Energy Price Freeze

Debate between Tim Yeo and David Mowat

Wednesday 2nd April 2014 Commons Chamber

[Mr Yeo]

I am coming on to deal with that specific point; if the hon. Lady waits for a moment, I will explain it. First, let me urge everyone to try for a bipartisan debate, as a good starting point, in the interests of helping the public to understand the issues better.

There is general agreement across all the parties that there are three principal aims of energy policy. The first is security of supply, which is fundamental. I do not think the public would tolerate the kind of cuts that occurred in the 1970s. Modern life, both domestically and in business, depends now on a continuous supply of electricity. The second aim is affordability, which is much in everyone’s minds right now. The third is reducing greenhouse gas emissions, which the latest Inter- governmental Panel on Climate Change report underlines should have equal priority to the other two.

Any proposed energy policy should be measured against those three aims, and I am sorry to say that, as my right hon. Friend the Secretary of State has eloquently pointed out, the proposed price freeze does not score terribly well on those three tests. On security, a price freeze will actively harm Britain’s interests. It will inevitably deter and discourage new investment in capacity, particularly in electricity generation capacity, just at the time when, as is universally accepted, Britain needs huge new investment—£110 billion is a commonly agreed figure for the level of new investment needed in the next few years. Of course, as we all know, we face a situation over the next two or three years where margins of spare capacity will be at historically low levels. A very severe winter in this country and in north-western Europe could mean that we face a risk—not a huge risk—of a black-out.

The danger that the price freeze will discourage new investment has already been shown by some of the reactions. My hon. Friend the Member for Warrington South (David Mowat) referred to Centrica. It is all very well for Sam Laidlaw to say that, in the event of vertical integration coming to an end, Centrica would stop investment, but the truth is that in the UK it has already stopped investing. [Laughter.] It pulled out of a nuclear consortium last year. The company is investing heavily in other countries—in markets where it can see better returns than at home. This should not be a cause for laughter by the Opposition; it is very serious, because one of our biggest energy companies is deciding that Britain is no longer a market in which it wishes to participate.

[David Mowat]

My hon. Friend’s observation is pertinent. Was he as concerned as I was when SSE announced its freeze two weeks ago and simultaneously pulled out of three of the four offshore wind farms in which it was involved?

[Mr Yeo]

My hon. Friend is right in what he says. I was going to deal with that point in response to the hon. Member for East Lothian (Fiona O'Donnell), but I will bring it forward. One of the other damaging effects of a proposed price freeze is shown exactly by SSE’s actions in its voluntary price freeze—it introduced that having raised its prices to a level it thought would be acceptable for the next two years. It actually brought forward a price increase, at the expense of consumers, in order to be able to announce this headline-grabbing freeze, and at the same time, as my hon. Friend mentioned, it announced that it was pulling out of three very substantial low-carbon investments. The freeze that SSE announced had two directly damaging effects.

UN Framework Convention on Climate Change

Debate between Tim Yeo and David Mowat

Thursday 18th April 2013 Westminster Hall

[Mr Yeo]

I certainly do not dissent from the hon. Gentleman’s analysis of the effects. We are at a sensitive stage in the nuclear negotiations and this may be another unhelpful dimension. I would like to see a rational approach. There is an important role for nuclear, alongside a lot of other low-carbon technologies, but we need to get it at the best value for money for electricity consumers and the competitive position of British business.

[David Mowat (Warrington South) (Con)]

I wish to follow up on the point made by the hon. Member for Brent North (Barry Gardiner). A subsidy for new nuclear would be more defensible, but the issue is that it is a subsidy for existing nuclear, which makes no sense whatever. I reiterate the point made by the Chairman of the Select Committee, my hon. Friend the Member for South Suffolk (Mr Yeo): such a differential between us and the rest of the EU could wipe out large parts of the process industry in the north of England. It is not tenable—not at all.

[Mr Yeo]

My hon. Friend is right about the difference between new and old nuclear, and I take his point. I reiterate that my Committee and I are wholly opposed to the floor price for carbon, which is a tax. It is not a green measure, although it was introduced as one, and it was never going to have that effect. I am a great supporter of the concept of emissions trading and a great advocate of more urgent action to accelerate the introduction of low-carbon technology. The floor price for carbon will not do anything to achieve those objectives.

[Mr Yeo]

The hon. Gentleman makes a telling point. It is clear that, even in the Treasury, the floor price is simply seen as a way to extract revenue, but it has chosen to do that in a way that is particularly damaging to some sections of British business. Incidentally, his thoughtful intervention has given me time to remember that, in opening, I should have drawn attention to my entry in the Register of Members’ Financial Interests and declared an interest in a number of energy businesses. I reiterate, as I have on previous occasions, that those interests were acquired long after my views on these subjects were formed 20 years ago, when I had some ministerial responsibility for the matter.

