Viscount Hanworth
Main Page: Viscount Hanworth (Labour - Excepted Hereditary)
Lord Cameron of Dillington
My Lords, I support the theme of these two amendments, particularly the latter one. It is widely recognised that energy demand reduction is one of the cheapest ways to achieve decarbonisation of our economy. I have seen figures—I am not sure whether they came from DECC—which state that energy saving could reduce demand by 26% by 2030. I imagine that that 26% is not from where we are now but from where we would be if we did not have any form of energy demand reduction schemes in place.
It worries me, as the noble Lord, Lord Roper, was saying, that DECC originally said that it would be implementing energy demand reduction via the capacity market. Perhaps I am quite glad that the noble Lord did not find any reference to it in his reading last night because maybe we have got that wrong. To be honest, it makes absolutely no sense. Why wait for the capacity auction next year and implementation in four years’ time before introducing demand reduction schemes? Why wait for a capacity crunch before introducing them? We need these schemes to start now or as soon as possible. As the noble Lord, Lord Teverson, said, we are not talking about energy security or even capacity margins; we are talking about emission reductions across the economy.
I think that I am happy to accept that the Government might want to run pilots here, although the noble Lord, Lord Roper, was absolutely right that we need to put details in those pilots; for example, when the results will be, what will happen afterwards and so on. We have seriously to get on with this.
Lots of opportunities are available. Smart meters are the first that come to mind. A supply company can run machines within a business or a household that are very expensive on electricity—tumble dryers and even dishwashers can wait until the smart meter tells it to turn itself on. Obviously, it should be allowed to be overridden by the householder but the householder must know exactly what cost there will be if he or she overrides the meter. There will be certain times—obviously, when people come home from work and turn on the kettle, or when they get up from watching a film or “Coronation Street”—when the electricity companies know intimately when the peak demand will be. The prices should be allocated accordingly.
I should also say that in future, smart meters could—nay, should—be sensitive to the amount of supply available. If a large proportion of our supply such as photovoltaics or wind turbines is dependent on the weather, a smart meter should know what the weather is to be tonight at 6 pm when the peak demand is coming and therefore what the capacity margin will be. For instance, in Germany last week—and probably this week as well—at certain times, 33% of the national electricity supply came from photovoltaics. Clearly, at those times there was no shortage of power in the country and no need to restrict demand at all by cost.
The noble Lord, Lord Teverson, also said that demand reduction could be encouraged by better energy rating in housing. I could not agree more. Again in Germany, 360,000 homes have been brought down to near zero emissions by lending money to householders at 1%. Perhaps a pilot could be encouraged on those lines; as we all know, the Green Deal has not been very effective as yet.
However, the most important move, because it throws down the gauntlet to the entrepreneurial flair of industrialists, business people and householders themselves, is to pilot and introduce as soon as possible energy efficiency premium payments. Those schemes have worked very well in the USA and, I believe, could work in the UK if bundled together with grants for capital investment. That could, incidentally, include hundreds of household or office-based batteries linked to the smart meter—so electricity is going in and out of those batteries. Obviously, some help would be needed with the capital expenditure in those circumstances.
The main point is that the Government have to drive that agenda, not just sit back and let it happen via the rather clunky capacity mechanism, which was never really designed for electricity demand reduction in the first place.
Viscount Hanworth
My Lords, I, too, express my appreciation of the intentions of the noble Lord, Lord Teverson, and the noble Baroness, Lady Parminter, but I should like to pick holes in the amendment in much the same way as has my colleague, my noble friend Lord Davies. Whereas he considered proposed paragraph (f), I shall concentrate on proposed paragraph (g). It may well be that the amendment is more sophisticated than it seems, because it is possible that the noble Lord, Lord Teverson, is trying to strike a judicious balance between saying something felicitous and saying something that will get past the Minister.
Let me try to deconstruct what is being said in paragraph (g). It is an injunction,
“to progressively increase the energy efficiency of the United Kingdom as measured in terms of quantity of energy used per unit of GDP”.
