Monday, 31 January 2011.
Energy Bill [HL]
Committee (5th Day)
We continue the Grand Committee on the Energy Bill. If there is a Division in the Chamber while we are sitting, this Committee will adjourn as soon as the Division Bells have rung and resume after 10 minutes.
Clause 66 : Power of Secretary of State to require information: carbon emissions reduction targets and home-heating cost reduction targets
30ZA: Clause 66, page 48, line 14, at end insert—
“( ) to assess whether the person’s obligations under section 41B of the Electricity Act 1989 or section 33BC of the Gas Act 1986 are, in particular, being discharged transparently, cost-effectively and consistently throughout the duration of the obligations and achieving value for money; and( ) to assess whether these obligations are consistently targeting priority groups and properties”
My Lords, this is a fairly brief and self-explanatory amendment, which gives us the opportunity to have an assessment of the obligations to ensure that they are,
“discharged transparently, cost-effectively and consistently”,
throughout the time period and to ensure that we have those areas covered so that we can make a full assessment of the effectiveness of the obligations. It is very straightforward and I hope that the Minister will be able to accept it. We have all learnt from past examples when the programmes in place may have been extremely valuable but we have also learnt lessons about how much more valuable they could have been if there had been such transparency in place. This is about getting the best approach. I beg to move.
My Lords, I welcome everyone back to the Committee and thank all noble Lords for their great contributions to date. May it continue. As I have said repeatedly, this is only one stage in the passage of our Bill, and there will be opportunities between now and Report for further advice to be given and listened to, further discussions to be had and further detail to be discussed.
Before I begin, I should say that in the debate on 26 January, I referred to a target of reducing carbon emissions by 10 per cent. I should clarify that this target refers to emissions from central government. I did not want any uncertainty there. We are keen for local authorities to play their part in reducing emissions. This will help the UK meet its legally binding carbon budgets, but local authorities are not formally covered by the 10 per cent central government target.
Amendment 30ZA would amend Clause 66 to provide further information-gathering powers. This is entirely consistent with the Government’s intention for greater transparency under future energy company obligations. The powers in Clause 66 allow us to gather such information as is necessary to help the Government to decide what provisions to make in future secondary legislation, powers which also enable the Government to review the operation and effect of policies that are under way. The matters that the noble Baroness seeks to cover are all, I believe, potentially germane to these issues, and are therefore covered in principle by the existing powers. Information could include, for example, exactly which measures the companies are delivering where, and how much those measures are costing the energy companies to acquire and install.
I hope that this has provided satisfactory reassurance and ask the noble Baroness to withdraw her amendment.
Amendment 30ZA withdrawn.
Clause 66 agreed.
Amendment 30A not moved.
Clause 67 agreed.
Amendment 31 not moved.
32: After Clause 67, insert the following new Clause—
“Promotion of reduction of home heating costs: reduced VAT rate
(1) For the purpose of enabling consumers to purchase energy efficient products in order to reduce home heating costs and carbon emissions, the Chancellor of the Exchequer must within 12 months of the coming into force of this section lay before Parliament an order to reduce the rate of VAT to 5% on—
(a) passive flue gas heat recovery systems; and(b) energy efficient windows in specified premises.(2) An order pursuant to this section shall be made by statutory instrument subject to the negative resolution procedure.
(3) In this section—
“passive flue gas heat recovery systems” means technology that can use the waste heat from condensing boilers in order to heat water;
“low emissivity glass” has the same meaning as in Part L of the Building Regulations.”
My Lords, this is a new clause concerning proposed reductions in VAT rates and adds to the new clause I moved at the last sitting of this Committee. Members will be aware that most energy-saving materials enjoy the reduced VAT rate of 5 per cent; it makes no sense taxing energy saving more than energy use. There are some exceptions, however, and there are new technologies, as I mentioned last time.
I apologise for the wording in this amendment. As originally worded, subsection (1)(b) referred to “special glass” and not “energy efficient windows”, and when I changed the amendment I regret I did not change the explanatory paragraph below, which talks about the glass. I anticipate the amendment in this form is unlikely to be accepted by the Committee but if the Minister was minded I am sure he could change it.
It is important that we try to encourage people, as we are in this Bill, to spend their money on energy efficiency measures, but we have some that carry rather a high rate of VAT. The supply and installation of this equipment can be charged at a 5 per cent rate and I hope the Minister will look at this favourably. I suspect the Minister will say that this is something he must talk to the Treasury about, and I appreciate that point; but if we are serious about this we need to be consistent across the board on how we apply VAT to energy efficiency measures, products and installation. I beg to move.
I was a member of the Treasury team when VAT was first introduced in 1972. It was one of the principles of the then Government that it should be as simple a tax as possible. There were of course some major exclusions from VAT, for instance all food and children’s clothes, but I well remember my noble friend Lord Higgins, who was dealing with the Finance Bill, saying that it was a simple uniform tax to be extended across the range of products and services, apart from those that were specifically excluded.
Since then Governments, no doubt of all persuasions, have found themselves led down a path of adding more complications to VAT. I have sympathy with what my noble friend has suggested, because these are clearly energy-saving and carbon-saving measures, which one would wish to encourage. However, to use VAT and the tax system to do that seems to me to go against the principle of keeping VAT as simple a tax as possible.
VAT is now substantially higher than it was when it was first introduced, for reasons that we can all understand, although that is not within the competence of the Committee. Wisely, my noble friend’s amendment places this firmly in the hands of the Chancellor of the Exchequer, although it could not be with anybody else, as my right honourable friend the Chancellor is the Minister in charge of the tax system. However, I sound a note of caution on beginning to extend lower rates of VAT to other services and products, notwithstanding that one might have some sympathy with what is being sought. Having said that, I should be interested to hear what the Minister has to say in reply.
My Lords, the noble Lord, Lord Jenkin, is right to remind us that exempting certain goods from the normal rate of VAT is a matter for the Treasury. We are all too well aware that the Treasury looks at these issues with a sharp eye and intensive scrutiny at any time, but in this age of austerity that position is likely to be intensified. As the noble Lord indicated, the noble Baroness, Lady Maddock, is seeking to build on the 5 per cent reduced rate of VAT that already applies to a number of installations that relate to energy conservation, both to encourage householders to install energy-saving facilities and as a clear earnest of the Government’s intent that these issues are significant enough for us to look at them in this regard, albeit not quite as we do food and children’s clothes, which attract no VAT. Nevertheless, the 5 per cent rate relates to a clear priority area; it is an exclusive area. In her amendment, the noble Baroness wants to extend that area.
I am not in the slightest doubt about the merits of doing that and I think that, in the framework of the Bill, we should indicate that we think that this will give substance to the Bill’s principles. However, like the noble Lord, Lord Jenkin, I acknowledge—no doubt the Minister will also indicate this to the Committee—that it is difficult to write Budgets in the framework of energy legislation when that is the preserve of the Chancellor of the Exchequer and the Treasury. I would not be at all surprised if we had a somewhat guarded response to the amendment. However, we already have provision of the reduced rate in this area and the amendment would not add a great deal, although the Treasury might argue that the cost would be significant. Nevertheless, the amendment fits in with the pattern of reduced rates of VAT in this area and I hope that the Minister will indicate that, at the very least, the Government have an open mind on the issue.
My Lords, the purpose of Amendment 32 is a perfectly understandable aim. However, we have been advised that this proposal would not fall within the scope of the Energy Bill, since taxation can only be amended in a Finance Bill. Therefore, as my noble friend Lady Maddock anticipated, I can confirm that taxes are indeed a matter for the Treasury and that the Chancellor keeps all taxes under review and announces any changes as part of the Budget process. We understand the thrust of what she is arguing, but I hope that on the basis of what I have said, my noble friends will feel able to withdraw the amendment.
My Lords, I apologise to the Committee for jumping the gun and moving my amendment before it had actually been called. I thank my noble friend for her reply. It was anticipated that that might be the case, but I think that it is important to flag up that we are not consistent in this area. A Bill of this nature seems to provide a good opportunity to raise the inconsistency. May I ask the Minister if he will have a conversation with his Treasury colleagues about this to see if we cannot be a bit more consistent? After all, a lot of time and energy is being spent on the green deal and other things. This was particularly aimed at how we might help community buildings and so on. So the message is: please could somebody try to bring a bit more consistency in this area, and could we have conversations about it? In the mean time, I beg leave to withdraw the amendment.
Amendment 32 withdrawn.
Clause 68 agreed.
Amendment 32A not moved.
Schedule 1 agreed.
Clause 69 : Smart meters
32B: Clause 69, page 50, line 26, at end insert—
“( ) In subsection (2), after paragraph (a), insert—
“(aa) requiring the holder of a licence to—(i) abstain from any sales activities while they provide or install, or facilitate the provision, installation or operation of, meters of a particular kind;(ii) only supply marketing material in written form while they provide or install, or facilitate the provision, installation or operation of, meters of a particular kind;(iii) supply independently written information outlining how to use the smart meter while they provide or install, or facilitate the provision, installation or operation of, meters of a particular kind”.”
My Lords, we are now moving on to Chapter 5 of the Bill and the issue of smart meters. We have touched on it from time to time at earlier stages, and I have said that some of the issues that arise in relation to the Green Deal also arise in relation to smart meters. The Government will need to consider the implications of the two programmes. I should probably make it clear at the outset that I am in favour of a roll-out of smart meters, but there are a significant number of consumer issues which arise in relation to the installation of such meters which, if wrongly handled, will lead to some resistance and backlash against them.
Smart meter installation is different from the Green Deal because the Green Deal is ultimately a voluntary scheme that the householder or landlord can take on board, and then he can decide whether it had been a good deal for his premises. With smart meters, the obligation is on the supply companies to install them. They are already beginning that installation, and some of them, particularly British Gas, already have a substantial programme under way. However, we should look at the implication for consumers. As colleagues will know, one of the problems in the energy market has been the ease with which people can switch and the potential cost of switching in terms of both the supply company and the method of payment.
If we have a wholesale introduction of smart meters—which make it more difficult, more costly or more of a hassle for the consumer to be able to say, “I’m fed up with the way this company is dealing with me; I want to switch to the next company”, or “I’m fed up with paying by pre-payment meter; I want to go on to direct debit” or whatever the choice is—and if the meter itself, the system under which the meter operates or the terms on which it is supplied make that more difficult, then we have significant consumer detriment. We must remember that the energy market is not one that is characterised by deep trust of consumers in their suppliers. Nor is it the case that the regulator has substantial powers over the peripherals: it has substantial powers over the supplier, but there is no real protection in relation to energy products or services in the same way. Installation of smart meters could lock people in to their current system unless we provide that the meters are reasonably interchangeable, compatible and available in a way that allows people to switch both method of payment and supply.
We have to bear in mind that the introduction of smart meters is not so universally supported as it probably is in this Room. Research by Consumer Focus a couple of years ago, as well as evidence from Which?, showed fairly deep resistance to it, and some misunderstanding. So there is some mistrust at the consumer end, to put it at it mildest. We also know that in other countries where similar programmes have been adopted there has been some resistance—for example in some states of America and, on broader human rights grounds, in the Netherlands. So it is a delicate area. If we are to achieve introduction with minimum consumer resistance and minimum delay and challenge, we need to be able to reassure the householder that the meter that they are installing will not stop them switching should they wish to change tariff, company or the method by which they pay.
So, Amendment 32C deals with the degree of compatibility. This is not just an issue of standards, because we have been talking about standards for smart meters for at least 10 years before we have introduced a single one, and we are still at a position where we do not have a common standard. It would obviously help if at this point we already had a standard, but the issue here is compatibility, which need not necessarily mean a single standard or specification. It is important that we can reassure consumers that installing a meter will not inhibit their choice.
Amendment 32B deals with a slightly more ticklish issue. When the supply company or their agent is required to go into households and install a smart meter, how will it deal with trying at the same time to sell other products that are related to the smart meter, or that could be made to be related to it? Protecting consumers during the installation process is essential if we are not to meet with some resistance. On the one hand, there is the possibility of mis-selling in these circumstances; on the other, some devices are coming on to the market that would make it much easier for consumers, on the basis of the smart meter, to know what was causing their energy consumption to increase and how they could control it. The basic smart meter primarily gives the supply company that information, although it also tells the consumer at any given time what their level of consumption is and the cost of it.
The amendment would allow information to be given to householders about other products that could help them to make sense of and use smart meters, but in a way which does not amount to hassle or to a situation where their mandatory presence inside the consumer’s house can be misused to sell particular products. The amendment effectively requires the marketing material to be in a written form so as to protect the householder from being misled or mis-sold a related product.
I have no doubt that the Minister and his officials will have comments to make on the exact wording, as will the supply companies; but unless we recognise this as a potential problem, we could find ourselves in some difficulty. In one sense we are ahead of the game in that some installation programmes are going on and we know that there will be no standard design or specification before 2014 at the earliest. We could therefore already be locking people in. We need to ensure that, as the programme rolls out, we minimise the degree to which that can happen in future.
I hope the Government can at least take on board these concerns and look at the best way of dealing with them in terms of the legislation and reassuring householders that smart meters will not inhibit their choice or lead to their being ripped off in some other way when the installation takes place. I beg to move.
My Lords, like the noble Lord, Lord Whitty, with many of whose remarks I entirely agree, I, too, have been trying to keep in touch with what has been going on—indeed, ever since I was offered the chance of installing a smart meter by one of my suppliers, only to be told that I could not possibly have it because it was in a porch and, therefore, accessible to anyone passing the house. It seems to me that these are the kind of things that must be dealt with.
I think that the noble Lord, Lord Whitty, has not fully taken account of the extent of the discussions, which have been going on now for some time, between the Government, the industry, Ofgem and consumer groups. These discussions have been extremely positive and seem to me to have been exactly the right way forward. We now have the Government’s prospectus—issued in July, I think—and a draft code put out by the Energy Retailers Association, which works with Energy UK, that sets out how a code might deal with precisely the points to which the noble Lord, Lord Whitty, drew our attention.
I am told that this has attracted comments from the consumer organisations, which are clearly interested in seeing how it will develop. In terms of securing a system that is both clear and at the same time offers flexibility—and flexibility is something that the industry has tried to build into the system; there must be some flexibility in how this will be done—a code which can be more easily amended in the light of experience may be better than trying to establish firm statutory rules, such as those in the amendments which the noble Lord has moved.
One of the points right at the heart of these discussions is that the right of changing your supplier has to be built into the system. I have had a letter from my noble friend’s department only this morning in response to a representation that I made to him a couple of weeks ago. It states:
“Common specifications will also be the means for achieving ‘inter-operability’, which means that suppliers can use smart meters installed by other suppliers, allowing easy switching.”