I shall touch briefly on one or two other recommendations. The Government agree with the Committee that we should work with industrial sectors and stakeholders to develop a sectoral trading scheme between developed and developing nations. The Government also accepted the Committee’s recommendation that the second commitment period of the Kyoto protocol should last eight years and include a review clause to allow for more ambitious emissions targets, if necessary. They also agree that efforts should be focused on developing the Durban platform, because countries such as Canada, Russia and Japan were unlikely to sign up to a second Kyoto period.

I share the concern of some commentators that more progress has not been made towards closing the emissions gap. Without wishing to provoke my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) into too much anger, I will quote Lord Stern, whose comments on it were apt. He said that

“there has been, yet again, a very big mismatch between the scale and urgency of action required to effectively manage the huge risks of climate change, and the political will and ambition that has been displayed in Doha. Current commitments and pledges by countries to reduce emissions by 2020 are clearly not consistent with the goal of giving the world a reasonable chance of avoiding global warming of more than 2 centigrade degrees. We are headed on current plans for likely increases of 3 centigrade degrees or more”.

He has more to say, but I think I have perhaps said enough on that point.

The Government also supported the Committee’s view that a target of a 30% emissions reduction by 2020 should be set at EU level, and the view that that would be in the UK’s long-term economic, as well as environmental, interest.

I will leave other members of the Committee to address some of the report’s other recommendations, because I want to allow a little more time, if possible, for the second debate, which is on low-carbon links with China. The process that we consider in the report and are debating this afternoon remains important and, frustrating though it is, I am glad that the Government continue to participate fully and constructively in it.

[David Mowat]

My hon. Friend makes a point that I have been reflecting on. He says that his Committee is of the view that a 30% cap is in the UK’s long-term economic interest. For my own education, will he tell me the main thrust of the argument on how that long- term interest will be met by that?

[Mr Yeo]

Gladly. I am pleased that my hon. Friend has raised that point. I was suggesting a 30% target for the EU, rather than for just the UK. I believe it is highly probable that global concern about climate change will intensify substantially in the next 15 to 20 years, and that by the mid-2020s large areas of the globe will be covered by emissions trading and have carbon pricing mechanisms. It is also likely that that will be supplemented, in many countries, by carbon taxes. If that turns out to be the case—of course, I cannot be sure it will—I believe that countries that have moved more quickly towards low-carbon transport systems and electricity generation, and energy-efficient low-carbon buildings of all kinds, will have an economic advantage, as well as their having done the right thing environmentally. The probability is that in that situation the costs attached to fossil fuel consumption will become very high.

I entirely accept that if my expectation is wrong, and if concern about climate change decreases rather than increases, with the world being quite happy to burn huge quantities of coal and gas, my judgment will turn out to have been wrong and a fairly small competitive disadvantage will have been suffered by countries that chose to diversify their energy mix in the way I suggest.

There are also energy security reasons for not saying, “Let’s bet the farm on gas.” I look at what has happened to gas prices in the past five or six years, the International Energy Agency projections for gas consumption, particularly in Asia, and the possibility of planning difficulties with the uncontrolled roll-out of shale gas developments in this country, and I think that in policy terms it is rash to believe, “We have a secure energy future by saying it’s all going to come from gas.” I strongly favour a diverse mix, with nuclear, low-carbon renewables and much more emphasis on energy efficiency—a true “no regrets” policy. Countries adopting that model are likely to be in a better position in the 2020s and might have a big competitive advantage.

[David Mowat]

I agree with what I think is the point that the Chairman of the Select Committee is making, which is that if the world continues to show great concern about climate change, the first movers might have an advantage. Does it not give him pause for thought, though, that the EU in particular now appears to be showing some reluctance on building in a persistent competitive disadvantage to the United States? That would be one interpretation of the vote this week. If that were to become more pervasive, it would create some issues with respect to my hon. Friend’s analysis.

[Mr Yeo]

I do not want to get too distracted by that, but the terms of trade in the debate have clearly shifted a lot in the past year or so. The two big factors are, first, that the recession seems to be longer and worse that we had thought—not just in this country, but across the EU, although perhaps for slightly different reasons, and, secondly, the extent of the competitive advantage that shale gas now gives the US. Despite all that, if we say, “Okay, that’s fine. Let’s not bother with nuclear or low-carbon renewables, it’s all going to be gas,” we might find that we are buying gas expensively from a variety of places, which might even include America.

We would not have done much for our competitive position if we landed up completely dependent on fossil fuel imports, the price of which would be completely outside our control, and even the supply of which might not be wholly reliable. I point to the views of all sorts of businesses that are not green-dreaming tree huggers—some are not even connected with the energy industry—but which clearly feel that an energy mix involving a variety of technologies is a better bet than complete reliance on fossil fuels.

Energy Supply

Debate between Tim Yeo and David Mowat

Thursday 6th September 2012 Westminster Hall

[Mr Yeo]

The hon. Gentleman—in terms of the Committee’s work, he is probably my hon. Friend—is absolutely right about that point. The situation will get much more serious from Europe’s point of view in relation to its reliance on imports from Russia. I commend the work of the International Energy Agency, and especially of Fatih Birol, who has a particularly mature and perceptive view of long-term energy trends. The IEA’s work gives us a lot of warnings.

