[Relevant documents: Eighth Report from the Energy and Climate Change Committee, Session 2010-12, HC 1065, and the Government Response, HC 1813.]
Motion made, and Question proposed, That the sitting be now adjourned.—(Mr Hayes.)
It is a great pleasure, as always, to serve under your charming and skilful chairmanship, Mr Amess.
I draw attention to my entry in the Register of Members’ Financial Interests. In view of a lot of traffic on Twitter and on the blogs, I would like, if colleagues will forgive me, to clarify precisely what my interests are. I have two financial interests in the renewable energy field. The first is AFC Energy plc, a UK-listed company that I have chaired for five and a half years. It is developing a fuel cell to convert hydrogen into electricity for applications in static situations—in other words, not on vehicles. That company does not receive any Government help. Its business model does not assume that it will ever be eligible for renewables obligation certificates or feed-in tariffs. Its aim is to compete on equal terms with other forms of generation. I do not believe that, since I have been its Chairman, the Energy and Climate Change Committee has ever discussed the subject of fuel cells.
The second financial interest is TMO Renewables, another UK-based company, which is developing a second-generation biofuel. That company does not receive Government help. It does not plan to market its product anywhere in the European Union, so it is not affected by any UK or EU policy. The company is not seeking any subsidy from taxpayers or consumers. It is promoting its technology in the BRICs—notably in China and Brazil, and also to some extent in India. I would also mention that when the Minister for Universities and Science recently visited that company, it was not at my invitation. I was not informed of the invitation in advance; it was made by the staff. I deliberately did not attend that visit, although it resulted in an invitation for the company to take part in a Government-led trade mission shortly afterwards. I also have a non-financial interest in the Renewable Energy Association as that organisation’s first ever president, which is an unpaid post. When I took it on, I made it clear that I could not act as an advocate for the association or for any of its members. Finally, I have a financial interest in Group Eurotunnel SA, which is considering a joint venture that would involve the construction of an interconnector to take electricity to and from France.
I apologise for the length of that declaration, but so many untrue—and sometimes, I think, deliberately false—statements have been made about my interests in the past few weeks that I wanted to make the record absolutely clear.
I simply want to say that during all the time I have served on the Committee, it has always been aware of the Chairman’s interests, and at no time have any of us felt that those interests have in any way impeded or compromised the work of the Committee. He has been absolutely scrupulous in declaring those interests and making clear his position. I deprecate the journalism that has sought to besmirch the work of the Committee, which I believe is what journalists have tried to do, by suggesting that there has been any compromise. I welcome the fact that the Chairman has made such a statement.
I, too, am grateful for that entirely unsolicited intervention from my colleague.
I also point out that I have been a strong and consistent advocate of greater investment in renewable energy for almost two decades—ever since I first took an interest in climate change when I was rather unexpectedly given ministerial responsibility for it in 1993. I believe that Britain needs investment in many forms of low-carbon technology, which of course includes nuclear power, and the suggestion that my views on the subject could possibly have been influenced by interests that I did not acquire until 2006 is simply absurd.
I warmly welcome the new Minister to his post. He comes in at a very challenging time in his Department’s history. We, as a Committee, look forward to working closely with him. We worked very closely with his predecessor, my hon. Friend the Member for Wealden (Charles Hendry). I would like to take this opportunity to pay public tribute to him as an exceptionally conscientious, straightforward, knowledgeable and trustworthy Minister. He will be much missed—certainly by me, and I think by the whole Committee—and his knowledge of the issues, at a time when rather complex legislation is going through the House, is something that I hope my hon. Friend the new Minister will also soon acquire. I wish him well in his task.
I also thank my colleagues on the Committee for their work in producing not just the report that we are debating, but an extraordinary number of reports over the past 12 months. I also pay tribute to our very hard-working staff.
It is almost a year since the publication of the report that we are debating, and the concerns that we expressed then are almost exactly the same as those that we would express now. Britain is, of course, very dependent on imported fossil fuels for its energy, and anxieties about the level of generating capacity remain. The concerns about the fact that much of our existing capacity, in the form of the old coal and nuclear plants, will retire very soon, and about the need for that to be replaced, are as acute today—if not more acute—as they were last year. Absolutely enormous investment is needed in new capacity, storage facilities and so on. In the past year, there has still been progress, albeit insufficient, on energy efficiency, and on carbon capture and storage.
Britain remains a big net importer of energy—the figure was 29% last year. We are very lucky to have Norway on our doorstep, which is a friendly and reliable supplier of gas, but it is still desirable that we try to minimise our dependence on imports. In my view, that supports the argument for exploiting our shale gas reserves, for which we look to the Department of Energy and Climate Change for early approval, as has been recommended by the Committee. We will soon return to that subject, and I hope that we get the go-ahead soon.
Norway is a friendly supplier of gas, but even that fact cannot insulate us from future gas price spikes. Those who advocate relying mainly on gas to generate our electricity must recognise not only that, without the so far unproven economic availability of carbon capture and storage, gas cannot possibly get us to the 50 grams per kWh emissions target set by the Committee on Climate Change for 2030, but that there is also a real danger, as the Asian economies continue to grow, that global demand for gas will drive prices up, meaning that Britain’s economy will become less competitive if gas is our principal source of electricity generation.
I am sure that the hon. Gentleman recalls the “World Energy Outlook” report and our interview with its head, Fatih Birol that drew particular attention to the fact that as Russian gas from western Siberia is gradually going offstream, the eastern Siberian gas fields will then come onstream. The likelihood is that there will be a decrease in the gas from Russia that comes into Europe and that, as the countries of Asia—China and India—see a rise in their need for gas, the eastern Siberian stream will increasingly be pulled down there. The position of Russia will therefore put Europe in a very different situation vis-à-vis gas.
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.
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?
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.
