[Steve McCabe in the Chair]
I beg to move,
That this House has considered the cost of the energy review by Dieter Helm.
It is a pleasure to serve under your chairmanship, Mr McCabe. The motion has a slight ambiguity as to whether we are considering the cost of producing the report or the contents of the report itself, and I want to make it clear that we are considering the report itself, and not the £500 a day paid to Professor Helm for producing it.
The report is a devastating critique of Government policy over the past 10 years or so. That is not just this Government, but the coalition Government and the previous Government. The report’s extraordinary headline is that we will have paid £100 billion—that is one hundred thousand million pounds—more than necessary by 2030 for current energy policies. Consumers are paying 20% more for energy than would otherwise have been necessary. Thinking about the debates, rows and discussions we have about major infrastructure in this place, High Speed 2 will cost £40 billion or £50 billion, which is half as much. Some of my hon. Friends are against that highly controversial project, and many Government Members are in favour of it. Cost is a crucial issue, but it looks as though, for no real infrastructure benefit whatever, by 2030 we will be paying twice as much—£50 billion more—for an energy system that is, in the words of Professor Helm, “not fit for purpose”. One could also argue about the marginal differences in cost that people see for remaining in or leaving the EU. The sheer size of this £100 billion figure leaves many such arguments in the shade.
Professor Helm’s report is long—240 pages long—but if people want a simple version of his views, I recommend reading the transcript from when he was before the Business, Energy and Industrial Strategy Committee on 16 January. He knocked down some of the criticisms of the report when he was quizzed by Members. The transcript is much easier to digest and more to the point than the 240 pages of dense, well-argued points.
One can agree or disagree with the report, but it is logically coherent. One surprise is that, given the sheer magnitude of the figures involved, the Government have not responded in detail to it. I am sure there are responses that could be made. There could be disagreements on much of the detail in it, but it is a real failure that the Government have not responded to such an important report, which they of course asked for.
One thing that the report emphasises is how the energy market is working and has been set up. The Government have tried to pick winners, but as often happens, they have not. We would all like to pick winners; we would all like to win on the Derby or the Grand National, but most of us are not very good at it, and Governments by and large are not much better at picking winners in industry and energy. The people who are good are inefficient businesses—losers, rather than winners, if you prefer, Mr McCabe. They are good at picking weak Governments and lobbying and arguing for subsidy for less-than-competitive industries. The report says that they have done that, and it is devastating in its analysis.
Not only have the Government—as I said, I am not making a particular charge against this Government; this charge is levelled at the last three Governments—been subject to lobbying and wasted money, but in the background of the process are many lobbyists and green groups whose acquaintance with the truth sometimes leaves a lot to be desired. We not only have industry with vested interests, but groups such as Greenpeace lobbying in the background, many times dishonestly, to support policies that fit their ideological preference.
Mr McCabe, you may remember walking into the House of Commons before Christmas and seeing big signs outside sponsored by Greenpeace that said the cost of wind had been cut by 50%. That was an outright lie. It was challenged at the Advertising Standards Authority, and Greenpeace was made to take those adverts down. When Greenpeace and others were asked to justify their position, they said that they were using projected costs for wind farms in the North sea that had not yet been commissioned, let alone built. That is the background to a controversial policy area that the Government should by now have responded to.
I said that Professor Helm was coherent, which he is, but—this will come as no surprise to the shadow Minister, my hon. Friend the Member for Southampton, Test (Dr Whitehead)—I do not agree with the objectives that Professor Helm has always agreed with. They are the Government’s objectives, too, and I will explain why I do not agree. He starts the energy review by talking about the Government’s target in the Climate Change Act 2008 to reduce carbon emissions in this country by 80% from 1990 levels by 2050. I do not agree with that, and I will explain why. However, it is the Government’s policy and the law, and that is the basis of the review. His second objective, which he took as concrete, was the security of energy supply. Along with those two objectives, he wanted to see whether costs could come down.
My disagreement is that I have always thought that there should be a hierarchy of targets in energy policy. Security of energy supply should always be the top target, because if the lights go out, not only would we be in trouble as Members of Parliament for creating a system that does not keep the lights on, but the country would be in trouble. I have always thought that security of energy supply, rather than arbitrary carbon targets, should be the top priority.
Secondly, I would find it difficult to explain to my constituents and industry in my constituency if price was not one of the top priorities. For it to be tertiary is a mistake. Lower prices should be a priority, but a consequence of the policy is that they have been neglected, and they have gone up by more than they would have otherwise. That is where I disagree.
I congratulate the hon. Gentleman on securing the debate; he makes some good points. I agree entirely with what he has just said about price, and with what the report seems to indicate. There has been a complete failure of competition in the domestic energy market; Governments always talk about it, but they have failed to deliver. There is still a predominance of the big six energy companies, effectively rigging prices. Does the hon. Gentleman agree that that needs to be fundamentally addressed if we are to have a proper energy market that benefits customers?
That is my reading of the report. I think Professor Helm goes slightly further than that—beyond the big six energy companies—and talks about the problems that have been caused by investing in costly new technologies that might have been cheaper to purchase later, but I essentially agree with the hon. Gentleman.
The price of energy is important not just in the way that I have described; it is also probably the most important industrial policy that this country can have. Matt Ridley pointed out in The Times some 12 months ago that at the start of the industrial revolution—this is from memory, so I might have the numbers slightly wrong, but they will not be far out—the cost of energy in Newcastle was about one 20th or one 25th of the cost of energy in China. We know what happened: this country, Europe and the United States boomed ahead because what previously required 20 horses could now be done with a few lumps of coal.
Recklessly putting up the price of energy has been a huge mistake for the country. When I say that, I do not want anyone to think that I am somehow in the category of anti-science. My background is that of a scientist, and I understand the opacity or otherwise of carbon dioxide to different wavelengths of electromagnetic energy. I understand the greenhouse effect in some detail, and I do not deny its existence—I think that what its impact will be is sometimes exaggerated, but that is a debate for another day.
We have been putting the price of energy up and closing coal stations—probably the coal stations should have been closed earlier, as Professor Helm says. As an intermediate pathway to the Government’s goals, it might have been sensible to use gas-fired power stations, which have half the carbon emissions of coal-fired power stations. If we look at the whole-world picture, we see what little impact we have—I think we produce about 2% of the carbon dioxide in the world. Over the next 10 years or so, 1,600 coal plants are planned in 62 countries around the world. China will make 700 of them. Approximately 65% to 70% of India’s energy production is from coal, but last Monday India cancelled the vast majority of its planned nuclear power plants.