That is most unlikely to impose a binding constraint. The fact is that the ratio has been decreasing monotonically since 1950, at least, so that in 2010, we used about half the quantity of energy per unit of real GDP as we did in 1950.
I want to make a bigger point than that. I think that we should approach most of what we read in the Bill in a spirit of cynicism and scepticism. I am sorry if that sounds strong, but if we analyse a great many clauses in detail and think of the circumstances in which they would be applied, we realise that they impose non-binding constraints and impose no particular behaviour by the Government that might staunch emissions, improve efficiency, or whatever. I do not fully understand the motives of the noble Lord, Lord Teverson, and they may, as I said, be more sophisticated than they seem but, if I may be forgiven for saying so, his amendment would perpetrate exactly such an ineffective provision. I hope that he will forgive me.
Lord O'Neill of Clackmannan
I follow on from my noble friend’s remark and say that Amendment 51N is pretty vacuous. It is giving us the excuse to have a debate, but it will not come to anything. It is certainly the case that the Government have been reasonably successful in demand reduction because of their economic incompetence over the past three years. We have been in recession, we have seen emissions fall and we have seen the demand for electricity change. That is the first point which has to be made.
Sooner or later, we will come out of this recession—and when we do, we are going to need far more than Amendment 51N would do regarding capacity changes. We are, I hope, going to have an economy growing in a manner which, in its early stages, will probably not be the most attractive for energy efficiency. In some respects, we want to get out of the recession as quickly as possible. Having to chase around for the most energy-efficient way of doing that when we are trying to find economic prosperity for our people would be questionable in the eyes of the public and their sense of priorities. Frankly, the quicker we move on from this amendment the better, because it is a waste of time, although the other amendment has a degree of merit. I am also always dubious about split infinitives in law at the best of times.
Lord O’Neill of Clackmannan
I have some questions for my noble friend. What he is suggesting has been tried before. We used to have the separation—I shall not say of powers—but we did not have vertical integration at the time of privatisation. That position prevailed for about 10 years. My noble friend has to show us whether things were better then. Were prices, independent of exterior energy costs, cheaper than now? Certainly the degree of obfuscation of tariffs was not as sophisticated as it is now, but whether that is down to the character of ownership, the nature of the industrial organisation or just the badness of some of the people involved in setting the prices is for others to decide.
The point I am getting at is that this is not new; we have had it already. I am not sure that consumers were any better protected then than they are now, or that prices were that much lower, when we take out the externalities that determine the price. I am not sure that when we take out the impact of the price of oil and gas on the energy market there is that much of a difference.
Let us not forget that one of the first things that the Labour Government did in 1997, which attracted no opposition at all, was to introduce the windfall profits tax because of the way in which a number of the utilities had been screwing the country as a whole. The Select Committee that I chaired thought that we made a sizeable contribution to a better understanding of the abuse of utility power at the time. Indeed, I always worried that such was the universal acclaim for the Labour Government’s windfall profits tax that they had probably got it too low. They probably could have got far more out, because people knew the degree of pain and had prepared themselves for it.
That is not the point that I am trying to get at here. If there are abuses of the kind that my noble friend suggests, would it be better to go through what might be a lengthy and costly process—I can imagine the lawyers salivating at the moment over the prospect of what they would get out of it—or would it not be more appropriate to try to deal with that market abuse by a radical reform of the regulatory process? The selective choice of international examples made by my noble friend is not really relevant, because in the case of France and Germany, we are dealing in the main with regional monopolies. Their markets are not like ours. We have an oligopolistic system where there is fantastic loyalty to the old electricity boards, and people still talk about them in that way. The reluctance of people to switch has been one of the great frustrations of the regulator and the advocates of the market, because people, by and large, like to stay with the devil they know and choose not to move, for whatever reason.