I thank my hon. Friend for allowing me to intervene as I may not have a chance to deal with this issue in my summation. He made two interesting points, which I should like to test a little further. The first is about the relationship between gas and competitiveness. After reading the work that his Committee has done on low-carbon growth links with China and listening to his general comments on China, may I ask him to say something about the changing character of demand, especially from the emerging economies, and the effect that it may have on the world price of gas and our competitiveness? I have another point, but I have gone on long enough. I do not want to test your indulgence, Mr Amess, beyond reasonable limits.
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.
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.
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.
I hear what my hon. Friend says about certainty being a pre-requisite for getting the kind of investment necessary over the term about which we are speaking. The Committee has spoken about that before: its report on the emissions trading system talks about a strong and stable carbon price signal being another component that is needed to achieve certainty and predictability, which are the pre-requisites of investment. Will he explain that to me? After all, I am on a sharp learning curve.
I am sure that the Committee is encouraged by the fact that the Minister keeps quoting from our reports. He could not have a better textbook from which to embark on his learning curve. The signal that we would like to see of a strong and stable carbon price is one that has been conspicuously absent from the EU emissions trading system, for a variety of reasons. First, the cap was originally set much too high in phase one, and phase two was scuppered by the recession. It will probably be the latter part of this decade, at the earliest, before we see that strong, stable carbon price emerging, but we will see it eventually. I would be surprised if, by the 2020s, we do not see a stable carbon price. Moreover, if more countries, including some large ones, adopt emissions trading as one of their instruments to address climate change, I suspect that the prospects for that strong and stable carbon price will be greatly increased.
I am listening with great interest to my hon. Friend. My question is about energy storage, to which he has referred a few times. Are the members of the Energy and Climate Change Committee, and indeed the Minister, thinking about energy storage and the technologies involved, including, for example, liquid air? If so, are they considering studying the effect of energy storage on investment and how the impact of energy storage might be calibrated?
I am hoping that the Minister can enlighten us about that, if not this afternoon then before long. One thing that we as a Committee recognise is that the present system—the market—is not giving enough incentive to companies to invest in energy storage. That is why no investment is taking place. There are a variety of ways in which that could be remedied. However, at the moment the ball is probably in the Department’s court on energy storage, and we look forward to hearing what it has to say in due course.
I will try to make some progress, because I am conscious that my colleagues need to speak in this debate. I will just reiterate the point that I was making before the Minister last intervened. Uncertainty or last-minute unplanned policy changes on which consultation has not taken place—I am happy to point out that such changes might not necessarily come from the Minister’s Department but from the Treasury, as we saw in Budget 2011, which contained changes to the tax regime for oil and gas that had not been consulted upon—are simply killers for investment.
Our Committee’s report urged that there should be diversity in energy supplies. Of course, the size of the role that gas can play in that regard will depend significantly on progress being made on carbon capture and storage. If that facility becomes available, there is a much bigger opportunity for gas. Therefore, we should focus our efforts on CCS as much—possibly more so now—on gas as on oil. Alongside that, however, we also need nuclear. Many of us regard it as a clean and safe technology. We have some anxieties about the progress on new nuclear power stations. EDF appears to be on the brink of making the decision in that regard, but it is not quite over the line yet. The future of the Horizon consortium is still unclear. I say to the Minister that if the only way to get nuclear power stations built in Britain soon is to accept investment from abroad, even from China, with the right safeguards, that is perfectly acceptable. The aim is to get these things under way.
Even if that alternative—investment from abroad—fails, I wonder whether the time is approaching when we should consider another model, in which the Government take the construction risk for nuclear power stations and use their own balance sheet and excellent credit rating, which I pay tribute to the Chancellor of the Exchequer for achieving, to finance the construction stage of a nuclear power station. Then, when it is completed, the power station can be handed over for operation; we can sell it to one of the nuclear power companies. I am just anxious that we may reach next year and find that no one will build under the present policy. I hope that it will not come to that.
Let me turn briefly to renewables. I am encouraged by the price falls that we have seen in technologies such as solar power. I am also encouraged by the further innovation taking place in a range of technologies, including some waste-to-energy technologies, and by the British leadership in non-wind marine technology, such as tidal power and wave power; the Committee has also reported on that technology.
However, I urge the Department to take an evidence-based approach, which the Committee itself has adopted. We must do what we can to protect consumers by rigorously insisting on value for money from renewables. I would love to think that we could get huge amounts of base load power from tidal power, but in practice it is much too expensive at the moment for it to be a big factor.
We must face the facts, however uncomfortable they are to the population. Whenever I mention the subject of onshore wind turbines, I am assailed by hundreds, possibly even thousands, of e-mails, some of which are quite irrational or even offensively pornographic, but never mind. I will not read them out to Members here in Westminster Hall; it would involve using some unparliamentary language. Nevertheless, we cannot avoid the arithmetical fact that at present it is cheaper to generate electricity from an onshore wind turbine than from an offshore wind turbine—or from tidal power or wave power—and it is likely to be so for some years to come. I cannot wish that fact away.
However, I do not suggest that we should impose wind power from wind turbines on any community that does not want them. Any community is perfectly entitled to say that on visual or noise grounds the turbines are too intrusive to be accepted; that view is fine. None the less, we cannot alter the fact that if we ruled out onshore wind turbines completely, the absolutely certain consequence would be to raise the price of electricity for consumers.
Just as we need clarity and stability about policy on generating capacity, we need clarity and stability in the transition process from renewables obligation certificates to feed-in tariffs. We also need clarity about the levy control framework and about what would happen in the event that there is a clash between meeting the requirements of the Treasury, in terms of the framework, and meeting the requirements of the Government as a whole, in meeting the carbon budgets to which they are committed. All of those issues will have to be answered when the House considers the energy Bill in the next few months. We look forward to being given some clues about the Minister’s attitude towards these issues.
