Energy Market Design

Philip Boswell Excerpts

Monday 23rd November 2015 General Committees

[Andrea Leadsom]

I am not completely sure that I understand the hon. Gentleman’s question. The point I am making is that it is for individual member states to look at the balance of energy mix that is important for their own energy security. The integration among and co-operation between member states leading to greater interconnection offers all member states access to surplus in another member state, which is of benefit to energy security and, of course, prices in each member state. Interconnection is valuable, but that is not to say that one size fits all and that a common methodology must therefore be used in every member state for every interconnector.

[Philip Boswell (Coatbridge, Chryston and Bellshill) (SNP)]

The Minister spoke of the especially effective integration of renewables. The document mentions storage. Does she agree that the storage of energy, particularly from renewables, will be key to the solution for European energy in the future and deserves a much higher profile in the document than is currently the case? What does she propose to do about storage in the UK?

[Andrea Leadsom]

The hon. Gentleman is exactly right that storage will play a huge part in future. I certainly feel that not enough has been done at a time when power generation from renewables has been rising rapidly not only in the UK but throughout Europe and the world. Of course, that renewable generation has added stresses to the system because of its natural intermittency, so finding a way to bring down the costs of storage and exploring the different storage technologies is important for all of us throughout the world who aspire to decarbonise our energy systems.A particular advantage of greater focus on the electricity market design across Europe is that we will be able to share with our European neighbours the costs of the technology and of research and development. We will be able to co-operate and find the best and most cost-effective solution for all our consumers.

[Andrea Leadsom]

The hon. Gentleman might be aware that significant investment has already been made into research at both grid and domestic-level storage in the UK. My Department has invested significantly in trying to bring design ideas to fruition. We are at the cusp of a big change, with storage costs coming down. He is right that some of the household battery designs in the States are becoming significantly cheaper. We are seeing those costs fall, supported by co-operation not only at EU level but elsewhere. Last week I was at the International Energy Agency, which is also very keen to focus on research and development into new storage technology to ensure that costs come down for us all.

The hon. Gentleman is exactly right that at both system and domestic level, storage and the whole demand-side response to enable people to reduce their own demand on the system are extremely valuable, not only to keep down costs for consumers but to help to support our energy security.

[Philip Boswell]

Following on from the hon. Member for Luton North, both he and the Minister mentioned battery power as a potential fix. Does she agree that that would be a megawatt solution for a gigawatt problem? I was Shell’s contract lead on the carbon capture project, which I moved from Longannet to Peterhead, and I am familiar with different storage facilities. Does the Minister think that compressed air electricity generation might provide an alternative solution? Does she agree on the megawatt issue?

[Andrea Leadsom]

Yes. I am grateful to the hon. Gentleman for making that point. It is absolutely right to say that domestic battery storage is a small solution for an enormous problem. However, there is increasing use of smart metering; domestic households are increasingly generating their own power through solar panels on their own domestic rooftops; and so on—all these small measures in aggregate are changing the balance of the system. Those demand side responses of individuals play a very important part. Nevertheless, he is exactly right that there are some amazing technologies coming to fruition: compressed air; pumped storage; and grid level battery storage. There are a number of different technologies and my Department is very keen to see which one can have the biggest effect and, of course, which one can offer the most cost-effective solution for consumers.

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[Philip Boswell]

Following on from that, I understand that stopping wind and solar was one option, but was not another option to slow them down to retain the supply chain? Creating a supply chain from nothing, as we look to move into tidal, wave and other forms of renewable energy, is extremely difficult. Continuing with wind and solar, although they might have slowed down, may have given us a greater advantage, putting Britain at the forefront of renewable energy and maintaining the advantage we had gained. Was it perhaps unwise to stop entirely?

[Andrea Leadsom]

I am sure the hon. Gentleman is aware that we have not stopped the feed-in tariff entirely. We are consulting. The consultation is now closed and we will respond as soon as we can. There were significant numbers of responses, and we hope to provide the Government’s policy response by the end of the year. The hon. Gentleman will be aware that, in fact, the proposal is to continue to give a return to investors from participating in the feed-in tariff. He will also be aware that there is a significant amount of onshore wind still in the pipeline in terms of meeting the grace period for the early closure. He will also be aware that, only last week, the Secretary of State gave a continued commitment to support for offshore wind, where Britain has 50% of the world’s deployment. I hardly think that that is calling a halt to renewables.

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[Philip Boswell]

I will be at pains not to repeat much of what has been said in this debate, most of which I agree with, but there are three points that I want to touch on. Page 19 of the third report speaks of the regulatory frameworks and integrated markets, and of integrated entities not subject to regulatory oversight, the functions of which have “characteristics of natural monopoly”.

