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Electricity Market Reform

Volume 723: debated on Thursday 16 December 2010


My Lords, with the leave of the House, I should like to repeat a Statement made by my right honourable friend Christopher Huhne in the other place.

“Mr Speaker, today we begin consulting on the reform of the electricity market. This programme sits at the heart of my department’s mission to deliver secure, affordable and low-carbon energy.

The case for reform is clear. We need significant investment in our energy infrastructure. As old coal and nuclear plants shut down and demand for electricity grows, we must build the next generation of power stations. The electricity that they deliver must be both affordable and sustainable, helping us to meet our emissions reduction targets and to keep the lights on. The current energy market has served us well but it cannot deliver long-term investment on the scale that we need, nor can it give consumers the best deal. Left untouched, it would lock carbon emissions into the system for decades to come.

Investors and boardrooms around the world want to know whether the UK is a good place to do energy business. Today, we are setting out our plans to make it one of the best places to do energy business. The challenges, and the opportunities, are huge. Put simply, we face growing demand, shrinking supply and ambitious emissions reductions. The demand for electricity could double by 2050 as we decarbonise the economy. Thirty per cent of our electricity must come from renewables by 2020, up from 7 per cent today, to meet our contribution to the EU renewable energy target. In the next 10 years, one-quarter of our existing power plants will need to be replaced as nuclear and coal plants reach the end of their lives.

Without action, we will face a real and growing threat to the security of our supply. The reserve margin of spare generating capacity will fall over the next decade and the risk of interruptions to our energy supplies will rise, so we must build the next generation of power stations and act to ensure that there will be enough reserve capacity to meet our needs. We will need, together with renewables, new gas-fired power stations and new nuclear plant. We must attract more than £100 billion of investment in new power stations and grid connections by 2020—double the investment rate of the last decade.

We must rebalance our market framework to attract investment in the right technologies. At the moment, there is a bias towards low-cost, low-risk fossil fuel generation. Renewables, nuclear and carbon capture and storage all have relatively high upfront capital costs, but a more diverse, lower-carbon energy mix is better for our energy security, our economy and our planet.

Some measures have already delivered investment in new low-carbon generation, such as the renewables obligation and the EU Emissions Trading Scheme, but we must go further and faster. To secure reliable, affordable low-carbon electricity, we must change the market structure. We must create the right framework to ramp up our power generation and secure our supply. We must also deliver cleaner, greener electricity for the 2020s and beyond. Today, we are proposing new incentives to drive our investment while protecting the rules for investment already made. The focus will shift permanently from conventional fossil fuel-fired electricity to low-carbon technologies: renewables, nuclear and cleaner fossil fuels. Our preferred package of reforms is designed to strike a balance between the best possible deal for consumers and giving existing players and new entrants in the energy sector the certainty that they need to raise investment.

Reform will be gradual. We want to reassure industry that rules for existing investments will be protected. By consulting on a process and principles for the transition to the new market arrangement we aim to minimise uncertainty. The competitive market will remain at the centre of our energy policy, but the four elements of the reform package announced today will change incentives in the market and ensure both the security and decarbonisation of our power supply system, while minimising costs to consumers.

First, there will be greater long-term certainty about the additional costs of running polluting plant to make lower-carbon investment more attractive. Proposals set out in HM Treasury’s consultation to support the carbon price directly tackle the core problem—putting a better price on emissions, increasing the cost of fossil fuel-backed generation and strengthening the carbon price for UK electricity generators.

Secondly, greater revenue certainty for low-carbon generation will make clean energy investment still more attractive. Through the proposed ‘contract for difference’ feed-in tariffs, the Government will guarantee greater revenue certainty for low carbon in the form of top-up payments if the wholesale price is below the feed-in tariff and a potential clawback for consumers if wholesale prices are above the contracted tariff.

Thirdly, there will be additional payments to encourage the construction of reserve plants or demand-reduction measures to ensure that the lights stay on. Capacity payments will create an adequate safety cushion of capacity as the amount of intermittent and inflexible low-carbon generation increases.

Fourthly, there will be a back-stop to limit how much carbon any new coal-fired power station emits. An emissions performance standard will reinforce the existing requirement that no new coal is built without carbon capture and storage.

Together, these four reforms make good on our commitments in the coalition’s programme for government. They will make the UK a prime location for low-carbon energy investment. They will ensure that our energy supply is cleaner and more secure. They will protect the consumer as, while prices will rise in the medium term, the additional impact of the reform packages will be small. By 2030, consumer bills will be lower than if we did not reform the market now. The reforms will also lay the foundations for the sustainable economy of the future, bringing jobs up and down the supply chain.