I was going to say a bit more about energy efficiency, but I hope that everybody takes it as read that for our Committee that is the first and foremost priority. It is the one area where the needs of security, affordability and reduced emissions all come together; greater energy efficiency achieves all those objectives.
I am keen that the Minister should have plenty of time to give us the first clue about his thinking on these issues, so I will conclude my remarks now and just say that I hope my colleagues will deal with the other parts of the report that I did not have time to deal with myself.
It is a great privilege to follow my hon. Friend the Member for South Suffolk (Mr Yeo), the Chairman of our Select Committee. As he rightly said, we have been involved in producing a wide range of reports. Subjects such as energy can be quite dry, but every 10 or 15 years, they become the most exciting portfolio across all Government Departments.
I welcome the new Minister to his post, which he takes at a time when energy is perhaps one of the most important and interesting issues that the country faces, with energy security absolutely at the heart of that. I look forward to his first appointment with the Committee, which I am sure will be in the near future.
I also follow my hon. Friend the Member for South Suffolk in recognising the extraordinary work and success of the Minister’s predecessor, my hon. Friend the Member for Wealden (Charles Hendry), who was an exemplary Minister with a reputation both here and abroad. I am sure that the new Minister realises that his post is, in many ways, a sales job. It is about knocking on doors around the world to try to ensure that we find the investment we need, which is close to £200 billion. I am sure that fellow members of the Committee will join me in hoping that my hon. Friend the Member for Wealden has an interesting future beyond the portfolio that he has left.
Energy security involves two competing issues, in that we face a significant increase in energy consumption but, at the same time, a decline in UK production. I do not want to make too much of a political point, but that situation did not arise only yesterday—we have faced it for the past 15 or 20 years, so it has been straightforward to predict. It is unfortunate that we are now racing to try to achieve some policy certainty and reinvestment in the energy sector when it has been quite obvious that we have been facing this problem for many years.
Globally, some would say that the last century was dominated by the politics of ideas. This century will be about the politics of resources. That is what makes the energy security debate so important, because it is about much more than the energy sector. It is also about our future industrial growth, our competitiveness and keeping the lights on, and in a much less benign environment than before. There is demand for energy, food and water from domestic audiences, whether they are in the UK, China, Russia, or even countries where democracy is not necessarily the watchword. For the UK and all these other countries, access to resources will be absolutely crucial and will determine their economic success.
No one is proposing energy independence, but I have a personal experience that illustrates why I am particularly sensitive to the issue of energy security. I worked in the energy sector for about 15 to 20 years. Before I came to this place, I worked for the Georgian Government in the Caucasus, advising them on the Baku-Jehan pipeline. The second time I was in Tbilisi, I came out of my hotel room and saw a man who was not much further away from me than my hon. Friend the Member for South Suffolk is now. Somebody then went up to that man and shot him in the head. That was related to a large energy deal that was being proposed by a Russian company. The Georgian businessman had turned down the deal, and instead of a shareholder meeting, a P45 or any form of renegotiation, there was a murder in the main street of Tbilisi. That might sound unusual to people in Whitehall, but it is not necessarily unusual in parts of the world where energy is politics.
In addition, when I was sitting having a nice meal in Georgia, the lights went out for 20 minutes. It was apparently a message from the President of Russia to the President of Georgia—“Please will you give me a ring?” He gives him a ring, and 20 minutes later the lights go on. The Georgians then turn around to each other and say, “So, we have lost a bit more of our sovereignty.”
Those examples might seem extreme, but this is where politics and resources come together. Although we might not be exposed to the politicisation of energy, the international market will be, and we must clearly understand that the world of benign energy trading might become a bit more difficult.
Unlike for many countries, it will be not the insecurity of supply that we have to address, but the cost of the supply. The cost of volatility in our energy sector will greatly affect the desirability for inward investment into this country. In India, the electricity went down for three or four days, and that was a massive blow to the country’s attractiveness as an investment market. We might not have the actual lights out, but we will have a problem when it comes to cost, and the cost to our industrial base is crucial. As a result, we should be looking for consistency and predictability to the same extent as considering the lowest cost at which we can deliver energy.
What does a secure energy environment look like? I agree with the Chairman of our Committee that it looks like a truly mixed energy economy, because that will deliver us the greatest resilience. We need to consider increased domestic production, because international volatility will be one of the most destructive economic factors for British business. Our domestic production will, of course, include nuclear—I am a great proponent of nuclear, but we need to get the investment profile and environment right—wind, gas with carbon capture and storage, and coal.
I had an interesting experience with my right hon. Friend the Member for North Somerset (Dr Fox), who has never been known to be a great proponent of Europe. He said in a Chatham House speech before the election—perhaps in 2008 or 2009—that European Union member states should become a co-ordinated and active consumer of energy when it comes to Russia and certain parts of central Asia. I therefore agree with my hon. Friend the Member for Stroud (Neil Carmichael).
To return to the question of a mixed energy economy, new technologies must also play a part in the resilient energy mix, but anyone who thinks that any of the energy generation sources are pain-free is misguided. Planning applications for shale gas, which I have had in my area, make onshore wind farms look like a walk in the park. The cost of nuclear, including de-risking, will be a lot more than the Government think. In many ways, that reiterates what the Committee Chairman said about considering taking on responsibility for build costs.
The wind sector needs to become much more efficient and to understand how to better engage communities. We must recognise that no energy solution comes without some pain. We must not necessarily look to pick winners and losers, but consider how the mixed energy economy needs to be addressed. We all need to appreciate that opportunities are not simple and straightforward.
