Tuesday 27 October 2020
The Grand Committee met in a hybrid proceeding.
Arrangement of Business
My Lords, the hybrid Grand Committee will now begin. Some Members are here in person, respecting social distancing, others are participating remotely, but all Members will be treated equally. I must ask Members in the Room to wear a face covering except when seated at their desk, to speak sitting down and to wipe down their desk, chair and any other touch points before and after use. If the capacity of the Committee Room is exceeded, or any other safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes. The clerk has already explained the new button-pressing regime so, with that being said, we will move on.
Greenhouse Gas Emissions Trading Scheme Order 2020
Considered in Grand Committee
My Lords, the order was laid before the House on 13 July 2020 in draft. The UK will cease to participate in the EU emissions trading system at the end of the transition period, as a consequence of the UK’s withdrawal from the EU. This draft Order in Council, laid under the Climate Change Act 2008, establishes a UK-wide greenhouse gas emissions trading scheme: the UK ETS.
Emissions trading schemes work on the cap and trade principle, where a cap is set on the total amount of certain greenhouse gases that can be emitted by installations and aircraft covered by the scheme. Within the cap, participants receive or buy emission allowances, which they can then trade with one another as needed. This cap is reduced over time so that total emissions fall. Participants are required to monitor their emissions during a calendar year and surrender one emissions allowance for every tonne of carbon dioxide equivalent they have emitted at the end of each reporting year.
The four Governments of the United Kingdom nations have agreed the policy positions that act as a basis for this UK ETS. These positions are set out in the government response to The Future of UK Carbon Pricing consultation, which was published on 1 June 2020. Further secondary legislation, to be introduced later this year under the Climate Change Act 2008 and the Finance Act 2020, will amend this order to introduce additional elements of the UK ETS.
On the importance of emissions trading for decarbonisation, a UK ETS would support us in pursuing our climate ambitions by enhancing the UK’s carbon market signals. From day one, the cap on emissions within the scheme would be reduced by 5% compared to the UK’s notional share of the EU ETS cap. That is not the limit of our ambition. The Committee on Climate Change will, in December this year, deliver its advice on the level of the sixth carbon budget. Once this advice is published, we will consult within nine months on what the trajectory for the UK ETS cap should be for the remainder of the first phase, to ensure that it is appropriately aligned to our net-zero objective. At the same time as ensuring that we reduce our contribution to climate change, the new scheme will provide a smooth transition for businesses.
The UK was instrumental in developing the EU emissions trading system and has long been a centre of carbon trading. We have drawn on this experience in designing the new system, while simultaneously improving certain scheme elements, like the tightened cap, to reflect our world-leading climate ambition. Reducing emissions while supporting UK industry is central to my department’s mission to deliver our net-zero target. Alongside carbon pricing, the Government have schemes worth nearly £2 billion operating, or in development, to support our vital energy-intensive industries to decarbonise. Our economic recovery from Covid-19 must build on the UK’s proven track record of cutting carbon emissions while still growing our economy. Over the last three decades, we have seen the economy grow by 75%, while cutting emissions by 43%. It is vital that we keep up the pace of change as we rebuild from the pandemic and look ahead to the UK’s presidency of the COP 26 climate talks in November 2021.
The Government have an ambitious range of policies in place to help industry reduce costs and decarbonise while supporting a clean, green recovery. In July, as part of a £350 million package to cut carbon emissions, the Prime Minister announced £140 million to drive the use of innovative materials in heavy industry. The 13 initial projects will include proposals to reuse waste ash in the glass and ceramics industry and the development of recyclable steel. Some £139 million was also committed to cut emissions in heavy industry by supporting the increased use of low-carbon hydrogen as a greener fuel source, instead of natural gas, and scaling up carbon capture and storage technology.
We want to show that the UK can have a thriving, competitive industrial sector, aligned with our net-zero target. To this end, in July we announced that the Government will publish a comprehensive long-term industrial decarbonisation strategy in spring 2021. This strategy will cover greenhouse gas emissions from manufacturing, including steel, cement, chemicals and oil refineries. Carbon pricing will be at the centre of this, incentivising decarbonisation. The UK ETS will provide a clear signal for businesses to invest for a net-zero future, backed by the funding and support we have, and will have, available to them.
