts
Mr Yeo
It depends on our priority. Mine would be to get the largest amount of low-carbon electricity generated at the least possible subsidy cost to consumers. Given the figures that are currently projected, I am simply saying that the mix looks unlikely to achieve that objective. I entirely understand the hon. Gentleman’s point that if we are to support any technology, a degree of predictability is important for encouraging investment—I am not advocating a lot of chopping and changing—but at the same time, we are in the early stages and getting better value for money might be such a high priority, given the burden that energy costs now represent to consumers, that we should consider whether the projected mix is right.
On the subject of uncertainty, although the levy control framework helpfully gives a considerable degree of predictability for the rest of this decade, seven years is not all that long given that the investment cycle in the energy industry is very long. Will my right hon. Friend say when we might get at least an indication of the likely levy control frameworks beyond 2020?
That is particularly important in the light of the issue that the hon. Member for Brighton, Pavilion (Caroline Lucas) has just raised about nuclear. There is clearly at least a perception that nuclear will take a great chunk of levy control framework money in the 2020s. If we do not know the total, some people thinking of bringing on new investments later in this decade may be put off because they fear that not enough money will be available.
The Minister of State, Department of Energy and Climate Change (Michael Fallon)
I am not sure whether I heard my hon. Friend correctly. Is he really asking me to advise the House on public expenditure totals beyond 2020—two elections hence?
Mr Yeo
I am not sure whether the total comes under public expenditure. The money is not coming from taxpayers; it might merely affect electricity prices. In the context of the fact that the Committee on Climate Change now sets carbon budgets a minimum of a decade in advance and that we now have a fourth carbon budget that covers the period up to 2028—even the third carbon budget goes beyond the period for which we know the levy control framework total—I am simply asking for some indication of the Government’s thinking. Will the total be maintained in real terms at £7.6 billion index-linked, given that a very big demand on levy control framework money will be made in the early to mid-2020s if the nuclear power station goes ahead?
Mr Yeo
I think of the hon. Gentleman as an hon. Friend, because we agree on so many important issues. He has made his point quite effectively, without the need for me to comment on it. I remain a supporter of investment in new nuclear power stations, notwithstanding the concerns about the arithmetic eloquently introduced into the debate by the hon. Member for Brighton, Pavilion. I simply make the point that without any knowledge of the levy control framework total in the 2020s, there is certainly a perceived and probably an actual risk that nuclear might crowd out some other technologies.
May I tempt the Minister to tell us what he thinks is the prospect for the floor price for carbon?
Mr Yeo
I thought that the Minister was a bit like Oscar Wilde, who could resist everything except temptation, but perhaps he will resist it on this matter. I understand why the floor price policy was introduced, but it does not cut greenhouse gas emissions by a single kilogram, and it raises the costs of British business. If the Treasury’s priority is to help Britain to become more competitive, it is slightly bizarre for it to insist on that policy. There are of course now widespread rumours that we will soon hear that the floor price for carbon will be frozen, instead of going ever upwards. If that is the case, the sooner that it is made clear, the better.
Andrew Percy (Brigg and Goole) (Con)
It is a pleasure to follow the hon. Member for Angus (Mr Weir), particularly as he finished by talking about off-grid customers, and I wholly concur with his comments. I represent a number of off-grid communities, and all the problems highlighted by other hon. Members obviously affect my constituency.
We have had two debates in which fossil fuels have, perhaps for understandable reasons, come in for a bit of a bashing, but whenever we debate them, I like to remind the House that many thousands of my constituents work in the coal and gas and the offshore oil and gas industries. This is still an important sector of the economy, and they play a valuable role, whether by working at coal-fired power stations, at Kellingley or Hatfield pits in my constituency, or offshore.
Throughout this debate we have witnessed the flogging of a dead horse: the energy price freeze—an idea that has been roundly rubbished, including by the public. What would happen in such a situation is clear: prices would go up before a freeze, and they would go up again after a freeze. The public have not been conned on that one. Many of my constituents contacted me when that policy was announced, and they had figured it out for themselves; they needed no assistance from me or my party to do so.