The Minister faces an interesting in-tray. Energy security will be achieved through a range of Government policies, although sometimes the policies are so complex that they might create competing behaviours. There are capacity mechanisms, increasing market liquidity, which is crucial, storage policies, which were mentioned by my hon. Friend the Member for Stroud, distributed energy incentives, which have not had sufficient profile and enough focus placed on them by the Department, and smart technologies. A range of interactive measures can help to reduce wastage, increase productivity and hedge costs. If energy security means anything, we must ensure that we closely consider demand reduction. Our Committee was a bit concerned and rather disappointed that the Department did not include in the draft Bill a significant set of policies on demand reduction. That can be a very exciting win for the UK when it comes to competitiveness and to building a resilient and modern economic base.
In conclusion, I want to highlight a significant problem with the country’s energy security. This reflects something that the Committee Chair said, and I hope that the Minister will be able to resolve it. The issue is policy certainty. Companies are much less worried—strangely enough—about what incentives there are, or about exactly what they feel they will get out of choosing one energy source or another. However, we currently have rhetoric and we have reality. We have a fast track on the low-carbon economy with one measure, and the brakes appear to be put on with another. We have an opportunity to build a really strong economy around our need for energy investment, but we sometimes confuse the investment community about our intentions. Certainty and clarity of direction will offer the Minister the greatest opportunity for success when he travels the world’s energy company boardrooms, selling the UK as one of the most predictable and reliable investment locations in the world.
I am delighted to speak in this important debate, and I am particularly delighted to welcome the Minister to his position. His work within his previous skills portfolio was much respected, and I think that many of us hope that he will bring not only the dedication that he showed in that role, but his focus on developing green skills, into this new portfolio, where he is considering the UK’s energy supply. It is a difficult time to be taking on the brief, and I think that we all sympathise with him for taking over at this juncture, with so much on his ministerial plate. I assure him that the Committee—both sides of it, I think—will seek to co-operate with him to ensure that he gets his feet under the ministerial desk as quickly as possible and can take the brief forward.
I do not want to go over the ground that the Chairman of the Committee and the hon. Member for South Thanet (Laura Sandys) have already covered—I entirely agree with most of what they said, particularly the hon. Lady’s call for certainty in policy. She is absolutely right; that is one of the key things that will hold back—is already holding back—the investor community from pressing ahead with the sort of investments that we need, if we are to see the £200 billion investment come on stream and ensure that we have the continuity of a secure supply of energy over the next decade.
I want to focus on subsidy and the importance of getting subsidy right. Earlier this summer, there was a contretemps between the Treasury and the Department of Energy and Climate Change on the subsidy for onshore wind. The debate was not phrased in that way; it was phrased, “How much can we cut from that subsidy?” Should the subsidy be cut by 10%, which is the Department’s public position? Or should it be the far more severe cut of 25% proposed by the Treasury? Interestingly, the Department won the day in that political debate. In a straight fight between the Chancellor and the Secretary of State for Energy and Climate Change, most people in most circumstances would back the Chancellor, but in this case the Department won.
We need to consider the economic case for onshore wind. The new Minister has previously commented on onshore wind. We subsidise the technology, which operates intermittently. Wind does not blow all the time and cannot provide the base load of electricity supply. On a number of occasions, the Minister has remarked on the way in which the technology adversely affects communities in the countryside.
Long-term subsidies are not good. I think we can all agree with that. In my view, we should not subsidise any energy in the long term. Subsidies should never be a permanent feature of any market. Subsidies should be introduced only to address market failure and they should be withdrawn gradually as such market distortions are addressed. I hope even the Chancellor and the Treasury accept the economic rectitude of those remarks. Whether they can square that with this country’s ongoing fossil fuel subsidy is an entirely different matter.
Last year, the OECD estimated that, in 2010, UK subsidies for coal, gas and petrol amounted to £3.6 billion. Additionally, the Chancellor announced in his 2012 Budget further exploration and production subsidies of £65 million to develop the west of Shetland fields. The market failures addressed by those subsidies are unclear. On the contrary, fossil fuels appear to have an entrenched subsidy culture in which such taxpayer handouts are regarded as a right, rather than a means of addressing an otherwise unlevel playing field.
By contrast, the total subsidy paid to onshore wind amounted to less than £400 million in 2010-11, or £6 on the average household’s annual bill. That gives a better sense of the subsidy onshore wind currently enjoys against the £3.6 billion in consumption subsidies that fossil fuels enjoy before factoring in the cost of carbon emissions.
I hesitate to speak for the OECD, but my understanding is that the £65 million is composed of production subsidies, VAT subsidies and other things. I am sure information on the figures is available from the OECD, because they are the OECD’s figures, not mine.
I am sorry, but I do not understand that answer, because £3.6 billion is a very large amount of money. The hon. Gentleman makes a powerful point if that figure is a true reflection of the situation, and it is reasonable to ask how the money is being transferred at that rate to the energy companies and, presumably, their shareholders, because that had previously passed me by.
Members of Parliament are not noted for admitting ignorance, but I am happy to do so. I cannot give the hon. Gentleman a detailed breakdown, but that figure has been given by the OECD. As I said in response to his previous intervention, my understanding is that the subsidy is accounted for in VAT subsidies and in other production subsidies, such as the ones I mentioned. I cannot go further than that. I do not claim to be the economist or accountant who worked out the figures published by the OECD, to which I refer him.
The real market failure is that the environmental, economic and social costs of greenhouse gas emissions are not properly factored into our fossil fuel price. The Government recognise that and have tried to attribute a price to carbon emissions through the EU emissions trading scheme. Unfortunately, the carbon price has neither been stable enough, as the Chairman of the Select Committee mentioned earlier, nor high enough to redress that market failure, even for the 40% of UK carbon emissions covered by the ETS. Fossil fuels are operating in a market tilted distinctly in their favour. Those who support renewables such as onshore wind that do not produce polluting carbon emissions are perhaps entitled to claim that there is clear justification for that level—albeit a very low level, as I have shown—of subsidy.