The consultation that opens today invites everyone to tell us whether they think that the preferred package of reforms is the right one and to provide the evidence to support their views. Final recommendations will be published in a White Paper in late spring 2011 and the reforms will be introduced before the end of this Parliament. We are also reviewing the role of Ofgem and the energy regulatory framework and today we are publishing the Government’s response to the call for evidence on the terms of the review. We have a once-in-a-generation chance to rebuild our electricity market, our investor confidence and our power stations. Like privatisation before it, this will be a seismic shift securing investment in cleaner, greener power and delivering secure, affordable and low-carbon energy for decades to come”.

My Lords, I thank the Minister and his departmental colleagues for giving us early sight of today’s Statement. Given the other business before the House, it was helpful to have that advance notice. We certainly welcome the Statement and the high-level recognition of the issues that we as a nation have to tackle.

I want to highlight four key issues that come across in the consultation document: first, security of supply; secondly, the ability to achieve our green targets in the longer term as well as through short-term measures; thirdly, securing the investment of around £200 billion that is needed in order to grow those businesses that will help us to achieve those targets and energy security; finally and crucially, keeping energy prices reasonable. The Minister will be aware of the press speculation today, which has already caused great concern. We face a huge challenge, but the consumer must not bear the whole or too great a burden.

I make it clear that we on this side of the House believe that the programme is absolutely necessary to support security in energy for the future and that we will support sensible, fair mechanisms for reform. Today, we welcome the publication of the paper and the consultation, because it is crucial that the Government put in place the mechanisms to make new low-carbon investment attractive. They also have to bridge the looming energy gap that we face without a rush for unabated fossil fuel generation. The Government also have to provide energy security across a balanced and diverse energy portfolio while considering, at all stages, fairness and affordability for the customer. Although increased energy bills have become a reality, we cannot ask consumers to accept ever increasing bills. We must be able to give them genuine assurances that we are doing all that we can to protect them.

I shall ask the Minister a few questions. The paper is an electricity market reform proposal but, given that we enter this winter with the worst gas storage, do the Government also intend to bring forward some proposals for gas security? Can the Minister also assure us that the Government are committed to low-carbon growth and stimulating investment? Given the welcome announcement today that the green investment bank is to go ahead, what role is the bank likely to play in that?

There are a number of challenges and the Government have to seize this opportunity, which is why we welcome today’s Statement. However, investment and certainty are paramount. The energy security of the nation means that we cannot allow any delays. We have to act, and act fast. The noble Lord knows that the industry needs certainty if it is to invest at the scale needed. Are the Government able to provide certainty to the industry and to people who are already paying inflated energy bills? Will the programme being put forward today be enough to encourage energy companies to invest in the UK, to create the jobs that this country needs—and the skills to fill them—and to protect customers from unaffordable energy bills?

A number of issues are before your Lordships’ House at present. We have had this consultation; we have the Second Reading of the Energy Bill next week; we have the announcement today of the green investment bank; and we have the Treasury consultation on carbon prices. It is all part of a bigger picture, along with the review of Ofgem. Noble Lords will be aware that the Energy Bill has been introduced and is being debated next week. We certainly welcome the Bill and the opportunity to work with the Government on it, but it presents as many questions as it answers about the Government’s intention on energy policy while, as we can see, much of the detail of the green deal is intended to be included in regulations. I look forward to the Delegated Powers and Regulatory Reform Committee’s analysis of the Bill and to debating the substance of the policies as the Bill goes through the House, so that we can play our part in working with the Government to address these issues.

Finally, we entirely agree with the Minister and the Government about the importance of this Statement and the consultation. This is the once-in-a-generation opportunity that he referred to. As always, we are prepared to work with him and his Government constructively to ensure that we achieve the triple goals of fairness for consumers, a better environment and energy security.

I thank the noble Baroness, as I always do, for her constructive contribution and for being very clear that we are working closely on this, as we have so far with pre-briefings and such things. I do not want to get into the detail of the Energy Bill because we are going to exhaust ourselves over the next few months on that subject, so let us keep our energy pent up and ready for that.

I will deal quickly with the two substantive questions which the noble Baroness asked. We recently agreed to planning permission for a 15 per cent increase in storage for gas. Gas storage is fundamental but not critical because, from the previous Government’s activities, we now have the most flexible gas refinery and ports to import gas. We are in a pretty unrivalled position to import. We have 50 per cent of our own gas supply and a secure supply from Norway of 20 per cent. We are in quite good shape at the moment but we cannot be complacent. As the noble Baroness said, the green investment bank has been given the go-ahead, which is good news. It will be fundamental to pump-priming many of the activities that will be fundamental to the capital investment that is required.

