Tim Yeo
Main Page: Tim Yeo (Conservative - South Suffolk)Government Levies on Energy Bills
Tim Yeo Excerpts
Mr Tim Yeo (South Suffolk) (Con)
I am delighted that the House is debating this important subject. Its importance can be gauged by the fact that by 2020 the amount of possible spending under the levy control framework will be £7.6 billion a year, more than double the total budget of the Department of Energy and Climate Change. The fact that the money comes from consumers rather than taxpayers is, as far as parliamentary scrutiny is concerned, rather beside the point. The two categories largely overlap, and as the sums are so large it is essential that Parliament should scrutinise effectively and carefully how they are spent. I shall come back to that point.
I begin by drawing attention to my entry in the Register of Members’ Financial Interests. In doing so, I emphasise again that my views on climate change and the need to cut greenhouse gas emissions were formed more than 20 years ago, when I had ministerial responsibility at the old Department of the Environment in John Major’s Government. I studied the science as it then was and concluded—as, I hope, an open-minded layman—that the increased concentration of greenhouse gases in the atmosphere was likely to be a significant and possibly the main cause of the observed changes in the climate that the world was and still is experiencing.
My views have not changed in the intervening 21 years. I have expressed them regularly in private and public as a member of the Government and of the shadow Cabinet, including as shadow Secretary of State for the Environment and for Trade and Industry, and as a Back Bencher. The financial interests recorded in the register have all been acquired since I left the Front Bench in 2005. Suggestions that my views have in some way been influenced by those interests are not supported by the facts.
I hope and believe that we are now seeing the last gasps of the flat-earthers in the debates on climate change. The Intergovernmental Panel on Climate Change fifth assessment report has reinforced the overwhelming scientific consensus that the conditions of climate stability that the world has enjoyed in the past few hundred years and which have made possible the unprecedented and phenomenal success of one of the earth’s most recently arrived species—human beings—are now threatened by the activity of that same species.
I warmly welcome the public statements made in various parts of the world in the past few days by my right hon. Friends the Prime Minister, the Chancellor of the Exchequer and the Secretary of State for Education, all of whom have endorsed those scientific conclusions. That mainstream acceptance of the science, which is shared on a bipartisan basis by the Opposition, is very helpful because it allows us to concentrate on what the real debate should be about: how should we in Britain tackle the challenge of cutting our own greenhouse gas emissions? How can we play our part in helping the whole world move towards a low-carbon economy?
Of course I understand the fears of some about the short-term additional cost of low-carbon investment and the burden that that might place—particularly on poorer households, for whom energy bills are a significant anxiety. I also understand fears about the wider impact that that cost could have on Britain’s competitive position. Those are all legitimate concerns, and they should be assessed in the context of the knowledge that action in Britain alone will not solve the problem.
However, we need to be aware that other countries are now moving quickly—surprisingly quickly in the case of China, perhaps. Even in the United States a substantial change in what is happening on the ground has occurred in the past few years. Those extra costs will disappear entirely if the price of carbon rises, as seems probable if international concern about climate change intensifies in the next few years. I am confident that those countries—I hope that Britain will be among them—that lead the way towards a low-carbon economy will in the medium term not just have done the right thing environmentally but reap an economic benefit, in the form of lower costs and improved competitiveness, as the price of carbon rises, whether owing to the widespread introduction of carbon taxes, to a carbon price driven by emissions trading or, as seems most likely, to a combination of the two.
All that is directly relevant to this debate. I warmly welcome the establishment of the levy control framework and the pathway to 2020 helpfully set out by the coalition at the end of 2012. That was reassuring for investors and gave great encouragement to those of us such as me who are extremely concerned about climate change. It encouraged us to see that a realistic amount of support will be available to promote and support low-carbon electricity generation, including a significant element of renewable energy.
I want to look first at the scope of the levy control framework—what it covers and what it does not. We already know that a range of low-carbon electricity generating technologies will be covered; they have already been identified and strike prices for contracts for difference have been announced. It would be helpful if the Minister confirmed this evening that the list is not exhaustive and that proper consideration will be given in future to extending it. None of us knows today what technologies may be available in a few years’ time; some may offer better value for money than those available now.
I would also like the Minister to clarify how the capacity mechanism will fit into this. There is an urgent need for clarity on this subject. He will be well aware of the narrow margin of surplus generating capacity that will exist a year or two hence. Part of that problem is caused by the reluctance of investors to commit to new investment in gas-fired power stations, despite the glittering prospect of large quantities of domestic gas reserves if the reluctance of local communities to exploit them by using fracking can be overcome. I welcome the Government’s incentives, but I am not sure that they are yet sufficient to persuade some of the residents in beautiful parts of our crowded countryside. We are even seeing a reluctance among investors to bring existing gas plants out of mothballs. That reluctance is unlikely to be overcome until more details have been revealed of how the capacity mechanism will work in practice.