Bringing new technologies to market can be difficult, and many technologies have died in the valley that lies between demonstrator a prototype and full commercial development. If the UK is to develop world-leading renewable technologies, such as those mentioned by the Chairman of the Select Committee, particularly marine technologies, we need further subsidies to enable renewables to make that transition from prototype to full commercial scale. The renewables obligation subsidy introduced by the previous Government was designed to do that to some extent and supported new wind generation as the technology successively improved and economies of scale reduced production costs. It is worth noting that it is onshore wind’s positive trajectory in reducing costs that led the Department to argue that the subsidy could be reduced by 10% in the first place. As the technologies become cheaper, it is right to scale down the subsidies. That trajectory has led some in the industry to project that onshore wind will be cost competitive with gas by 2020, which brings another element to our discussion. Indeed, the hon. Member for Warrington South (David Mowat) highlighted that differential and the possibility of seeing cheaper gas in the UK because of shale gas in the United States.
Clear social and environmental costs are associated with shale gas in the United States, and the Committee flagged them up in its report on the potential for shale gas in the UK. However, at every point we should aim to factor the cost of pollution into the true cost of the fuels that we use. That is really how we should evaluate the cost. We do not, for example, factor into the cost of fossil fuels the cost to the health service of people with bronchial or asthmatic conditions caused by carbon emissions from diesel and petrol engines. If we want to get a far better handle on our energy needs and supply, and the security of that supply, let us compare the true costs of the separate parts of our energy mix, and not simply look at the market cost.
I want to go off slightly on a tangent and mention, in response to the shale gas debate, one other aspect that I think it important to draw to the attention of the House. As shale gas provides the USA with increasingly low-cost fossil fuel, there will be a substantial shift in American foreign policy, which has been fixated on the middle east—for good reason. Its fossil fuel supply has substantially depended on stability in the middle east providing continuity of supply. The discovery and exploitation of shale gas in the United States significantly changes that perspective, and when we look to the future of European and UK energy we need to factor that in too. The drivers that caused the US to be so involved with middle east countries will shift. We need to recognise that, as much as we recognise the shift happening in the gas fields in Siberia, and the rise in demand from India and China.
There is one further thing I want to comment on: the fourth pillar of the Government’s proposals on electricity market reform—the emissions performance standard, the carbon floor price and the way in which they interact. Is not it strange that the emissions performance standard was set at 450 grams per kWh? Whom did the Department think it was fooling by setting that figure? It is clear that it was set because it excludes dirty coal without carbon capture and storage, but it has a beneficial effect on investment in nuclear, boosting the price.
In the past year and a half, the Committee has spent a lot of time talking to the investment community, which has been generous with its time and views and has made clear the way in which the risks associated with different technologies and energies manifest themselves. There are planning, construction, operational and price risks and, particularly with the nuclear industry, a decommissioning risk. The key matters on which the investment community focused in discussions with the Committee were construction risk and the period during which capital is exposed in the construction of new nuclear, as opposed to new gas, technology, and the different lengths of time needed to get production in place and price coming through. The investment community made clear to the Committee its belief that without Government subsidy—not covert subsidy by way of price subsidy through the EPS but real subsidy in relation to those risks and the extra cost of capital—there will not be the level of nuclear infrastructure development that the Government have said they want.
I come back to where I began on the question of subsidy: without a much more transparent understanding of the subsidies going to fossil fuels, and the lack of accounting for their cost in damage to health and the environment, and pollution; without factoring those things in; without a clear understanding of the subsidies necessary as technologies develop, and the reduction in subsidy necessary as they become more cost-effective; and without transparency about the real subsidies that the Government are offering the nuclear industry, and the structuring necessary to get the development we need, we will not have a successful energy policy.
Order. The debate finishes at 4 o’clock. I intend to call the Opposition spokesman at 25 minutes to 4. Then the Minister will respond and the Committee Chairman will make his final remarks. Time is tight. I think that two hon. Members want to catch my eye.
I shall be extremely brief, Mr Amess. I congratulate the Minister of State, my hon. Friend the Member for South Holland and The Deepings (Mr Hayes), on taking on his new responsibility. I also want to express my appreciation of his predecessor, my hon. Friend the Member for Wealden (Charles Hendry), who made himself remarkably accessible and reached out to hon. Members like me who have constituencies with significant energy-producing resources and establishments.
I want to mention two such establishments today. One is the largest oil refinery in the country, at Fawley, and the other—also at Fawley—is the power station, whose future is under extreme threat: it is doubtful almost to the point of extinction. Fawley power station is a reserve station. It was set up in the shadow of the great oil refinery next door. Its future is doubtful because of European legislation. Unless an alternative power generation role is found for the site, compatible with European legislation in the future, it will cease to make even a reserve contribution. I will flag up today the point that I used to make to the Minister’s predecessor: sometimes emergencies happen to a country—situations of extreme peril—when restrictions must be set aside.
I still feel that it is worth the Government’s examining the possibility of keeping the Fawley power station in a reserved condition. If an extreme situation of national danger arose where we needed emergency extra supplies of electricity, inevitably it would involve a temporary setting aside of such things as European and environmental restrictions on what could be allowed in power generation. There could be a strategic role for Fawley power station in an emergency—something that I hope the Minister will consider.
Finally, in the time available, may I say that we are greatly concerned—by “we” I mean local oil refinery people and, nationally, the UK Petroleum Industry Association—that oil refining in this country does not compete on a level playing field with oil refining abroad? Unless the Government adopt a somewhat reduced, laissez-faire attitude—they keep saying that they believe in an open and competitive market—the sadly diminished number of oil refineries in the UK could go below a critical mass, to the strategic disadvantage and, indeed, endangerment of this country.