This draft Order in Council establishes a UK ETS which will be operational from 1 January 2021. It establishes the following key areas: the scope of the UK ETS, and this includes energy-intensive industries, the electricity generation sector and aviation; the cap on allowances created under the UK ETS each year, which will initially be set at 5% below what would have been the UK’s expected notional share of the EU ETS cap over the 2021-2030 period; a full review of the UK ETS in 2023; the monitoring, reporting and verification requirements for UK ETS participants; a robust and proportionate enforcement system; and the roles of the national regulators in monitoring and enforcing the scheme.
This order will establish a new carbon pricing regime for the UK, encouraging cost-effective contributions to our emission reduction targets and furthering progress towards our net-zero goal. I commend it to the House.
My Lords, I thank the noble Baroness, Lady Bloomfield, for her opening speech. The UK is seen as a world leader in carbon trading. We have played a prominent role in the establishment of the EU’s first emission trading scheme in 2002, which was a pilot to the current EU Emissions Trading Scheme. There are now over 50 carbon pricing initiatives that have been, or are in the process of being, established, covering over 20% of international greenhouse gas emissions. Of these, 28 are emissions trading schemes.
The UK’s carbon pricing system, made up of the EU Emissions Trading Scheme plus a carbon price support, has overall been a successful mechanism in incentivising the abatement of greenhouse gases in a cost-effective and technologically neutral way, while mobilising the private sector, especially the energy sector, to invest in emissions reduction technologies and solutions. This has been possible because carbon pricing is one of a suite of policies which have enabled alternative and low-cost technologies and infrastructures to come forward. Carbon pricing remains an important catalyst to continue incentivising cost-effective abatement of greenhouse gas emissions.
As the noble Baroness mentioned, a replacement for the EU ETS must be introduced as the UK transitions out of the European Union. Carbon pricing must continue beyond Brexit; we need to make sure that this is replaced at the earliest opportunity. Businesses operating in these markets require more certainty before private sector investment can be deployed. A final decision on replacement of carbon pricing in the UK would be very beneficial to all sectors. Would the noble Baroness agree that Brexit negotiations should not end without agreement on the UK’s replacement for the EU ETS? Surely this should be a priority. It is critical that the EU ETS is replaced by a UK ETS. The preference of the CBI, of which I am president, is that a UK ETS should be introduced as soon as possible and—I ask if the noble Baroness would agree—should be linked to the EU ETS so that markets can align. It is widely known that introducing a UK ETS is relatively easy. It is the linking that will cause problems: computer systems need to be set up, and so on.
Following the sixth carbon budget advice from the Committee on Climate Change during December 2020, any changes to the UK emissions trading scheme, once introduced, whether related to the emission cap or sectors included within scope, should be implemented by at least January 2023. When developing the “UK ETS”, the Government should ensure that sectors negatively impacted by carbon pricing, such as energy-intensive industries, are protected. They will still require compensation by free allowances to protect competition and mitigate the risk of carbon leakage. This is a critical aspect of the UK scheme and emissions abatement moving forward. A heavy industry cannot compete on a level playing field with international counterparts that have a less stringent carbon policy. Competition between these sectors must be protected, and until the Government fix this issue with other policy decision-making, free allowances as a form of compensation must remain. This is critical, and every effort should be made to link the “UK ETS” with the EU ETS.
If the UK Government cannot introduce a UK emissions trading scheme by 1 January linked to the EU ETS, it is possible that a carbon tax would be introduced. Can the Minister inform us whether this is a possibility? The CBI can support such a carbon tax, although only as an interim measure that should be replaced by a UK ETS when it is ready. The carbon tax must be ambitious and fairly implemented, and there should be compensation for heavy industrial emitters: that must continue.
I hear that Treasury officials are said to be interested in a report that suggests that a carbon tax of £75 per tonne of CO2 emitted by 2030 on greenhouse gasses could raise up to £27 billion of taxes, which would, of course, help the Covid recovery, cushion household bill rises and support clean energy. In fact, Guy Newey, strategy director of Energy Systems Catapult, said that a coherent strategy was needed:
“The danger with relying solely on a carbon tax is that no one believes politicians will not scrap it when things get tough, so no one invests. A cap-and-trade scheme that guarantees an outcome, alongside regulation and innovation support, is much more likely to lead to cuts in emissions.”