Whatever impact we have will be minimal to negligible, yet we are putting the price of energy up for some of the poorest people in the country, including my constituents. We are also undoubtedly damaging industry, because due to the high price of energy we are, in effect, exporting many jobs to countries such as China, India and Malaysia, where they are often less efficient, and there is the carbon cost of the transport by ship or plane when we buy their goods.
Professor Helm, taking the Government’s policies as firm, has a number of suggestions. First, he believes that there should be one uniform carbon price. He points out, in a chart towards the end of the report, that we have many carbon prices at present, where we add to the cost of fossil fuels through many of the interventions to VAT. He believes that they should be unified, which would make things transparent. He also believes that there should be auctions for energy suppliers. Devastatingly, he says in the report that he is surprised, and I think it was a surprise to everybody else, that when things were put out to auction, rather than using interventionist prices, the prices dropped dramatically.
Professor Helm gives us his reasons on the interventions. I do not want to read too much of the report directly, but he says that the different interventions have made the market extremely complicated and expensive. He points out:
“The legacy costs from the Renewables Obligation Certificates (ROCs), the feed-in tariffs (FiTs) and lowcarbon contracts for difference (CfDs) are a major contributor to rising final prices, and should be separated out, ring-fenced, and placed in a ‘legacy bank’. They should be charged separately”.
On the complexity, Professor Helm’s answer to the Business, Energy and Industrial Strategy Committee was devastating, because some of the vested interests had been into the Committee previously and had lobbied. Some of the renewable energy people and some of the people from the Committee on Climate Change—all of them professors, you understand, Mr McCabe—had said, “There’s no problem with complexity whatever.” I think there is a problem, and anybody who has been in the real world for very long knows that there is a problem. Professor Helm’s key finding and recommendation on that was:
“The scale of the multiple interventions in the electricity market is now so great that few if any could even list them all, and their interactions are poorly understood. Complexity is itself a major cause of rising costs, and tinkering with policies and regulations is unlikely to reduce costs. Indeed, each successive intervention layers on new costs and unintended consequences. It should be a central aim of government to radically simplify the interventions, and to get government back out of many of its current detailed roles. This review explains how to do this.”
In taking on the professors who think that complexity is not a problem, Professor Helm said:
“It is empirically impossible to work out the costs of current policy, because each policy intervention interacts with every other policy intervention. Any cost-benefit analysis of a particular intervention has to do the plethora of interactions with all the other bits as well. If you want an empirical piece of proof, you need to have all that analysis done and then analyse the empirics of the counterfactual, of what would have happened if you did not have all that complexity.”
I agree with him: it is impossible.
The report also says that, having created that complexity:
“As a consequence of Electricity Market Reform (EMR), the government now determines the level and mix of generation to a degree not witnessed since these were determined by the nationalised industries”.
I suspect that if I had been a Member of this House when Lord Lawson, as Energy Secretary, proposed privatising the energy industries, I would have voted against. Nationalised industries at least have a direct line of responsibility between the taxpayer, who may benefit from them and subsidise them, and the controlled industry. What we have here is a complete mess: Government intervention, interfered with by lobbyists and vested interests with no accountability, which ends up with the poor consumer paying more than they need to.
Professor Helm criticises the Government for focusing too much on electricity and not enough on agriculture, which is a tiny part of the economy and creates about 10% of carbon dioxide emissions. He strongly believes—this should please the Government—in a free market solution. He believes that the auctions will not pick winners, but that the winners will pick themselves by being efficient in the auction process.
I want to deal with one of the main questions put forward by my hon. Friends who represent constituencies where Vesta, for instance, produces wind turbines. That question is whether the alternative, renewable energy business would have got going without intervention. Nobody can really answer that. When all that extra cash has been put into the energy market, there are bound to be spin-off benefits, but it cannot be known at any time, unless the market is tested, whether someone could have got more bangs for their buck for investing differently.
One area where I completely agree with Professor Helm is that we need research—not just the research carried out by vested interests who want to produce energy, but pure research. There is a long way to go in battery technology, which may be part of the solution. Unless something has happened since I left the Energy and Climate Change Committee, we do not even have a proper pilot scheme for carbon capture devices. All those things could be explored in a pure way and then, in the way that often happens after pure research, industry could look at what could be used and the way we are investing at the moment.
The final point made by Professor Helm is that tens of billions have been invested in subsidising wind farms in the north sea. On what basis can we say that was the right decision, rather than putting the money into carbon capture and storage? I do not have the answer to that, and I know the Government do not have the answer. They have opened their arms to vested interests and have ended up with a system that disadvantages our constituents and is essentially not fit for purpose. The Government need to respond thoroughly and properly to this important report. It is possible to disagree with it or to agree with parts of it, but it certainly needs a response.
It is a pleasure to serve under your chairmanship, Mr McCabe, and I thank the hon. Member for Blackley and Broughton (Graham Stringer) for securing this important debate.
I thank Professor Helm and the advisory board for their work on the independent review. It has certainly contributed to the wider debate on how we should approach energy policy in a way that balances the challenges of climate change, energy security and justice for customers. The true cost, or benefit, of the review will be determined by what the Government do with the findings. I am confident that the review, or at least the debate it has provoked, will lead to positive and successful steps to reduce the price of energy in this country for both domestic and business users.
The concept of starting an important debate about the future of energy markets, with the aim of bringing down the cost of energy for customers, must surely be the right thing to do. The UK Government have already shown that they are serious about making energy prices more affordable for consumers. In July 2017, the UK Government and Ofgem set out a plan to create a smarter energy system. We are seeing some progress, although perhaps not as much as many would like, on smart meters. It is a big hill to climb and I only hope it will continue to accelerate in the next couple of years. I am looking forward to the return of the Domestic Gas and Electricity (Tariff Cap) Bill to the House for its remaining stages, which I believe will be next week. It is entirely reasonable that the UK Government have sought to build on those actions with a review of what else can be done to bring energy prices down and provide energy security in a low-carbon economy. All the elements of energy production and the low carbon aspect make this quite a difficult Rubik’s cube to square off.
