Electricity System Resilience (S&T Committee Report)

Viscount Ridley Excerpts

Tuesday 3rd November 2015 Lords Chamber

[Viscount Ridley (Con)]

My Lords, I congratulate my noble friend Lord Selborne—I think I can call him my noble kinsman, since we share a great-grandparent —on this excellent report and on chairing this inquiry with his characteristic skill, courtesy and perceptiveness. I declare my interests as listed in the register, including, most importantly, an indirect interest in coal mining and a small shareholding in National Grid.

I would like to make four main points. The first is that I think our report was, if anything, a little too sanguine. The string of closures of power plants since then has left us even more exposed. The closure of Longannet, Eggborough, Ferrybridge and Ironbridge and the delay to the Trafford gas-fired station make the capacity margin even tighter this winter. As Professor Dieter Helm of Oxford University told our inquiry:

“It is a quite extraordinary state of affairs for a major industrialised economy to find itself even debating whether there is a possibility that the margins may not be sufficient in electricity to guarantee supply”.

My second point is that “the lights going out” is a red herring. The national grid has many weapons at its disposal to keep the lights on somehow. That is a misleading test of policy health. The risk of system failure, which is always present, can be kept within bounds—but by pouring consumer funds into the sector.

My third point is that rising costs are the correct index of policy success or failure, and here I am afraid the news is bad. Even leaving aside the emergency costs of bringing on diesel generators when the wind does not blow, we are paying very heavily to have a resilient electricity system because of what I would consider deliberate policy mistakes. The Office for Budget Responsibility has recently published data showing that the cost projected for the capacity mechanism, which my noble friend mentioned, will be £1.3 billion in 2020—about 10% of the total levy control framework cost in that year. As my noble friend said, it is not for new capacity but for existing capacity. We should remember that most of that is going to fossil fuel plants, which should not need subsidising at all.

So why are we subsidising them? Because we have destroyed all incentives to build new, efficient, dispatchable generators, by using the law to force unproductive, expensive renewables on the consumer. That is why nobody is building new combined cycle gas turbine plants here unless they get subsidised. We should remember that those subsidies do not come from general taxation. They are added to electricity bills so they hit the poor hardest. As Rupert Darwall of the Centre for Policy Studies told our inquiry,

“if you subsidise high-fixed-cost, zero-marginal-cost intermittent electricity generation, you will end up destroying the market and incentives to invest in the capacity to keep the lights on when the wind is not blowing and the sun is not shining. That outcome was wholly predictable but wholly unanticipated by policymakers”.

Can my noble friend the Minister assure us that the study currently being carried out by Frontier Economics into whole-system impacts of electricity generation technologies will take this into account—how much has wind prevented new gas being built and at what cost?

We have spent £14 billion so far subsidising renewable electricity. The cost is rising rapidly and will soon hit roughly £10 billion a year and stay that way for decades. What are we getting for that money? A less reliable electricity system, a big increase in cost and no discernible cuts in CO₂ emissions, because of the need for back-up, the failure to allow gas to replace coal, and the leakage of energy-intensive industries to other countries with the loss of jobs here. I do not think that is a trilemma: it is a trisaster.

My fourth point is that interconnectors, while clearly a good thing, are in many ways irrelevant to the resilience debate, for two reasons. First, the current ones from France and the Netherlands are running one way—into the UK—at near-full capacity most of the time anyway, so they are no use for extra electricity in times of emergency. Secondly, they are not much use in in managing the variability of large renewable fleets because, as John Constable of the Renewable Energy Foundation pointed out to us, wind speeds are well correlated across Europe: a calm day here is usually a calm day in Germany. At 3 pm today, for instance, I looked up how much electricity was coming from wind in this country and in Germany: 1.4% in this country and less than 1% in Germany.

Where do the four points that I have raised leave us? It is now clear that instead of building windmills in the North Sea, whose electricity will cost three times the wholesale price, we should have been using cheap gas to phase out coal and putting more money into R&D designed to bring down the price of nuclear power. What Professor Helm called the “Miliband-Huhne-Davey policy” was based on the assumption that fossil fuel prices would go up. Instead, they went down.