The International Monetary Fund says that a combination of carbon pricing and an initial green stimulus would turbocharge economic recovery from the coronavirus and help put the global economy on a sustainable growth path post endemic.
Direct emissions in the UK from buildings fell by 4% in 2017. However, 19 million out of 27 million homes in the UK have an EPC rating below C. In fact, only 1 million homes have low-carbon heat. We need to make a huge investment in heat. Does the Minister think that a new green finance bank is a possibility?
As president of the CBI and Chancellor of the University of Birmingham, I have been privileged to chair the Heat Commission, whose report was recently released. It highlights the fact that decarbonising the UK’s heating system is the greatest challenge that the UK faces in meeting its net-zero target of 2050. The commission made various recommendations. It said that it was vital that
“business, Government, regulators and communities work together to shape policies.”
One recommendation is that the Government should include low-carbon skills in the national retraining scheme, including training in heat pumps, hydrogen boilers and the move from gas boilers. This would create almost 1 million jobs and would make us not only more efficient from a sustainability point of view but more effective.
Does the Minister agree with the recommendation that energy-efficiency in heat should be a national infrastructure priority? It would create a new low-carbon heating scheme to replace the domestic renewable heat incentive with a grant system. It recommends creating a national delivery body to co-ordinate heat decarbonisation—an Olympic-style delivery body. It mandates that after 2025, all new boiler installations must be part of a hybrid system or be hydrogen-ready. Heat accounts for about 40% of energy consumption and is in large part delivered through the combustion of natural gas, so if we deal with this, and take these recommendations into account, we will get to net zero by 2050.
We cannot hear the noble Baroness, Lady Bennett of Manor Castle, who was next to speak, so we will come back to her and move straight on to the noble Baroness, Lady McIntosh of Pickering.
My Lords, I thank the Minister for introducing this regulation so clearly and comprehensively. I have a number of questions; if for any reason she is not able to answer the questions today, perhaps she will write to me, because some are technical and I have only just had sight of them myself.
I understand that the impact assessment gave a net cost to industry of between £5 million and £11 million which, I understand, is per year. Obviously, my concern is that this will be passed on to customers. All of us as users notice that even if we switch as often as we are asked to do, our electricity bills go only one way. That is as a single energy user rather than having electricity and gas. Is the Minister not concerned that this will impact heavily on customers’ bills? What action, if anything, is the Government likely to take to help those on fixed incomes, particularly in the current situation?
My next question relates to the impact of Covid, particularly on the aviation sector, which obviously has been heavily affected. I declare an interest in that, when I met my husband, he was working in the aviation sector. Its cashflow is clearly a matter of great concern: it has to carry on paying for the use of the aircraft whether they are flying or not. Will the Minister assure us that the impact of Covid, particularly on the aviation and aeronautical sectors, will be kept under review?
I would be pleased to have an update, if possible, on where we are with carbon capture and storage. As I understand it, that would make a massive contribution to reducing our greenhouse gas emissions. It is something that the Government are keen on and I applaud them for that.
The impact assessment says very clearly that one of the objectives of the policy is to incentivise cost-effective emissions reductions while balancing the competitiveness of UK industry. Given that the Government are coming forward with this scheme very late in the day, with two months to go before the end of the transition period, is the Minister absolutely sure that the industry—or all three sectors that are going to fall within this regime —has been given enough time to adapt to a new system?
I would like to place on record the industry’s view that it is critical across the board that the UK emissions trading scheme has the capacity to link to the EU ETS. Is it still the Government’s intention to follow that? I understand that everyone from industry to environmental non-governmental organisations share this view. Were the Government to diverge from the EU ETS, will the Minister assure me that we would not be simply diverging for divergence’s sake and that there would be a very good reason to do so?
I turn to some more specific questions that, as I said, the Minister might wish to write to me about. She said very clearly that this regulation has been consulted upon and has the support of all four devolved nations. Can she assure us today that whichever carbon-pricing scheme is chosen, it will have the full endorsement of the devolved authorities?