My Lords, while warmly welcoming my noble friend’s Statement, it gives rise to several questions. I have one in particular. Is it part of the purpose of the proposals to provide a longer-term level playing field across the different low-carbon generating technologies? That seemed to be inherent in the Statement last November of his right honourable friend Mr Huhne. However, my noble friend’s department has recognised that the lifetime carbon footprint of nuclear power is roughly equal to that of wind power. For how long will it be justifiable for the consumer to have to pay a substantial subsidy to generate more wind power when you could get a more reliable source of energy at a lower cost from a larger nuclear programme? I would be most grateful for the answer to that question.

There is no greater expert than the noble Lord on these matters. I can assure him that this electricity market reform is to establish a level playing field for renewables and to get a clearer line of benefits and support for it. As to his point about nuclear power, we have cleared the decks for the start of new nuclear. His experience would concur that, unfortunately, the period for establishing a new nuclear power station is a minimum of eight years. Then there are all the other regulatory issues that we must go through in getting to there alone. My noble friend will know—because he is so knowledgeable on all these matters—that the 2050 pathway, which will incur a doubling of electricity demand, means that we will have to obtain electricity from virtually every source we can get our hands on.

My Lords, it looks as though we are in for another cold weekend. As the weather gets colder, the confidence of consumers in being able to turn on the heating without worrying too much about price needs to be reinforced. To do that, we need to have confidence in our supply. Building on the last question, can the Minister give some assurance about developing nuclear to help fill the energy gap, and developing it on time, particularly given the Health and Safety Executive’s decision not to issue final certificates to new forms of nuclear technology? Similarly, can he give some assurance that the Government will invest in skills so that we can grow such skills in the eight-to-10-year window? Will we develop those skills domestically in areas such as Somerset, down the road from where I live, where we want to see the nuclear skills academy going ahead with confidence?

The noble Lord makes an extremely good point on skills. There has been inertia in nuclear. I pay credit to the previous Government for reversing public opinion on nuclear, but not for the fact that there has been no activity. We have created much activity. Nine months ago, or when we got into power, people would have asked what was going to happen on nuclear. SIs have now created the opportunity for new nuclear. It has become a fundamental part of our programme. There is a serious task in obtaining the skills to satisfy that programme. I welcome the noble Lord’s support for that. It is fundamental because we have lost those skills in the past 20 years and it will be no small task to regain them. Therefore, we must have a programme that runs concurrently with the development to make sure that they both happen, and that we can cope with the eight or nine power stations that will, we hope, be built in the next few years.

My Lords, I join noble Lords who have thanked the Minister for repeating the Statement, which was made in the House of Commons by the Secretary of State, my right honourable friend Chris Huhne. It gives noble Lords in this part of the House great confidence that this important area is in the hands of Chris Huhne, our Liberal Democrat Secretary of State, and his team of Ministers in both Houses.

In view of the importance of making sure that consumers get a fair deal, does the Minister have confidence that this package will deliver more decarbonisation and low carbon for less cost? Is it true that this package shows that we can reach half the level of carbon in the electricity system at a lower cost than that which was planned by the previous Government?

I am grateful that my noble friend champions my boss, Chris Huhne, who has been excellent to work with. I compliment my fellow Ministers on the Conservative Benches for their excellent work on this matter. The key to this reform package is to ensure that we have a pricing structure—which would otherwise be going out of control through the uncertainty of fossil fuel prices in the future—that gives us electricity security through our own supply of electricity from renewables. We have no alternative but to achieve our targets because they are set down in European law.

My Lords, as an aside, I hope the noble Lord, who is normally very courteous about all these matters, will not repeat the canard that the Labour Party was uniquely responsible for not getting nuclear to be more advanced than it already is. After Chernobyl in 1986, all western Governments got cold feet about nuclear; it took an awfully long time to bring the world around to the reasoning for going forward, which has several elements, as we all know. The Labour Government got us to the starting gate more or less before the election.