Professor Helm has frequently raised concerns about the price of renewable energy as produced by current technology and has called for Governments to take a more balanced approach to sourcing and securing energy. In his review, he put forward many interesting proposals for the future of UK energy policy, from a carbon price to the replacement of overpriced standard variable tariffs with a new default tariff, to a wider simplification of the whole raft and range of state interventions, which are cumbersome and only understood by a few people, if by anybody.
We do not necessarily have to subscribe to the findings of the review in full to acknowledge that many of its proposals are interesting contributions to the debate and at least merit further examination. That is why it is right that the UK Government have responded to the review by taking evidence from a range of interested parties, including consumer groups, and are now analysing that evidence. The review has been worthwhile and I am confident that it will prove to have been a valuable contribution to the UK Government’s efforts to reduce the cost of energy and to reduce fuel poverty—an important aspect for many—and to assist industry to become far more competitive as we go forward.
I express my thanks to the hon. Member for Blackley and Broughton (Graham Stringer) for securing this debate. I am pleased we are having this debate on the cost of the Dieter Helm independent review, launched by the Department for Business, Energy and Industrial Strategy and led, of course, by Professor Helm, an economist specialising in energy. Such a review is a rather important matter. Therefore, it was extremely disappointing that it was announced by BEIS on a Sunday in the peak of the August holiday season last year and was scheduled to last a mere 30 days.
The review was set in the context of rising customer concern about power prices, which were set to increase by 15%, following the decision by British Gas to increase electricity prices by 12.5% on average, despite falling wholesale prices. Although UK domestic power tariffs remain low relative to other countries in the EU, they are rising, and for industrial users, they are the third highest of 15 European countries, according to the UK Government’s figures. One reason is increases in climate-related policy costs, which make up a growing proportion of the average energy bill.
The review’s terms of reference are about ensuring energy is affordable for households and businesses. It sets out 11 short bullet points and reiterates the laudable ambition to have the lowest energy costs in Europe for homes and businesses. However, the expert panel of five working alongside Professor Helm lacked a consumer voice, although manufacturing was represented. I do not understand why that was the case, but perhaps the Minister can shed some light on it.
Although the review was independent, with the purpose of reviewing the cost of energy, it focused on electricity. The Government said:
“The specific aim of this review is to report and make recommendations on how”
carbon and energy security aims
“can be met in the power sector at minimum cost and without imposing further costs on the exchequer.”
Indeed, the Government recognised that, although the UK has some of the lowest gas prices in Europe, our electricity prices are less competitive, compared with those for households in Europe, and are among the most expensive for the industry. Bills are about volume, not just price. For example, average domestic electricity prices in the US are half those of the UK, but bills are higher because the more energy-efficient UK homes have less waste. The same can be said of gas.
As well as the fact that the review was restricted to electricity, utility firms’ pricing and profits were not included, which some might argue was a missed opportunity. The Government have rejected the idea that the review was too narrowly based on Professor Helm’s opinions and too brief to unearth any valuable new evidence. Does that remain their view? How on earth can anyone seriously consider the cost issues facing UK energy without looking at the £20 billion Hinkley Point reactor project? I know that many in the energy industry agree with that.
There has been much debate about various aspects of this report, and that is as it should be. The report’s two main findings are that the cost of energy is significantly higher than it needs to be, and that energy policy, regulation and market design are not fit for the purposes of the emerging low-carbon energy market, but I believe we have to focus on the cost of energy to the consumer. The report makes it clear that, since late 2014, the price of oil, gas and coal has fallen significantly, the price of renewables has fallen, and there is downward pressure on the cost of transmission, distribution and supply. New technologies should mean lower, not higher, costs, and much greater scope for energy efficiency. Margins should fall as competition increases, yet Professor Helm points out—if we accept this—that households have seen few benefits from the cost reductions. Prices have gone up, not down, for too many consumers.
I am sure I do not need to tell the Minister about the strain that the unnecessarily high costs for households put on household budgets across the UK. Indeed, Professor Helm warns that such costs risk undermining the broader democratic support for decarbonisation. The Climate Change Act 2008 estimates that the cost of decarbonising electricity is about 20% of typical electricity bills, and it is thought that such legacy costs will amount to well over £100 billion by 2030. Professor Helm concludes that much more decarbonisation could have been achieved for less, and that costs should be lower and falling further. I am interested to hear the Minister’s reflections on that.
As Professor Helm identifies, the problem is that those higher than necessary costs are locked in for at least a decade, despite the Government’s welcome temporary price cap, due to contracts that the Government entered into. We need a way to reduce the burden imposed on consumers and businesses and ensure that decarbonisation costs are more transparent, at the very least.
There is no doubt a difficult balance to strike between costs and the challenges that the electricity and energy system will face in the next decade and beyond. Carbon budgets need to be met as we invest in new technologies that come on stream. We are living through a technological transformation, and electricity is increasingly the dominant energy form.
Professor Helm is clear that the 2050 carbon target could be met at a lower cost. It could perhaps even be met early, which would be of real benefit to households and the entire industry. Does the Minister have any thoughts about that? It is important that we consider Professor Helm’s work more carefully than is possible in a 90-minute debate, because our wider economic needs, and our ability to meet our energy demands and deliver our carbon budgets may, as Professor Helm points out, depend on it. We must also be extremely mindful when we attempt to break out of the high costs of our energy system, which locks too many households into fuel poverty. There are opportunities in the energy market, and I am extremely interested to hear how the Minister intends to capitalise on them for the sake of consumers, businesses and the delivery of our carbon budgets.
We cannot take Professor Helm’s conclusions as gospel, and nor should we. Indeed, in the past his work has not been short of critics, but it always provokes debate. It seems that Governments have pretty much ignored much of what he has said in the past. I am interested to hear about how his work will inform the Government’s approach as we face the future in this field, and about how consumers can remain at the heart of this process.
It is a pleasure to serve under your chairmanship, Mr McCabe. I congratulate the hon. Member for Blackley and Broughton (Graham Stringer) on securing the debate.
I agree with much of what has been said. The Helm report is imperfect, although my copy is greatly improved by the artwork on the back of it contributed by my children. Such a report was always going to be imperfect. For the past 18 months, since the report was first discussed and commissioned, the whole industry and the Government have been holding their breath in anticipation of the response. It was always unlikely that the clouds would part and Professor Helm—as brilliant as he is—would provide the absolute solution for all future energy policy.