What procedure will be followed to ensure that the devolved authorities are actively involved in the decision-making process as we go forward? My noble friend was heavily involved in the discussions yesterday, which are ongoing, on the United Kingdom Internal Market Bill. This is a classic potential example of why we need to ensure we carry all the devolved authorities with us.
The Government have presented their proposals for a UK emissions trading scheme in this form, which is regulated by a legally binding emissions cap. What assurance is my noble friend able to give that it is possible to align the proposed carbon emissions tax with net zero given the lack, as I understand it, of an emissions cap? What further assurances can she give that the revenue collected by a UK emissions trading system would be hypothecated and reserved largely for climate measures and investment in low-carbon energy? That would at least ensure our industry remains competitive going forward.
Will the Government ensure that the level of the carbon emissions tax will also be set in a fair and transparent manner, to ensure that it is not subject to political considerations—Governments may change—and that it can be aligned with the UK’s legally binding net-zero trajectory? On that point, is my noble friend convinced that industry will be able to meet what I understood her to say would be a target capped allowance that will be 5% below what it might have been expecting to meet as part of an EU Emissions Trading Scheme? In opting for a carbon emissions tax instead of an ETS, with months to go before COP 26, is this sending the right message on the UK’s commitment to carbon markets as envisaged by Article 6 of the Paris climate agreement?
As I say, these questions are technical and, since I have a couple of others, it is probably best if I write to my noble friend. However, I am glad of the opportunity to debate this instrument and put the questions to her today.
We are going to return to the noble Baroness, Lady Bennett of Manor Castle.
My Lords, I apologise for the technical hitch, but I was unable to see or hear the Committee. I was going to say that it was a pleasure to follow the focus of the noble Lord, Lord Bilimoria, on the terrible standard of UK housing stock and the need to decarbonise home heating. This is the Cinderella of energy policy and it needs to be put centre stage. But it is also a great pleasure to follow the noble Baroness, Lady McIntosh of Pickering. It is no surprise to be following her, given her intense involvement in environmental issues.
It is always my intention to be positive when I can, so I welcome the fact that there has been consultation with and agreement from the nations of the UK on this order. We would like to see this happening in many other areas of governance. I also welcome the fact that there is a promised and apparently firm timetable for appropriately aligning to a net-zero trajectory by January 2023 and no later than January 2024. However, I would of course like to see faster action.
The net zero by 2050 target is grossly inadequate when we look at the science and the facts on the ground —from the failure of the Arctic sea ice to begin reformation this year to the fact that in Colorado they are hoping for snow to end an unprecedentedly long wildfire season. The Green Party is calling for a 2030 net-zero target.
One thing that Covid-19 has shown us is that the way in which our society operates can change quickly under emergency conditions, and we are in a climate emergency now. The whole Arctic Ocean is heading for ice-free conditions in the future, possibly very soon, if defined as less than 1 million square kilometres of ice cover. That is down from 8 million square kilometres just 40 years ago. We have just come out of the warmest global September on record and it is now more likely than not that 2020 will be the warmest year for the earth’s surface since reliable records began—and without a major El Niño event, which has contributed to most of the prior record warmest years. The noble Lord, Lord Bilimoria, painted a picture of successful policy. That does not look like a successful picture.
With the Covid-19 lockdowns, there was a significant drop in emissions in the first half of the year globally, but I want to quote Hans Joachim Schellnhuber, the founding director of the Potsdam Institute for Climate Impact Research. He said:
“While the CO2 drop is unprecedented, decreases of human activities cannot be the answer … Instead we need structural and transformational changes in our energy production and consumption systems. Individual behavior is certainly important, but what we really need to focus on is reducing the carbon intensity of our global economy.”
In simpler terms that is system change, not climate change, which is what this statutory instrument has to be part of delivering. As the Green Party has always said, individual action cannot make a difference on the scale needed; we need to make a massive adjustment to and transform our economy and society, so that we no longer see the few profit from pumping carbon into the air while the rest of us pay with the planet in flames.