It seems to me that that is the kind of standard which the noble Lord, Lord Whitty, was looking for, and I think it is now firmly taken on board by both the industry and the department. Indeed, I have been told that the question of maintaining the right to switch suppliers has been regarded as a sine qua non. It has to happen with the installation of smart meters, and nothing in the system should prevent it, given that it is the way in which competition can be made to produce benefits for the consumer. A voluntary code that balances flexibility to provide the customer with information, while at the same time guaranteeing their rights, would be a very desirable way forward. I do not know what my noble friend will say but, against that background, the amendments might be regarded as being overprescriptive.
This will be a major exercise. There are 26 million or 27 million smart meters to be installed by 2020, as we were originally told. The target was then changed to 2015 or 2016. It will be a huge operation. Many consumers will find it quite a hassle. It is not unlike the problem—although it is not quite as serious—with insulation and other such matters that were raised in our discussion of the Green Deal. The consumer protection aspect of this is very important. I shall certainly look forward to hearing what my noble friend has to say on that. However, I am encouraged by what I understand is going on between the various parties—the industry, the bodies representing the installers, consumer groups and so on. This is the right way to approach it and, I hope, to get the right answer.
One thing in the noble Lord’s amendment with which I wholly agree, and it is very much in the code, is that installers should not use their presence in a consumer’s house to bully them into taking other products which may or may not be related to the ones that they are selling at the time. We have all been subjected to that. One has to be robust and say firmly, “No thank you”. However, the installers should not do it. The noble Lord will find that that is firmly in place when the code comes out. The companies that we will be dealing with will have a firm policy on that, and, no doubt, disciplinary proceedings for those against whom complaints are made. While supporting entirely the motives behind the amendment, I would like to think that the discussions that have been taking place, which have been intensive and are ongoing, may produce a result that combines protection for the consumer with the flexibility that is necessary to ensure proper competition and room for development.
My Lords, we agree in large measure with the amendments tabled by my noble friend Lord Whitty. We thank him for introducing the subject of smart meters so that we may discuss certain aspects of their operation. On his first amendment, on marketability, we understand that a balance must be struck between information provided to the consumer and possible salesmanship at the time of installation. He is quite right to draw the attention of the Committee to the fact that only 20 per cent of consumers view their energy supplier as “most trustworthy”, which is a huge gap to bridge in getting to a degree of confidence for the consumer.
On the question of smart meters and interoperability, as we know, at present consumers cannot change supplier without changing meters. We understand that there could already be something approaching 2 million smart meters in the marketplace, although the exact number is not known. It would be very interesting if the Minister could provide us with any figures. At Second Reading, my noble friend Lady Smith raised the question of interoperability. The Minister has since written to us to say that he has had discussions and will do his utmost to make sure that, as far as possible, interoperability will be maintained. What exchanges has the Minister had with the energy companies in this regard? I draw to his attention that this is a vital area for consumer confidence, and ask whether there are indeed ongoing conversations with the industry.
The noble Lord, Lord Jenkin, drew to our attention the fact that the Energy Retail Association has produced a draft code of conduct for consultation, building on suppliers’ current work on a draft voluntary code of practice on vulnerable consumers and accurate billing. Our understanding is that, when the code of practice comes into place, this interoperability should be a standard requirement. Perhaps the Minister can comment on whether, by the time the regulations are drawn up, smart meters will be not only entirely interchangeable between credit and pre-pay systems but completely interoperable between energy companies.
That leads me to ask the Minister a few general questions that are afforded by this opportunity. Does he have in mind perhaps undertaking a review of consumer protection in this field? It is a huge area and could benefit from such a constructive operation. Furthermore, does he have in mind a strategy to deliver consumer benefits? These smart meters are not simply a new device that will allow the “market to provide”, as he said. Perhaps we cannot simply install them and hope that they will work. There will have to be a strategy to ensure that the consumer benefits are realised and, indeed, a constant interactive review of the rollout strategy to ensure that all the opportunities are not missed. At the moment there does not seem to be any monitoring framework in mind. There are also no minimum standards to encourage not only general acceptance among consumers but some knowledge of what they are looking at when they see a smart meter. The whole consumer field could be greatly augmented by undertaking a constant interactive review. Lastly, has the Minister thought about an independent smart-metering delivery campaigns body to monitor these situations and perhaps to give him guidance on extra help to low-income and vulnerable consumers?
I welcome this amendment. It is important that we have a code that is as robust as possible, not least because this process will be carried out without a clearly identifiable body responsible for consumer protection. We have previously had gas and electricity consumers councils. After that, we had the combined one and Energywatch, which was folded into Consumer Focus, which, of course, will disappear. Many people have grave doubts about whether the citizens advice bureaux as presently constituted have the resources. They certainly have sufficient locations, but the question remains whether within these locations they will have people with the expertise to take on the protection of consumers when matters such as smart metering arise.
As has been pointed out, there is a great lack of public confidence in the energy suppliers in this country. That is quite a sizeable achievement, because for many years we were able to point to British Gas, the Post Office and one or two other companies as being the kind of companies that people could depend on and trust. Now, in large measure, either through commercial incompetence or greed—in the case of the Post Office it is not really greed, but I certainly would not acquit the others of a charge of greed—the public lack confidence in these companies.
The rolling-out of meters will go on for some time. We will have something like 18.5 million households with gas and another 24 million with gas and electricity, and then there are small businesses, shops and the like. So we could be talking about somewhere in the region of 45 million-plus meters being installed over a relatively short period.
One of the hallmarks of this process at present is that it is shrouded in secrecy. The lack of transparency about the discussions taking place between the Government and the companies is, in many respects, quite astounding. There is not that much that we need to concern ourselves with in terms of commercial secrecy, but we need to know a great deal more. If we are not going to have what many of us would regard as appropriate bodies for consumer protection, if we are likely to have a lengthy period in which this rollout will take place and if we have a conspicuous absence of transparency in the planning and the bringing down, even intermittently, of tablets from the mountain, it is important that we have as robust a code as possible.
While we may get the usual claptrap from the Minister about the words in the amendment not being the exact words, we want reassurance. The public deserve reassurance. We as consumers will be paying for the installation of these meters even though they will be owned by some electricity or gas supplier. It must be made clear that we will have these meters for a long time. I remember that one of the past arguments against smart metering, at a time when there was not quite the environmental edge to the debate that there is now, was that these meters were robust enough to last for 40 years. It was the “If it ain’t broke, don’t fix it” kind of argument. We are going to be saddled with these damn things for a long time, so we should ensure that they are the right ones, that they are sufficiently flexible, that we begin to get clear indications of the intentions of the companies and that there is to be a sufficiently strong and robust process of consumer protection throughout that period.
To each of those requests, I would expect some kind of lukewarm response from the Minister, such as, “We’ll do our best. We’re all trying very hard, chaps”. Until such time as we can get something more robust than that, the least that we can hope for is a decent code of practice. My noble friend Lord Whitty has made a reasonable stab at that. The words may not be exactly what are required but, if the message can be got through and if at Report we can get something to reassure and protect consumers, we will not have made too bad a fist of this part of the Bill.
My Lords, when the Minister does indeed bring the tablets down the mountain at the end of this short debate, I wonder if he could put on record what the Government anticipate will be the average capital and installation cost, which will be an additional burden on the energy consumer.
My Lords, perhaps I may make a short comment on the contribution of the noble Lord, Lord O’Neill. Of all the things that the Minister has or has not done, the one thing that he has not done is to come back on amendments and say that they are not exactly right and will not therefore work. I have never heard him make that particular response, to put the record straight.
It is usually the Whip who gets the dirty job of saying, especially to his noble friends, that they have a nice amendment but it is not quite good enough and they will have to come back. The noble Baroness has already done it several times, but perhaps the noble Lord was not in the Room at the time.
My Lords, I am grateful to my colleague the Energy Minister, Charles Hendry, for coming down with his tablets from the other place to listen to the quality of this debate and indeed, according to the noble Lord, Lord O’Neill, the “claptrap” that I am about to tell him. I am sure that he did not mean that.
We will wait and see. I am disappointed to hear that from a man who was on the government Benches for 13 years. We all know that smart meters started before we got into government and that consumer protection was not high on the noble Lord’s list then. Maybe he was internally debating with his own party; I hope so.
I am also extremely grateful to the noble Lord, Lord Whitty, and the opposition Front Bench, who telegraphed to us their message on these important issues before this event. It is a fundamental subject for us to address. At its heart, as the noble Lord, Lord Whitty, would say, is unwelcome sales activity on the one hand and interoperability between companies on the other. Those are the two salient points of his amendments.
I begin with a couple of factual issues to set the scene. We estimate that there will be 46 million smart meters. The noble Lord, Lord O’Neill, was right on that, which is excellent. We know that British Gas has rolled out around 250,000 so far; it told me so this morning. We also know that the average cost to British Gas is around £300 over a lifespan of 20 years. I hope that that deals with the comments of the right reverend Prelate.
On the thrust of this argument, it is absolutely fundamental that customers are protected from unwarranted and unwelcome sales activity. However, we must not ignore the fact that at times sales activity may be welcome, which we must bear in mind in legislating on this matter. Thanks to the previous Government, we already have powers available to us for consumer protection in the Energy Act 2008, which stands at the moment. It is fundamental that Ofgem is carrying out what I could not believe was called a “spring package” and will issue recommendations on how interoperability and the various issues that are absolutely fundamental to smart meters will be rolled out this summer. As I said, the Energy Act gives us powers to act on this. I do not believe that, as the noble Lord, Lord O’Neill of Clackmannan, suggests, companies go into smoke-filled rooms for clandestine meetings with Ministers to discuss these things. These matters have been discussed and aired openly because it is to companies’ advantage to work with the customer. After all, it is the customer who will be taking these on board.
As I said earlier, I am so concerned about these two issues that the noble Lord, Lord Whitty, has raised that I had a meeting with the chief executive of Centrica this morning. We went through it line by line. I must say that I was impressed by the way in which that company is determined to roll this out. I am also impressed that it is co-operating in a very difficult technical area with Scottish Power and E.ON and has relationships with RWE and EDF. Understandably, they are looking at how the technology develops, particularly in the use of telephones. British Gas is currently working with Vodafone and we hear now that British Telecom has come in with a product. It is a complicated product that is evolving. As Ministers, we will monitor and make sure that this has the consumer confidence that all of us in this Committee want to see. With that in mind, I hope that the noble Lord will withdraw his amendment.
On cost, does the Minister agree that the purpose of rolling out smart meters is to save money and to make our electricity generating system more robust and less expensive? It is unlikely to offer the prospect of reduced prices, but it could offer electricity prices that rise a little less rapidly than they would have done otherwise. It should be a double win. The companies will avoid the inconvenience and cost of having people come round to read meters. They will also get a much better understanding of the power requirements of different parts of the community at different times, which will allow them to manage the electricity system better. From the consumer’s point of view, they avoid the inconvenience of inaccurate and late bills, with which we are all familiar. They also get the opportunity, if they so wish, to manage their consumption in a way that will lower their costs. This should be a win-win proposition. The Government and the companies—if they believe this, as I hope they do—have a responsibility to spread the word abroad.
My Lords, the noble Lord, Lord Oxburgh, provokes me to ask a further question, either of him or of the Minister. On the basis of the figures that have just been given, the cost will be about £14 billion over 20 years. What hard estimates have been made of the savings when set against £14 billion, which is not an insignificant amount for consumers to have to bear?
My Lords, I asked the Minister whether he had anything in mind regarding consumer protection in the field. Perhaps I could press him again on that, because I understand that some consumer protection provisions are contained in the Energy Act 2008. Does he think that they are sufficient, or will they be repealed? As we all appreciate, energy companies are working on behalf of their shareholders rather than consumers. What discussions has the Minister had with consumer groups in addition to those with energy companies?
I am grateful to the noble Lord, Lord Oxburgh, for his commentary on this issue, which partly answered the question of the noble Lord, Lord Grantchester. It is mutually beneficial to both parties that smart meters are introduced. As I mentioned, Ofgem has consulted all groups closely to find a way forward. It is for it to report and to determine whether there should be a tightening of existing powers under the Energy Act following its spring package.
The total financial benefits of introduction are as yet unknown. There are a number of ways in which one could look at them. An executive of British Gas told me this morning that, when she was young, her father used to sit her down in front of the electricity meter to see it going round and round and to show the cost that was being incurred in the household. As I have said, I have sat my own children down and said, “Look, this is what’s going on”—I have one of those little boxes, which I commend to your Lordships. They are horrified that, at one point, it shows 298 an hour and then, at another, 130 an hour. There will obviously be a lifestyle change, which we cannot begin to assess, as people seek to reduce the cost of their electricity. I discussed with Centrica this morning the likely impact on bills. We estimate that there will be a saving of £14 to £15 on an electricity bill net of the cost of installation.
My Lords, I am grateful to all noble Lords who have taken part in this debate. The Minister said that provisions exist in the 2008 Act and it is clear, as the noble Lord, Lord Jenkin, said, that some progress on a voluntary code of practice has been made. However, this section of the Bill is intended to move that forward in a way that meets anxieties that interoperability and householders’ freedom of choice are protected.
I should probably have declared a past interest: until last month, I was the chair of Consumer Focus. There has been some engagement, but not all our points have been met, in particular the issue that, from the word go of the rollout, consumers should not be subject to cost when they switch. The Minister has already consulted with British Gas and Centrica. There are about 250,000 smart meters out there. The estimate is that, by 2014, there will be 4 million, most of which will be British Gas. This is before the standards on interoperability have risen. My understanding is that, at the moment, if British Gas customers who have one of these smart meters want to switch, they will effectively be in dumb mode if they switch to another supplier whose meters are not compatible. Likewise, if they are on pre-payment but wish to switch, the smart-meter systems for pre-payment and for direct debit, for example, are not compatible.
In many ways, I am pleased that British Gas has taken the initiative in starting to roll these things out for all the reasons that people have given—we want them out there as soon as possible. However, the fact of the matter is that we are going to have a whole number of them that are not compatible and, unless we lay down principles in this Bill, that will continue. Those principles need to apply to the ongoing rollout and they need to apply to the standardisation that is introduced beyond 2014.
I agree with the noble Lord, Lord Jenkin, that the manner of meeting those requirements can be flexible. I am in favour of a strong voluntary code of practice covering this area, but the principles that lie behind my amendments should surely be in primary legislation. I accept that these amendments are probably too complicated and that ongoing discussions and outcomes need to be taken into account when we reach the final draft, but I would be concerned if we were to pass the Bill without the principles of, in particular, no detriment in terms of choice and no mis-selling being written into the primary legislation.