As the second hon. Member to speak who had nothing to do with the report, I congratulate the Select Committee. Three of the report’s features strike me as particularly good. It was short, which is always good for Select Committee reports. Secondly, it talked about gas storage. It is odd that we talk so little about gas storage, because it is a structural issue. Thirdly, I want to talk about recommendations 5 and 6, which ask the Department to publish performance indicators on security and the route or road map that we are trying to get through. That is needed, because there is a lot of misinformation on this subject and the Government’s response to the recommendations was quite weak; the only part that was perhaps adequate was the last sentence, which stated:
“The Government continues to examine options for further improvements.”
That needs to be considered by the Government, and I would just like to put into the mix four potential issues that have not been talked about.
Biofuels are rapidly becoming the biggest source of renewable energy in the UK. We have to be very careful on this with regard to security. In October, the United Nations described the increasingly prevalent practice around the world of turning corn and wheat into ethanol as a “crime against humanity”. One of the best points in the speech by the hon. Member for Brent North (Barry Gardiner) was about how the geopolitical aspects of shale gas are affecting US foreign policy. That is absolutely right. There are geopolitical issues in continuing to put corn and wheat into cars and power stations, as though we are pursuing some great environmental truth when we are not, and that is difficult.
The unique point about the UK’s energy position compared with the rest of Europe is that we have to spend £200 billion in the next decade. We will apparently double the amount of electricity that we currently generate at the same time as decommissioning coal stations—let alone the oil refineries to which my hon. Friend the Member for New Forest East (Dr Lewis) referred—and nuclear power stations. It is beginning to look like a very difficult issue indeed, and the Minister has come in just in time to manage it.
We have put ourselves in a position, particularly on nuclear, where we are negotiating with a single supplier. People talk about the cost of nuclear. A colleague of mine who I used to work with once told me that, if he was running a utility and was dealing with the UK Government, the only coherent strategy to take would be to wait until they were desperate enough to pay the money. Roughly speaking, that appears to be what is happening, and I wish the Minister luck with those negotiations. In a scenario in which we are not going to let the lights go out—let us assume that that is going to be the case—I always thought there would be a dash for gas. When considering a strategy, one always asks, “If this strategy fails, how do we know it has failed?” The dash for gas is obviously the default.
In the past few months, and possibly the past year, there has been another emerging aspect of strategy failure: the increasing amount of imported electricity through the interconnector from France and Holland. Currently, we import approximately double the amount of electricity that we generate from renewables. If there is a policy failure above all policy failures, it is the fact that this country is apparently no longer able to generate its own electricity and has to take electricity from the French and the Dutch, even though much of it is generated using relatively cheap nuclear power.
I add in passing that in the past six months there have been two announcements about increased capacity in the French nuclear grid—1.6 GW in Flamanville and 1.8 GW in Penly—coming on stream in the next 18 months. France appears to be able to do this a lot more easily than we do. This may be an issue for the Select Committee, but I do not wholly understand why the French can get nuclear power stations on stream without the pain that we apparently need to go through. A road map of the Department’s plan in this regard would be very useful. The fundamental strategy of putting out the energy market and saying that the market will decide will become increasingly untenable, as we get close to the day when the lights might go out.
Finally, what is causing so much error in policy is the conflict between the Climate Change Act 2008, which I support, and the need to reduce emissions and the EU 20-20-20 directive, which states that not only do we need to reduce emissions, which I support, but that that must be done with renewables. That has caused a huge amount of misallocation of capital resource and expertise. Germany is often used as a great example of a country that has hit the renewable button hard and has done it well. It is true that Germany has four times as many renewables as the UK. It also has 30% more carbon per head than the UK, because it burns more coal. We have to focus on what matters, and the directive is deeply flawed and has caused a misallocation of capital and the resources that go with that. The Minister may wish to consider that in the months and years ahead.
It is a pleasure to serve under your chairmanship, Mr Amess. This is a welcome and timely debate. Debates on Energy and Climate Change Committee reports are, by their nature, wide-ranging and touch on a number of issues. As the hon. Member for Warrington South (David Mowat) said, the report is relatively short, but issues of energy security and energy independence touch on a wide range of Government policies, not all of which are the responsibility of the Minister. I commend the speeches by the Chair, the hon. Member for South Suffolk (Mr Yeo), and other members of the Select Committee for touching on some of those issues. Given the time available, I do not intend to repeat points that have already been made, but I will perhaps come on to some other recommendations in the report.
I congratulate the new Minister on his appointment and welcome him to his post. As other hon. Members have said, he takes up his post at an important time for energy policy. He follows the hon. Member for Wealden (Charles Hendry), who had the respect of hon. Members across the House and the entire industry for the diligent way in which he undertook his duties, and for the accommodating way he would listen to and engage with different views from across the political divide on the areas for which he was responsible. I wish him well in whatever he does next. I wish the Minister well, too. He was well regarded for the seriousness with which he engaged with the skills agenda, his previous portfolio. As my hon. Friend the Member for Brent North (Barry Gardiner) made clear, the skills agenda is perhaps even more important in the energy sector. I look forward to discussing these issues with him in the House in the months, and possibly years, ahead.
Energy security cuts across many areas of Government policy, so there are many challenges for the Government as whole. As the hon. Member for South Thanet (Laura Sandys) said, this is an ongoing issue, not a new challenge that has suddenly arrived. It is to the detriment of government and governance when a difficult challenge gets left and is pushed along a bit on the agenda. There is a danger in the timing of such things. As the hon. Member for Warrington South said in a slightly different context, people keep waiting until it is almost too late, and sometimes the decisions are not necessarily the right ones and the costs associated with fixing them do not necessarily provide the best value for the taxpayer.
On page 43 of the report, the Committee described energy security as
“keeping the lights on, buildings warm, vehicles moving, businesses operating and electrical appliances running”.