I am disappointed that the Minister’s introduction had such a focus on economic growth. To quote a long-term green saying, you cannot have infinite growth on a finite planet. Economic growth has given us an unhealthy, poverty-stricken and unstable society. We need a different target in policies and systems to deliver the energy and goods that people need within the physical limits of this one fragile, damaged planet.
I will make no apologies for continuing to remind your Lordships that the UK has a unique responsibility as the chair of COP 26. If we think about what history will remember from this period, the result of that meeting will feature far higher, for good or ill, than any other events of our time—no matter how hard-pressed we are at this moment by the Covid-19 pandemic interacting with the pressing poverty and inequality in our society, as highlighted in an important report today by another Member of your Lordships’ House, the noble Baroness, Lady Lawrence. I suggest to the Committee that we ask ourselves whether the SI today and all the Government’s policies go far enough. Will they be part of the solution or of the problem?
The position of the UK’s Green Alliance on the UK’s emissions trading replacement for the EU-ETS scheme is that
“the general principle that should apply is that any new regime has to be ‘as strong or stronger’ than current arrangements.”
That would seem to be the promise of government policy although, as so often with what we debate in your Lordships’ House, there is a risk of a devil in the detail. An SI scheduled for next month refers to the arrangements to make free allowances for businesses most at risk of transferring production to other countries with less stringent emissions constraints.
It is of course impossible to talk about the EU ETS without reflecting on how it failed to deliver the needed changes. When the history of the past decade of carbon policy is written, that is likely to figure as one of the great failures. We need to look at this SI in that context.
We come back to the UK’s role as the chair of COP 26. We have the dreadful suffering of the pandemic and the chaos at the end of the Brexit transition period. But we have yet to hear, as the noble Lord, Lord Bilimoria, said, about the talks on the integration of how the EU ETS and Britain’s scheme will interact. What progress is being made? That is one of the many areas on which I look forward to hearing responses from the Minister to my questions, and those of other people.
My Lords, during my days as Energy Minister, when I had a keen interest in sustainability and the renewable energy sector in particular, I had the privilege of launching the non-fossil fuel obligation order—the first steps taken by the UK Government into renewables and the challenge of tackling carbon emissions. I have been strongly supportive of the principle of market-driven solutions to reduce carbon emissions ever since. I should declare that until the end of 2019 I was chairman of Hydrodec plc, a company which used proprietary technology to re-refine used transformer oil in Canton, Ohio, securing the first carbon credits for this process and offsetting what would otherwise be new transformer oil refined from virgin crude.
This order is welcome but, as admitted by the Government, it is tight on time. It is laid before the Grand Committee when the energy sector faces the twin challenges of Covid-19 and the end of the Brexit transition period, in a little over two months’ time. It will be welcomed by the market, but it still faces the twin challenges of some lack of clarity and time constraints.
Before moving on to address the specific problems, I thank Linklaters and Pinsent Masons. They have exceptional knowledge and expertise in the sector, and the work their teams have done on this complex subject is invaluable.
As drafted, the order is for a stand-alone domestic emissions trading system—a UK ETS—as the Minister has made clear. By virtue of being stand-alone it will of course be problematic or, at least, introduce complexities for companies with cross-border operations—for example, those that have taken a UK and Ireland approach. It also means that the market for trading allowances is smaller than if it was directly linked with the EU ETS from the outset. This is particularly the case, as it seems from the order that only allowances created under the UK ETS will be capable of being surrendered to meet companies’ obligations under the UK ETS. This means that EUAs would not be capable of being surrendered to meet companies’ obligations. In addition it looks like CERs and emission reduction units under joint implementation—Kyoto units—would not be capable of being used for compliance with the UK ETS, whereas they can under the EU ETS. Would the Minister confirm that this is correct and if so, have the potential impacts of this in terms of effectiveness been considered?