Professor Helm is right that the auction system we have been operating over the past decade or so is imperfect. It is complicated, and parts of it have given us the wrong result. Until recently, in the grid services markets, in particular, we ended up with lots of diesel coming through to meet that need. Clearly, that is not what the Government or anybody in the lobby in favour of decarbonisation hoped for. Clearly, it was not perfect. I accept Professor Helm’s criticism of the Government’s picking winners. More accurately, losers are very good at picking Governments. There is no doubt that some things we committed to in the past would not bear scrutiny today.
I do not accept that it is all doom and gloom. I accept the criticism from the hon. Member for Blackley and Broughton of the advertising that suggested that the cost of offshore wind had come down by 50%, but let that not hide the fact that the speed at which the cost of offshore wind has come down is a stunning success. Whatever the reduction is—we can debate that—there is no doubt that, only a few years ago, it was well over £100 per megawatt-hour, and it is now well below that. That is a consequence of the Government seeing the opportunity both from an energy perspective and for industrial strategy in the north-east of England. I think that is a good thing.
I appreciate the hon. Gentleman’s point, but does he agree that there has not been a huge technological advance in windmill technology over the past few years? The drop in costs probably represents how inefficient the energy market was previously, rather than an increase in wind turbines’ efficiency.
I do not have the evidence at hand to disagree with the hon. Gentleman absolutely, but my understanding from the industry—I accept that he is sceptical about the industry’s lobbying prowess—is that there have been some fairly significant improvements in the cost of manufacture and in the scale of the wind turbines that can be deployed. It may be that the cogs, wires and mechanisms within are no more efficient than they were—I honestly do not know—but if they can now be deployed much more cheaply because of the scale at which they are being manufactured, and if they can generate so much more electricity because of the size of these things, I think that those are cost reductions even if the underlying technology has not moved on. I suspect it has a little, but I do not have the evidence at hand to debate that point today.
Renewables have, I think, become the cheapest form of generation. Solar has been going gangbusters in the speed at which it has brought down its costs and so, too, has onshore wind, notwithstanding the political pressures against it in this place. It is increasingly hard to argue that the burning of hydrocarbon for the purpose of generating electricity is the cheapest way of providing electricity. More and more often, we can buy out the intermittency of renewables to deliver very cheap clean green energy, and it is no longer a choice between decarbonisation and cheap energy. It is just that the greener energy happens to be the cheapest as well. Crucially, what renewables also allow us to do, which will realise a big saving, is to decentralise the energy system. That will certainly bring with it significant reductions in the costs of transmission, and potentially even distribution as well.
I have said that our auction mechanism is imperfect, but it is worth noting that many other countries have sought to emulate what we have done with Government policy on the deployment of renewables. It has sped up our decarbonisation—spectacularly so—and has reduced the wholesale price of energy. I accept that that has been clouded by a combination of the energy companies not necessarily passing on the savings to consumers as quickly as they could and of the green taxes that the Government put on top of the wholesale price. That has meant that consumers do not see it, as some people in this room would, as the right thing, because, as the hon. Member for Blackley and Broughton said, they have not seen on their bill the translation of that change into their energy costs.
Professor Helm also rightly mentioned that there are other areas for decarbonisation where the Government have not yet made as much progress as they might. Some very good things are being talked about within the Minister’s Department and I know that she is a big champion of the decarbonisation of heat and how we do that better. I am a Parliamentary Private Secretary in the Department for Transport and I know that a lot of work is going on there to look at how we decarbonise transport and the future of mobility.
My right hon. Friend the Secretary of State for Environment, Food and Rural Affairs is doing great things on waste. I accept the criticism of Professor Helm and others in this place that agriculture has been lagging behind. Representing a farming constituency, I know exactly why that is the case. It will be very challenging when we have to start telling people that they need to reduce their consumption of meat, milk, cheese and everything else in the interest of decarbonisation, but that conversation is surely coming.
The issue is how we translate all the advances in technology in the power sector into reduced bills. The Domestic Gas and Electricity (Tariff Cap) Bill, which I spoke to on Second Reading—I also served on the Public Bill Committee—should not be regarded as the process by which we do that. I am reassured by my previous discussion with my right hon. Friend the Minister, and I hope that the Bill will not be a temporary raid on the market.
The analogy that I like to use is that the current market, the caterpillar, is going into the chrysalis and on the other side we will have the butterfly that is the wonderful, digitised, decentralised energy system of the future. It would be disastrous if the caterpillar went into the chrysalis and after an inordinate period of time what emerged on the other side was still a caterpillar. We need to give Ofgem the latitude to use this as an opportunity not just to introduce a price cap, but to transform the energy system so that all of the savings that clean tech undoubtedly will afford start to translate into reduced bills for consumers.
In this place, we have a job to keep ahead of what will undoubtedly be a change in the mindset of consumers. Electric vehicles are not gaining in popularity among the electorate because we in Parliament have told people they are a good thing. They are gaining in popularity because they are unquestionably the future of motoring. They are technologically advanced, better than normal cars and cheaper to run, and people will be going for such things as a result of that, not because they are motivated by decarbonisation. We need an energy system that is ready to give them not only the ability to motor effortlessly because the charging network is all there, but from which, with their electric vehicles, they can take full advantage of the fact that they now have a battery parked outside their home and can participate in the energy system to further reduce their bills.
Increasingly, people will start to get the internet of things within their home and businesses. They might not realise that that transition is happening because all that it might mean at the moment is a smart speaker in the corner of the room from which they invite Alexa to tell them the weather. Increasingly, people will find that as their homes become smart, they will be able to participate in the energy system and access services that will allow them to deliver their domestic energy much more cheaply because something like Alexa, Siri, Google Home or whoever else will be able to run their homes more cheaply and will work out when they need to perform various functions to take advantage of cheaper market prices.
In turn, as policy makers we need to ensure that everything is in place for storage to be fully unlocked both in catalysing the research and development for grid scale storage and making sure that the market is ready for people who have storage in their business, home or community. We need to make sure that the market is ready for storage to participate.
Demand-side response has been spoken about for so long, but I am not sure we have the policy levers quite right yet to make sure that demand responds on a meaningful scale, particularly when aggregated across lots of domestic users and small businesses. We have the big users signed up to it, but delivering it when it is aggregated across a large number of consumers is very important. We need to accelerate that transmission because I suspect that consumer demand for those things will start to take off quite quickly in the next five to 10 years. There is a danger that we will get caught out having not put in place policy and regulatory frameworks for the new energy system that people will realise they want, and it will not be delivered if we do not get that right.