Is my noble friend not concerned that, from what the Minister has said, the ongoing discussions will probably be completed by the summer, by which time this Bill will have become an Act? Therefore, it will not be possible for us to deal with the outcome of these discussions in relation to this legislation. It will require a subsequent electricity/gas Act to accommodate it, unless we are going to have some kind of magic SI brought in at a later stage to take account of the discussions. Has my noble friend thought of this point?
My Lords, we get energy Acts rather frequently and one would hope that this would not provoke an even speedier reversion to new primary legislation in this field. As I understand what the Minister was referring to, he was speaking about the discussions involving the regulations that Ofgem is going to bring forward as part of its spring package, which—confusingly, as he says—will emerge in the summer. That is not necessarily the end of the line. I hope that, by the time the discussions are finalised in, shall we say, the late spring, the outline of this part of the Bill will be clear to Ofgem and those with whom Ofgem is consulting. If it is not, the situation to which my noble friend Lord O’Neill refers arises.
I thought that I had explained this but, for clarification, Ofgem is dealing with this short-term interoperability under its existing licensing and code. We have the primary powers, which the previous Labour Government created under the Energy Act 2008, to enact the necessary changes that are thrown up as a result of this. Indeed, we will use them if we need to.
It deals with interoperability, but it does not deal with the cost to the consumers of not having interoperability, which is what lies behind this point. It may be that the Government can interpret that sufficiently widely to intervene, but I am not necessarily convinced of that. This is effectively the last piece of legislation before the main part of the rollout is going to occur and, unless we have those principles embedded in primary legislation, the Minister’s leverage with Ofgem and the supply companies will be more limited as we go down the line.
I shall return to this amendment in perhaps simplified form at a later stage in this process. Some of us who sit through energy Bills are pretty convinced of moving in this direction. As the noble Lords, Lord Teverson and Lord Oxburgh, said, the aim is to reduce the cost of electricity, both in terms of supplying it and in terms of the cost to the consumer. That will work only if the consumer is in a position to interpret the information that a smart meter gives effectively and proactively and if the smart meter installed at the beginning of the process is still relevant to a changed supply tariff or method of payment for the householder at any given point. The principles need to be laid down here. This is not a matter that we should avoid as we go on through the passage of the Bill. I beg leave to withdraw the amendment.
Amendment 32B withdrawn.
Amendment 32C not moved.
Clause 69 agreed.
33: After Clause 69, insert the following new Clause—
“Energy tariffsEnergy tariffs
(1) After consultation with electricity and gas retail sellers, and consumer groups, the Secretary of State shall introduce regulations that make it mandatory for electricity and gas through pipeline supply companies supplying to domestic properties to configure their tariffs so that the initial units of energy supplied are at a lower cost to the consumer than remaining units.
(2) The principles of the scheme shall be—
(a) that the number of lower priced initial units shall represent the average amount of energy required for a household of that size to keep warm, clean and fed to a modest but acceptable standard; (b) the tariff price for the initial units shall be equal to the medium term marginal cost of the production of that energy;(c) overall, the new combined tariff should be revenue neutral to the energy supply companies.(3) The scheme and its tariffs will be assessed and audited by the Office of the Gas and Electricity Markets, who will also be responsible for the capture, analysis, and reporting of all information to the Secretary of State regarding the implementation and management of the scheme.”
My Lords, there are many strange things about electricity bills. This amendment caused me to look at mine more carefully. There are four pages of information, which normally I fail to look at—and most of the time when I need to look at it I find it too complex and I understand it less after I have read it than I did before I read it. On tariffs, the first tranche of units used by a normal consumer is at a significantly higher level of charge than the ensuing tranche. Some consumers may have even more divisions, but I have two and, as it is for most people, the first units used are far more expensive. On 23 December 2010, my first units were 20.1p each and the next units after I had finished those were a quarter less at 14.55p. I do not know whether that completely replicates what other people have, but it seems fairly representative.
We have two issues affected by tariffs generally. When I learnt economics as a corporate economist, we learnt that on the whole when prices were high you demanded less and that when they were less you demanded more. That was a demand curve, in which I am sure all noble Lords are well versed.
We are really trying to do two things in the Bill. One is to reduce the amount of electricity and energy used in the nation, thereby reducing carbon emissions. The other is to reduce fuel poverty by investment in making houses, dwellings and business premises more energy efficient. Yet these types of tariff—higher at the beginning and less at the end—mean that the market signals that we are trying to do exactly the opposite. That is why I have tabled my amendment in this way. I will be interested to know whether the Minister criticises the way in which it is written, as the noble Lord, Lord O’Neill, seems to think he might.
I would like to probe this area particularly. There should be a better way of doing this, which is what my amendment attempts. First, it says that things should be the other way round, so that there is an incentive to keep energy consumption relatively low and that those normal consumers who suffer fuel poverty are charged less. Having tried to table a suitable amendment, I absolutely agree that it is difficult to encapsulate exactly how that should happen, which is why it suggests a general scheme of what we are trying to achieve. At the end of the day, the arbiter would probably have to be Ofgem. We want the electricity units used by an average household for essentials to be at the lower rate, with a higher rate after that. Overall, the outcome should be revenue neutral. I say, maybe from my work as an economist, that the existing dual-pricing function is probably an indication of a monopolistic marketplace. You certainly do not have perfect pricing here. At another time, maybe we will want to address that.
Unfortunately, the amendment does not state that pre-payment meters should not charge significantly more than ordinary electricity tariffs, thus heavily and severely working against the poor and the fuel poor. We might consider that another time; perhaps it goes back to the smart meter issue. However, that is not what the amendment is about. It is about trying to bring a much more just tariff into the industry. The only way in which that can happen is through legislation. I beg to move.
My Lords, I certainly support the thrust of the amendment, as I devoted almost my entire Second Reading speech to the subject. When I looked at my own electricity bill, I noticed that I was being charged nearly 30p for the first 900 units, after which the price dropped to about 13p; I obviously must have a word with the noble Lord, Lord Teverson, to see where he gets his from. I argued that that way of charging seemed cack-handed. As my noble friend said, it seems to defy the laws of supply and demand and their relation to price. The greater the demand, the greater should be the price. When I asked other customers and neighbours, they confirmed that they, too, were charged nearly double for the initial units that they consumed.
I further argued that the first few thousand units should be relatively cheap—near the break-even point of the supplier—and that the more you consume, the more expensive the units should become. Therefore, the more you use, the more you pay per unit. I am afraid that I have no idea what the break-even point for energy suppliers is but, if they are able to charge some customers below 10p a unit for daytime use, it must be somewhere below that—around 6p or 7p per unit. I presume that Ofgem would know exactly what the break-even points are for each supplier and, if not, it could find out. It begs the question whether energy companies should be required to disclose the break-even points and the changes throughout the year, which could then be verified either by auditors or by Ofgem.
I like the wording in the new clause proposed by my noble friend Lord Teverson. Subsection (2)(a) says that,
“the number of lower priced initial units shall represent the average amount of energy required for a household of that size to keep warm, clean and fed to a modest but acceptable standard”.
I suggested at Second Reading that it would not be too difficult for energy companies to obtain the council tax banding of each property, so that they could differentiate between, say, band A and band D properties. Obviously, a single person living in a bedsit would not require the same amount of energy as a couple with 2.4 children living in a three-bedroom or four-bedroom house. As things stand at the moment, there is little or no difference in the tariffs for living in a bedsit or a six-bedroom house. That is wrong. The person in the bedsit is paying a much higher proportion of their energy bill at the higher initial rate that is currently charged. Perhaps the electoral roll could help in determining how many adults live in each property.
If we are going to try to do something about fuel poverty, I believe that the way in which we charge customers must be changed, which is the whole thrust of my argument. In 2008, there were 4.5 million households in fuel poverty. I believe that, after the recent cold snap of November and December, this figure jumped dramatically, perhaps to 6.5 million households, 50 per cent of whom are pensioners. Those in badly heated homes are more prone to illness, which just pushes the problem and the cost on to the NHS. It was not surprising to read in the papers recently that energy companies have been cashing in on the cold snap and increasing their profit margins by 50 per cent. I am glad that Ofgem is investigating; it will report its findings on excessive profit margins in March. Consumers feel hard done by. Some whom I have asked feel that they are being ripped off.
Can Ofgem make energy companies change their tariff structure? I realise that energy companies are profit-making public companies, some of which are foreign owned. Can, as the amendment provides, the Government introduce regulations to force companies to change their tariff system so that the initial units supplied are at a lower cost to the consumer than the remaining units? Subsection (2)(c) of the amendment provides that,
“overall, the new combined tariff should be revenue neutral to the energy supply companies”.
I hope that the energy companies are willing to discuss this.
The thrust of my argument is to get as many of the 6.5 million households currently in fuel poverty—that is 26 per cent of total households—out of fuel poverty. I believe that progressive charging may be one way of achieving this. It would act as a real incentive for all households to reduce their consumption and to take up the Green Deal.
I received a useful letter this week from my noble friend Lord Marland, saying that the Committee on Climate Change looked into introducing rising block tariffs two years ago, before the recent hike in energy prices. It said that rising block tariffs would have an adverse impact on fuel-poor households, as they generally require more energy to heat their homes to an acceptable level. This is because the fuel poor tend to live in less energy efficient homes. Many of them, including pensioners, tend to spend more time in their homes. This suggests that a rising block tariff would make it more expensive for them to heat their homes to an adequate standard and make it more difficult to remove them from fuel poverty. The Committee on Climate Change concluded that rising block tariffs,
“should not be introduced until fuel poverty has been addressed through targeted energy efficiency improvement and other fuel poverty measures”.
Quite so; I cannot argue with that. But is this not exactly where the Green Deal comes in? If the tariff system was changed and these households took up the Green Deal, they should be much better off.
There is a curious statement in the Minister’s letter. It said that,
“at present suppliers can, with a degree of certainty, recover their fixed costs from the higher tier charges”.
I bet that all companies wish that they could get away with that. In the real world, if a company charged double for the initial units sold in order to cover its fixed costs, it would not make any sales, as it would be undercut by competitors. Surprise, surprise, the energy companies are able to fix their pricing so that they can recover their fixed costs by charging a higher initial tariff. That does not seem right.
What are my expectations for this amendment? I do not know about my noble friend Lord Teverson, but I am not expecting the Minister to accept it. It would be a first in this Committee. I am not even expecting the Minister to come back with a government amendment—although that would be nice—as it might be putting the cart before the horse. If the Committee recalls, the Committee on Climate Change concluded that rising block tariffs,
“should not be introduced until fuel poverty has been addressed through targeted energy efficiency improvement”.
I agree. The Green Deal should be allowed to get under way before rising block tariffs are brought in. I would like an assurance from the Minister that this will be looked at again, although not by the Committee on Climate Change, because it is probably not the most appropriate body to do so—but good for it for looking at this. Its report was not even 250 words long, so it is difficult to assess how it approached the subject. It did consider, however, whether a subsidised price should be charged for consumption to cover basic needs. It occurred to me that the £2.7 billion spent annually on winter fuel payments should be better targeted to those most in need and perhaps paid directly to their energy supplier.
The number of households in fuel poverty has already exploded and is likely to increase further as, if the papers are to be believed, electricity bills will have to rise by a further £500 per annum per household to pay for a new generation of environmentally friendly power stations. It seems quite extraordinary that, in our civilised society, over one-quarter of households live in fuel poverty, 50 per cent being pensioners, in many cases having to make the choice between fuel, food and perhaps their health. I think that changing the tariff structure is worth investigating, after consultation with energy suppliers and perhaps Ofgem, as it dovetails neatly with the ambitions of this Bill.
I find this a confusing debate. First, we have an elegant contribution from the noble Lord, Lord Teverson, explaining how there is a failure in the structure of the market and the present pricing arrangements. We then get an endorsement of this from the noble Earl, Lord Cathcart, who, with the greatest respect, is riding one of his hobby-horses. We are all entitled to do that, but half way through the business he changes horses and is not very sure whether he is going one way or the other.
One of the factors in making the Green Deal successful for consumers will be rising gas and electricity prices, because the Green Deal will make the savings that much greater. It will make the savings that much greater that much earlier if the initial block of electricity or gas units consumed is as high as possible; it is then the second tranche from which you may make some savings. That appears to be a recognition of the fact that we anticipate that, certainly for the rest of this decade, energy prices will continue to rise for a variety or reasons—changes in generation, shortage of supply or volatility of supply because of Middle Eastern uncertainties. All these things will, in varying degrees, result in a steady increase. That is one of the attractions—perhaps not the most compelling one—of the Green Deal. The amendment would in many respects undermine the attractive features of the Green Deal.
Equally, the climate change committee has argued that the majority of fuel-poor households have structural deficiencies which require more electricity to be used in keeping the rooms warm. Therefore, the priority must be to get people’s homes improved. The apparent attraction of making the price of the initial tranche lower is complicated by the fact that these people are always going to be the ones who will go into the second tranche to keep their houses warm. There are elements of contradiction in both arguments.
We have mentioned the role of Ofgem as a potential arbiter—a body that could hold the ring. Although Ofgem’s function is in part to protect the consumer, it is also to promote competition. The argument advanced by the proponents of privatisation and subsequent liberalisation was that, after liberalisation, you would have a competitive market in which the players would change the manner in which the old state monopoly had dealt with pricing issues. In fact, as we have seen, while it was apparently in the interests of the state monopoly to behave in a particular way, it is in the interests of these private oligopolies to behave in much the same way, in that they have not radically changed the nature of pricing.
Some of us have sought to introduce arguments about the injustice of the pre-payment meter to many households, although not all, as pre-payment meters suit consumers in a number of households, perhaps because people are there only part-time—the house may be a second home in a rural area, for example. The point that I am getting at is that it was only through the threat of intervention on the part of the last Government that we began to move on this issue. I think that only one company—Scottish and Southern—was prepared to change its pricing structure in relation to pre-payment meters. There may have been others, but that is the one that I remember from the big five or six in this area.
I do not think that Ofgem has the power to do this at the moment and I am not sure that it would want to do it. The argument advanced by the climate change committee is somewhat tentative, but it has some weight. If we are going to try to deal with the question of consumption and price, the speech of the noble Lord, Lord Teverson, provided an elegant solution. I respect him for that, but I am not sure whether it is the ideal solution. We have had a reasonable excuse to have a good debate, but I am not sure whether at this stage this is really the best way in which to deal with the problem. It would be preferable if we gave the regulator powers that it ceased to have some time ago to go in and explore this, if not independently to change it. I know that its powers are being reviewed; it certainly does not have the powers to interfere at this stage, as I understand it. But if it was to be given those powers following the government review, that might be a way in which to deal with the matter.