Much is mirror imaged from the EU ETS. Sadly, we will not be part of it, as a number of noble Lords have already said in this Committee. However, in the EU scheme there is a market stability reserve to ensure that no excess or surplus allowances materialise. This is critical to the higher carbon price. I would be grateful if the Minister could explain why there is no similar instrument in this UK ETS. Are the Government taking an approach that does not recognise the wider world markets, and devalues carbon pricing in the UK at a time when Governments are trying to create and support a market where carbon has a robust price? Companies will be keen to know when the first auctions will take place and to have any guidance for this, so that they can prepare, especially given that the first allocation starts in a couple of months’ time. They will want to understand the trading arrangements for allowances and associated documentation. Companies will also be keen to understand how any proposed carbon tax, yet to be consulted on, will interact with the UK ETS.
Although the Government are proposing to broadly mirror the EU ETS, depending on the proposed date of the first auction, there may not be adequate time for companies to prepare after the order is finalised, taking into account the fact that many companies will be operating relevant installations in both the EU and UK at present, and their current strategies in terms of trading and compliance will therefore reflect this. In deciding to take the UK ETS approach, which does not recognise the wider world markets, are the Government concerned that while the proposed initial cap is 5% below the UK’s notional share of the EU ETS levels from last year, it may not actually reduce emissions sufficiently? UK emissions last year covered by the EU ETS stood at some 129 million tonnes, in contrast to the Government’s proposal for an allowance cap of 156 million tonnes—well above that level. What is the Government’s rationale for this decision?
The companies involved will be keen to gain clarity and to know when the first auctions will take place, and to have detailed guidance on this, so that they can prepare, especially given that the first allocation starts, as I said, in 2021.
It is important to recognise that timing is critical. The cost to emitters and the cost to industry is considerable and, with new regulatory costs and a new compliance system, the more time that industry has to prepare the better. Asking industries at this point to adopt a completely different regulatory system and take on additional compliance costs for energy is a major ask.
I would like to pick up on the point that a number of noble Lords have raised and concentrate the attention of the Committee on the question of a carbon tax, which is still on the table, and ask to be informed of the Government’s current thinking. The concern about a tax route is that a tax is completely divorced from the clear net-zero targets which the carbon pricing mechanism is meant to achieve. I cannot see any coherent read-across strategy between the two, since using the tax route will never guarantee the net-zero commitments of Government. How would it be possible to marry a carbon tax regime to the proposed ETS? You need a staged market-led approach, which cannot be achieved by a carbon tax, but can be reached by an ETS. Perhaps the Minister could also give us her view on the benefits of a carbon tax and whether she agrees with my analysis. How will the Government seek to deliver a policy whereby a carbon tax can be aligned with a net-zero trajectory?
For a long time the tax option was very much a third option: a far fallback position. I hope that remains the case and I would be grateful for the Minister’s views on the subject. It would certainly be a troubling message for the UK to convey at COP 26 if we ended up adopting the carbon tax route. It remains my view that the first item the Prime Minister should discuss with Joe Biden should he be elected President of the United States is the challenge of climate change, the energy transition and the global environment. It would affirm the UK as the trusted friend of the US, as we jointly address the biggest challenge that we face together. It is incumbent on the Government to lead on this issue, work closely with industry and provide timely advice. The order is an important and welcome step in that direction.
My Lords, British industry is very concerned about the UK Government’s approach to carbon pricing after Brexit. The Government have committed themselves either to an emissions trading scheme or to a carbon pricing scheme post Brexit. This is despite the fact that witnesses from business, who recently gave evidence to the business Select Committee, were unanimous in their opinion that a UK emissions trading scheme, with a capacity to link to the EU Emissions Trading Scheme, is critical for everyone, both those in industry and the environmental NGOs. Reasons for this are simple: an ETS works by placing emissions under a cap, thereby producing a defined and legally binding environmental outcome in terms of greenhouse gas emissions reductions. By creating a tradable commodity, emissions trading uses the incentives of the market to ensure that emissions reductions are achieved in both the cheapest and most efficient way. The cap provides a long-term price signal for business, and gives predictability for industry in its decarbonisation pathway. Emissions trading ensures that cash flows in the direction of innovation and investment in low-carbon economies. In short, it provides a balance that works for all actors: flexibility for industry and environmental certainty for policymakers.