It was interesting to hear about ECO. A good project is going on in my constituency, where funding from the Dragonby wind farm has been used to support ECO funding to put energy efficiency measures into the small community of Dragonby, not too far from Scunthorpe. I see my constituency neighbour, the hon. Member for Scunthorpe (Nic Dakin), here. The project is proving effective, and I will be on site next week, as the next phase of construction takes off .
I want to focus most of my comments—this will probably not surprise the Minister—on Eggborough power station, which is in the constituency of my neighbour, my hon. Friend the Member for Selby and Ainsty (Nigel Adams), but is a big employer in my constituency. I can see from my front room Drax and Eggborough power stations. If I go upstairs, I can see Ferrybridge power station. Powers stations are something that we live with locally and something that we love locally, not least because of the large number of local people employed in them.
Obviously, there is a massive black cloud over Eggborough, which is one of the UK’s largest coal power stations, producing between 2% and 4% of the UK’s capacity, depending on whose figures are believed. But whether the figure is 2% or 4%, given that Ofgem predicts an energy margin of as low as 2% by 2015, Eggborough is incredibly important to generation. Sadly, however, EU environmental regulations and the carbon floor price mean that Eggborough will be forced to convert to biomass or face closure. Indeed, I have been concerned about the carbon floor price from the beginning. That is why I voted against it, along with my constituency neighbour, my hon. Friend the Member for Cleethorpes (Martin Vickers) and, indeed, the hon. Member for Scunthorpe. As ever, north Lincolnshire has been united on this issue, because of the large number of important carbon-intensive industries on the south Humber bank.
Eggborough has been working on a £750 million conversion project that would have started on 6 January and been the UK’s largest infrastructure project in quarter 1 of this year. That investment would have secured 800 jobs, many of them in my constituency, and created even more jobs further down the supply chain. That is on hold. For the past couple of years, Eggborough and local MPs have had positive policy signals from the Department of Energy and Climate Change that conversion to biomass would be supported through the final investment decision enabling process. We are pleased as local Members of Parliament that Drax has been secured through that process, but all the signs were that a rapid conversion to biomass at Eggborough would be supported, not least to sustain that important generating capacity on the grid as well as to meet our renewable targets. This was a shovel-ready project, as I have said, with £750 million of inward foreign investment already in place. The final decision was dependent on the FID enabling process. Several drafts of the documentation were produced, and by the third and final draft something seems to have changed in the selection criteria. Just a few weeks before the final announcement applicants were informed of the change and, as a result, Eggborough was excluded.
Michael Fallon
May I make it absolutely clear to my hon. Friend, probably for the nth time, that the selection criteria were not changed? It was always clear, in each of the updates on the FID enabling process from the beginning of last year onwards, that the budget might have to be constrained if there were more applications for biomass conversion than the budget could accommodate. I am delighted that we could accommodate, through immediate selection, the biomass conversion plant to which he has referred at Drax.
Andrew Percy
I thank the Minister for that, but it is not a situation or an explanation that Eggborough, others involved in the debate or I accept. Yes, I grant it to the Minister that it was clear in the initial documentation that there were a range of selection criteria. That was mentioned in passing in the first draft. By the third and final draft it appears to have become an overriding consideration and criterion. That is what we believe has changed. If that was not the case, why were positive messages given to Eggborough throughout the process? It would have been clear at the beginning that Drax and Eggborough could not both have been funded, given the scale and size of the Drax conversion and the budget. Later, the range of technologies seems to have become the overriding criterion, which is why other local Members of Parliament and I have sought to clarify what happened and are concerned for our constituents who work in this important power station.