I am not certain that this amendment will achieve what it is trying to do in respect of the poorer households that spend a fair amount of money heating their homes. It is unlikely that we could get a tariff structure to enable all the heating of the poorest people’s homes in the country to be done on the lowest tariff. If we could get that, we would go some way towards alleviating the problems faced by the disadvantaged. Equally, we might well put ourselves in the position of having disproportionately higher prices for the second tranche, which might reach a level that brings additional people into fuel poverty. So we seem to be damned if we do and damned if we do not.
I am a bit confused and I am sure that other noble Lords are as well. It may be that listening to me has made matters worse. If we are to deal with this issue, we really need to deal with it on the basis of far stronger and more comprehensive evidence than we have at the moment. The present system does not work, but I am not sure whether something as flip as this amendment will necessarily come up with the answers that quickly.
My Lords, I support my noble friend in raising an important issue, which has led to rather a long debate. In reply to my noble friend, could the Minister tell us where we are in getting the utility companies to simplify their bills and make them clearer? If the Green Deal is going to work and people are going to understand where their energy savings are, the bills need to be better. In the past, you might try to work out the payback on new technology. We had a condensing boiler and it was really complicated to look back over a year—we had changed suppliers at the time—to work out what we were saving. I think that in the end I did work it out and we had saved at least a quarter of the gas in a year with the condensing boiler, but it was no mean feat. Given that the Green Deal depends on people understanding such things and that we know that we will not all have smart meters in the near future, it would be helpful if the Minister could tell us a little about that.
I support my noble friend Lord Cathcart on what we need to do to help those in fuel poverty, but I cannot agree with him on trying to do it on council tax bands. The banding of your house does not relate to your ability to pay the council tax or any other bill. That is why I have been so against it for so many years. However, I support him in his aim to do something about fuel poverty. I have probably declared my interest before but, like the noble Lord, Lord O’Neill, I am involved with National Energy Action, which is a charity trying to do something about the fuel poor. We have been doing it for over 25 years now.
My Lords, the step tariff to which the noble Lord, Lord Teverson, has drawn attention clearly has its origin in the old concept of the standing charge—a charge that companies levied to cover people coming round to read the meters, preparing paper bills and all that sort of thing. The smart meter arrangements, which we have just been describing, will remove nearly all the justification for that concept. It would be useful if the Minister considered how he might ensure that the benefits of introducing the meters can be passed on to the consumer; it will obviously be some time before the whole system is drawn out. If any step is needed, it really should be a very small one. Smart meters should certainly make the handling of pre-payment meters identical to conventional ones; there need be no difference in charge. I presume that pre-payment meters will be managed the same way as top-up phone cards, so the whole thing should be straightforward.
Inverted tariffs can work. They have been used for water in Sydney, Australia—you get your first so-many cubic metres of water at a particular price and, as your water use goes up, so does your price. That is not quite the same, because a lot of subsequent use of water would be for watering large lawns and things of that kind, which is not quite what we are talking of here. Also, in my Shell days, we used something like this in Nigeria, where the company gave away a certain amount of electricity—enough to run a refrigerator, a number of light bulbs and a television—and charged consumers only when they went above a particular level. Those things have worked and have been used to alleviate poverty. Whether this is quite the way to do it, I am not sure; I am with the noble Lord, Lord O’Neill. However, there is an important idea here.
My Lords, the noble Lord, Lord Teverson, is to be congratulated: he has really put his finger on what is utterly wrong with the whole structure of tariffs in the energy market. It is an object of public policy to reduce fuel poverty, and it is an object of public policy to reduce consumption of energy, yet we have a structure of hugely complicated tariffs for households—2,500 tariffs, or whatever it is—the net result of which is that the poor pay more, and that the more you use the less you pay. That is an absurdity arising from a combination of an oligopolistic market, a history of the standing charge, and a sort-of ideology behind the Ofgem intervention about cost reflectivity. If you were really trying to achieve the outcomes that successive Governments have declared, you would restructure and regulate the market in the direction proposed by the noble Lord, Lord Teverson.
Obviously, there are complications. There will be winners and losers. I disagree with the climate change committee and, to some extent, with my noble friend Lord O’Neill—the bulk of the fuel poor are fuel poor because of the price that they pay for electricity, not because they have to use more of it, even though it is true that a programme of improving the energy efficiency of buildings would ideally predate any change in the tariff structure. A sub-group of the fuel poor have to spend to use an enormous amount of energy to meet minimum comfort levels, but the majority are hit because of the prices that they have to pay within the properties that they occupy.
There would have to be some sophistication of the proposition made by the noble Lord, Lord Teverson. The crude definition is a rising block tariff, but it is not necessarily the only way in which to act. The Government would be well advised to ask Ofgem, the energy companies and everybody else in the field to look at the whole concept. Until we effectively reverse the structure of tariffs, we will not achieve those two objectives and—via the objective of using less energy—the energy-security objective of energy policy. The noble Lord, Lord Teverson, has a big idea here. I suspect that the noble Earl is correct that the Minister will not leap overboard and grab this amendment, but we need to think radically here and ensure a proper analysis of how the restructuring could be done effectively with minimum collateral damage.
My Lords, I am going to offer a word of solace to the Minister: I recommend that he suggests that the noble Lord withdraws his amendment, not that the Government should accept it. I doubt whether the Government will accept it, not least because although this has been an interesting and informed debate, the cross-currents have been very sharp and very obvious. In seeking the objectives that we all seek, the question of strategy is difficult. I doubt whether this Bill can stand the strain of carrying an amendment which indicates that the whole of the tariff position should be restructured as far as the electricity companies are concerned, particularly given that we are short of information.
First of all, the companies are short of information about which households ought to have preferential treatment. I very much enjoyed the thoughtful and considered speech of the noble Earl, Lord Cathcart. He took us with him in terms of the objectives, but council tax will not do as a measure of the relative strength or weakness of household economies. We are in the historic position—as the noble Lord, Lord Oxburgh, identified—that this initial tariff is the old standing charge written into a new pricing framework. Now there are elements of a standing charge which companies have to meet.
However, our consideration with this Bill is, how do we make the Green Deal effective? I listened very carefully to my noble friend Lord O’Neill, who indicated the difficulties of both ends of the spectrum in this argument. In terms of making the Green Deal effective, it would complicate matters enormously if we were also saying that in a short period of time, we would be changing the nature of the pricing policy. There is enough of a problem with pricing anyway. We all know that we have a terrifying situation at the moment with world energy prices and the issues faced by consumers. None of us knows what lies ahead, but it is unlikely that energy will become significantly cheaper in the foreseeable future. Therefore households treat energy bills with great seriousness.
Can this be solved along the lines of this amendment? In due course, I think it would probably need to be. We have to get away from the issue of why the pricing policy is as it is. The Bill has to deliver the drive towards the Green Deal. The priority has to be to emphasise to households that they must pursue strategies to reduce the consumption of electricity. It is consumption that we have got to reduce or, more accurately in many cases, we have got to reduce waste, given that our houses are so ill-equipped for the circumstances.
We have to deliver the Bill’s objectives before we move, and expect the industry to move, to that dimension identified by the amendment of the noble Lord, Lord Teverson. This has been a very useful debate, but I fear that if the concept in that amendment was put into the Bill, we would complicate matters enormously in terms of the impact on households. We would therefore fail with the main strategy to which we are all committed under the Bill. I hope the Minister will take a similar view.
The noble Lord, Lord O’Neill, said that there were inconsistencies in my argument. What I was doing was reporting from the letter that my noble friend had sent to me, where there may have been inconsistencies. I said in my remarks that putting rising block tariffs in this Bill would be like putting the cart before the horse. I agree with the noble Lord, Lord Davies; I am not expecting to have an amendment to get rising block tariffs into the Bill. I am asking the Minister to assure us that this will be looked at, so that the Green Deal can take effect first, and then the whole issue will be considered after the Bill is done and dusted.
My Lords, I am grateful to the noble Lord, Lord Davies, for summing up so well—he has done most of my job for me, which is extremely kind. The noble Earl, Lord Cathcart, drew this matter to my attention several months ago, as did the noble Lord, Lord Teverson. I am extremely sympathetic to it, but this debate has thrown up the different and slightly schizophrenic aspect of this tariff system. On the one hand we have the inequality of it, and on the other we have to take into consideration things like the fuel poor, inefficient houses, time tariffs, colder parts of the UK and so on.
There are two fundamental things that I can suggest to the Committee. The first, as I said earlier, is that we are going to carry out a full-scale review of fuel poverty and its implications. We will be announcing that review in the very near future, and it will look into the various aspects that noble Lords have brought up here. Secondly, I recognise that this is a complicated issue, not a simple matter which the Committee can debate now and then present a conclusion on. I can therefore suggest—and we have already started work on it—that officials within the department should look very closely at this in order to determine its operability without reference to the climate change committee, and between Committee and Report stage we will have the opportunity to explore it further with noble Lords who may wish, with officials, to see whether there is merit in this amendment. That is a genuine offer. I agree with the noble Lord, Lord Davies, that this is not a matter for this Bill as it is a complicated issue that needs considerable thought. Therefore, despite the merits of the amendment, I ask the noble Lord, Lord Teverson, to withdraw it.
My Lords, I thank my noble friend the Minister for his reply. I suppose that I ought to feel very comforted by having both the opposition and the government spokesmen speak against me. That ought to feel like old times and add a feeling of warmth—which is obviously lacking among the fuel poor—but it does not. I thank noble Lords for their discussion of this. As I said in my opening remarks, as you try to write this sort of amendment, you find all the difficulties about applying it. The words of the noble Lord, Lord Whitty, summed it up in many ways.
Again, the quantum of fuel poverty concerns not so much the amount of energy used but the cost of that energy. That is what we have seen in the huge increase in the number of fuel poor, which has risen primarily in response to the very substantial increases in energy prices. This debate has exposed the problem that the current tariff structures are just not right They are not right in terms of a competitive market, in terms of serving consumers, or in terms of justice within our society. For that reason, I welcome the Minister’s remarks that this area is to be looked at further and that, although this might not be exactly the right solution, it is something that will be pursued. I look forward to hearing the outcome of that.
I say to the noble Lord, Lord O’Neill, that I do not see the conflict between this and the Green Deal, which is not about reducing emissions or energy consumption in a household to zero but about making energy efficiency within our stock of dwellings much better—as I know that he knows, and which I know he supports. So I do not see them in conflict at all.
With that undertaking from the Minister that this area will continue to be looked at in the Department of Energy and Climate Change, I am happy to withdraw the amendment.
Amendment 33 withdrawn.
My Lords, this may be a convenient moment for the Committee to take its customary short break. I suggest that it recommences at 5.25 pm.
Clause 70 : Access to register of energy performance certificates etc: England and Wales
33ZA: Clause 70, page 51, line 15, at end insert—
“( ) requiring the disclosure of sufficient information to enable green deal participants, improvers and bill payers to decide what measures may be appropriate for a property”
My Lords, the Bill contains welcome changes to the energy performance certificates, but reform may need to go further to inform householders better on the energy efficiency of their homes and provide sufficient information so that householders are enabled in their decision-making when considering the Green Deal. We have also added our names to the amendment proposed by the noble Lord, Lord Whitty, about introducing a 12-week delay to energy tariff changes, which I shall leave to my noble friend to speak to.
Clause 70 concerns access to the register of energy performance certificates, and the Government have suggested through subsection (1) that access to these documents or data on the register should be determined through regulations. Subsection (2) contains a list of such issues that may be included in the regulations. As we raised in our amendment earlier, it would be helpful if the Government could clarify whether the regulations and list of areas in subsection (2) are intended to be discretionary and what other areas the Government have in mind. Can the Minister confirm whether the legislative approach adds more or less certainty to the process?
In Amendment 33ZA, we aim to clarify what should be included in the regulations relating to the disclosure of energy performance certificates. We consider that in this area it would be helpful to make linkages with other aspects in the Bill such as the Green Deal. The information contained on an energy performance certificate provides a helpful baseline for understanding the energy efficiency of a property and helps Green Deal improvers and bill payers to track how efficient a particular improvement has been. The regulations made under the clause should include provision to disclose such information to enable Green Deal participants, improvers and bill payers to make informed decisions about what Green Deal and energy efficiency measures may be appropriate for their property. This amendment is based on a belief that consumers and their advisers should have the best information to decide what measures may be appropriate for a property. Baseline information through these energy performance certificates is vital for the decision-making process. If the Government agree with the sentiment and are as concerned as we are that the Green Deal scheme should work, we would hope to see them come forward with an amendment of that nature at Report.
Our second amendment, Amendment 33CA, is a stand-alone requirement for a landlord or property owner to pass on energy performance information to new tenants or property buyers so that those persons can appreciate the current energy efficiency performance of the property and take steps towards improving it. These improvements may or may not be funded through Green Deal finance.
The drafting of the amendment is based largely on Clauses 12 and 13, which outline requirements for property owners and landlords when selling a property or letting it out. We have also sought to clarify further the meaning of “valid” for the purposes of disclosure. The certificate being presented must be current, by which we mean that it should relate to a period that is no more than one year from the date of issue and that,
“the person required to provide the certificate has no reasonable grounds to suspect that the energy performance information on the certificate is no longer accurate”—
for example, where a landlord may have made structural alterations to the property.
Making sure that people have good information about the energy efficiency of their homes is a practical step in helping to achieve improvements in respect of such significant issues as climate change, energy prices and public health. I beg to move.
My Lords, I have Amendments 33B and 33C in this group, and my noble friend Lord Jenkin has Amendment 33A. Having heard what the noble Lord, Lord Grantchester, said in introducing his amendments, I think that it would be for the convenience of the Committee if I dealt with the rather different issues raised by our amendments by degrouping them. I shall therefore not speak to them now.
My Lords, I should like to start by countering comments made by the noble Lord, Lord O’Neill, during a previous discussion. Far from feeling that I have drawn the short straw as the Whip, the opposite is the case. Not only is my noble friend Lord Marland taking the particularly complicated areas but—far more importantly—this is such an easy Bill. It is a Bill on which we are agreed across the Committee, so it is a great delight. Our purpose here is to refine how best to achieve the Bill’s objectives. That may not have been the noble Lord’s experience in the past, but if he watches me through these proceedings, he will notice how happy I am.
Amendment 33ZA provides that sufficient information must be disclosed to enable those involved in the Green Deal to decide what measures are appropriate for a property. However, Clause 70 is not intended to make data available for this purpose. If someone was considering how to improve a building’s energy efficiency, they would commission an EPC, which would include recommended measures to improve the energy efficiency of the building and form the basis of advice by a qualified Green Deal adviser on the most appropriate measures for the property.