In comparison, a carbon tax is not designed to provide certainty as to environmental outcomes. Put simply, the lack of a cap means that is not possible to align a carbon tax with the UK’s legally binding net-zero target. Setting the carbon tax at a level necessary to achieve climate action is extremely difficult, as emissions are controlled by a set of external factors. Experience shows that taxes face additional challenges in the long run—as has been said by the noble Lord, Lord Bilimoria—because they are highly politicised. No Government can provide long-term certainty over future pricing levels. This restricts the industry’s ability to hedge and puts in jeopardy the popular support for carbon pricing among the general public.
I too have a few questions. To some extent, they overlap with those of the noble Baroness, Lady McIntosh of Pickering. I want an assurance that whatever carbon pricing scheme is chosen, it will have full endorsement of the devolved authorities and that they will be actively involved in the decision-making process. The Government have presented their proposals for a UK emissions trading system that is regulated by a legally binding emissions cap. What assurance can they give us that it is possible to be regulated by a legally binding emissions cap? What assurance can they give us that it is possible to align the proposed carbon emissions tax with net zero, given the lack of an emissions cap? What assurances can the Government give that that the revenue collected by a UK emissions trading system, or a UK tax, would be hypothecated and largely reserved for climate measures and investment in low-carbon energy?
Article 6.2 of the Paris climate change agreement allows two countries to link their emissions trading systems. I was talking this morning about two such linked systems, both of which have a partner in the EU and one outside. Evidence shows that this will enable the UK to move to net zero more quickly and at less cost. Are the Government aware that opting for a carbon emissions tax would negate any possibility of such a linkage, given that an operational emissions trading scheme is necessary to allow linkage negotiations to begin?
Are the Government aware that opting for a carbon emissions tax only weeks before the end of the transition period will result in significant new regulatory costs for industry as it grapples with a new compliance system in the middle of a global economic crisis? Do the Government understand that an emissions trading scheme provides continuity for industry at a difficult time? Do the Government agree that by opting for a carbon emissions tax instead of an ETS just before COP 26 would send a troubling message to it about the UK’s commitment to carbon markets, as envisaged in the Paris climate agreement?
I fully concur with what has been said about heat emissions; they are most troubling and something on which every Government should get a firm grip. Despite the fact that there is a lot of sympathy for the aviation sector, as a big emitter, it needs to be included in any system.
I thank the Minister for her introduction to the order and welcome her to the duties of responding for the Government on energy and climate change. As she explained, it is important that the UK continues with an emissions trading scheme, having left the EU scheme, as it covers 33% of UK emissions. It is an essential element of decarbonisation policies to encourage cost-effective emission reductions along the pathway to the net-zero target. I approve of the order very much on that basis, and on the basis that the clear preference is for the UK ETS to be linked to the EU ETS post the implementation or transition period. I am glad that the CBI agrees with that position, as outlined by the noble Lord, Lord Bilimoria. Paragraph 6 of the Explanatory Memorandum states this in terms of the Government being
“open to considering a link between a future UK ETS and the EU ETS … to establish a much larger carbon market”,
creating more opportunities for emissions reductions, greater cost efficiencies and increased flexibility.
As climate change and the ETS are devolved matters, the tussles of the scheme at EU level will be replaced with tussles to which any UK scheme may give rise with the devolved Administrations. Would the Minister care to comment on which set of tussles she considers may be the more intractable? I will not widen discussion into the dispute-resolving mechanisms of the common framework and how effective they may or may not be. However, the noble Lord, Lord Bradshaw, is correct to be anxious that dialogue with the devolved Administrations is constructive.
The subject gives rise to my first question regarding whether the UK will resolve the remaining difficulties in negotiations with the EU and include the preferred option of linkage with the EU ETS. Does the Minister have any important news on that? It is understood that the order envisages the UK emissions trading scheme as a fallback position, and that this will by and large shadow the EU ETS. Can the Minister say whether development of the UK’s ETS will take place with a view to future linkage, or will a carbon emissions tax be set up instead? Time is now becoming critical to provide leadership and credibility in the run-up to COP 26 next year. A separate carbon emissions tax would become more open to political intervention, and more institutional safeguards would be needed to ensure that pricing would remain consistent with the pathway to net zero. Can she now rule out the possibility of a carbon tax regime? I understand that the question still has to be settled with the Treasury. The noble Lord, Lord Moynihan, is also concerned with that continuing uncertainty.