That is a good, practical encapsulation of energy security. Although it is not the most glamorous subject and does not always attract attention in the same emotional way as other aspects of this brief, it is important to the economic future of our country. It is difficult to overstate the importance of those factors, because a safe and secure energy supply is vital to our economic recovery, both in creating jobs, which are desperately needed for millions of people throughout the country, and ensuring that businesses can rely on the energy supply.
I want to mention a couple of recommendations in the report. The report is almost a year old and makes points about the Government’s electricity market reform policy proposals. Since it was published, the Committee has undertaken pre-legislative scrutiny on the draft Bill. It is striking, however, that much of the criticism from the first report, even after pre-legislative scrutiny, remains valid. I am sure that EMR issues are high in the Minister’s in-tray and that he looks forward to responding to the Committee’s report on the draft Bill before it is introduced later this year. The EMR process is a key feature in securing the UK’s energy supply for the future, in terms of securing investment and setting out the certainty and predictability, as hon. Members have mentioned, which are important in getting investment in place.
Both reports touched on the capacity mechanism. I am sure that the Minister will be keen to deal with that as soon as possible. In the evidence to the pre-legislative scrutiny report in March, Ian Marchant of SSE commented—I do not agree with everything that he says, but I agree with this—that the
“the biggest issue at the moment is…uncertainty…the Government has created”,
for want of a better phrase,
“a known unknown.”
Knowing that there will be a capacity mechanism but not exactly what it will be, people will wait and see what the mechanism is, so there is a danger of creating a hiatus in investment. It is vital that we deal with that matter as soon as possible.
The Committee considered the relationship between Government and industry, specifically in relation to the oil and gas offshore industry and the impact that that can have on investment in the UK. It concluded, in reference to the measures announced in Budget 2011, that there is a need for a constructive relationship to restore industry confidence and maximise the benefits from the UK continental shelf. That is important.
I appreciate and acknowledge that since then the Department has done work to reinvigorate PILOT, the industry-Government body, and on establishing the fiscal forum, which is important. Although any Government have the right to adjust their fiscal policies to meet circumstances, the way that the changes were announced at the time—almost without any prior warning or degree of consultation—highlights the possibility and danger of an adverse impact on investment and, therefore, on revenues coming in. Various statements were made at the time about the impact of those changes, but because it is such a long-term industry those will not yet be known for certain. However, the report touches on that important point.
My previous point feeds into the wider, broader issue of certainty. Government decisions in the past couple of years serve to underline the degree of uncertainty. Oil and Gas UK claimed at the time that the UK was regarded as one of the
“most unstable…provinces in the world by many investors”.
Thinking about some other environments, that is quite an alarming statement. I hope some of that damage has been or is in the process of being undone. Similarly, in relation to other measures, including the feed-in tariff, renewables obligation and the banding review, about which there was movement backwards and forwards, sometimes such public discussions and squabbles send a signal to the wider investment community that they cannot necessarily rely on what the Government will do. That is a dangerous position to get into. I hope that the Minister, in his early weeks and months in his new role, seeks to provide the appropriate amount of certainty and predictability.
The hon. Member for New Forest East (Dr Lewis) mentioned the refining industry. The Government have committed to undertake a refining strategy, which is timely, and they will publish it later this year. However, that is too late for people employed at Coryton refinery. It is worrying when a fully functioning refinery with high environmental standards—perhaps one of the best in the UK—is closed with the loss of an estimated 850 high-skilled and high-paid local jobs that made a significant contribution to the local economy. The strategic issues in relation to our refining capacity are serious, as is our ending up importing refined product as a result. I hope that the Minister and the Committee will consider those issues. The Committee has a full agenda, but it may wish to consider these issues and keep an eye on them, because Select Committees can bring a degree of vigour and impartiality to such discussions.
During pre-legislative scrutiny the Committee criticised the draft Energy Bill for not including any measures on demand reduction. Hon. Members have mentioned demand reduction. It is hard to disagree with the Committee’s saying,
“It is completely unsatisfactory that DECC's work was not completed in time to be published alongside the draft Bill. This suggests that DECC is still failing to give enough priority to ensuring that demand-side measures contribute to our energy policy goals.”
Over the summer the McKinsey report, published for further comment, highlighted 11 key barriers to capturing the potential of energy reduction. Other hon. Members may have missed the Secretary of State’s saying that he was intending to graft some demand-reduction measures on to the draft Bill—that was at a Liberal Democrat summer school, so the attendance and attention might not have been huge—but I note the Committee’s warning that
“adding last-minute measures to an already pre-determined structure of a Bill may severely limit what can be achieved on demand reduction”.
That is important.
I take that on board, Mr Amess. I concur with my hon. Friend.
There are many challenges for the Minister to deal with—many of them covered in the report—and I am sure that he will seek to do so in his diligent manner. Although we in the Opposition will always seek to scrutinise effectively, we will not oppose for the sake of opposition. We hope, in these areas and many others, to address the energy challenge of the country and be an inquiring, critical colleague for him in the months ahead.
As ever, it is a pleasure to serve under your chairmanship, Mr Amess.
Benjamin Disraeli said,
“What we expect seldom occurs, but what we least expect generally happens to us.”
In that spirit, I stand here as the Minister responding to this important debate. I thank the Committee for drawing the matter to the House’s attention.
Energy security is a vital subject with ramifications and implications of all kinds for our economy and for wider society. In addition, there are implications for employment, skills and many other areas, as the shadow Minister, the hon. Member for Rutherglen and Hamilton West (Tom Greatrex), who I look forward to working with closely, said. That is why energy security is at the heart of the Government’s energy policy.
Time does not permit me to go into the detail that I would like, but I will happily write to hon. Members about any queries that they might have, in particular those arising from the debate or indeed from the Committee’s report, because that is the right thing to do in the circumstances. I also want to take some time to thank my predecessor, as several hon. Members already have. I will of course draw on his experience; I am meeting him for lunch next week—[Interruption.] I will be paying. I will also draw on the experience of members of the Committee.