My real point is that I am not sure that the international comparison is that relevant because although the companies are vertically integrated, they are operating in different market structures. While this is an interesting debate to engage in, I am not certain that it will come up with the answers that my noble friend is looking for. In the 1990s, when we had something like this, it did not really work that well and there were an awful lot of other forms of market abuse. Indeed, that is why we had market reforms—the previous Labour Government had two bites at the cherry during their 13 years. I understand where he is coming from but I am not sure whether he would get where he wants to be by the mechanism he suggests, short of having a radical, tough regulator prepared to have a go, unlike the overly cautious regulators that we have been blessed with in the energy markets over the past 20-odd years. The Opposition have said that they would like to change drastically the character of regulation in this area, and that might be a more productive way of going about it.
As I said, I am grateful to my noble friend for raising the issue because it is important that we consider it, although I am not quite convinced that past experience or the evidence that he has adduced are necessarily unduly relevant to the objectives that he is trying to find.
Viscount Hanworth
My Lords, I support the amendment of my noble friend Lord Berkeley. If his amendment were adopted, and indeed if the policies that it prescribes were implemented, I believe that many of the problems that afflict our electricity industry would be overcome—notwithstanding what my noble friend Lord O’Neill has just said, which I shall consider at some length.
The amendment would radically alter the oligopolistic environment in which the big six vertically integrated companies dominate the generation of electricity and its supply to industrial, commercial and domestic consumers. There would then be some chance that a genuine economic competition could ensue. The vision of the free-market fundamentalists, who inspired the radical restructuring of the industry through a privatisation that occurred a quarter of a century ago, would come closer to being realised than ever it has been.
Having said that, I confess that I greatly regret the demise of the state-owned electricity industry. Mine is not a doctrinaire position, as some might imagine, albeit that much could be said to justify a doctrine of state ownership. An attitude in favour of state ownership of the electricity industry needs no further justification than a reference to the example provided by the French electricity industry. Although the dominant French company Électricité de France, or EDF, sometimes adopts a cunning commercial concealment, it is state-owned, excepting a very small proportion that is attributable to shareholdings which are predominantly in the hands of other companies closely allied with the French state.
I am an admirer but not a friend of Électricité de France. A testimony to its success is the fact that, apart from being one of the aforementioned big six companies dominating the English market, this company owns virtually all of Britain’s nuclear generating plant. Over many years, Électricité de France has worked in close collaboration with the French Government to realise the latter’s strategic objectives regarding the provision of the nation’s electrical power. Only recently, with the advent of François Hollande, has there been any significant difference of opinion between the politicians and the management of EDF regarding the investment strategy.
An investment strategy is precisely what the Bill is about. The danger we face is that the industry’s dominant firms will have no interest in providing the investment in the UK that would serve to avert the risk of a serious electricity shortfall. Although the free-market economists might deny this reality, the fact is that these are multinational companies, often with head offices in other countries. This implies that their primary interests and loyalties are not with the UK. When they are seeking profitable investment opportunities, they are liable to look much further afield.
There are some minor players in the UK electricity market that are based predominantly in this country and have few interests abroad. These are the independent electricity generators which are concentrated in the renewables sector. It is perhaps inevitable that the Government should look to these companies to provide a substantial proportion of the new investment in renewable generating capacity. Notwithstanding the fact that they currently account for only a small proportion of the generating capacity, it is hoped that they will provide something between 35% and 50% of the new investment in renewable plant.
The truth of the matter is that these companies are in trouble. They are being squeezed out by the big six, which have an increasing proportion of renewable capacity in their own portfolios and a declining reliance on the independent generators to fulfil their renewables obligation. The eventual suspension of the renewables obligation in 2017 will spell the doom of these companies, unless measures are adopted to safeguard their position. This is what the present amendment and subsequent amendments being spoken to today propose. It may well transpire that the measures proposed in subsequent amendments represent the only viable ways to protect the interests of the small generators and ensure that they continue to have a market into which to sell their produce.
