Electricity Capacity Regulations 2014

Viscount Hanworth Excerpts

Thursday 24th July 2014 Grand Committee

However, as my noble friend made clear a few minutes ago, we are not at the end of the road. There is still time to put this right. The OLR regulations are still to be published though the consultation, as she says, actually ends tonight—this is the last day. My noble friend made very clear, and I took a careful note of what she said, that these will be “subject to consultation”. My final plea is that, for goodness sake, whatever advice she may be getting from her officials, I beg that Ministers listen to the representations still coming from the independent generators so that when the regulations are finally published, they do implement what they have always said is Ministers’ determination to ensure that there should be competition in these markets. It would be tragic if, at the very last minute, we found ourselves failing to ensure that OLR support for independent generators was introduced in time for the first auction. To my mind, the Government simply must listen to that if their intentions are to be achieved, and I hope that my noble friend will take note of that.

[Viscount Hanworth (Lab)]

My Lords, I wish to reassert and reinforce some of the anxieties that we have been listening to. More than 20 years ago, a Conservative Government sought to privatise the electricity industry in favour of free enterprise and competition. The outcome has been an industry dominated by an oligopoly of six large suppliers owned primarily by foreign capital. There has been an absence of the necessary oversight of the industry that would provide an assurance that it will meet the future needs of the nation, and there has been a severe deficit in investment.

The present Conservative Government have sought to amend this situation through a programme of electricity market reform. The result was the Energy Bill, which we struggled with last summer. The Bill promised to engender a raft of secondary legislation that would come to haunt us later. Now, that legislation is represented by a massive pile of documents concerning the regulation of electricity market reform, the regulation of the so-called contracts for difference and the regulation of the capacity market. We are aware that not all the regulations are yet before us, and this shortfall promises to cause problems.

On encountering the mass of regulations, I am assailed by feelings of inadequacy. I have neither the time nor the energy for the task of scrutinising the regulations in detail. I fear that my own inadequacy may be a symptom of a more general problem with which government is faced in our era. One of the features of the problem is clear. It is that, by pursuing a philosophy of free enterprise and marketisation, the Government have created an almost impossible amount of centralised regulation.

The foreign ownership of our electricity industry is one of the reasons for the severe underinvestment. The owners of the big electricity companies are large multinational enterprises that are able to look worldwide for the best investment opportunities. They have no overriding incentive to invest in the UK. Therefore, the Government are constrained to look to small independent generators within the UK to provide much of the necessary investment. These companies require careful fostering if they are to fulfil this role and if they are not to be squeezed out by the big six oligopolists.

The Government have signally failed to protect independent generators. Their oversight in this respect is baffling and distressing. Last summer, it seemed that, eventually, the Government had been convinced that the independent generators required an assured route to market for their product. The means of providing the necessary assurance has been termed the offtaker of last resort. In the absence of a purchasing power agreement, the offtaker would be prepared to purchase the power at a heavy discount. This stringency threatens the viability of any investment projects that the independents might wish to pursue, and it has made it unlikely that they will be able to raise the necessary finance.

Now we are discovering that, notwithstanding the belated assurances of the Government, the problem persists. It seems that there will be an 18-month delay between the negotiation of the first contracts for difference and the realisation of the arrangements for the offtaker of last resort. My supposition is that this delay has been caused by the sheer volume of secondary legislation that is entailed in the electricity market reform and that this crucial element of the programme has been sidelined or at least severely delayed. The consequences for the independent generators and for their investment programmes will be dire.

[Lord Deben (Con)]

My Lords, I, too, support my noble friend in his concerns. It is a pity that the noble Viscount, Lord Hanworth, retreated to his usual attack on free enterprise and a glorification of the appalling electricity industry which was there before privatisation. Those of us who worked with it knew that the Central Electricity Generating Board was one of the most inefficient, self-opinionated and dreadful bodies that has ever been created. It was so bad that it hid from the world the cost of nuclear power, and when it was taken to pieces, the Cabinet had to accept that it could not do much of what it wanted to because the facts had been hidden by Lord Marshall—Walter Marshall—whose personal fiefdom it had become. It really is a pity if we have to discuss this via the déjà vu which was extremely biased in the way that the noble Viscount put it forward.

It seems much better if we discuss how it is at the moment, which is that privatisation has done a great deal of good but has a number of problems. One of its problems is that it has ended up with an oligopoly, but that oligopoly has been made more possible by decisions made by other parties as well. Looking back on it, I think that the previous Government would not have made the changes that they did and which have underlined that. Let us not make this into a party-political argument but try hard to see what to do now.

The two things which we have to do now are, first, to stop being argumentative about the fact that it is going to cost money to enable us to have a generating system that will withstand the very many pressures upon it. There is the pressure of climate change; we have to decarbonise our electricity system and do so according to a budget, which I am happy to say has again been accepted by the Government. That budget means that it has to be done relatively fast because we cannot reach the 2050 target, which is a statutory one, unless we do it according to the sort of speed which the budgets lay down. That means we will need a portfolio of generating capacity, because only in that way can we ensure that we do not pick winners and find ourselves in a situation of not having the opportunities as technology changes.

Regarding my noble friend’s slightly offhand remark about the cost of supporting wind generation, there is a very big cost in supporting something that he is very fond of, which is nuclear power. The strike price which we agree now and the commitment to that over a very long period may well turn out to be the most expensive piece of decision-making that we have made. I happen to think that it is necessary but do not let us suggest that it is not expensive—because, frankly, it is extremely likely that offshore wind will have come down in price to be competitive with nuclear and goes on going down, whereas I am afraid that nuclear is a system which has never actually got cheaper. It has always become more expensive and been less reliable in delivery terms than almost anything else.

Let us realise how difficult is the issue that we are dealing with. We need to have a real mix. However, my noble friend is right to say that one of the ways in which you can ensure that that mix works is to be absolutely clear about the need for competition. Only competition will stop us returning to the easy, comfortable position of the electricity business in the days of its nationalised state. New and small companies that are based here find this extremely difficult. My noble friend has been their advocate over a long period.

I have to ask the Government something terribly simple. If it is necessary to have an offtaker of last resort in the period following the first 18 months, why is it not necessary for the first 18 months? Indeed, I have to ask something much more fundamental than that. I am a businessman, and it seems to me that the process which has brought this to fruition has been one in which the Government have accepted that if you want independent generators, you need to have this protection. When do you need that protection most? You need it at the beginning of the process, when these people have just started, and when it is most difficult for them. If you need it at all, you need it when it begins. The idea that you need it not when it begins but 18 months later is almost incredible. I do not see how you can argue that case. The case must be that you either need it, in which case you need it at the beginning, or you do not need it, in which case you do not need it at all. It is not possible to argue a case which says that you need it, but only 18 months after you start. I find the economic and business arguments for that very difficult to take.