As for the impact of the change, Members of the other place and I have recently tabled parliamentary questions to demonstrate that the Government have made no assessment of the impact of the change in policy, nor of the impact on bills. When I intervened on my hon. Friend the Member for South Suffolk (Mr Yeo), my hon. Friend the Member for Suffolk Coastal (Dr Coffey) shouted at me that it was all about how cost-effective this was. Well, we do not know the cost of losing this generating capacity. Eggborough has announced that it will be forced to close unit 2, which provides about 1% of generating capacity, in September this year. According to the most recent information available, the management at Eggborough believe that the plant will no longer supply energy to the grid at all beyond 2015.
There is a crunch coming in 2015, perhaps as low as 2% of capacity, and here we are, about to take off 2% to 4% of generating capacity. The appropriate notices have been issued to National Grid, Ofgem and DECC. The Government may not have made an assessment of the impact on bills, but others have. The loss of that capacity could result in a £38 rise in consumer electricity prices, with £25 due to capacity crunch forcing up the wholesale price, and an estimated £13 of additional cost to decarbonise using technologies that are more costly than biomass conversion.
As I said in the meeting with the Minister and one of his officials, we potentially face a situation in which 800 people who are currently gainfully employed will be sitting at home, having been fired, paying increased bills for a form of generation that is 50% more expensive than the form that they were sacked from generating. To me, and to my constituents, that seems completely and utterly barking mad. It must not be allowed to happen.
We know full well that the process was changed—recalibrated perhaps—over a range of technologies, which seems to have become the overriding factor. There are technologies, largely offshore wind, that have come out ahead of Eggborough, even though they have no finance behind them and do not have planning permission in place, compared with a shovel-ready project that was ready to go.
The figure of £38 for the addition to bills might be disputed, but we have received no answers to our parliamentary questions that show what the impact would be. Perhaps it is worth delving into that in more detail. The £38 is based on the fact that annual wholesale consumption in the UK energy market is 360 TWh. If wholesale prices rise by 10% due to the supply crunch, that would add £5 per megawatt to the wholesale market, which equates to about £1.8 billion per annum. About a third of the market is for domestic households, so that is £600 million between 24 million domestic customers, which works out at £25 on domestic bills. Filling the 4% capacity gap, or maybe the 2%—the figures are disputed—with the more costly renewable technology will result in an additional £13, based on a total cost of £3.4 billion over the life of the project.
It is unfortunate that we find ourselves in this position. I implore the Minister and the Government to listen to our pleas on the matter. Eggborough is a major employer. The conversion project would secure 800 jobs, and potentially thousands more. The money is there, it is shovel-ready and the investment is in place. The fact that the project is losing out to others that do not even have finance or planning permission in place simply cannot be right. In fairness to the Department, I understand the desire to have a range of technologies, but we argue that that is what the contracts for difference regime is for. The projects that would replace Eggborough would not be on stream until 2019-20. There is another regime for them, but there is not for Eggborough. The FID enabling regime is it for Eggborough: it is the end. We really need action on this, perhaps through the Secretary of State using his reserve powers. If the regime is not right, as the Minister has consistently told us, let us look at the Secretary of State’s reserve powers, particularly those relating to the impact on generating capacity.
If this project does not go ahead, we have to be clear that we will be replacing it with a much more expensive form of technology. I support the development of our offshore wind sector through a different regime, and locally we have all been united—the Opposition Whip, the hon. Member for Scunthorpe, is nodding in agreement—in wanting to see the Humber develop as an offshore wind centre. We believe that we can do both. We should aim to do both, not only because of the number of jobs at stake, but because of the implications for consumers and how much they would be hit in the pocket. I hope that the Minister will listen again to our pleas on this subject. It is important not only locally, but from a national perspective.
The Minister of State, Department of Energy and Climate Change (Michael Fallon)
We have had a good debate, and I thank the Energy and Climate Change Committee and the National Audit Office for their recent reports on the levy control framework. I have written today to the Chair of the Committee, my hon. Friend the Member for South Suffolk (Mr Yeo), in response to some of the specific questions raised in the Committee’s letter sent last Tuesday. I hope that all members of the Committee have received a copy of that response.