The other thing it is tempting to do when talking about Professor Helm’s report, which focuses on the big stuff, is to forget that energy efficiency is far and away the best way to deliver savings to consumers. I know the Government have made some eye-catching announcements on this recently, and it is absolutely right that we continue to see small gains in people’s homes and businesses as just as important as the things that we talk about in the North sea or the big power stations that we build here in this country. They will deliver the biggest savings by far for consumers in the short and medium term.
I will wrap up simply by saying that the report is not perfect—we know that—but it raises interesting points that have stimulated a conversation in Parliament and helped to focus the Government on what could change. We are in danger of losing the argument with the bill payer if we do not start to show how all the clean technologies can and will translate into lower bills for users. The longer-term challenge is how we make sure that we fully decentralise and digitise the energy system. With that comes an opportunity to balance upwards from behind the meter through the community and then the region, rather than having the current system that is run rather inefficiently by a centralised system operator.
Last week BP announced some eye-catching policies for their internal decarbonisation goals over the next 10 to 15 years, but what was interesting was to hear Bob Dudley. When asked about the role BP might play in helping its customers decarbonise, he was clear that getting carbon pricing right is the thing that will move the dial most obviously, particularly for the big industrial users of energy. As policy makers we need to start considering urgently how we strike that balance between prompting the right behaviour from industry and not being punitive when it comes to increasing the price of energy. The opportunity for a future hydrogen economy requires decades of planning as we seek to transition, so starting that conversation now is very important indeed.
The discussion that we are having today is excellent. There is a lot that the Government need to do, and that Professor Helm will have prompted them to do through his report. It is not perfect, but the fact is that renewables are driving down the costs of energy. We need to be able to translate that into cheaper bills for the consumer. I know that the hon. Member for Blackley and Broughton is sceptical on such matters, but I passionately believe that the evidence shows that what we are doing is the right thing, and that we should keep our course.
It is a pleasure to serve under your chairmanship, Mr McCabe. I congratulate the hon. Member for Blackley and Broughton (Graham Stringer) on bringing forward the debate. I was glad that we cleared up, right at the start, the pedantic point about the title and that we were not going to be debating whether Professor Helm should have been paid £500 or £400 a day.
The hon. Gentleman set out his stall with respect to the potential value of the overpayment by consumers. Obviously, we need to realise, going forward, that the issue is about getting the best value for consumers. I was a wee bit alarmed when he said that he was a scientist. I am a civil engineer, and I am always aware of how scientists like even more evidence-based detail. Funnily enough, one of the criticisms of Professor Helm’s report by some parties was that there was perhaps not enough evidence to back up his assertions. However, as other hon. Members have touched on, it certainly provides a good debating point, and throws down a few markers for the Government to consider.
The hon. Member for Blackley and Broughton mentioned a potential 1,600 new coal plants coming in around the world, while we are decarbonising and, correctly, eliminating coal-fired plants, so the UK impact on overall world reductions is pretty minimal. I do not think that that is the correct attitude. We must continue to lead by example on decarbonisation and to lobby and negotiate for others to do so. The hon. Gentleman was correct in pointing out that complexity is an issue—a theme that Dieter Helm brought out in his report.
A recurring theme of the hon. Gentleman’s remarks was the correctness or otherwise of the information presented by lobbyists for what he sees as vested interests. There is no doubt that it is a challenge for the Government and for all politicians when someone sets out how good their technology might be and how it might change the world. As I get more involved with the energy sector, it is a challenge to get to grips with the terminology—the buzzwords and abbreviations.
Most of the hon. Members in the Chamber seem to agree that the review is a good thing, but there has been debate on aspects of it. The hon. Member for Blackley and Broughton seems to question the value of the reductions in respect of offshore wind and how much is through cost reductions or efficiencies. I suggest that, at the very least, there has definitely been an increase in the efficiency of the manufacturing supply chain from going bigger and better. There is obviously an initial up-front cost. Cost reductions can be seen all around Europe. Given those similarities, I think there are genuine reductions in connection with technology.
In a relatively brief speech, the hon. Member for Ayr, Carrick and Cumnock (Bill Grant) touched on smart meters and the progress of the Domestic Gas and Electricity (Tariff Cap) Bill. He mentioned the Rubik’s cube, which is another thing I never got to grips with, and overpriced standard variable tariffs. At least in terms of the tariff cap and overpriced SVTs, cross-party working and political pressure are bringing the energy companies to book at last. I welcome that.
The hon. Gentleman talked about reducing fuel poverty. That is certainly important. I suggest that it is not just energy policy that leads to fuel poverty; austerity clearly feeds into it—if people do not have enough money coming into their household, they will, by default, almost certainly experience fuel poverty. So other Government policies have an impact.
My hon. Friend the Member for North Ayrshire and Arran (Patricia Gibson) gave a characteristically laid-back and chilled speech. I am tempted to go down that route, but I certainly agree with all the points she made. She concluded that consumers need to be at the heart of considerations. She is a champion of consumers, and I echo that sentiment. She correctly highlighted the issue of Hinkley Point. I shall come back to that and the fact that the cost of decarbonised energy is equivalent to 20% of bills; perhaps there is a better way of paying for decarbonisation.
Finally, we heard from the hon. Member for Wells (James Heappey). I congratulate his children on the high standard of their art work. The hon. Gentleman echoed Dieter Helm’s assertion that the auction system may be imperfect, but, as he said, it has clearly led to decarbonisation and the introduction of low-carbon technologies. There may be faults, but it has moved things in the right direction.
When the hon. Gentleman spoke of lobbyists and of losers backing Governments, I thought he might mean losers in government—but perhaps that is just a cheap shot by me. Electric vehicles are perhaps an offshoot of the debate, and although he said that there is increased uptake because people see them as the technology of the future, I am not sure we are quite there yet. Electric vehicle uptake is still too low, and we need to do more to get people to use them.
Uncharacteristically, I want to commend the Government for commissioning the review of energy policy. It may have been an admission that household energy bills are too expensive. As we have heard, that point has been reinforced by the announcement of the intended energy price cap—the Bill has its Third Reading on Monday. In October 2017 the Secretary of State said:
“Over the past 15 years energy prices have risen by over 90% in real terms.”
He added that there were bill increases
“on prices the CMA had already concluded were too high.”—[Official Report, 12 October 2017; Vol. 629, c. 473.]