I feel that we should not allow this to fall into private or quasi-private hands and should not be frightened to discuss solutions outside the market, such as nationalising elements of what we do in that respect. That is very much what the hon. Member for Luton North spoke about. Scottish Water is a prime example of how that can be done, and the national grid is an entity that could and perhaps should have a future in the hands of public ownership, or even in some hybrid public-private partnership. That door should not be closed, as the language in the papers to date seems to suggest it is. I urge that that not be done, and that we keep an open mind to all solutions available to us at any given time, particularly when it comes to security of energy supply.

On security of supply, I understand that each member state needs to plan its future capacity, and market coupling should significantly increase the effectiveness thereof. Most are considering future shortfalls. Page 20 of the same paper mentions better investment cycles: that is, profit-driven investment. That has not been the case to date, and legislation needs to do more. Better investment signals alone will not resolve the security of supply problems. There is no excuse for poor, bad or no planning by any Government or governing body in that respect.

Although I concede that Hinkley Point is forward planning, having some knowledge of the industry, I am certain that neither the delivery price, which allegedly includes decommissioning, nor the start-up date will be as the company envisaged. I doubt that the UK has much, if any, contingency plan for the delays and price increases at Hinkley Point. Do not be presumptive.

Page 20, paragraph 1 warns of market distortion and speaks of an objective of phasing out harmful subsidies, including for fossil fuels. That ignores the fact that the only sensible move to a carbon-free system involves continuing to improve emissions reduction on fossil fuel energy production as we gradually move towards general greener energy markets, making full use of revenues from existing fossil fuels.

Also, what is the problem with distorting the market when the market is clearly not working for consumers? Again, the paper seems too reliant on the market, when as the hon. Member for Luton North rightly pointed out, Longannet provides about 40% of Scotland’s energy. It is being closed early, next year, although it had four years to run. He is absolutely correct that we were capturing more than 90% of emissions from the coal-fired power station. The last deep mine is in England, the last Scottish mine having already closed in Scotland. That is the quality of coal that we want, with fewer emissions.

The capture system that we use—we used it at Longannet, but have moved on to the gas system up in Peterhead—is a very early design. Capturing more than 90% of emissions is like having a block mobile phone. If we move to an iPhone 5 or 6 in five years’ time, we should be capturing a high 96% to high 98% of emissions. That is entirely doable. The marketplace requires support, not destruction. Moving away and closing plants is a missed opportunity. I will not repeat the points well made by Opposition Members about foreign companies—ironically, they are nationally owned—coming in and making a killing in our market with inflated prices, given the opportunities for reductions.

[Andrea Leadsom]

I am pleased that we have had a good, constructive debate on the important subject of electricity market design. Now is the right time to review European energy market design. As Europe continues to make progress towards its decarbonisation objectives, it is important to ensure that they are achieved without placing at risk the effective and efficient functioning of the single market in energy.

The hon. Member for Southampton, Test talked about the EU decarbonisation targets. The Climate Change Act 2008 provides a stronger decarbonisation challenge than the EU targets and I assure him that we are looking at what we can do on heat and transport to ensure that we meet those challenges. I take his point that we could do more on electricity generation, but he would agree that it is also essential that we keep an eye on the cost to consumers. We cannot simply worsen fuel poverty and make our businesses uncompetitive, which we would if we increased, with no limits, cost to consumers through their energy bills.

The hon. Gentleman mentioned the use of interconnection being historically far too low. I hope that he welcomes the fact that we are looking at far more interconnection going forward. He said that prices will eventually make interconnection inefficient and ineffective, but I assure him that that is not the case at the moment: the cap and floor regime makes interconnection still profitable and we hope to take advantage of lots of other interconnection opportunities that are coming up.

The hon. Member for Luton North raised coal. Our coal-fired power plants are all very old—40 or 50 years old—and they are due to come off-grid. They are not brand-new clean-coal plants. Most are not able to meet the industrial emissions directive and only a couple are prepared for it. Their future is not long term and I do not think he is right to say that we should stick with coal just because it is cheap. The Secretary of State made it clear that because gas is the cleanest fossil fuel—its carbon footprint is about half that of unabated coal—we should look to it as the bridge to a low-carbon future, not old coal. We are still dealing with the legacy of our deep coal mines. People are still dying of cancer and appalling problems caused by them, so I think we should be glad that those days are behind us.

[Philip Boswell]

On deep coal mines, we are get most of our coal from Colombia, where the health and safety record is appalling, as it is in China. If we were digging for our own coal here, at least we would be doing it safely. In the talk of switching to gas, I feel there is an alternative agenda, which is fracking, which the Government are rushing headlong towards. I wrote a paper on fracking in about 2006 and while I admit that the chemicals we were using or talking about using then as catalysts for better—

[The Chair]

Order. Relatively short interventions, please.