Lord Oxburgh
My Lords, I will make two quick points. First, I point out that many Governments would salivate at the thought of having six roughly equipotent competitors or participants in a regulated industry in competition with each other. For my information, I am not clear how you decide when you have enough competition, because six participants is quite a lot. It is popular to bash the big six, probably because they do not handle their consumers very well and they have all been associated with unpopular price rises. However, I would like to hear this aspect explored a little more.
My second point is quite separate, which is to draw attention to the second subsection of the amendment of the noble Lord, Lord Berkeley. Regardless of whether the amendment is accepted by the Government, it is very important that the Government take note of that second subsection. It covers a lot of small businesses—I declare an interest as a director of 2OC, which does this—that use renewable energy on a particular site and deliver it to a particular business or a very small range of customers locally. They generally combine generation and transmission to one or a limited number of customers. The Government should make sure that that is protected in the Bill, whatever the final outcome.
Viscount Hanworth
Perhaps I may make a few more comments, some of them addressed to things that have just been said. A great deal of negative propaganda accompanied the privatisation of the electricity industry in the UK, but many studies indicate that the industry was far more efficient than another national industry with which we should compare it, the American industry. There is no question about that. Yet many people tendentiously denied these realities.
If we are to have a nuclear industry, it will be in the hands of a state-owned foreign monopoly. That is a reality that sits very ill beside the fantasy of perfect competition. If we are to have a competitive environment or, indeed, any competition in this environment, perhaps the competition should come from a British state-owned nuclear industry. We have to think somewhat outside the box and not revert to the paradigms of perfect competition versus state industry, which seems still to dominate people’s thinking in this respect. The only countervailing force that I can imagine that could really survive in the British electricity industry to induce competition is if a fraction of it lay in the hands of the state.
Baroness Worthington
My Lords, like the noble Lord, Lord Deben, when I read this I thought that it was a very elegantly phrased and simple set of provisions that are very easy to understand and could go a long way to sorting things out. Having thought about it a bit more, I am still quite attracted to it, but that is not to say that it is necessarily the only way in which the problem could be solved—or, indeed, the right way. What we really want is an acknowledgement from the Government that, rather than thinking about the past— sadly I do not have the benefit of those many years of pre-privatisation—we should really be thinking about the future and acknowledging that the Bill signifies a massive change of direction. As a result of that, it is appropriate that we think again about our competitiveness regime. It will come as no surprise that, from our side, we believe that we need a new regulator to do that—one with real teeth and independence, and one which is not scared to hear from the incumbent, saying, “You don’t like that? We’ll change it for you”. That is the modus operandi of Ofgem, I am sad to say. There are many ways in which we can address the issue.
In answer to the question from the noble Lord, Lord Oxburgh, about how much competition is competition, six companies might be appropriate if it were not for the fact that the vertical integration of generation and supply gives them an enormous advantage in this market. That is what needs to be looked at—and that is why the noble Lord, Lord Berkeley, can be congratulated on his precise and laser-like vision in getting to the nub of it. It is possible to force the integrated companies to operate in a less integrated way, but it is what they do with the DNOs, as my noble friend pointed out. Many of the big six are owners of DNOs. But there are regulations and laws that mean that they have to have a very firm Chinese wall between those parts of their industry, which is precisely because they are natural monopolies and will gain enormous advantage by knowing what is going on in the other parts of the business. So there is a precedent for keeping the corporate structure the same but having clear delineations between the different parts of the business.
Why is this more important in future? One reason that has been oft-cited for allowing vertical integration to continue is that it keeps the cost of capital low. If you are a vertically integrated company and you have a supply base of millions of customers, you can borrow against it very easily and get nice low-cost capital. That was true until this Bill, which completely removes the risk of new generation and potentially gives companies a many decades-long contract against which they can borrow. So the old arguments for vertical integration are falling away, and we should now be reconsidering the logic of allowing it to continue. There are many examples where vertical integration can act against the interests of consumers and of more plurality, competition and lower costs in the market. I shall choose just two.