The cap is intended to be temporary—until 2023—which does not give the market too long to become truly cost-effective and competitive. That means that we need longer term, consistent, logical energy strategies in place by then. Hopefully we shall see the butterfly come out of the chrysalis, as the hon. Member for Wells said.
It is therefore not surprising that Dieter Helm obviously agrees that the cost of energy is too high
“to meet the government’s objectives and, in particular, to be consistent with the Climate Change Act”.
Another key finding was that
“energy policy, regulation and market design are not fit for the purposes of the emerging low-carbon energy market, as it undergoes profound technical change.”
Those aspects of the matter, as the hon. Member for Blackley and Broughton said, are the result of a combination of successive Government failures to remedy matters.
The review highlights the fact that the investment strategy of picking winners is not necessarily efficient, and suggests that interventions should be radically simplified. No doubt the latter point will appeal to a Tory Government, but it is also the case that simplification should not happen to the detriment of emerging technologies. I have sympathy for a Government trying to support particular technologies. However, it should not be done on too much of an ad hoc basis. The way the Government have tackled the matter has not always been logical. My hon. Friend the Member for North Ayrshire and Arran mentioned Hinkley Point C, with a price of £92.50 per megawatt-hour, compared with £57.50 per megawatt-hour in the latest auction for offshore wind. That is only half the story. As Dieter Helm correctly reminds us, Hinkley is sucking those costs out for a 35-year contractual period. Meanwhile offshore wind gets only a 15-year contractual period. As he says:
“The nuclear plant will always run, reducing the market available to newer technologies until mid-century or possibly longer. This could act as a brake on technical change”.
Will the Government heed that warning and pull back from other nuclear projects such as Sizewell?
On my recurring theme of onshore wind, we need to find it another route back to market. It has been excluded from contracts for difference auctions, cannot bid for the flexibility market under current arrangements, and is not allowed to bid for the capacity auctions. We need to find a way to get onshore wind and photovoltaics or solar back to market so that we can capitalise on the reduced prices.
Dieter Helm also recommends that the legacy costs for renewables obligations certificates, feed-in tariffs and contracts for difference should be separated, ring-fenced and placed in a legacy bank. It will be interesting to hear the Minister’s recommendations on phasing those out.
Dieter Helm highlights the fact that the “revenue = incentives + innovation + outputs” framework for Ofgem, which covers the transmission and network operating regime, needs to be changed, and is resulting in higher than necessary prices. We have long argued that the current transmission system is outdated and disincentivises the construction of appropriate generation in the correct locations. Of course, it also disadvantages Scotland—particularly the north of Scotland.
Dieter Helm suggests that the Government should establish an independent national system operator and regional system operator in the public sector, with relevant duties to supply and take on some of the obligations of the relevant licences from regulated transmission and distribution companies—again, it would be good to hear a ministerial response on that. Such a provision might be slightly different, but to me it vindicates the SNP Government’s proposals to develop a not-for-profit energy retail company, and further changes that Dieter Helm suggested would complement that venture. It would also reduce Ofgem’s role in network regulation, which would be good.
Dieter Helm highlights that capping the supply margin would be the best way to meet the objectives of new legislation, and that the Government should issue an annual statement to Parliament, setting out required capacity margins and guidance for system operators. That would give parliamentarians greater scrutiny and input, which I would welcome.
Energy costs are a function of two things—the cost of energy and the amount of energy households use, which is linked to a property’s energy efficiency. Other hon. Members have touched on that issue, and I think the Government need to make more direct investment in energy efficiency policies. The SNP Government are doing that, and there is no doubt that the cost of energy then becomes less of a burden on those who might be fuel poor or struggling with their energy bills. If the money comes from direct taxation—especially in Scotland, where we have a more progressive tax system—that is clearly a much better way of paying for such initiatives and creating a fairer society.
As other hon. Members have said, this is a great starting point for debate. In the long term, we look forward to a proper Government response after their call for evidence, and I would certainly welcome a response from the Minister on the matters raised today.
I congratulate my hon. Friend the Member for Blackley and Broughton (Graham Stringer) on securing this debate. He is well ahead of the Government in having the first response to the Helm review—as he rightly said, a response from the Government who commissioned the report in the first place is currently conspicuous by its absence. Given how these things proceed, it is a little odd that the Government’s initial response to the Helm review into the costs of energy was essentially to call for evidence on the cost of energy. I am not quite sure where we are with the Government response to the report they commissioned, although I am sure we will hear about that from the Minister. Because we have no indication of what the Government intend to do with the Helm review, we are slightly at sea in terms of how best to respond to it at this stage. Should we consider the commissioning of the report, its terms of reference, the recommendations within it, or, indeed, what the Government will do with it?
A good place to start would be Dieter Helm’s conclusion that there is apparently nobody in government or any other sphere who can explain all the interventions being made in the energy market, such is the clutter of interventions in that market.
The hon. Gentleman makes a strong point. That point is also made strongly in the Helm report, which has a list of the various interventions in play. Indeed, I think we can add a few more to those in the report, some of which have appeared more recently, such as energy intensive industry, underwriting and so on. What the Helm report says is right: we have vastly over-complicated many of the areas that we consider necessary as policy levers. Indeed the temptation, not just for the current Government but for successive Governments, has been than when they see a shed that is slightly leaning, they build another outhouse on the side to stop the shed leaning. They subsequently have to do something with the outhouse, and then we get the current extraordinary complexity of the whole process.
To get a feel for exactly how complex the market is, I refer hon. Members to a recent chart produced by the University of Exeter about the various interactions that the energy market now undertakes. Helm makes that point strongly. The question is this: if we are simplifying the market and how it works, how do we do that? How do we dismantle the complexity as we simplify the market, and what will be the consequences of that simplification?
All other things apart, this review was a hospital pass for Dieter Helm, and, as the hon. Member for North Ayrshire and Arran (Patricia Gibson) emphasised, it was, frankly, an unbelievably rushed job. It was commissioned on 6 August last year, and concluded on 25 October last year. Not only was it commissioned on 6 August, but it had terms of reference that ran to one and a half pages. If hon. Members read them, they will see that not only do they greatly curtail what the review could have covered, but they are internally contradictory regarding what they ask the review to do. For example, the review states that the Government have
“the ambition for the UK to have the lowest energy costs in Europe”,
but, as the hon. Member for Kilmarnock and Loudoun (Alan Brown) emphasised, the review merely talks about power. Although we are supposed to have the lowest energy costs, the review is only supposed to consider power, and not heat or energy efficiency; that point was made by the hon. Member for Wells (James Heappey). The review has apparently wide ambition, but in practice it covers a constrained area of examination. It is essentially a review of the cost of electricity, and that is what it concentrates on.