Before turning to some of the major questions raised about the estimates, not least by the hon. Member for Rutherglen and Hamilton West (Tom Greatrex), let me address some of the specific points made in the debate. My hon. Friend the Chair of the Committee asked about the levy control framework and whether the list of technologies was exhaustive. We have set out all the technologies that we consider should be supported at the moment up to 2018-19, although of course we cannot bind our successor—if there is one—and I do not rule out extending that support. He will see that we have put a support price for wave technology, tidal power and so on. He also asked for more details of the capacity mechanism. We are consulting on the exact operation of the capacity market and the auction, and he will receive more details about that shortly.
My hon. Friend asked about the position of carbon capture and storage in the levy control framework. The capital costs of carbon capture and storage—the £1 billion that the Government are committing to the two projects for which we have signed initial feed contracts—are not in the levy control framework because they are, of course, taxpayer funded. However, the operating costs will be covered through the framework. Finally, he asked me to speculate on the future movement of gas prices. There, I am afraid I cannot help him with any particular update or assumptions, and neither do I think that I would best respond to the debate by doing so.
The hon. Member for Glasgow North West (John Robertson) made important points about energy efficiency, and I do not think there is too much difference between the two sides of the House about the importance of those measures. He went on to attack the performance—indeed, the existence—of the big six. I did not hear him admit, however, that the big six were a creation of the previous Government, who seem to have started with 14 retail companies and ended up with the big six. He would have been on stronger ground if he had acknowledged the failure of the previous Government to do anything about increased concentration in the sector.
My hon. Friend the Member for Southport (John Pugh) made important points about the returns enjoyed by energy companies and the ECO, but his most important point was about the fuel poverty target and how, when we get the new target rolling, we should monitor it properly, account for its performance, and be sure to explain to those—including all the voluntary organisations that worked with us on the construction of a better focused target—how we are meeting it.
The hon. Member for Southampton, Test (Dr Whitehead) made a number of points about the estimates, which I will come to when I reply to the meat of the debate. He drew the House’s attention to the important inter-relationship between the carbon floor price and the levy control framework. He is right to remind us that any changes made to the carbon floor price will, of course, have implications for the levy control framework.
My hon. Friend the Member for Truro and Falmouth (Sarah Newton) referred to the strike prices for some of the newer technologies. I am glad that we were able to confirm those strike prices, which have been such a boost to renewable projects in her area. She went on to make some important points about our continuing work to improve the position of off-grid households. I certainly take her point that we perhaps ought to include some representation from Public Health England in our work. I will certainly reflect on that further, before I convene the next meeting of the ministerial round table in May.
The hon. Member for Angus (Mr Weir), in a lengthy speech, paid much attention to the extent of renewables support without confirming that more than a third of renewable support goes to Scotland, which has just 9% of the population. He would have been on stronger ground if he had referred to the extent of support that comes from outside Scotland; not just from England, but from taxpayers in Northern Ireland and in Wales, too. More than one third of all our support for renewables ends up in Scotland, which has just 9% of the population.
My hon. Friend the Member for Brigg and Goole (Andrew Percy) raised again the position of Eggborough. I do not think, because he champions the cause of Eggborough so well, that he fully appreciates that some 16 projects came forward under our intermediate regime. They all involve enormous taxpayer support, so it would not have been possible for taxpayers to support all 16 projects. We are taking nine projects forward on the basis—I have to correct him slightly—that all are ready to sign this month: all have finance in place this month. I am delighted to confirm that two are biomass conversions—Drax, right next door to him, and Lynemouth in Northumberland—so we are not neglecting the cause of biomass conversion. It is not right to say that a project not taken forward under the FID enabling process has, in the phrase I think was used the hon. Member for Rutherglen and Hamilton West, slipped off the list. We are not able to give taxpayer support to every single renewable project that came forward for the intermediate regime. Those not afforded under the regime will still, of course, have the option of applying under the existing renewables obligation or the forthcoming contract for difference.