Viscount Hanworth
My Lords, this amendment is the result of a representation to us by the Combined Heat and Power Association. It is designed to allay the impression that a demand-side response is simply a matter of staunching demand. It points to the fact that much wasted capacity can be saved by rescheduling the demand for electricity within the days, within the weeks, and even more widely within the year, so as to diminish its variability.
A proper definition of what constitutes a demand-side response is provided by this amendment, whereas as it stands the Bill lacks such a definition. In the course of being alerted to this lacuna, we have also been advised of some of the hazards that might arise. The association fears that in the process of assimilating demand-side responses to the capacity mechanism, there is a risk of creating a mechanism designed around a traditional large-scale generation plant. Such a design risks limiting or even excluding the demand-side response of small-scale embedded generation.
Traditional large-scale generation comprises baseload generation by large power stations running at or near capacity, accompanied by intermittent generation by peaking power plants—“peakers”, as they are known colloquially—which run only when there is high demand. The power that they supply commands a much higher price per kilowatt hour than the baseload power. The peakers are typically run with much lower thermal efficiencies than baseload plants and they often use obsolescent equipment that is close to its retirement.
Small-scale embedded generation, which the Bill is in danger of neglecting, is carried out by small businesses, hospitals, university campuses, et cetera, and not by sophisticated electricity-generating companies. Small organisations have fundamentally different needs from the large-scale generators. If they are to participate in the capacity market, the system must be designed around their requirements. At present there are no proposals to support the trading of small volumes of electricity capacity within the market. The provisions cater to large plants, which typically trade hundreds of megawatts of power, and these provisions risk excluding those who trade, as we have heard, just 2 megawatts or 3 megawatts. We alert the Minister, therefore, to these facts, in the hope that they will be accommodated within the primary or secondary legislation in this Bill.
I will take this opportunity to describe some of the realities of electricity demand. The statistics of electricity usage are readily available. The leading page of the National Grid’s website displays graphically the electricity demand over the preceding 24 hours. It also shows demand over the previous eight days. At the lowest point last week, Monday night, the demand in Great Britain was 56% of the highest demand, which was recorded in the late afternoon or early evening of Wednesday. This kind of variation is greatest in winter. In September the minimum demand, at around 4.30 am, would be a mere 50% of the peak demand, at around 3.30 pm. These figures point to a huge potential for flattening the profile of demand.
Other interesting facts can be garnered from DECC’s literature. The report from the Building Research Establishment on the impact of changing energy use patterns in buildings on peak electricity demand in the UK is particularly revealing. It points to the surprising fact that 50% of our electricity is consumed within buildings for heating and lighting, and by appliances of one sort or another. Apart from being fascinating in their own right, such pieces of evidence convey an important message: if we are to manage our electricity demand in a meaningful way, we must do more than simply assimilate the large-scale generators to the capacity market by means of differential tariffs and incentives. We need to study in detail the components of electricity demand in order to understand the scope for demand reduction, and more particularly for demand smoothing. That is another point we want to emphasise.
Lord Roper
My Lords, I am very sympathetic to the first three amendments and, to a more restricted extent, the fourth because they cover quite a number of the points that I raised earlier with regard to Amendment 55ZA. In moving his amendment, the noble Lord, Lord Grantchester, pointed out the complexity of the range of topics that come under the slightly blurred title of demand-side reduction and electricity demand reduction. For instance, in Amendment 53B, the idea of having a separate auction for the demand side is very interesting. It is easier to involve classic demand-side reduction into the general auction; on the other hand, it is still rather difficult to see how what one might call permanent demand reduction is included in any normal auction. One may need to look at some other market principle to cover that.
Perhaps I may draw attention to one other aspect of energy demand reduction. At a lunch two or three weeks ago, I learnt about the significant contribution of the work of the voltage management and optimisation industry group. It does a rather specific thing in enabling people to reduce their demand permanently by introducing important technologies. That is done in universities and hospitals, and in quite a number of areas of social housing. I hope that when we are thinking about this general area, we do not overlook that important contribution.