In the spreadsheet released last year by Department of Energy and Climate Change, in the low fossil fuel price scenario, the cost of renewable subsidies for small and medium-sized businesses would add 77% to their electricity bills by 2020. Even in the high fossil fuel price scenario, the impact is still an increase of 45%. In other words, even if fossil fuel prices go sky high, the policies do not in fact offer any significant protection.

Every part of the world is increasing gas consumption at the moment except one: Europe. All the others—North America, South America, Africa, Asia, the Middle East, the former Soviet Union—are all increasing their use of gas, often to displace coal, as a response to the falling price of gas thanks to the shale gas revolution. Europe is doing the opposite. The Competition and Markets Authority has reported since our report that the renewables target is more of a constraint than the carbon budget; that is, there are cheaper ways of meeting our carbon targets.

I feel that we have the worst of all worlds: a system that has the high finance costs of the private sector but where all decision-making is nationalised; a system that has all the costs of renewable energy but trivial emissions reductions; a system that depends on regressive subsidy for even the cheapest and most reliable power; a system whose high cost is driving employers abroad; and a system with such low margins that costs will spike in the months ahead. I think there is a lot of work on my noble friend the Minister’s plate.

--- Later in debate ---

[Lord O'Neill of Clackmannan (Lab)]

My Lords, I have interests in the electricity industry, and I have declared them in the register. First, I congratulate the noble Earl on this report. He and I have served as colleagues on the committee for many years, and I was more than delighted when he assumed the chair. He has already acquitted himself with great distinction today and in the production of the report.

When we embarked on this inquiry, I do not think we anticipated that we would be debating it at such a significant time of year. About now there is usually a meteorological Cassandra forecasting the coldest winter in living memory and concluding that we are all doomed to months of freezing darkness. Although I would not want to adopt a Panglossian view of the prospect for the next few months, I think that some cautious optimism is called for, at least for 2015-16.

National Grid, the system operator, has forecast a loss of load expectation of 5.1% de-rated capacity margin, which will be met by 2.43 gigawatts of additional balancing services. At the time we were given the evidence, I could probably have explained all that to your Lordships in very simple terms, but I will not trouble the House this evening by going into great detail. Suffice it to say that a major element will be demand-side management.

When we were taking evidence, we were told, as I said, that we could be confident that in 2015-16 the lights would not go out. National Grid has a reasonably sound track record in that area. The question remains: what of subsequent winters? It is perhaps easy to say that the margins are getting ever narrower and that we should have dealt with the anticipated problem earlier. I have been participating in debates in the other place and here for nearly 40 years, and I have always heard people saying that we must have a long-term strategy.

I came into Westminster in the 1970s, when, like the welfare state, the coal industry was big. It was something that we took pride in. Within about five years, the coal industry was to be destroyed. After 1989, we embraced gas because we could start burning the gas in the North Sea to keep our houses warm. There was a major change in European policy, and we embraced gas-fired power stations at the expense of everything else. We abandoned nuclear. Then we discovered that it might be a wee bit dangerous if we were to be completely in thrall to gas, because we did not always know where it was going to come from. The somewhat hyper-enthusiasm for gas of the noble Viscount, Lord Ridley, this afternoon suggests that he has forgotten where a lot of the gas that we depend on comes from. We might not want to be overdependent on some of the sources of supply.

Nuclear was out; gas was going to be the answer. Then, people began to wake up to the fact that we were going to be shutting down our nuclear power stations, which in those days accounted for about 25% of our power. Even if we kept just a few coal-fired power stations and imported the gas, European diktats were going to require us to start closing them down as well.

So I am very cautious when people tell us that what we need is a long-term strategy, because most long-term strategies last about seven or eight years, maximum. At the same time, if we are investing in nuclear power, it is very expensive at the beginning but has a very long life. It is therefore possible to pay it back over time. Nevertheless, it is a major expense. We know at the moment that it is very difficult to attract investors to it.