Of course, levy control framework money will not be confined to supporting electricity generation. Any light the Minister can shed on how it can be used to support demand-side measures would be welcome. It would also be useful to explore how the cost of supporting carbon capture and storage—on which I welcome the recent progress that has been announced—will fit into the other priorities for the levy control framework.
On to the key issue of expenditure control, levy control framework spending will, by its nature, be very hard to predict: the lower the price of gas, the greater the cost of the contracts for difference that has to be met from the LCF. Given that the Department for Energy and Climate Change forecasts that, by 2020, as much as a third of all LCF spending will be accounted for by CfDs, it would be helpful to know what assumptions my right hon. Friend has made about gas prices in the pathway through and up to 2020 in arriving at the estimate of about £2.5 billion of LCF spending that is to be allocated to meet the cost of CfDs.
Will the Minister also say a bit about what will happen if gas prices turn out to be much lower? That would, of course, be a happy scenario for consumers, because it would mean that their energy bills were lower, but it might result in a substantial shortfall in the LCF. How will that cost be met? Will consumers be expected to bear the burden of the overrun? That might not be such an unreasonable prospect, given that in such circumstances the part of consumer bills accounted for by the wholesale gas price, which is substantial, would be lower than expected.
By the same token, the opposite scenario is also interesting. What will happen if gas prices are much higher than expected? In theory, at least, the cost of the CfDs could be zero. Does that mean that lots more contracts would be offered to allow a much greater level of guaranteed support for low-carbon electricity generation, or would the Government simply rely on the market to incentivise new low-carbon investment in view of the rising cost of fossil fuels?
In view of all those uncertainties and the inherent difficulty of making long-term future projections about energy prices, will the Government publish annually an update on the assumptions about the gas price they will use in reaching their judgment about the cost of CfDs within the LCF?
On the subject of controlling costs, I would be very interested to hear the Minister’s comments about the value for money offered by different technologies. The main aim of the renewables obligation, feed-in tariffs and CfDs is to help Britain meet its greenhouse gas emission reduction targets by encouraging low-carbon electricity generation, but affordability is also a very important aim of energy policy. I note with interest that the Government believe that offshore wind may make the biggest contribution of all the technologies currently included for support by the LCF.
Caroline Lucas (Brighton, Pavilion) (Green)
I am reluctant to interrupt the hon. Gentleman, because up until now I have agreed with everything he has said and I fear that my question might lead us to depart from that. Does he agree that if we compare the strike price for nuclear in 2023 with the price of offshore wind, onshore wind and even solar photovoltaics in 2023, we will see that nuclear is vastly more expensive, and that if we are serious about keeping energy bills down, it is ludicrous to support those technologies whose price is likely to go up, rather than those whose prices are coming down?
Mr Yeo
I had a hunch that that was the issue the hon. Lady would raise. For the most part I agree with a great deal of what she says on this and some other subjects. It is perfectly true that, arithmetically, nuclear is very expensive. I think that the decision, which I support, can be justified on only two grounds. The first is that I am uncertain that, even with all the other support, we will be able to generate enough electricity from low-carbon renewables to meet the targets we have set for 2020 and beyond, from 2030 through to 2050. It would need some pretty heroic assumptions about the roll-out of some of the technologies to think that we could replace the whole of the electricity currently generated by nuclear with electricity from other low-carbon sources.
Secondly, I think there is a real prospect—though I do not suppose I will carry the hon. Lady on this point—of the cost of nuclear coming down substantially if we see a big expansion of the industry. Nuclear power stations in China, for example, are going to become almost a commodity given the number that will be rolled out. In the 2020s, we might find that we will be able to buy them off the peg at a much lower price than the admittedly high price currently expected for Hinkley Point.
Andrew Percy (Brigg and Goole) (Con)
I, too, share my hon. Friend’s concern that we will not be able to replace current generation with renewables in the way predicted. Does he, therefore, share my concern that, because of the recent “final investment decision enabling for renewables” process, we are likely to lose Eggborough power station, which currently accounts for between 2% and 4% of the UK’s generating capacity, along with 800 jobs? Given that it was a shovel-ready project, it is frankly bonkers and utterly barking mad that it has not been given the go-ahead for biomass conversion.
Caroline Lucas
It is not just a question of heroic assumptions about renewables. Actually, I think those assumptions are not so heroic, particularly if we add community energy and energy efficiency, which along with conservation is always the poor cousin in this debate. We know that we could make huge inroads on the amount of energy we use if we were serious about that. If we combine that with renewables, there is plenty of evidence from the Centre for Alternative Technology and many others that we could get the nuclear reductions we need without nuclear or more fossil fuels.