The Green Deal adviser would calculate exactly how much money would need to be borrowed and the number and amount of repayments et cetera. This is all part of the discussion that a householder will need to have with the Green Deal adviser as part of the potential transaction. We do not consider it necessary or appropriate to stipulate this level of detail in legislation.
Amendment 33CA provides that, where a property is to be sold or rented out, the seller, prospective landlord or their agent must provide an EPC free of charge to a prospective buyer or tenant, the EPC should be no more than a year old and the person providing it must not believe that it is inaccurate. It has been a statutory requirement under existing regulations since October 2008 that an EPC is made available free of charge to a prospective buyer or tenant when a property is put on the market by the seller or prospective landlord. In the case of domestic sales, there is a duty on the agent to be satisfied that an EPC has been commissioned before marketing a property. A similar duty will be extended to agents in respect of domestic rentals and non-domestic transactions later this year.
As for the accuracy of EPCs, which is what the noble Lord is flagging up, I assure noble Lords that, under existing regulations, a duty of care is placed on the energy assessor to carry out energy assessments with reasonable skill and care. The only change that this amendment would introduce would be to provide that EPCs must be less than a year old. At present, an EPC can be up to 10 years old. In deciding on an appropriate validity period, we need to strike a balance between ensuring that an EPC contains up-to-date information and not requiring sellers or prospective landlords to incur unnecessary costs. In future, where improvement works are funded through the Green Deal, there will be an obligation to produce an updated EPC to capture the impact of the work on the energy efficiency of the property. While there will not be such an obligation where Green Deal finance was not used, it would be sensible for them to obtain an updated EPC that reflected the impact of any other work, because it will benefit them when seeking to sell or rent out the property. However, it is unnecessary to introduce a statutory obligation in such circumstances. I hope that noble Lords have found my explanation reassuring and will withdraw their amendment.
I thank the noble Baroness for her understanding and for clarifying the situation regarding our two amendments. However, I may puzzle her for one second further—although she has been very clear in explaining the situation. If the information were to be inaccurate, would the costs then be passed on to the new owner or tenant? How would that situation be challenged?
As I mentioned, under existing regulations the duty of care placed on people in terms of producing the EPC could be relevant in this kind of circumstance. I will seek further clarification. Clearly, if somebody has already done work, that should assist. It is also the case that the energy assessor would be liable if the EPC was inaccurate.
Amendment 33ZA withdrawn.
Amendment 33A not moved.
33B: Clause 70, page 51, line 39, after “section” insert “other than subsection (2)(e)”
My Lords, we are still dealing with Clause 70, which deals with energy performance certificates. My Amendments 33B and 33C do not concern the substance of the regulations that will be produced but the parliamentary procedure to be applied to them. At present, by virtue of Clause 70(6), only the negative procedure applies to any regulations made under Clause 70. That includes regulations made under subsection (2)(e), which allows sanctions for non-compliance. Here we return to the eighth report of the 2010-11 Session by the Delegated Powers and Regulatory Reform Committee, which pointed out that where sanctions could include financial penalties, the Bill should provide—as a minimum—for the affirmative procedure. That is what my amendments would provide. The committee went on to say that the Bill should also provide for a maximum, which my amendment does not provide. I hope the Minister will be able to satisfy me on how the Government intend to respond to the report of the Delegated Powers and Regulatory Reform Committee. I beg to move.
My Lords, it will not surprise the Minister to hear that I agree entirely with the case made by the noble Baroness, Lady Noakes. The sanctions are a different and important dimension, which is why the Merits Committee referred to the issue. The Minister will know only too well that regard for the Merits Committee is such that, when it recommends the affirmative procedure rather than the existing negative procedure, Ministers normally agree, as I hope the noble Baroness will.
Amendment 33B withdrawn.
Amendment 33C not moved.
Clause 70 agreed.
Amendment 33CA not moved.
Clause 71 agreed.
Clause 72 : Power to modify energy supply licences: information about tariffs
33D: Clause 72, page 53, line 5, at end insert—
“( ) The information to be provided about a tariff by virtue of subsection (2) with regards to the amount of the tariff must be guaranteed not to change for a period of 12 weeks.”
My Lords, this amendment was originally in a group, but it has been disentangled, as it may be more logical for it to stand alone. It deals with the requirement in Clause 72(2) that a supplier must provide its domestic customers with information regarding one or more of its lowest domestic tariffs. In other words, it is an obligation on the supplier to ensure that the consumer knows what the lowest tariff is so that they can move to that tariff. This was so central to the coalition’s programme that it was referred to in the programme itself, which said:
“We will increase households’ control over their energy costs by ensuring that energy bills provide information on how to move to the cheapest tariff offered by their supplier”.
I therefore welcome the clause and its fulfilment of that commitment.
Of course, it is also true that there is a history of people moving to heavily advertised tariffs only for that tariff to change after a reasonably short time, often without notice during the period of the switch. This is a relatively modest attempt to ensure that this does not happen. If the householder switches on the basis of the supplier’s advertised lowest tariff, there should be no change to that tariff until after a period of 12 weeks. This seems a reasonable protection for the householder and would make a reality of Clause 72(2), which in itself is an important principle and one that I welcome. I beg to move.
I thank the noble Lord for his amendment. He makes a good point: it would not help consumers if information on lowest tariffs was often quickly out of date. The amendment would require the Government to guarantee that a supplier’s lowest tariff was available to customers for 12 weeks after information about that tariff had been provided to them on their bill, thereby allowing them sufficient time to consider the information on their bill and to act on it before their supplier could move the goalposts and change the price.
The powers that we are seeking in the Bill would allow the Government to require suppliers to inform customers about their lowest tariff and how to switch to it. It is a feature of our competitive market that energy suppliers are able to react to changes in the market through dynamic pricing. The amendment would effectively prevent suppliers from making changes to the price of a tariff for a period of 12 weeks, which is not the intention of these proposals. Such a requirement would limit suppliers’ ability to react to changes in the market and may lead to a more conservative pricing strategy, risking higher prices for customers across the board—in other words, the law of unintended consequences, which we have been looking at in other areas.
Could the Minister give us any evidence that this has taken place with any degree of consistency? We normally find that upward changes in prices as a consequence of market conditions are introduced almost immediately but that, when there are downward movements as a result of the same market circumstances, it takes rather longer. It seems that the customer in the middle is left having to pay more for longer and getting the benefits of lower prices for a shorter period.
The noble Lord might be reassured if I could conclude. We are sympathetic to what the noble Lord, Lord Whitty, intends. We have to give careful consideration to the amendment to make sure that the unintended consequences that I have just mentioned are not brought to bear. I therefore propose to him that we take away the amendment for further consideration, because we understand the principles behind it. On that basis, I wonder whether he might be willing to withdraw the amendment.
Amendment 33D withdrawn.
Clause 72 agreed.
Clauses 73 and 74 agreed.
Amendment 34 not moved.
Clause 75 : Annual report by Gas and Electricity Markets Authority on security of electricity supply
34ZA: Clause 75, page 55, line 22, after “electricity” insert “, including renewables and low-carbon generation”
My Lords, the Bill is concerned with energy efficiency and reduction of carbon emissions. In that regard, we found it curious that it made no mention of renewables and low-carbon generation. The Minister may say, “Well, please understand that all that is included by what we mean by the generation of electricity and the storage of electricity”. Nevertheless, we thought the omission most curious and that we should perhaps underline our encouragement and enthusiasm for low-carbon generation and renewable energy by including reference to them in the Bill.
In light of our debates at the start of the year on energy market reform and on the mix of energy sources that will be needed for the foreseeable future—including new nuclear—we thought it important to draw renewable and low-carbon generation into our debate today so that the Minister might underline those aspects of it that he sees as being important within the framework of the Bill. It is important to encourage the Government to deliver on their promises, most notably that they demonstrate how new nuclear will be up and running by 2017-18, despite the proposals for operators to take on much more of the cost and liability. We also think it important that the Government deliver on the further stages of CCS and provide clarity on the future of fossil fuels as part of the energy mix and their relationships with the Green Deal. The Government should also provide clarity on the future of ROCs and FITs—the feed-in tariffs for renewable energy. We think that it is important for the Minister to explain this, because it will be important for consumers, both businesses and households. The price element of this is the subject of the next amendment. I beg to move.
My Lords, I would just like to ask the noble Lord why he thinks that these are not already included in the words “generation of electricity”. That is exactly what they do, so in what way are they not covered? I see his reasons for wanting to put them in explicitly, but it seems to me that that would not actually add anything.
I thought that I had explained in my opening remarks that we could well understand that they could be thought to have been included in the Bill already. However, for the reasons that I outlined, we wished to make sure that the words “renewables and low-carbon generation” are included to underline their importance in the energy mix of the future.
I am grateful to the noble Lord for his amendment, but the noble Lord, Lord Jenkin, puts it rather succinctly. Obviously, at the moment, we are carrying out a serious consultation on electricity market reform, and these vital subjects are part of that consultation process. Whereas I completely support the thrust of these amendments and the importance of these sources in the general electricity market, I think that the noble Lord will agree that this is a matter for the electricity market reform consultation, where we are grateful for any views or comments in this area. I hope that, on that basis, the noble Lord will feel able to withdraw his amendment.
Amendment 34ZA withdrawn.
34ZB: Clause 75, page 55, line 29, at end insert—
“( ) the impact of supply on consumer prices”
I think that the noble Lord, Lord Jenkin, if he is not careful, is going to have to rise again and make exactly the same speech, although he made it in such a convincing fashion that he convinced me. It will be seen by the Committee that we were interested in making sure that these issues were very much to the fore. Following the intervention of the noble Lord, Lord Jenkin, we got the assurance from the Minister that the consultation that is going on includes these issues. That is all that I have to say.
Amendment 34ZB not moved.
Clause 75 agreed.
Clause 76 : Annual report by Secretary of State on security of energy supplies
Amendments 34ZC and 34ZD not moved.
Clause 76 agreed.
Clause 77 : Power of the Gas and Electricity Markets Authority to direct a modification of the Uniform Network Code
34A: Clause 77, page 57, line 33, at end insert—
“36D Strengthening the Authority’s powers with regard to Public Service Obligations on suppliers
The Authority may modify the arrangements contained in Gas Licence Agreements to impose further obligations in the PSO requirements, as follows—
(a) the Authority may modify the gas storage Public Service Obligation for gas suppliers in the United Kingdom;(b) the Authority may set new industrial and commercial PSOs on suppliers requiring suppliers to meet the mandated levels of gas storage as set by the Authority;(c) the Authority shall publish gas storage targets annually and may monitor supply licence holders’ compliance with such obligations.”
My Lords, noble Lords will remember that at Second Reading I raised the whole question of gas storage and its contribution to a greater certainty of supply in the event of something untoward happening. I have tabled this amendment to strengthen the incentive to invest in more gas storage. I took account of what my noble friend said in response to the amendment, but I have now made it my business to gain a better understanding of the considerable complexities of this sector of the energy market. How to ensure security of gas supply has become increasingly important, particularly in the light of the anticipated running down of the UK’s own indigenous supplies from offshore sources. It is for this reason, no doubt, that the industry, successive Governments and the regulator have all rightly been very concerned to make as sure as they can that gas consumers will be assured of a continuous supply.
Since Second Reading, Ofgem has published—on 11 January—a consultation paper headed Gas Security of Supply Significant Code Review. I will come back to that. However, several other important reports were published in earlier years. In May 2007 a long report was published by the consultant Oxera, headed An Assessment of the Potential Measures to Improve Gas Security of Supply. Three years later the previous Government commissioned a report, this time by the consultant Pöyry, headed GB Gas Security of Supply and Options for Improvement. In April the previous Government published a policy statement headed Gas Security of Supply. Last November there was a joint DECC and Ofgem report, Statutory Security of Supply Report. Noble Lords will be relieved to know that I do not intend to quote more than a tiny portion of those reports. It would have been quite an effort even to bring them to the Moses Room.
The reports, which I hope I am summarising accurately, come down to this: although the risk of what one might describe as a “black swan” event—one of low probability but high impact—hitting the supply of gas to the UK market is very low, it is acknowledged by all that it is not impossible. It could be a combination of adverse events, such as pipeline accidents, import interruption or the withholding of supplies by overseas suppliers. The previous Government’s provisional conclusion, therefore, was that some additional measures are needed to deal with that remote possibility.
The various reports examined and evaluated several options in great detail. The DECC policy statement of last April concentrated on five options. I will read the relevant two paragraphs from that April 2010 report to the Committee. On page 7, paragraph E.30 of the executive summary says, under the heading “Enhanced financial incentives to balance demand and supply”:
“The Government supports Ofgem’s work with industry to examine the case for greater use of market prices with enhanced incentives in the balancing regime”—
one needs to hang on to those words—
“in particular by … unfreezing cash-out prices in an emergency; and … further finessing the cash-out regime in market conditions (outside an emergency)”.
The next paragraph, under the heading “Supplier obligations”, says:
“The Government is considering the case for strengthening shipper/supplier obligations, such as through Public Service Obligations”,
or PSOs, as they are widely known in the business. Those are the two preferred options that have been considered.
The earlier reports considered a number of other options. One is often described as sharpening the balancing mechanism—the balance between supply and demand—so that the effect would be more immediate. This would be done by modifying what is called the uniform network code, which is itself a massive document, running into several volumes of print. I confess at once that I have not studied it in detail. However, I can understand what it is saying. It is about strengthening the market mechanisms by changing the code so as to make it more effective and profitable and, if gas supply is interrupted, more costly to the supplier. The other option is to strengthen the existing public service obligation to require increased storage capacity, which could be done by giving Ofgem the power to amend the suppliers’ licences to require more investment in storage.
What sharpening the balancing mechanism means in practice is to increase sharply the cost of the failure to deliver gas. Industrial and commercial customers could have a right to sue the supplier for those costs caused by an interruption, because they would be the ones who would be asked to interrupt their supplies. It is widely accepted that it is inconceivable that one should deliberately cut off the supply to domestic consumers, for all the obvious reasons. It is the industrial and commercial consumers who are asked to turn off their supply. That is the balancing mechanism.
It is often not recognised that there is an existing public service obligation for gas. It has existed ever since the privatisation of the industry and constitutes an absolute guarantee of supply for a one in 50 winter, but is a guarantee to domestic consumers only. The obligation was originally placed on the supplier and is now placed on the transporters—the gas grid—and the local distributors. The cost is recovered from the consumer via the grid charges to the suppliers. The obligation is to guarantee three or four days of supply if demand exceeds supplies. Strengthening that existing PSO would be achieved by amending the licence of the suppliers to require them to have more than three or four days’ storage. They might go to 20 or even 30 days of storage. In Germany, the figure is 80 days and in France it is 90 days. I fully concede that the circumstances of those two countries have been very different, because the UK has its own indigenous source of supply. However, increasingly, we now rely on supplies piped from overseas. The argument now for approaching a storage figure more comparable with those of our neighbours seems to be a strong one.