Given where energy is now, if we talked properly about its overall cost we would have to mention that, as the Helm review lays out in some circumstances, the cost of energy is higher in a number of other European countries but the cost to consumers is much lower. That is because of the difference in energy efficiency in those countries, and the interaction between different forms of energy—what happens to heat, for example—and the power sector. If we take the lowest energy costs in Europe as our theme, it is not immediately clear what we are talking about. What will those lowest energy costs be compared with? If we restrict ourselves to the power sector, how can we complete that examination in terms of overall energy costs? That is a bit of a theme of the report, hospital pass that it is, although given the short time span and the terms of reference given to Professor Helm he has done a tremendous job.
Nevertheless, we should be clear that the report in essence represents an extended opinion piece: the opinions of Professor Dieter Helm on how the energy market and the electricity market in particular will work in future. He has been expressing those opinions—I am familiar with a number of them—forcefully for a considerable period. I strongly agree with some of his opinions and I do not agree as much with some, but they are mostly there in the report, one way or another.
The question we have to ask about the recommendations that Professor Helm makes in the report is, how are they backed up with evidence? Having read the recommendations or even the executive summary, we might confidently assume that in the report we would find not only evidence to back up the recommendations, but talk of their consequences. However, we do not find that. What we find is material to back up why Dieter Helm’s opinions are right. As a satisfactory answer to the question asked, the report falls rather short of what one wishes might have been achieved. That is a problem in responding to it fully.
I strongly agree with some of Professor Helm’s conclusions, but some I do not agree with at all. However, I would have liked to see in the report what informs his conclusions, what the consequences of those conclusions are, and how they will be worked through. Professor Helm, for example, talks about the legacy costs of energy and of interventions by Government. As the hon. Member for Stirling (Stephen Kerr) intimated in his intervention, the extent of those potential legacy costs is laid out for us in the Helm report.
The solution provided is that those legacy costs should be discontinued as something that goes on people’s bills, as they do at the moment, but that they should be all bundled up and put somewhere else. Where are they put? There is nothing in the report to tell us that, except that they will be socialised across consumers and not across to industry. One way or another, the bundle of legacy will reach back on consumers’ bills, in just the way that the social and environmental costs that appear on bills now are also borne by customers. Not only that, that cost will land on customers’ bills in a more concentrated way because, according to Professor Helm’s recommendation, industry will be exempted from the impact of the legacy costs. That means that customers’ bills will go up considerably and not down considerably over the period, as I assume is the intention of that particular proposal.
Similarly, one suggestion is that generators that produce power intermittently might be required to back that up by commissioning their own power resources to ensure that the intermittency is not spilled across the rest of the market. That sounds like a good idea except that if we do that, with each of those power generators independently commissioning their own power back-ups, that is a recipe for extreme inefficiency in the market over time. The market would have a series of near-redundant back-up power stations, not socialised across the piece but responsible only to those people who commission them and, therefore, in the market as a whole probably substantially increasing rather than decreasing the cost of energy.
There are a number of things in the report—the question of who runs the distributed energy service, how that is best run in the public interest, the simplification of the system over the period, and how the carbon price can be used in future to manage the transition to a low-carbon economy—but I am not convinced that it is much other than a good talking point as far as future energy policy is concerned. The report is a good, elegant and well-constructed talking point, but nevertheless it is a starting point and not a conclusion by any means.
I hope that that is how we see the report in future, because there is a long way to go before we get to the conclusions necessary to back up what the hon. Member for Wells described as the difference between the caterpillar turning into the pupa but still ending up as a caterpillar, or the caterpillar turning into a butterfly. As I think I have already mentioned to the hon. Gentleman, I personally prefer the example of the axolotl, which is a Mexican salamander. As I am sure hon. Members know, unlike other salamanders, it does not undergo the metamorphosis necessary to become a land-living amphibian; it stays for the whole of its life unmetamorphosed, with gills, under water. We do not want the energy market to end up like the axolotl. We are in a process of rapid transition—
Yes, Mr McCabe. I am just about done with the axolotls.
To conclude that remark and indeed all my remarks, in our energy markets we are above all—indeed, the terms of reference to an extent underline this—in a period of rapid transition towards forms of energy generation, transmission, distribution and supply that will look very different from most things that we are used to today. We know that is the case, because that transition is proceeding apace. I am not sure that the report does justice to that transition, and I hope that the Government response to it and their actions on its recommendations—that transition and the need to achieve a safe landing with that transition in the interest of customers and carbon emissions—are properly undertaken for the future. I look forward to the Minister’s response.
It is a pleasure, as always, to serve under your chairmanship, Mr McCabe.
I understand about axolotls and chrysalises, but I did not know what a hospital pass was. I assumed that it was something people put in their windscreen when at Great Western Hospital. It made me very grateful that we unveiled the statue of Millicent Fawcett today— 11 blokes and now one woman in Parliament Square. Perhaps we can have some terms everyone understands in the future.
I thank the hon. Member for Blackley and Broughton (Graham Stringer) for securing the debate. We could discuss the issues of science and climate change, but that is not why we are here. The points he made were very good ones. The challenge of how to make policy in a way that keeps the lights on and the costs down, does not burden future generations with unnecessary costs and achieves carbon emissions reduction targets, involves important questions for debate, so I am grateful.
Before I get on to some Helm comments, I will set out a couple of ground-preparation points. We are at a tipping point. When we used to talk about low carbon, it was axiomatic to think about high cost. As we heard very eloquently from my hon. Friend the Member for Wells (James Heappey), those trade-offs increasingly are going away. I accept that renewable energy without the necessary level of battery, solid state or liquid storage will not keep the lights on and give us the hot showers we want, which is why I am such a proponent of gas, particularly clean gas, in the system in future.
Tackling our climate change issue and delivering on our carbon commitments, which are world leading in their scope, does not mean that we are looking forward to a high-cost, low-economic productivity future—quite the opposite. As we have set out in the clean growth strategy and continue to debate, we are employing more than 400,000 people in the low-carbon economy, which is bigger than aerospace in the UK. That economy is growing very rapidly, creating great export opportunities, and is doing so in the knowledge that we have decarbonised more and grown our economy more than any other G7 country. That is something of which successive Governments should be very proud.