The hon. Member for Nottingham South (Lilian Greenwood) raised one important point in particular on the Clifton scheme in her constituency, which, she suggested to the House—I have no reason to doubt her—is a victim of the changes taking place in the ECO arrangements. She alleged that she had not had a reply from the Secretary of State. If that is true, we will certainly investigate and make sure that that point is chased up. I will, of course, write to her on the particular issue facing her scheme in Clifton and see exactly what the situation is. It is not true to say, by the way, that all six of the big six cheered when the announcements were made on the extra two years for the ECO. Some of those who had already committed to the work were not at all pleased that their competitors were being given further time, but I will look into the specific points mentioned.
On the specifics of the debate, as the NAO has acknowledged, the levy control framework is a valuable tool in supporting control of the costs to consumers as we pursue our energy policy objectives. The framework helps to drive investment in our energy sector. It helps to create jobs and growth, and, of course, takes us to a leaner, more secure energy supply. However, I recognise that proper oversight of the framework is important. Those who pay the bills, our constituents, need to know that Parliament is looking out for their interests in scrutinising this expenditure.
Let us look first at why we need the levy control framework. We need to secure an energy future at a cost that we can afford, and that is a huge task. One fifth of our power stations will go off line in the next six or so years. By 2030, if nothing else changes, we shall be importing 70% of our gas. Eight of the nine existing nuclear stations are scheduled to have closed by the time Hinkley Point C opens. However, in the same framework, energy demand may have doubled by 2050. The generation mix will have to tip significantly towards low carbon if we are to meet our legally binding climate change targets.
We are working to reform our energy sector to unlock investment now, and to create a framework for the delivery of a secure energy future. Nearly £40 billion had already been invested in the electricity sector between the beginning of 2010 and the middle of last year. More than 16 GW of new capacity has been brought on to the system, including five new gas plants, and a sixth is under construction. Two huge offshore wind farms opened last year, and we are seeing a very healthy pipeline in key technologies, including four more large offshore wind projects which are under construction. We remain No.1 in the world for offshore wind, and it is the work of the Government and, indeed, the work of the House that has enabled that to happen.
The Energy Bill received Royal Assent last December. That significant milestone laid the groundwork for the delivery of electricity market reform and sent a strong message to investors and industry about the cross-party agreement on the fundamentals of energy policy and the framework that we are establishing. The levy control framework is a key part of that. It provides certainty for investors, helps to control the costs of energy, and helps to ensure that the Government are held to account.
Last Monday I co-chaired the Offshore Wind Industry Council, which consists of many chief executives from different companies that are investing in the United Kingdom. They told me that the stability provided by the levy control framework had been an important factor in their decision to continue to invest in the UK. That is one of the reasons why the figures from Bloomberg show that the average annual investment in renewables has more than doubled in the current Parliament, from £3 billion to nearly £7 billion.
The provision of low-cost, low-carbon energy, improved energy security and the tackling of fuel poverty are all outcomes that the levy control framework helps to deliver, but it is obviously important for the impact on bills to be scrutinised closely and carefully as we pursue those goals. My Department is acutely aware of the pressure that consumers are facing, which is why we took action to reduce bills by an average of £50. The Opposition have a different approach, and we may disagree on the merits of that approach, but I think that Members on both sides of the House can agree that the cost of energy matters deeply to our constituents. It is therefore important for us to have an informed debate about it.
Let me say something about the work that we are doing to increase transparency. In March last year my Department published the prices and bills report, which showed the impact that our policies have had on bills in a clear and transparent way. The annual energy statement sets out our priorities, and an assessment of our progress in meeting our ambitious targets. In addition, Ofgem reports regularly on the costs and impact of each of our existing schemes.