One might ask what the essential difference is between the two options. Under the supply mechanism—the one which includes strengthening the balancing mechanism—the remedy for an interruption would be a high cash penalty and the risk of having to pay cash compensation to the industrial and commercial consumers cut off. Under the PSO option, the existence of higher storage capacity would be intended to avoid the risk of interruption at all.
This can be illustrated by explaining what the effect would be on a large industrial consumer of gas—for example, a very large baker such as Rank Hovis McDougall. The nub of the case is that RHM requires gas and not cash. If its business is interrupted because of the interruption of gas supplies and it is unable to bake bread for all its customers, including supermarkets that may be all round the country, it will lose its business. No amount of cash compensation for the short-term interruption of supply could possibly compensate. But surely there is also an argument of principle. Is it not better to prevent the failure of supply before the event, rather than to find suppliers and compensate customers after the event?
This is the nub of the difference between the two solutions that the Government have been considering. Yet, the Government have come down in favour of strengthening the balancing mechanism via the uniform network code. That is the proposal in the consultation paper of 11 January this year entitled Gas Security of Supply Significant Code Review. Clause 77 allows Ofgem—in the Bill it is always called GEMA, something I get very confused about—to direct a modification of the uniform national code.
My Amendment 34A provides an additional power. It is an addition and not an alternative to the strengthening of the balancing mechanism. It strengthens the PSO by giving Ofgem power to amend the licences to provide for an obligation for a higher level of storage. I stress that it is an addition. The amendment does not seek to remove the strengthening of the balancing mechanism, the power in Clause 77(1), but to add a new subsection. I see these two as complementary. My amendment merely empowers—it does not direct—Ofgem to act.
One may ask, then, why the amendment is necessary. PSOs may become necessary. If the strengthening of the balancing mechanism is shown not to be enough to ensure gas supplies, then it may be necessary to reinforce them with an enhanced PSO. The amendment would ensure that it is on the statute book. It will be there as a power. I am assured that a great deal of the preparatory work would be done by Ofgem and by the companies, so that they would be ready, if it became necessary, to respond more quickly to a requirement to hold higher levels of storage. If one had to start from scratch, with no existing statute provision, it might take six or seven years before one could have the storage. If all the preparations had been made—as would be expected if this was actually in the Bill—it could be half, or less than half, that time.
I think that this is a worthwhile amendment and I hope that my noble friend may be able to smile on it. I beg to move.
My Lords, I support this amendment and compliment the noble Lord, Lord Jenkin, on covering pretty well the whole of the case. Like him, I was approached by a company called Gateway, which is in the business of constructing storage facilities—or would like to be in the business of constructing storage facilities. My understanding, which the Minister will perhaps confirm, is that at the moment we have around 5.9 billion cubic metres of gas storage facility in the UK, and that we could need in extremis to double that or—instead of storing the four or five days’ worth of gas that we have at the moment—go up to 20 days’ worth. The consumption of this additional gas is not on a pro rata basis; it tapers because other things would happen.
My point is that the balancing mechanism is essentially the market mechanism, which assumes that this will be fine if we have a gas storage facility that blows up, as happened a few years ago. World market conditions were not affected to any great extent by that but we still had to buy in additional supplies. If something happened in the United Kingdom that in some way interrupted or interfered with our present indigenous supplies, we would not be affected by world prices. On the other hand, there could be a world crisis and an interruption to supply because we may well be the last in line for Russian gas supplies. There are reasons why we would be last in line in a world crisis, not least because for a long time we were self-sufficient and exported gas. There were periods in the 1990s when we changed the nature of our gas contracting and, as a consequence, we have tended more towards short-term contracts than long-term ones. Therefore, we have less of a claim on access to the world market.
The point I want to make is that it is fine to use the market-balancing mechanism when there is, in effect, a UK problem, but when there is a world problem, it becomes exceedingly expensive. If we are to be prudent, it is necessary for us to look at what would be regarded as getting the balance right between the two options. Neither of them is exclusive. In the case of the PSO, we would give a signal to the market that our very low level of storage ought to be increased.
When we touched on this subject at Second Reading, the Minister told us, “I have just signed the document offering planning permission”, and said that this may well go ahead. Something like 15 projects at present enjoy planning permission but nobody sees the need to act on them because there is no clear indication that the Government are prepared to give them active support by way of a PSO. We need additional supply if what I have been told by Gateway is true. I have no reason to doubt that, although I accept that Gateway is in this business and will want to enhance its case, which is not unreasonable. The same could be said for the gas traders who have been successful in tipping the balance the other way. It is necessary for us to have a clearer indication.
Am I right in saying that we have somewhere in the order of 5 billion or 6 billion cubic metres and that if we were to double that it would probably afford us supplies to meet the demands of 20 days or slightly beyond that? I do not think that we need to go anywhere near the French or German models because we still have access to the North Sea and some long-term contract facilities with Norway and the like. However, we are not guaranteed supply.
As for the one in 50 winter statistic, I have spoken to people from British Gas who used to do balancing in days gone by and they say that the 1929 winter is perhaps a better base year to take than the winter of 1963, which is normally referred to. I imagine that the noble Lord, Lord Oxburgh, being a geologist and a specialist in these matters, could give us chapter and verse on this. I merely raise this point to indicate that there is a debate here, not only between the two options, but also on the option of the PSO and whether the wisdom currently embraced by Ofgem and DECC should be revisited. An amendment of this nature would merely put on the statute book the opportunity for us to deal with a fuel shortage should we have a third bad winter in 50 years within the next four or five years.
As we move through 2015 the implications of the Large Combustion Plant Directive will become that much clearer. We will no longer be able to access coal-fired generation in the way that we have in the past and, until nuclear comes along, there will be an enhanced dependence on gas-fired electricity and the other purposes to which gas can be put. There will be a need for an increase in storage because we will be consuming more gas. I am not confident that the supplies that we have presently would be sufficient to be accommodated by a balancing act. The chances are that if we have a rotten winter in Britain, it will be mirrored by our neighbours 20 or 30 miles away across the Channel. If that is the case, the price of gas will rise and the costs of the balancing mechanism will be extremely high.
Whether or not we accept the optimism of the Government about the likely outcome of our present economic travails, we hope that by 2016 or 2017 our economy will be expanding. We will have to use more electricity, and more of that electricity than we have at present will be dependent on gas.
I take that as just one simple example of the likelihood of an increase in demand for gas, a likelihood which may not be capable of being economically addressed by the option that the Government are currently favouring in exclusion to the other. I would ask that the PSO be included as an additional option in the Bill. It will give the industries the opportunity of some certainty, and we will then have the likelihood of investment in what is an expensive, although not such a technically difficult or lengthy, process. If we were to indicate that a PSO option was there, it is quite likely that the planning applications will be exercised. Some of the applications that have been granted will be taken up and used; at the moment they are not being acted upon. Enhancing our storage facilities is therefore a very prudent approach to our energy supplies. We should do so because we may well find in future, when we are in danger of running short of gas, that market conditions are extremely unfavourable and supplies are very expensive. It is probably better to give the nod to the spending of some money now rather than waiting for a solution which could well be far more expensive in the future. For these reasons I am happy to support the amendment of the noble Lord, Lord Jenkin.
I too would like to say a few words in support of the amendment, which is designed to strengthen the powers of the authority with regard to public service obligations on gas suppliers, like the obligations that already exist on oil suppliers. The debate has so far shown that UK gas storage capacity is too low in terms of the crucial insurance policy that it represents for this country either against a direct cut-off of gas supplies; or against sharply rising prices of such supplies, perhaps due to a cut-off somewhere else when we find ourselves at the end of the supply line. It would be helpful if the Minister could confirm that UK gas storage capacity is much lower than that of other EU member states—not just the ones cited, but quite a few more. Is our vulnerability really also not lower than theirs? Now that North Sea gas is running down, I believe that our vulnerability is every bit as high as theirs.
Gas storage has to be an important element of both our and the European Union’s long-term energy security policy, along with other elements such as the diversification of supplies, the diversification of pipelines, more interconnectors between member states and more competition in the single market. The right honourable gentleman the Prime Minister is going to Brussels at the end of this week to discuss all those issues, because that is the topic of the European Council this week. I hope that it will make progress on all those issues. We need to put ourselves in a better position than we are now, so far as gas storage capacity is concerned. As the noble Lord, Lord Jenkin, said, the simple way to achieve that is through the PSO. That is the thrust of the amendment and why I support it.
I ask the Committee’s forgiveness for straying slightly outside this piece of legislation when I ask the Government whether they are considering a minimum requirement for gas storage in the European Union on each member state. That is highly desirable, as it has proved for oil. If it were to be introduced, it would likely be helpful for this country. There was a great deal of opposition from the suppliers when the oil requirement was introduced in the 1970s, but you do not hear anything about it now. It is taken as the most natural thing in the world that we and every European Union country hold—I think—40 days’ supply of oil. Working now for an EU minimum that would apply to all member states would be worth while. If we were to move down that road, the amendment would put us in a position to meet any obligations. It would therefore make our position in the negotiations for a minimum requirement in the EU much stronger. We would be showing other member states that we were serious about working for this, even though we were merely introducing a potential power to do it.
I see no particularly good arguments for resisting the amendment. After all, it does not impose an actual obligation on anyone; it merely makes it possible to do so without further legislation if it can be shown objectively to be both necessary and desirable. I therefore hope that the Minister will give serious consideration to it in his reply.
My Lords, I briefly add my support to this amendment. The noble Lord, Lord O’Neill, is right that our dependence on gas will undoubtedly increase over the coming decades; as renewables and other sources of low-carbon energy come in, gas will be very important. It is equally true that the amount of storage that we could get away with when we had the North Sea producing at full rate could be relatively small, but it is also clear that the storage that we have today is inadequate. I will not go into the details, but something like 10 to 20 days’ supply is what we should be thinking of today. This will not happen without regulation of some kind. The supply companies have no incentive to do it, and what both industry and the consumer need is gas, not compensation.
My Lords, all that needs to be said about this amendment has been said by informed Members of the Committee. I congratulate the noble Lord, Lord Jenkin, on his amendment, which was supported so strongly by my noble friend Lord O’Neill, who also knows energy issues so well. It reinforces the case.
I am always worried when this issue of days crops up. The noble Lord, Lord Jenkin, indicated that France and Germany are different from the United Kingdom. They have been massively different historically because we have had our own indigenous resources. Our needs for storage are therefore very different from the needs of those and other countries in Europe. When I was charged with responding on energy matters for the previous Government, I always used to shudder when the “Today” programme would say, “The French have 90 days’ security of supply and we have four”. One felt the shudder go round the nation because of a colossal risk that we were all taking with energy. That is not so, and we must not spread alarm, but we must make provision for the future in a significantly changing situation, and we need to adjust to it. As the noble Lords, Lord Jenkin and Lord O’Neill, indicated, we are talking about a significant increase over present storage capacity. However, we are different from those other countries.
There were one or two occasions in the past when the United Kingdom’s position at the end of that supply line cost us and we paid higher prices for gas in some circumstances. One remembers that enormous row with the Germans, who had to go to the European Community over the extent to which German companies seemed rather better at availing themselves of the available gas from Russia than we were. So this is an immensely serious issue, and there is no doubt that storage is the key issue. We have a range of suppliers, but a range of suppliers is no good if we do not have the storage capacity to deal with potential interruptions. There will always be limited supplies as far as gas is concerned, and it is obviously the case that we have issues regarding our own supplies.
I hope the Minister will accept the crucial point made by the noble Lord, Lord Jenkin, in his amendment—that this is in addition to what is in place at the moment. It is an empowerment that we might need. We might not need it, but if we do not, then it will not be utilised. However, it would be remiss of us if we did not guarantee that this power was in this Energy Bill. I therefore hope the Minister, who I know has to wrestle with all sorts of difficulties in responding to even the most constructive of amendments, will appreciate that the Committee expects a positive response.
My Lords, I thank my noble friend Lord Jenkin for raising this issue and, in particular, for this canter through the gas situation as it is today. When I was shadowing my current role during the Labour Government and spoke on a number of occasions about gas storage, they reassured me that we had enough storage and that we were in very good shape. Indeed, now that I have got to the position that I am now in, I largely agree with them. That does not mean that we should be complacent or should not press hard for greater gas storage. But the facts are as follows: we have 16 days of storage available and we have under construction another 25 per cent. Maths is not my strongest suit, but as the noble Lord, Lord Moynihan, can tell us—because maths is his strongest suit, along with running and jumping and other things—that gives us just over 20 days’ storage.
The noble Lord has such talent in one body. So we have 20 days’ storage. The noble Lord, Lord Hannay, said quite reasonably that we should compare ourselves to other countries. Obviously, Germany and France have more than that, but they do not have their own gas supply. They are entirely reliant on what used to be called the old Iron Curtain countries for their supply. I would be concerned about the security of supply in the light of some of the endeavours that they have been through. We in this country still produce 50 per cent of our own gas and we are still finding more gas, which will not, admittedly, stop the supply being eroded, but will decelerate the erosion. We have a secure contract. The noble Lord, Lord O’Neill, suggested that we must have good long-term contracts; we probably have as good a long-term contract as any country in the world with Norway, from whom we receive 20 per cent of our supply, managed by Shell, the former company of the noble Lord, Lord Oxburgh—and a marvellous job it does as well. My own view is that we have a very significant secure supply.
Let us look at the matter of storage. Yes, we have given planning permission to various endeavours, but at the moment the cost of storing gas is significantly higher than the price of storing oil, so not unsurprisingly people are giving due consideration to the commercial viability of this project. Of course, part of the thing that we must do in government is to weigh up the pros and cons and absolutely ensure that the nation has security of supply, which is fundamental to all Governments, and to be able to gauge that. We have not had a greater opportunity to gauge that than the unfortunate months of November and December last year, which were beyond record for bad weather, when we came through with flying colours. There were certain countries—and we shall not mention the names—that did not do so. Given the tests that we have had, we have come through with flying colours.
We should not be complacent, of course. That is why we have acted swiftly to engage in planning permission and to make it much easier for big infrastructure projects to be authorised quickly. But we cannot sit in government and insist that certain things are going to be carried out unless they have gone through proper consultation. In many ways, the noble Lord, Lord Jenkin, gave me the answer to the question posed by his excellent amendment. Ofgem is already considering our requirements and carrying out a significant code review consultation, which will be produced at the end of February, on the resilience of our gas energy supply. It would be right for us to take on board what Ofgem has to say, to review it and then carry out what powers are necessary to ensure that, if there are areas that need to be dealt, the Government deal with them.