We have been looking at the closure of power stations, the reduction in our capacity quickly to replace them and, at the same time, our dependence on renewables. The dependence is on plants that are too small and, invariably, interruptible. Therefore, while we can look forward with some confidence to Hinkley, it is not quite in the fusion category, yet it is taking rather longer than we had anticipated. It is not that many years ago when we thought the Christmas turkeys of 2017 or 2018 might be being roasted with nuclear-generated electricity; it might be more realistic to talk in terms of 2027. Certainly, the French record of building nuclear power stations is none too encouraging, although one would hope that, having had two test runs in Finland and France, they might be able to make a better job of Hinkley than they have hitherto. One thing that is certain is that the electricity that will come out of Hinkley will not be cheap, because unfortunately the first-generation kit being constructed in the UK is the most expensive, and takes the longest and is the most difficult to build. Some might say that we could get new nuclear from other sources almost as quickly as we get it from Hinkley—but that is another issue.

Demand management, which is really the self-imposed reduction in demand by major consumers, is seen by National Grid as an important contributor. It will ensure that there will be no enforced blackouts in the foreseeable future, but this will have to be achieved in the context of emerging electricity markets, which are in the process of being reformed. The committee expressed concern about the quality of information on which many judgments are being made, particularly the appropriateness of the reliability standard. The Government are required by law to monitor that every five years. They would be well advised to produce annual reports to let us see what the thinking is, rather than dashing to get the information in place in the last nine months before the end of the five-year period.

As has already been said, it is not all about indigenous generated power, because we have interconnection. However, the situation is not very clear, as the information we received on back-up generation and interconnection was somewhat less than satisfactory. It would be interesting to hear from the Minister whether that information has been updated. Certainly, we would want reassurance regarding the scaremongering that often provides the headlines, fills the space between the adverts in social media and feeds the paranoia of the bedsit conspiracy theorists; we need better information to dampen those anxieties at source. It is fair to say that we were impressed by the awareness of the appropriate authorities of the dangers of cyberattacks on the system and terrorist threats generally. There was a reassuring absence of complacency; they certainly seemed to anticipate what the bad guys would be trying to do. In that sense, we have some degree of consolation. Nevertheless, eternal vigilance is required in this area, as in so many others; we underestimate the dangers of cyberattacks and other attacks on our system.

We must be cautious. People say that we will have smart meters and better integrated grids, and that all kinds of technical possibilities will be realised, such as storage batteries, carbon capture and storage, electrical vehicles and electrification of the transport system. All those technologies will come at a cost; many are still immature and cannot really be depended on with any degree of certainty. We have to strike a somewhat cautious note, but it is a bit frustrating for Select Committees when the report has been produced and we have what we think is the most up-to-date information, yet we get very cautious responses. I draw some consolation from my experience in Select Committees, which goes back quite a while. I am reminded of what George Bernard Shaw said—that when he was 18 he was convinced that his father was one of the most ignorant men he had ever met; yet, by the time he was 21, he was surprised how much his father had learned. We often find that, within a very short time— before the dust has settled on Select Committee recommendations—civil servants, the machinery of government and eventually Ministers change their tune. It will be unfortunate if that does not happen here, because this excellent report can be ignored only for so long. We ignore it any longer at the peril of our economy and our quality of life.

[Viscount Ridley]

The noble Lord says that he is concerned about where the gas is going to come from, but we are more dependent on imported coal than on imported gas, in that 85% of our coal comes from abroad and 40% of it comes from Russia.

[Lord O'Neill of Clackmannan]

I am not sure whether I am supposed to respond to that. My point is that there are a number of uncertain sources of gas. I think we would all agree that the nature of our dependence on coal is essentially temporary. The long-term requirements of a section of our fossil fuel demand will be met by gas, which will still come from areas that will be unpredictable politically and socially, to say the least.