[Philip Boswell]

I apologise. Does the Minister intend to rely heavily on fracking to provide us with gas?

[Andrea Leadsom]

I am glad that the hon. Gentleman has given me an opportunity to respond to that. At the moment we import up to half our gas needs, but by 2030 we will import up to 75% of our needs—he will know that the North sea basin is slowly in decline—so it is vital that we either build our home-grown gas or recognise that we will become extremely dependent on imported gas. My view is that, having looked carefully at all of the regulation and fracking processes, if it is safely done with some of the best regulation in the world—we have more than 50 years’ experience of regulating onshore and offshore gas—we can safely extract in this area.

As the hon. Gentleman will know, there is no fracking going on in the UK at the moment and we do not even know if we can extract gas from the shale. Never to give it a chance seems to be an enormous waste of a potential industry that could offer up to 65,000 much-needed jobs, which would be a huge boost.

[Philip Boswell]

We entirely agree with the Minister on the gas issue—Scotland has a moratorium. However, although it is true that the known gas reserves are in decline, there is plenty of gas off the west coast of which we are aware. Does the Minister agree that we should focus on developing that safer fracking offshore, rather than onshore gas?

[Andrea Leadsom]

I can agree that it is vital that we maximise the economic recovery from the North sea. The hon. Gentleman will be aware of all the measures we have taken, including on the fiscal regime, the setting up of the new Oil and Gas Authority, and our seismic studies to help businesses that want to consider the under-explored parts of the North sea basin. I certainly agree that the industry is vital to the whole UK.

The hon. Member for Luton North said that he thought that we are behind the pace in tidal. We are keen to consider such projects but, notwithstanding our desire to bring on new technologies, the projects need to offer value for money to bill payers if they are to be deployable. He also talked about nationalising energy businesses, and I am sure he will recognise that I do not agree with him on that. The UK has always been open to foreign investment but that does not mean usurers’ profits going overseas, nor does it threaten our energy security. Foreign investment in UK energy projects benefits the UK consumer, bringing in the competition that keeps the costs down.

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[Andrea Leadsom]

The UK is a trading nation. We invest overseas. We allow foreign investors to invest in the UK. I still strongly argue that foreign investment in UK energy has benefited consumers by keeping bills down, and energy security by keeping the lights on.

Finally, the hon. Member for Coatbridge, Chryston and Bellshill discussed his concern about the lack of energy security. I point him to the capacity mechanism that ensures that we provide capacity for the future, to ensure that we have the security on which we all depend. He will be aware of the demand-side response. We enter into agreements with companies that wish to be paid either to reduce their demands on the system or go off-grid and generate their own power at times when that is needed. That response is a vital contribution to energy security, as is the capacity mechanism, and the hon. Gentleman should rest assured that my Department’s absolutely non-negotiable core focus is ensuring energy security.

[Philip Boswell]

On the issue of closing Longannet, 40% of Scotland’s energy generation comes from Longannet, which will make us more reliant on EDF Torness and Peterhead—the two ageing nuclear power stations that the Minister referred to. That creates a massive problem for a black start. If things go down in Scotland it is extremely difficult, without power generation from the coal-fired power stations, to start up again. What assurances can the Minister give us that we will be able to start up again?

[Andrea Leadsom]

All I can say to the hon. Gentleman is that we, along with National Grid and Ofgem, focus above all else on security of supply. National Grid has a range of tools—I have mentioned a couple—to ensure that we are able to keep the lights on at all times. It is our No. 1 priority. I can assure him that National Grid has created sufficient security of supply and that there is a margin to ensure that the lights stay on, as stated in its “Winter Outlook Report”. The matter is absolutely non-negotiable.

For the energy market design in Europe to enable the further integration of the single electricity market, national interventions need to be in line with single market aims and the EU state aid rules. Consumers should be enabled to play a more active role in the market and mechanisms should be developed further to incentivise demand-side response and storage. The UK is already addressing those challenges, including through the implementation of the electricity market reform and other measures, such as smart meters, enabling domestic households to make the most of their electricity management. Many other member states are only just starting. We stand ready to share our expertise with them and with the Commission.

I want the UK to be constructive on the issue of energy market design, but I am determined to ensure that any proposals brought forward by the Commission maintain an appropriate level of competence between the Commission and member states. I urge the Committee to endorse the motion.

Question put and agreed to.

Resolved,

That the Committee takes note of European Union Document No. 11018/15 and Addendum, a Commission Communication: launching the public consultation process on a new energy market design; and supports the Government’s approach of welcoming the Commission’s consultation which addresses the challenges that decarbonisation creates for Member States’ electricity systems and the effective functioning of the internal energy market, while working to ensure that any future legislative proposals preserve an appropriate balance of competence between the Member States and the Commission.—(Andrea Leadsom.)