The business of ensuring that we can maintain energy supplies without disruption, and that we have adequate infrastructure investment to do so, is central to our aim. That objective sits alongside and must be delivered with others to which hon. Members have referred. Significant among them is the affordability of energy, but we also have obligations in respect of carbon emissions and renewables. My hon. Friend the Member for Warrington South (David Mowat) made a powerful point about some of their perhaps contradictory effects, on which I shall ask my officials to brief me thoroughly after the debate.
Fundamentally, the basis of our energy security policy is to ensure that there are competitive market structures that incentivise companies to provide reliable supplies at attractive prices, combined with robust regulation. The arrangements must be made to work in the national interest. Obviously, there have been no major physical interruptions to UK oil supplies in recent history, and electricity capacity margins are currently very high. Our gas market coped admirably with the coldest December for 100 years in 2010 and, more recently, with the cold snap that we had this winter. In addition, in recent years, the gas market has brought forward import infrastructure equivalent to some 150% of annual demand.
My hon. Friend the Member for South Thanet (Laura Sandys) is nevertheless right to say that we must not be complacent. Politicians, at least in this country, are accustomed to being fired, but not to being fired at, and I hear what she says about that not being true elsewhere. We certainly need to recognise the challenges that we face with a degree of seriousness that affirms that this is an imperative.
The challenges can be summarised as follows. First, over the coming decade, UK production of oil and gas will continue to decline and our dependence on volatile global fossil fuel markets will increase. In the longer term, the pressure on price from increased global demand creates uncertainties—that was mentioned by the Committee Chairman, with the point clarified still further in an intervention—and supply constraints are expected to increase.
Secondly, many of our coal and nuclear power stations will reach the end of their lives over the next decade, as hon. Members know, and we need to ensure that the market brings forward sufficient generating capacity to replace them. I have asked about that already in the Department, and the Committee is familiar with the issue.
Thirdly, the Climate Change Act 2008 committed the UK to reducing our greenhouse gas emissions by at least 80% by 2050. European legislation commits the UK to producing 20% of its energy from renewables. Those are most ambitious goals, which brings me to the fourth challenge: the tough market conditions for energy investors and developers. With typical courtesy and acumen, the hon. Member for Brent North (Barry Gardiner) made a salient point about the need to ensure the circumstances in which investment is possible. As the shadow Minister said, we must ensure a degree of certainty and predictability in an extremely volatile set of world circumstances if we are to get the necessary investment. Investment requires such a spirit of certainty, and the Government must help to deliver that, irrespective of world conditions which are, to put it politely, challenging.
In addressing the challenges, we have developed a vision for the future of energy security in which low-carbon technologies, including renewables, nuclear, and fossil fuel generation equipped with carbon capture and storage, compete on price. As several hon. Members said, that diversity of provision is at the heart of our vision. Our aim is a secure energy system with adequate capacity, diverse and reliable energy supplies, and a demand side that is responsive to unexpected changes in supply.
As has been said, the policy response involves huge uncertainties—we are predicting for at least a 40 or 50-year period, which is bound to be full of change. The carbon plan explores a range of plausible scenarios of what the UK might look like in 2050. Our energy mix and energy security challenges will depend on which of those scenarios ultimately comes to pass.
I can deal only with headlines in the time available, but there are key elements of policy; we certainly have to focus on adequate capacity, which raises the issue of the reduction in demand, which was mentioned by the shadow Minister and my hon. Friend the Member for South Thanet. Secondly, we have to look at energy efficiency in business and the public sector—that is critical. The Energy Efficiency Deployment Office will publish the Government’s energy efficiency strategy before the end of the year. As the shadow Minister emphasised, we will certainly be looking closely at electricity market reform, which includes the difficult issue of the capacity market, on which I know there are different views in the House, as well as in the sector, as I found out last night when I met a range of players from it. Nevertheless, that debate needs to take place if we are to get our thinking right about certainty and predictability.
[Mr Graham Brady in the Chair]
We constantly monitor and assess risks to ensure that there is adequate gas capacity, and the Government are working to ensure that planning and regulatory barriers are minimised so that the market can continue to provide such capacity. The UK oil refining industry, with its good links to other European refiners and access to North sea crude oil, provides the UK with a secure, reliable and economic source of transport fuels and other petroleum products. I heard what my hon. Friend the Member for New Forest East (Dr Lewis) said about that, and I emphasise that the UK’s refining industry has developed a strategic policy framework for the UK—we will be saying more about that before the end of the year.
I have talked about the diversity at the heart of our policy. That diversity requires each part of the energy mix to be commercially viable. Many points were made about viability and its relationship with what the Government do and do not do. I do not have time to respond to them, but I assure hon. Members that such points are at the heart of my early investigations into the subject, my discussions with officials and my connections with the industry.
On reliability, it is vital that we have the right electricity grid to connect generation to demand if we are to ensure energy security, to meet our climate change targets and to deliver affordable electricity. The “connect and manage” grid connection regime is enabling the faster connection of new generation projects, and significant transmission investment has been approved in principle by Ofgem to extend and reinforce the onshore transmission network. As has been said, gas plays a vital role in our electricity supply. My hon. Friend the Member for Warrington South talked about a dash for gas. I would not put it in those terms, but he is right that gas will continue to play a significant role, and it is vital that we have a considered strategic view of what that means.
I thank the Minister for giving us at least a brief set of headlines in response to the debate. He did not have time to do more than that, so we sympathise with him. I reiterate that we are looking for an energy policy that is made in the Energy Department, not in the Treasury, and for a policy that is predictable, certain, stable and supportive of the goals of affordability, security and low-carbon.