Mr Yeo
I take note of what the hon. Lady says and I respect her views, but she has not quite persuaded me that it will be safe to say no to nuclear in the immediate future. I think it is useful to have it as a weapon in our armoury, notwithstanding the high cost of this first new nuclear power station, but it is worth looking at and updating our assumptions. Nuclear is not exactly going to be in production tomorrow. There are still a few gaps to close between cup and lip before it will be in the bag. I am sure the European Commission’s objections can be adequately dealt with and I shall write to the Commission myself shortly on that very point.
I want to discuss a possible scenario. Of all the technologies being supported at the moment, the biggest expectation is for offshore wind. In 2017, offshore wind will qualify for a strike price of £140 and onshore wind for a strike price of £95, and let us suppose that the price of gas-fired electricity will be about £50 at that time. In effect, we are saying that offshore wind requires a subsidy that is double that for onshore wind and 40% higher than that for large-scale solar PV. Does that really represent good value for money for consumers?
Hitherto, I think that most consumers have been bewildered about the cost of supporting different low-carbon technologies. A system of renewable obligation certificates is obscure even to those of us who have tried to take an interest in the matter for a number of years, but suddenly it is going to become clear that certain technologies are very much cheaper than others. I wonder if, with a generous system of incentives, some of the cost advantages available to onshore wind—I know that it is probably the most controversial form of energy—were shared with the communities hosting onshore wind farms, some constituents might find the possibility of having a couple of wind turbines on the other side of the village green, given the offer of a freeze in their electricity price for as long as they were in production, less unacceptable than they currently do, but I merely speculate.
Staying with 2017, let us suppose that the gas price falls much lower, which many people would of course welcome. That would raise the cost of the already awarded contracts for difference that have to be met from the capped levy control framework. Is there a risk that the Government might have to stop offering any new contracts for difference, because it was clear that all the available money would be used up by the contracts already awarded? In that context, will the Minister explain why the Government think it is sensible to plan for as much as a third of all the electricity generation supported through the levy control framework to come from offshore wind, which is one of the most expensive forms? Will he comment on the danger that some projects that offer better value for money might get squeezed out if too much is allocated to expensive technologies early on?
Without clarity on such issues, there seems to me to be at least a risk of uncertainty in the system putting off some investors. It might at least encourage others to factor into their projects a higher price for the return on capital than would otherwise be needed in a more certain context.
Mr Mike Weir (Angus) (SNP)
I am listening closely to the hon. Gentleman, but I am slightly confused about what he is saying on offshore wind. The whole point of contracts for difference was to give certainty, as well as to give a boost to emerging technologies and get them off the ground. If the Government are now looking at not perhaps granting so many of them, does that not undermine the whole purpose of the contracts for difference system?
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?
Dr Alan Whitehead (Southampton, Test) (Lab)
To underline the hon. Gentleman’s point, does he agree that the likely take on CfDs in one year when Hinkley C comes on stream in 2023 will probably be more than the total money currently available for new entrants under the levy control framework? Does he therefore wish to emphasise that it would have a seismic effect on CfDs over the period 2020 to 2025, and the Minister might also want to consider that point?
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.
Mr John Redwood (Wokingham) (Con)
Given the mounting pressure generally from industry across Europe against very high energy prices, which forces investment outside Europe, does my hon. Friend think that the whole European framework on carbon is due for substantial amendment?
Mr Yeo
I cannot go down the route suggested by my right hon. Friend and remain within the scope of this debate, but I simply say that it is in everyone’s interest to make the European Union emissions trading system work more effectively. If it did, there might be no need for the floor price for carbon anyway. An EU-wide carbon price driven by a trading mechanism would at least be even-handed in its impact across the 28 countries of the EU, and it would not place a special burden on Britain in the way that the floor price for carbon currently does. I therefore urge the Minister to throw Britain’s full weight behind efforts being made to make the EU emissions trading system work more effectively.
In conclusion, I draw attention to my Committee’s recommendations about how the Department should report to Parliament on the cost of all schemes funded by the levy control framework. I hope the Minister agrees that accepting the recommendations would boost confidence in the Government’s readiness to seek value for money from levy control framework funds and to be transparent about decisions. As I have mentioned, the present system of renewable obligation certificates is pretty hard for most consumers to understand; feed-in tariffs, contracts for difference and the whole levy control framework should be easier for the public to comprehend. The establishment of the levy control framework was a positive and helpful development, but I am sure that my right hon. Friend recognises that exercising effective parliamentary scrutiny on how those very substantial sums of money will be spent is essential for public confidence. I commend my Committee’s report to the House.