Despite all that, in what I hope will be a diversified mix of energy sources—gas, nuclear, low-carbon and renewables—gas will remain important in the next 15 years. We cannot do without it, so I hope that the Government’s gas strategy will include a further expansion of gas storage capacity, which is currently only a fraction of that routinely maintained by Germany, Italy, France and the United States.

Our report also recommended that the Government should set up an independent central agency to manage Britain’s strategic oil stocks, so we look forward to progress on that. We distinguished, although not everyone does, between independence and security. Independence of energy supplies is not attainable for Britain in the foreseeable future but, in any event, security is more important. Security means much more than just reliable sources and supplies of energy, although that is a pre-requisite, as it makes storage and interconnection important factors, too. It means having adequate generating capacity and a mix of generation that delivers value for money to consumers and protects consumers in the event of a much higher carbon price, which may well emerge—indeed, it is likely—in the 2020s and 2030s.

I note en passant, and with approval, the continued spread of emissions trading as a policy instrument. It has been adopted in a growing number of countries, although that trend that was not apparent three years ago. We now see it in countries in Asia, in Australia and in parts of America, and pilots are taking place inside China, as we reported recently. That points to the use of emissions trading and the possibility of a rising carbon price in 15 or 20 years.

[David Mowat (Warrington South) (Con)]

I have just been reflecting on that point about security and diversity going hand in hand. Does my hon. Friend think that France, which is relatively undiversified—it has 70% to 80% nuclear—has inherently less secure energy than us?

[Mr Yeo]

That is an interesting point. France is exposed to the risk of something that derails nuclear technology. Last year’s Japanese accident, which was actually an industrial rather than a nuclear accident, effectively led to the closure of nuclear power in Germany. France has rightly taken a more robust attitude. The factors that led to the Japanese accident would not apply for the most part to French nuclear power stations. None the less, a great reliance on a single technology inherently puts a country in an exposed position, although that is perhaps less the case for nuclear power, given that the supply of uranium is probably reliable for the foreseeable future. Interestingly, France is also quite a big investor in wind power which, again, is not something that depends on imports. I would not say that France is excessively exposed, but would be in the event that something went wrong with its nuclear power stations. It is also struggling to renew its nuclear power stations, and cost overruns and time delays have affected EDF quite badly. None the less, I remain a strong supporter of investment in new nuclear power.

[Mr Yeo]

I am always encouraged when a Minister intervenes on my remarks. It suggests that he is listening, not that I expect anything else from the present Minister, and that we are debating something that is of some consequence. It is an interesting question. We are likely to see from China and the other Asian tigers huge demand for imported energy. China has a lot of coal and it may have some more gas that we do not yet know about, but the likelihood is that it will become an importer. Countries such as Korea are already huge importers of fossil fuels. I suspect that the world price of gas will tend to be driven up by the growth in these economies. There will be some interesting consequences. America, which may well be self-sufficient in gas for the time being, will thereby have a competitive advantage because if it wants, it can keep down its gas prices, although if I were a gas producer in America I would wonder about exporting it to a jurisdiction where the price was higher. It would be prudent for Britain to assume that, even if the price of gas remains decoupled from that of oil, we may see a significantly higher gas price by 2030, and that if we were too dependent on gas we might find that we were paying more for our energy than if we had a more diversified mix. A lot will depend on how much investment takes place in nuclear power in some of these countries, because at the moment that seems to be an open question.

[David Mowat]

I hesitate in trying my hon. Friend’s patience further. I was going to mention this earlier. There is no such thing as a world price of gas. There is a European price of gas and a Henry hub price of gas in the United States of America. Currently, the gas price in the US is one quarter of the price here—that is a game changer. Although the demand in China will be high, the US price may represent a constraint on price even in Europe because, if the US lets it happen, liquefied natural gas can be imported into Europe at a cost that is less than the differential between US gas prices and our gas prices now.

[Mr Yeo]

I agree with my hon. Friend: clearly, there is an opportunity for the very low price in the United States to influence prices here. If the US is allowed to do that—and it is converting some of its terminals to export rather than import LNG—the differential is too attractive not to pursue it. However, I doubt whether that by itself would be sufficient to offset the upward pressure from the much faster-growing and larger economies in the east.

Security also depends on a much greater investment in energy efficiency. As we all know, Britain now needs a huge investment in generating capacity. There is no guarantee that that will be forthcoming unless we have clarity and general stability of policy. I urge the Minister to ensure that there is no slippage in the discussions—not just those about the energy Bill but the negotiations on strike prices for contracts for difference—that are under way. The nuclear industry in particular requires as much clarity as possible as it has enormous capital needs and long delays before any return is achieved. I am sure the Minister will find that matter pretty high up his briefing pack.