During this evening’s debate, we have heard much about the coverage of the levy control framework. I do not want the purpose of the framework to be misinterpreted. It is a formal part of the public expenditure control framework. We have controls for departmental expenditure and annual managed expenditure budgets, and we also need controls for levies. However, the public expenditure control framework does just that: it exists to control public expenditure. Policies such as the energy company obligation are regulations, not public expenditure, so not all policies are considered public expenditure. The ECO is regulatory in nature and so lies outside the existing departmental expenditure limits and annually managed expenditure budget frameworks, but the fact that some consumer-funded policies sit outside the levy control framework does not diminish the oversight they should, and do, receive. Parliament has debated and passed primary and secondary legislation for all our major policies. Impact assessments that support those debates set out the full economic rationale for the action we propose to take.
We also take steps to monitor the costs of these policies and put that information into the public domain. On the ECO, for example, we published an assessment of the costs of compliance. Our bills and prices report takes account of the costs and benefits of all significant consumer-funded policy, including transmission costs, the ECO and smart meters.
However, we are not able to include three of our levies—the renewables obligation, the feed-in tariffs and the warm home discount—in our annual accounts. To those who have asked why not, the answer is that the Comptroller and Auditor General rightly requires Departments to meet international financial reporting standards. For the renewables obligation, feed-in tariffs and the warm home discount, revenue does not flow through the Exchequer. Instead, industry collects the money directly from consumers and industry controls how those funds are used to meet the regulatory requirements. It follows therefore that the associated expenditure also cannot be included in my Department’s accounts and if it was, the head of the National Audit Office would be forced to quality it. The Government do not gain additional funds through these levies to spend at their discretion.
That is a fairly simplistic explanation of a technical accounting issue and I am sure hon. Members appreciate that the time available tonight does not permit me to go through the detail of international accountancy regulations.
I have asked my officials to work with Treasury officials and the NAO to try to overcome this issue to maintain a clear line of sight, but as the Chief Secretary to the Treasury set out in his letter to the Liaison Committee in November, we have not been able to find a way through this for the existing levy schemes. However, I can assure the House that revenue and expenditure for contracts for difference and for the capacity mechanism— a point raised earlier—will flow through public sector bodies, and they will therefore be included in my Department’s account and will form part of the estimate.
John Robertson
Does the Minister have any idea how much money we are talking about that is not being shown?
Michael Fallon
I think at this stage of the debate the hon. Gentleman will probably allow me to write to him about that as I do not have that figure at my fingertips. However, those are the three principal levies that are not included in the main estimates. As I have said, the revenue and expenditure for the CfDs and the capacity mechanism will be included in our account and will form part of the estimate.
So what we now need to do, working closely with Parliament, is find a satisfactory alternative for the existing schemes. The Committee’s report has provided a very useful contribution to this debate, and I am going to ask my officials to consider carefully the points that have been raised and I will also reflect the Committee’s points to the Chief Secretary to the Treasury when I next discuss this with him.
I also recognise the accountancy and constitutional challenges this issue presents. Notwithstanding these technical challenges, I would like to set out now my intentions for the future reporting of consumer-funded policies, which lie at the heart of the Select Committee’s concern. First, I can confirm that the Government will publish information on consumer-funded policies that covers actual expenditure and forecast expenditure, and that captures the progress we are making towards our policy ambitions. I agree that that information would benefit from a proportionate independent audit and from being formally presented to the House. It is my intention to publish this information annually. The Chief Secretary wrote to the Chairs of the relevant Committees on 5 November, suggesting that this information should be published no later than Ofgem’s report on the renewables obligation. That report is due in March next year, but we need to do better than that, which is why my officials will work with their counterparts in Her Majesty’s Treasury and the National Audit Office to bring that date forward.
I hope that has been helpful. As I have said, we have made some real progress in delivering the investment that this country needs in its new energy infrastructure. The levy control framework is an important part of that process, giving confidence and transparency to investors. But Parliament has an important role in scrutinising the Government of the day and their actions on behalf of our constituents, and I welcome that scrutiny. I hope that the improvements I have suggested to the House tonight will help Parliament in performing its role in doing exactly that.
Question deferred until tomorrow at Seven o’clock (Standing Order No. 54(4)).