I come to three questions about this announcement. First, I particularly welcome the fact that the Treasury, as far as I know, has for the first time produced a consultative document that will lead to a Statement in the new year about a carbon price floor. That is the Treasury’s phrase. However, in not revealing what the carbon price floor might be in pounds, dollars or euros, the Treasury only lifts its petticoat as far its ankle. There is no further gleam as to where it might wind up. For 20 years, ever since Rio, we have known that—

The second question is coming up, if noble Lords would mind not interrupting. Secondly, how does the Minister reconcile this Statement with the Energy Bill, the Second Reading of which we will debate in this House next Wednesday? This is a rather important Statement, but the government decisions announced in it were not available when the Energy Bill was published. Does he agree that it is rather surprising—if you take a half-interest in these matters—that he has not said anything about the implications of our now having to table a considerable number of amendments to the Energy Bill? Finally, on the European aspect of the carbon regime, we are now talking as if we are acting on our own. I cannot believe this is the case. Will he comment on that as well?

Clearly the noble Lord was not listening when I gave credit to the previous Government for reversing public opinion. I thought that I gave fulsome praise in that regard. As for the carbon floor price, as the noble Lord rightly says, the Treasury has lifted its skirt and has said that it will publish the results of its consultation by 2011. It hopes to have the new carbon price support in place by 2013. The Treasury is carrying that matter forward now.

I am not sure what point the noble Lord makes about the EU. He may be suggesting that we are the only people who have signed up to our renewables target. However, this is a mandated, cross-European target, to which we are signatories.

My Lords, I have a simple question for my noble friend on the Statement. He mentioned that energy prices could well decrease. Will he assure me that, in any format or framework that will be produced by him and my noble friends, the consumer will benefit as soon as the price goes down, rather than the usual practice at the moment whereby as soon as the price goes up the consumer is hammered and eight, nine or 10 months pass before any adjustment is made? It ought to be very easy to adjust the rate automatically by computer. I suggest that he deals with this matter through Ofgem and the investment criteria for investing companies.

I thank my noble friend for her excellent point. I do not want anyone to go away thinking that electricity prices are going to go down in the foreseeable future. The whole point about this programme is that they will go up less if we do not have to rely on the unpredictable price of gas, which went up by some 80 per cent in four years and which is very volatile at the moment. The department predicts that by 2020 electricity prices will have gone up 33 per cent. This is of course very unsatisfactory, but results from the fact that as a nation we have underinvested in our electricity generation infrastructure for years. We have sat back and relied on North Sea oil and that is now no longer available in the same quantity. However, I assure my noble friend that if electricity prices do go down, they must be passed on to the consumer. This is fundamental to Ofgem’s monitoring of it. Ofgem will be subject to a review, and during that process we will ensure that we take on board her very valuable comments.

My Lords, I declare an interest as the chairman of a company that is endeavouring to promote renewable marine energy. What limits are there on the additional payments to help to construct reserve plants to cushion the capacity of intermittent providers of electricity—presumably principally wind power—and what calculations have been made as to the possible cost of that to the Exchequer, bearing in mind that many wind farms are in remote areas that do not require energy in the vicinity and that the National Grid indicated in May that it was not prepared to improve the grid in such areas? This problem could be exacerbated by the development of offshore wind. What economic projections have been made by the Government in offering to make these additional payments?

On the last point, the Energy Bill clears the way for offshore wind to link into the grid and to facilitate that. I shall comment on that further when we discuss the Energy Bill. The noble Lord is right that it is fundamental that we have the reserve capacity to cope with peaks, such as the well-known “Coronation Street” kettle peak, or with very cold periods. Therefore, we are developing a capacity payment to encourage people to create facilities for providing capacity at peak storage times. The development of storage technology for wind farms is also fundamental. We will drive forward very hard to ensure that that technology advances quickly.

My Lords, in declaring an interest as chair of Pelamis Wave Power, I welcome the Statement. I join noble Lords who have underscored the importance that the Government attach to the all-important issue of creating greater investor certainty in the electricity market. Can the Minister comment on the importance of consulting on the construction of the necessary electricity upgrades and new infrastructure to bring offshore gas and renewables onshore at increasingly competitive prices, including third-party access to pipelines in the gas market? Will he confirm that his department still believes that security of supply is best achieved through diversity of supply?

I assure the noble Lord that, as I think I referenced earlier, third-party access is a fundamental part of the Energy Bill, the Second Reading of which we will debate next week, and we will welcome his contributions, given his knowledge platform. Clearly, this whole EMR seeks to encourage a broad spread portfolio of electricity supply, whether it be renewables, nuclear or clean fossil fuel. As my right honourable friend Chris Huhne said on the radio today, it is rather like having a share portfolio—we cannot rely on one and not the other; we need all of them and a balance of them.