I hope that that sets the scene for the current gas supply situation. I hope that it answers a number of the excellent questions that noble Lords have asked and allows my noble friend Lord Jenkin to withdraw his amendment.
Perhaps the Minister could answer two questions. First, could he give us the number of billion cubic metres we have in storage at present? Secondly, am I right in saying that the effect of the amendment would be permissive rather than prescriptive? If it is only permissive, why not include it?
I thought that I answered the question on the storage available. I do not know precisely what amount is in storage as of today, but we have capacity for 4.6 billion cubic metres with another billion cubic metres of capacity in construction.
As for enablement, it is not for the Government to be too prescriptive. Already, in months, 25 per cent of gas storage is under construction. Already, we have tested that against difficult winter conditions. Already, we have found that it is satisfactory. As I mentioned, Ofgem is carrying out the review, so it would be wrong at this point in proceedings to pronounce on findings that might be different from those of the Government or us in this Room. We should listen to what it has to say, take it on board, and perhaps use powers available to us.
Let us not underestimate the difficulties. The noble Lord referred to Gateway, a company with which I am familiar. Its issue has been one of planning. The problem has been in Lancashire, if my memory serves me right. There is nothing that we in government can do about that if the local authority does not determine that it is the right thing to have.
Could I just follow up the Minister’s point about the work that Ofgem is doing? I thought I understood him to say—perhaps he did not—that if it came to the conclusion that the UK needed more gas storage as part of its studies, action would be taken. Does that mean to say that its findings could come in time to make an amendment to the Bill? That could be important. My second question about the Ofgem inquiry is: is he willing to make sure that Ofgem is brought quickly up to date with this debate, so that it can take it into account in its study?
The noble Lord makes a point. Of course Ofgem will be brought up to speed with what we are doing. I do not think that its review will have drawn the conclusions that we want by the time we have finished the Bill. There is some presupposing that people are sitting in knowledge. I have heard many different suggestions in this Room already today about how much we have or do not have in storage, and about what we should or should not have. It is up to the Government to look carefully at the facts and accelerate procedures where we think that should be done, as we have already done by 25 per cent—and we have been in government for only nine months; maybe a bit longer now. We have a level of comfort that is correct—not just in our own judgment; a whole range of sources tell us that we have it correct. The previous Government felt that it was the correct figure. If the information that results from the review shows us that we need to enact, we will. Ofgem itself has existing powers to modify licences and introduce new licence requirements, and may well do it itself. Of course this is very much a subject for debate, evaluation and continuing process, and I hope that satisfies the noble Lord.
My Lords, few movers of an amendment such as this could have had such powerful supporters as the noble Lords, Lord O’Neill, Lord Hannay and Lord Oxburgh. I feel greatly reinforced by the strength of the case which they have made. It would not be wholly unfair if I said that I was a little disappointed by the Minister’s reply.
The noble Lord, Lord Hannay, asked whether it would be open to Ofgem in its consultation to come forward with a proposal which said, “Yes, all right, we will strengthen the balancing mechanism but we also think that there is a case for increasing the amount of storage and that this will require some further measures”. That was a critical question, and I am not sure that I understood the answer.
We are talking about future demand and supply over a number of years. I have been provided with a chart, compiled by a consultant, which draws on all the various forecasts of demand for gas. If one looks ahead up to 2025, which is after all only 15 years ahead, one sees that the forecasts vary from a reduction in demand to three-quarters of the present level to an increase of a quarter. Those are huge variations, reflecting the uncertainty with which we are confronted when dealing with supply. We have tended to talk about supply, but the balancing mechanism is essentially a balance between supply and demand. If there is such a wide variation in the estimates made by experts—people who know what they are talking about—we should take that into consideration.
Yes, it is true that we have an indigenous supply, which is why our figure would, for the moment, be lower than that in our neighbouring countries—as I indicated in my opening speech. There may also be another Buzzard-type discovery in the North Sea. A recent discovery of gas quite close offshore certainly helped supply here. However, we must be cautious about what we say after the past two winters. Everybody has recognised that the electricity supply has been quite seriously affected by the recession and that the point at which we reach concern has therefore moved three or four years further forward. Why is that not the same for gas? We got through these last winters because there was a considerable measure of operating below capacity, which I hope will not continue. So here is another element of uncertainty.
We need to give more consideration to these matters. I shall certainly discuss what the Minister has said with those who have advised me. It may be that the noble Lord, Lord Hannay, is right and that we will get the Ofgem report before we reach the Report stage of this Bill—it looks a little less likely than it did before the weekend, but it is a possibility. We have another energy Bill coming up, which will affect among other things energy prices and the powers of Ofgem, so we may have another opportunity. I shall reflect; I hope that the Minister will do so, too. In the mean time, I beg leave to withdraw the amendment.
Amendment 34A withdrawn.
Clause 77 agreed.
34AA: Before Clause 78, insert the following new Clause—
“Accidental petroleum releases: verification of financial costs
After section 3 of the Petroleum Act 1998 insert—
“3A Accidental petroleum releases: verification of financial costs
(1) At the time of applying for a licence under section 3, the applicant must provide the Secretary of State with information showing that the applicant has sufficient funds to compensate any damage caused, or loss suffered, as a result of petroleum being accidentally released during the operation of that licence.
(2) The information provided in subsection (1) must be approved as a true and accurate record of the financial affairs of that person by an independent and qualified auditor and must meet any other standards specified in regulations made by the Secretary of State.
(3) The Secretary of State must make regulations, in particular, to provide for the type of financial and supporting information to be provided under subsection (1).
(4) Before issuing a licence under section 3, the Secretary of State must be satisfied that—
(a) the applicant has provided a complete and accurate record of information required by this Act and any regulations made under this Act; and (b) on reviewing that information, the applicant has sufficient funds to compensate for any damage caused, or loss suffered, as a result of petroleum being accidentally released during the operation of the licence.””
My Lords, I put this forward as a probing amendment to clarify the issue of liability in the event of an oil spill. There are two triggers for the amendment. The first is the group of clauses that we are coming on to discuss and the second is the debate that we had thanks to the noble Lord, Lord Moynihan, towards the end of last year on the Deepwater Horizon oil spill. It was while researching for that debate that I thought more about the issues of liability if we had a spill in this country. I understand that with the Deepwater Horizon spill the costs are huge—around $20 billion and still counting. I am not clear on the issues of liability in this country, which is an area of concern. This seems an opportune moment to raise it during our proceedings on the Bill.
There is a two-pronged approach to this. First, there are technical ways in which to do everything that we can to avoid such a spill. Secondly, we could have an insurance policy in case a spill was to occur. That is the reason for proposing this amendment. At the moment, should there be a significant oil spill, the costs would fall on the taxpayer. Would that be at a national or a local authority level? This amendment seeks increased liability cover to be required before drilling in the UK. The recent report from the Energy and Climate Change Committee in the other place dealt with this issue and highlighted liability as an area that needed significant improvement to protect the taxpayer. The financial requirements currently placed on the industry are under the offshore pollution liability agreement, but my understanding is that they are quite weak. A significant oil spill would leave taxpayers disadvantaged, because they would face potentially huge costs in order to clear a major spill from the ocean off our shores.
In proposing this amendment, we want the Government to ensure that any new offshore drilling licence is granted only when the licensee has proved its ability to meet the full costs to address the direct and indirect consequences of an accidental release of oil that occurred as a result of any operations on the UK continental shelf. The Government should also ensure that compulsory third-party insurance cover is obtained for all small exploration and production involved in drilling operations in the UKCS. When we discussed this issue before, the Minister was content that the current arrangements for monitoring in the UK were perfectly adequate. Indeed, we have some of the toughest regulations and inspections in the world, but the HSE has warned about the increase in the number of serious accidents and spills. It has said that the industry’s performance is not good enough and has urged it to up its game.
The monitoring and regulations that we have in place are significantly better than those that existed in the US at the time of Deepwater Horizon. However, I was concerned that the department’s evidence to the committee confirmed that just one inspection of a deepwater rig will take place in 2010-11. I appreciate that the Government will be vigilant, but we need some clarification on the costs and who would be responsible.
There are technical improvements that the Government could undertake. I am sure that the Minister is aware of the issues surrounding blow-out preventers and how they could be improved. Obligations might be placed on companies installing such rigs to have significantly improved blow-out preventers, doing everything that they could to prevent a blow-out and an oil spill. However, in case there was an oil spill, it would be helpful for some clarification as to where responsibility lies and whether measures could be taken via insurance on the licensees, as indicated in my amendment. Could the Minister consider that?
My Lords, the noble Baroness, Lady Smith of Basildon, raises some interesting points with her amendment but I wonder if its terms are quite right. She is asking for an ascertainment of financial capability at the time of the granting of a licence. However, if a requirement is to be imposed, it needs to be a continuous obligation—that is, something that is tested at regular intervals. A licence is granted at one point in time but a spill may occur many years later, when the financial position of a company is quite different.
Secondly, it is not so much a question of whether the applicant has sufficient funds, but of whether it has access to funds via insurance. It is probably much easier to demonstrate that there is adequate insurance to cover what might reasonably be expected to follow than to look at a company’s balance sheet. I also say to the noble Baroness, wearing my accountant’s anorak, that auditors do not certify things as being “true and accurate”. Doubtless if this amendment found favour with the Minister the correct wording could be formulated.
I am very grateful to the noble Baroness; her contribution was extremely helpful. Certainly, it was not the intention that the time of applying for a licence should be the only time when financial capability was assessed. The insertion somewhere in the wording of “continuous” would be extremely helpful, as is her point about access to funds via insurance. The contrast I was trying to draw was with the Government’s policy on the nuclear industry. Currently it is the Government’s policy that a nuclear power company would have to be responsible for all the costs of decommissioning for some time—indeed, for the foreseeable future. In our previous debate we talked about 100 years or so. It seemed that equal responsibility should be taken by oil companies. I am grateful to the noble Baroness for her suggestions.
My Lords, I was not going to intervene on this, but I have just watched, at some length, the follow-up proceedings in Congress on the first presidential commission report on the BP Deepwater Horizon disaster, which was published several weeks ago. Most of the cross-examination on this issue highlighted the fact that caution should be the order of the day in assessing the level of cover that an operator would require. Caution is needed because there is a massive difference between the majors and the independents. The representatives of the commission, when cross-examined in the last few days, highlighted the fact that they had not had the opportunity to discuss this issue, which is a valid and important one to raise. I welcome the fact that an amendment has been tabled so that we can consider it. However, the representatives had not had an opportunity to sit down with the insurance industry to look in detail at the exposure—the level of cover required—and the impact on the industry as a whole.
We in this country have a proud and, in my view, wise policy of encouraging independents to come on to licences alongside the majors to add further expertise and bring additional value to the table on safety, drilling expertise and well knowledge. I would be cautious about taking too much of a blanket approach to this at the moment—one which did not take into account the exposure that was being sought by the noble Baroness for different licence-holders and different companies on the same licence. The direction of travel in which she is heading is one that the industry will need to follow. This will inevitably be a major issue as the industry moves forward, both in the United States and elsewhere. It is a subject that will require detailed consideration between government, the industry and the insurers to come up with the best possible method of moving forward to ensure that, on the one hand, there is cover but, on the other, we do not end up with just a handful of majors and lose the independent sector. It has contributed so much to the development of the North Sea and has a commitment to safety that is as great as that of anybody else operating there. That is my only word of caution.
This is a highly complex area, which needs a good deal of further reflection, but I welcome the fact that the noble Baroness has brought this to the Committee. It is an important issue and she knows my interest in the subject. I hope the Minister responds equally positively about the importance of this issue and of continuing discussions between the Government, the insurance industry and the operators—and not just the operators but the drillers—to make sure that there is appropriate cover, but that cover is not required to the point at which we lose a significant section of the industry, which so far has contributed greatly to the development of the North Sea.
My Lords, this is an excellent amendment and the Government are entirely in agreement with its broad principles. I am grateful to my noble friend Lord Moynihan for his comment as a practitioner in this field. I should preface any remarks that I make with a reminder that, in my former life, I spent most of my time trying to sell insurance to oil companies and to make myself even richer, so I was all in favour of them buying as much insurance as possible. However, in my current role, I see that a balance has to be struck and that I was wrong at the time—or only partly right. My shareholders thought that I was right.
The Government are in full agreement on this. We have seen the Select Committee’s recommendations and we are evaluating them at the moment. The noble Lord, Lord Moynihan, makes the point that we must not rush into this or have knee-jerk reactions. Of course, when the Government issue licences, a fundamental part of that is that the company awarded the licence becomes a member of the Offshore Pollution Liability Association; it has to purchase £250 million of cover and it then goes into a pool that offers greater cover. This pooling arrangement is fairly unique and it gives us a number of solid assurances. There are two imponderables that need evaluation. One is the quality of insurance cover. Obviously, if the insurance provider is not of A-graded quality, particularly with a longer-term liability situation, that would be a concern. That needs looking at rigorously. Then there is the matter of the quantum.
Two things are going on, as the noble Lord, Lord Moynihan, said. The first is the inquiry that is happening in the United States. We would not want to prejudge what is happening in that inquiry, which we want to evaluate. Also, we want to evaluate the Select Committee’s comments, which are valid. I hope that the noble Baroness will understand that the Government take this matter seriously. She has been persuasive in taking an important line. It is very much in the country’s interest that the subject of pollution should be managed very carefully indeed.
I am grateful to the noble Lord for his expression of support and agreement with the intention of my amendment. I am not quite sure what he means by knee-jerk reaction and rushing into this. As new licences are being issued for drilling, probably as we speak, this is clearly an issue that needs to be addressed with some urgency, although I take on board entirely the points made by the noble Lord, Lord Moynihan. I understand from the Minister’s comments that the Government are looking at this matter and that we will return to it. With that information, I am happy to beg leave to withdraw the amendment.
Amendment 34AA withdrawn.
Clause 78 : Acquisition of rights to use upstream petroleum infrastructure
Debate on whether Clause 78 should stand part of the Bill.
My Lords, to be helpful to the Minister, I was able to give him advance notice of the kind of questions that I wanted to ask about this clause. I am grateful that, earlier today, someone from his department e-mailed me, although I have not had a chance to look through those responses in detail. It would be helpful to raise some of these issues in Committee and to hear his responses.
I feel that there is a lack of clarity about why this chapter is coming forward at this time. It is entirely appropriate—indeed desirable—that the Government move to consolidate the four pieces of legislation that currently exist in this area. That is helpful to the industry and to government. In consolidating, these clauses go a little further than the existing legislation. That is the area on which I seek clarification.