I want to reassure the hon. Member for Blackley and Broughton that when we think about technological investments in the future, we are trying to apply a triple test. First, what happens to the carbon emissions? Can we see emissions actually coming out—can we count them? Secondly, can we see a cost-effective pathway to deployment? Can we deliver technology that will reduce costs rapidly? Thirdly, does this give us a competitive advantage based on what we are doing well in the UK, which we can export? It is not just us on this low-carbon journey; the world is pivoting to a low-carbon economy. Trillions of dollars are being spent on low-energy production and transport.
The hon. Gentleman talked rightly about coal; as a founding member of the Powering Past Coal Alliance, I wish we could persuade all countries that it is the fuel of the past. Equally, it is not right for us to dictate to some of the emerging economies their energy mix. We have to encourage and support them. India has said that it wants its entire car fleet to be electric by 2030. That will have a material impact on the price of that technology around the world. All that creates a reinforcing, positive spiral. If we can demonstrate leadership in technologies and other countries do, too, the price will drop, as has been seen with solar panels. That means that more countries can adapt and we get ourselves to a better place.
The focus on low carbon is not a win-lose situation; it is a win-win situation. The emphasis on innovation cannot be made strongly enough, which is why we have committed £2.5 billion over this Parliament just for this area of low-carbon innovation, which is part of the biggest increase ever in public spending on UK science research and innovation.
We can debate strategies, and we will, but we need to focus on costs now. Reducing costs both for consumers and for businesses is the heart of what we want to do. We have seen and heard what has happened to the input cost going into the system; I accept the point about onshore wind—the hon. Member for Kilmarnock and Loudoun (Alan Brown) and I have debated that. We have a manifesto commitment that we do not believe large onshore wind is right for England, but I am aware of other parts of the country and we are working to see what we can do.
We have seen a dramatic fall in the cost of low-carbon energy. Indeed, we have just celebrated our second period of coal-free power generation—a record of 57 hours not using coal to power our electricity in the UK. There are some other more subtle points, too. Network costs, which make up a quarter of dual fuel bills, have fallen 17% since privatisation, and the pressure is downwards on those. We have seen a dramatic increase in the level of competition in the retail energy market—there are now more than 65 suppliers. Switching levels are hitting record highs.
As hon. Members will know, I will bring back to the Floor of the House the Report stage of the Domestic Gas and Electricity (Tariff Cap) Bill next week. It sounds as if we will have strong support from all Members present. We believe that we need to do more to help that market move towards a more price-competitive place, and we want that cap to be in place for this winter.
On household energy bills, it has not just been about consumers and taxpayers investing in the future of energy generation and low carbon. Much of that investment has been offset by improvements in fuel efficiency in homes, which I believe the hon. Member for North Ayrshire and Arran (Patricia Gibson) alluded to, often directly through measures such as the energy company obligation. In fact, although prices have gone up as a result of the investment in future forms of technology, the average bill in homes has dropped by £14 since 2012, because we have become much more efficient.
My hon. Friend has anticipated my speech; I was also going to mention the very dramatic, large roll-out of smart meters. We know we need to move to SMETS2 and make sure that that is done as seamlessly as possible for consumers who already have a SMETS1 meter—I am happy to take that offline.
I do; things such as the warm home discount are part of the long-term commitment that we have made to ensuring that there is better energy efficiency. We are working hard to take out costs wherever possible.
The hon. Member for Blackley and Broughton represents a manufacturing and industrial constituency; we have reduced the policy impact of energy bills on our most energy-intensive industrial consumers by up to 80%. He mentioned the relative costs of energy in Europe, where we tend to do very well in terms of gas costs and not so well in terms of energy. That is often because of political choices that countries make about where they will allocate their network costs. That is exactly why we commissioned the Helm report, to understand what it is we need to do better to ensure that our cost of energy for both households and businesses is as low as it can be.
I heard a lot of conversations about not wanting Government meddling in the design of the energy system, but somehow the terms of reference were too broad and Government should have been involved in setting them, and that the report was too short. Professor Helm is one of the world-leading experts on energy markets and design. It is fantastic that he has come out with some incredibly far-reaching recommendations; it is a no-holds-barred look at how we deliver more affordable energy, keep the lights on, decarbonise, create innovation and build relationships between the market and the public sector. I will not even answer the criticisms about his remuneration; he did a great report and it was good value for money.
We have had a very vibrant debate about the report; we will not rush to respond to it. This is an opportunity when we are at a tipping point on how we generate and deliver our energy. We need to take a very sensible, sober look at what we want to do. Much of that was covered in the report—questions about the importance of energy to our economic success, the disruptors that are going along, the move from passive to active demand, zero marginal low-cost clean generation, and the need to access lower cost, effective storage technologies. The market is changing, regardless of what the Government do. All the analyses of the report benefit strongly from hindsight, which is a wonderful thing, but the hon. Gentleman’s point about complexity, and Government layering intervention on intervention, are really well made. We need a response that is sober and sensible, that sets out an energy policy or strategy for the future that can survive successive political cycles and can respond quickly to what I have no doubt will be enormous technological changes.
The job of Government is to set ambition. We are among the most ambitious Governments in the world—we are the first developed country to ask for advice on what a zero-emissions economy would look like in 2050. It is great to see other countries joining us. We are also responsible for setting a balanced budget, so that all our decisions can be made secure in the knowledge that we will have a stable financial framework. Our job is not to respond to customers who lobby loudest, but to look to work with companies that create value for consumers, so we have frameworks and stability that will stand the test of time. If we get that right, this trilemma that we always talk about of cost, carbon and security, would be solved, at least for electricity.
I thank all the Members who have spoken; it is always a pleasure to talk about this very important subject. I look forward to repeating the debate when we bring forward the response to the Helm review, but I am extremely grateful to Professor Helm for his report and for challenging us to think about these vital issues for the future.
It has been a good debate. I thank the Minister; I understand why she says she is reluctant to formally reply to the report in the short term. That is disappointing—an interim reply on the Government’s position would be useful. I am pro-renewables: I just think that we are at the stage where they have to answer the question of whether they can exist without subsidy. If they cannot, auctions look to be the way forward, as Professor Helm says.
Motion lapsed (Standing Order No. 10(6)).