I understand that in the future, where there is a dispute about a third-party operator seeking access to upstream petroleum infrastructure, the Government will seek commercial agreement. These clauses provide for the Government to seek to resolve the issue. Their role almost seems to be that of an arbiter, though it seems stronger than that.
The Explanatory Notes clearly state:
“The Chapter gives the Secretary of State new powers to seek information about the progress of access negotiations; and where there is no realistic prospect of negotiations succeeding, to issue a notice granting relevant rights, without an application from any party”.
In reality, I am not sure that that is how it works. The information that I have had from the department is that there has been a request to the Secretary of State to intercede where there has been no agreement. I think that we would want to avoid the Secretary of State becoming an arbiter in what is a commercial agreement or disagreement between two parties. If the Minister could give some clarification on when it would be appropriate for the Secretary of State to intervene, that would be helpful. The tone of the clause goes against what the Minister has said throughout this Bill: that it is market driven; that the market will provide; that the Government should not intervene. Yet here we have stronger government intervention.
That intervention may be appropriate—I am just trying to seek the reasons why. I gather that this is the first time in 10 years that any company has sought the intervention of the Secretary of State. A note that I have had today says that possibly more would be forthcoming. Is that an indication that more are in the pipeline? Or has someone made an application—although there are not the powers to do so, and it is not what the Explanatory Notes say? Is it trying to use a sledgehammer to crack a nut because, in one case, the Secretary of State has been asked to intervene to help negotiations? We then bring forward legislation which gives power to the Secretary of State to intervene in ongoing commercial negotiations between two companies.
Where does the Minister think the current provisions are defective? Why do we need to bring these provisions forward? Where an application has been made to the Secretary of State now, I am not clear what the difference is. It seems to be that the impetus can come from the Secretary of State to seek information on why the negotiations are not taking place or are not proceeding in an appropriate way, rather than someone seeking the Secretary of State to intercede. There is a difference here and I am not clear why that is. There is a legal remit at present for the Secretary of State to intervene, but that does not seem to be what is being put forward in this legislation.
What discussions have the Government had with the industry and what was its response? The information from the department indicates that the industry is working to update its code of conduct, which is absolutely correct in order to reflect the new framework it is operating in. However, I understand that the industry has concerns that investment may be affected or hindered in some way. I wonder whether that problem has been raised with the department and what discussions are taking place to address it?
So I am seeking further information and clarification, and the reasons why the legislation is coming forward. Is it a reasonable response at this stage to have this kind of legislation coming forward where a Secretary of State intervenes in commercial negotiations having never done so before?
My Lords, this chapter is designed to replace the current legislation on third-party access to upstream petroleum infrastructure. Perhaps I can further clarify what information the noble Baroness has already received; she obviously has a good grasp of what this section seeks to do. It relates to access to offshore pipelines, platforms and processing facilities and to the onshore terminals and pipelines to which they connect. The existing provision, which in part dates back to 1975, has grown piecemeal. As the noble Baroness said, it is scattered over four Acts of Parliament. The procedures are not fully consistent; the definitions are not well aligned and some kinds of facilities are not explicitly covered, which is why the provision needed to be updated.
The need for third-party access is increasingly important. This is the significant point. Even after four decades of exploitation, there are 20 billion barrels or more that might still be produced from the UK continental shelf. The remaining pockets of oil and gas are typically individually small. Many are not large enough to justify dedicated pipelines or processing facilities. Economic development of these discoveries will increasingly depend on getting timely access to existing pipelines—where these have spare capacity—and on getting reasonable terms for that access. This is the kind of shift that helps to explain why this has been brought about. The time is therefore right to overhaul the existing legislation and to make sure that it is fit for purpose in this situation.
Of course, dispute resolution should not be a routine process. Third-party access can be and in the overwhelming majority of cases has been, as the noble Baroness acknowledges, agreed amicably between the parties involved. We have every intention that this should remain the case. We are fully engaged in and fully support the industry’s work to develop its own voluntary code of practice for infrastructure access. Disputes will nevertheless happen and negotiations will from time to time break down, so it is necessary that the Government should have the means of resolving an impasse where it occurs. This chapter therefore re-enacts the existing legislation, but as a unified process that has full coverage of all relevant pipelines, platforms and terminals.
Clause 78 sets out the basic procedure for resolution of disputes about access. It specifies the scope of the procedure—that is, the pipelines and other facilities to which it applies; the right of a person seeking such access to apply to the Secretary of State for the rights if unable to secure them by negotiation; the procedure that is to be followed; certain matters that are to be taken into account; and appropriate safeguards for the interests of the owners and others with existing rights. Finally, subject to that procedure and the safeguards, it sets out the powers of the Secretary of State to issue a notice granting appropriate rights to the applicant.
These provisions make two key changes. First, the current legislation provides a safeguard for the reasonable requirements of the owners for transport or processing of oil and gas and for the entitlements of other users who already have rights to the infrastructure for transport or processing. The Secretary of State must be satisfied, before making an access notice, that doing so will not prejudice these requirements or rights. In general principle, this is clearly right but, on reflection, we think that an unqualified requirement on this point will prove unduly restrictive. There will be circumstances in which introducing a third party into an existing facility will reduce, at least temporarily, the capacity available to others. If nothing else, the making of a physical connection is required, which entails a risk of interruption to operations.
We think it desirable that the Secretary of State should have a similar flexibility in determining terms for access. Accordingly, we have qualified the safeguard provision for existing capacity requirements or rights so that such rights and requirements can be effected, provided that suitable compensation is available to the affected users. The other innovation is that the access notice has effect only if accepted by the applicant within a defined time. This meets a concern that has been raised in discussion with the industry. We think that it will provide a helpful degree of clarity for all involved.
The noble Baroness made reference to this being left to the market. I emphasise that the market model applies to the Green Deal, and we are moving on to another part of the Bill here. I hope that she can see the case that is being made for why, in these circumstances, these measures need to be taken forward.
I am grateful to the noble Baroness for giving a detailed explanation, although I am not really sure that she understood fully the points that I made. I apologise if there was not enough clarity in what I said. I have asked that a copy of the brief that was e-mailed to me today by her department should be given to her as well. I shall make sure that she receives that.
We have heard so many times about what the market mechanism will provide under the Green Deal. Previously, in this area of policy, it has been more about the commercial arrangement than market mechanisms, but the Government seek to alter that—as I understand it, on the basis of one case in which the Secretary of State has been asked to intervene. Is this an appropriate way in which to progress? Although the Secretary of State has been asked to intervene, the new clause gives the Secretary of State powers to seek information on how negotiations are going and then to issue a notice granting rights. I am concerned that the Government feel that they could be acting on behalf of one of the participants in a commercial arrangement. I am not sure that that is prevented from happening in the clauses we are discussing.
I am happy for the noble Baroness to take this away and come back to me on this matter. There was another point that she did not address. Some companies have put it to me that such a clause, whereby there can be direct intervention by the Secretary of State in what was a commercial arrangement, could impact on the investments of those companies in the industry. That is quite a serious matter, and I asked whether there had been any discussions with the industry on investment. I appreciate that she does not have the information to hand, but if she could let me know it would be very helpful.
I like this part of the Bill. Good questions have come from the noble Baroness, which we would not have dealt with in Committee otherwise. First, as the Minister says, these provisions give the opportunity for small oilfields to be exploited when the infrastructure and investment in that would not otherwise allow that at all. Secondly, to pick up the point made by the noble Lord, Lord Moynihan—although he is not in his place—it must make it possible for smaller, independent oil companies to exploit those opportunities, which would not otherwise be there if there was no sharing. The pipelines that are already there are in a certain way a ransom strip. They are a monopoly of a facility that has been invested in, rightly, by those organisations, but they give undue leverage to those organisations. Also, the fact that this legislation is here means that commercial deals will almost certainly be done, whereas they might not be if it was not here. So this is a good clause in the Bill.
I welcome what my noble friend Lord Teverson has said. I note several things in relation to what the noble Baroness said. I point out that the briefing, which I hope she received all of, says that, while there are understandable differences of view—infrastructure owners are wary of change, but potential users are often strongly in favour—the industry is broadly speaking supportive of the case for change. On the point of whether the Government should be involved in something like this or whether it should simply be left to commercial negotiations, EU law requires the provision of a dispute resolution procedure for access to upstream gas pipelines.
My noble friend Lord Teverson pointed out that we have a responsibility as the UK Government to ensure that these resources are accessible. The fact that they are, as I have mentioned, in smaller pockets and may need that kind of sharing of infrastructure makes it even more important now that this is addressed. That is why that is being done: it is in the national interest that it is done and not simply left to market forces to resolve in these circumstances. On that basis, I hope the noble Baroness will feel that I have adequately addressed the issues that she has raised. If she remains concerned, we can have further discussions. In the mean time, I hope she is happy for this clause to stand part of the Bill.
I am grateful to the noble Baroness, who has sought to address my concerns. I have had a note from the officials to say that there are many legal complexities around this. On that basis, I am happy to discuss further—that would be helpful for my peace of mind and in understanding why certain provisions have come forward in the way that they have. I am grateful to the noble Baroness for that offer.
Clause 78 agreed.
Clauses 79 to 85 agreed.
Schedule 2 agreed.
Clauses 86 to 89 agreed.
Clause 90 : Application of certain provisions of the Energy Act 2004 in relation to esc administration orders
34B: Clause 90, page 70, line 43, at end insert—
“( ) In the application of section 157(2), insert “or” at the end of paragraph (a) and omit paragraph (b).”
My Lords, I am conscious that we are nearing the usual time for the Committee to adjourn so I will try to be brief. I just make a point by way of introduction. Nobody reading this amendment could have a clue what it was about. The reason for that is that it is a striking example of the Bill adopting the process of legislation by reference to earlier Bills. I am sorry my noble friend Lord Marland is not here. I have raised this matter with the Law Commission because the gas and electricity Acts are now virtually indecipherable; it is impossible to find one’s way around them. It is high time that there was a consolidation. Having said that, I will move on.
The real problem that the amendment addresses is that one of the provisions of the Energy Act 2004 that is being applied to this Bill is Section 157. Section 157(2) established three grounds on which an energy supply company can be put into administration. One is that the company is unable to pay its debts. Another is that it would be just and equitable, under Section 124A of the Insolvency Act, to wind up the company in the public interest—for instance to stop fraud or criminal activity. The third ground—this is what the amendment is about—is that the court must be satisfied that the company is likely to be unable to pay its debts. The 2004 Act applied to network companies; this Bill would apply it to supply companies. My amendment would delete that third ground—of a company being likely to be unable to pay its debts—for administration as it would apply to supply companies.
To put it in layman’s terms, this means that the petitioner for a special administration order must be able to convince the court that, while the company in question is currently quite solvent, it is at risk of becoming insolvent, perhaps because the scale of liabilities that it faces looks excessive in relation to the foreseeable value of its assets. How far ahead? It is a very uncertain test. The reason for the third test was that it enabled a company’s directors, who after all should have the best view of the likely future circumstances, to apply for insolvency administration. That cannot possibly apply here because the only people who can apply for administration under this Bill are the Minister or Ofgem. The directors cannot do so.
There is another reason why the test should not apply here. Those who followed closely the tangled affairs of Railtrack in 2001 can recognise that it is open to political abuse. I do not propose to go into the long and tangled story, which was reported the other day in the Times, but it was the very looseness of test, which was in reality just a call by an accountant, that enabled the Government of the day to put Railtrack into special administration, even though the company was at the time solvent. It was only on the basis of cash flow projections over a lengthy future period that the Government could proceed.
A test that requires that kind of assessment to be made is quite different from the other two tests. It is inherently inappropriate, particularly here where we are dealing with energy supply companies which are operating in volatile, competitive markets. It is made doubly inappropriate by the fact that the tests can be abused for political purposes.
My amendment would simply remove that test altogether as it would apply to energy suppliers. My noble friend may have better ways of doing this, but I do not think that that test is appropriate in such a case as we have here, where only Ofgem or the Secretary of State—not the directors of a company—are able to use it and where it would be inherently very difficult to apply. I beg to move.
My Lords, like the noble Lord, Lord Jenkin, I served on the Committee that produced the 2004 Act. It went on at least twice as long as we are destined to do. The noble Lord indicated that he has found a slight impediment in that Act. All I can say is that I did not see it at the time and I do not understand it now, so good luck to the Minister.
My Lords, I must say that I am incredibly impressed at the thoroughness with which my noble friend Lord Jenkin has read this Bill and that I hope that he very much liked Clause 78, which indeed consolidated and hopefully improved existing provisions.
The clauses on special administration in the Bill largely follow the tests and procedures for ordinary administration laid down in the Insolvency Act 1986. If a party applies to the court for an ordinary administration order, the court may grant it if it is satisfied that a company is unable to pay its debts or is unlikely to be able to pay them. Administration under the Insolvency Act 1986 is a business rescue procedure with the survival of the company as its primary objective. If entry to administration were available only to a company that could not pay its debts at the date of commencement, the rescue of viable businesses might be jeopardised. For this reason, administration can be entered also when a company is likely to become unable to pay its debts. The provisions in the Bill apply these same principles to energy supply company administration. They follow the same tests for insolvency as the Insolvency Act. My noble friend’s amendment would require the court to apply a stricter test for insolvency when considering applications for energy supply company administration than it does for applications for ordinary administration.
I make it clear that the Secretary of State would apply for an energy supply company administration order only as a last resort and to prevent the risk of financial failure spreading to other companies. I hope that I have reassured my noble friend that we are seeking simply to keep the procedure in line with that which applies elsewhere for other companies. I hope that he will withdraw his amendment.
My Lords, I am grateful for my noble friend’s explanation, but I have to say that I do not think that she has taken account of what I said. Under the Insolvency Act, which introduces this third test, the directors of a company can apply to put the company into administration. After all, they are the ones who are best able to decide whether the company is likely to be unable to pay its debts in the future. In this case, that does not apply. The directors are forbidden to do it; only the Secretary of State or Ofgem can make the call. I see that my noble friend has been given an explanation. It would nice if the Committee could hear it, too.
It is amazing what enlightenments can come when one listens to one’s noble friends. Funnily enough, I have come to this conclusion: the Secretary of State will no doubt wish to discuss any application for an energy supply company administration order with company directors in advance. Directors will be able to contest the application in court. However, enshrining a duty to consult directors in the legislation could lead to delay. The Secretary of State needs the flexibility to act quickly if the company’s position is posing a threat to the rest of the market. When we see what has happened recently in other areas, we realise why this is extremely important. I hope that that helps to elucidate why this is in this provision.
Amendment 34B withdrawn.
Clause 90 agreed.
Clauses 91 to 97 agreed.
Committee adjourned at 7.27 pm.