Regarding the shape of the proposed UK ETS, there are some curious figures. In paragraph 7 of the Explanatory Memorandum, it is proposed that the initial cap
“be set at 5% below the UK’s expected notional share of the EU ETS cap for Phase IV of the EU ETS”.
First, is that 5% lowering of the cap ambitious enough? Secondly, are the figures that the Government calculate the correct ones? The figures given are that 156 million allowances be set for 2021. However, I understand that carbon emission reductions are progressing at a faster rate, and that 129 million allowances would be more likely as the expected figure. Can the Minister explain why the latest data is not being used?
We can agree that the moving target of reduction percentages remain in line with the EU scheme. However, as the Government concede that the cap progression will be assessed against the trajectory towards net zero as advised by the Committee on Climate Change and its sixth carbon budget, this could amount to quite a demanding correction, as the Government have not maintained compliance with the fourth or fifth carbon budgets. Given how important the climate emergency is, as the noble Baroness, Lady Bennett, explained, and how ambitious we must be in continuing to set the pathways to the future, why do the Government consider that they have the luxury of delaying the correction until at least 2023 or even January 2024? This may need to be considerably more than setting a cap lower than the 5% level, and with more realistic figures. Can the Minister explain more fully the rationale behind the proposals outlined, and commit to giving more urgency to the matter in the long-delayed energy White Paper?
The noble Baroness, Lady McIntosh, asked whether the UK emissions trading scheme would set any more net cost on consumers. My understanding is that it would not, but the Minister may know whether that answer will still be correct in relation to any emissions tax alternative, and whether the 5% cap below the UK’s share of the EU scheme would also be commensurate with that understanding. What more stringent level below the 5% would still be consistent with the same net costs to the consumer, should a more radical correction be required in either 2023 or 2024?
Many more elements still need further clarity, such as the amount of free allowances and details of carbon auctions, and I welcome any further detail that the Minister may be able to give the Committee today.
I thank noble Lords for their valuable contributions to this short debate, and for their broadly supportive comments on carbon pricing and this SI. I recognise the strength of feeling about the carbon emissions tax and reassure noble Lords that no decisions have been taken about it; I shall certainly make sure that their voices are heard.
The noble Lord, Lord Bilimoria, raised the need to ensure that our heavy industrial emitters receive free allocation to ensure competitiveness. Free allocation of allowances will continue to be the main policy instrument through which carbon leakage risk and competitiveness impacts are addressed in the UK emissions trading scheme. Our initial UK ETS free allocation approach will be similar to that of the EU ETS period 2021-30, to ensure a smooth transition for participants for the 2021 launch. In 2019, the value of those free allowances given to the UK installations was over £1 billion, taking an average EU allowance price of £22. The Government also compensate some energy-intensive industries for the indirect cost of the ETS and other climate policies passed on to electricity prices.
The noble Lord, Lord Bilimoria, also mentioned the CBI’s heat commission report. I welcome his commission’s thoughtful recommendations on how to decarbonise this too often forgotten sector, which the noble Baroness, Lady Bennett of Manor Castle, described as a Cinderella sector. As he will know, industrial heat processes are within the UK ETS, but heating in domestic and non-domestic buildings is not. The Government plan to publish a heat and building strategy in due course that sets out our immediate and long-term actions for decarbonising heating in buildings. An industrial decarbonisation strategy will be published in the spring.
My noble friend Lady McIntosh raised a series of important and detailed questions. Given time constraints, I will be happy to respond to them in writing, but she also raised the impact of Covid on the aviation sector, as did other noble Lords. Our absolute focus in government at this time is combating Covid-19. We recognise the challenges that Covid-19 has caused the aviation sector and are working closely with the industry to provide support, but it is important that we continue to work on our longer-term priorities, including tackling climate change. There should be a minimal impact on the sector, as the UK ETS will ensure that aircraft operators continue to face obligations for emissions on UK routes that will no longer be part of an EU ETS.
The noble Baroness, Lady Bennett of Manor Castle, rightly said that we should question whether we are going far enough. That is the right question to ask and why we are committed to consulting within nine months of receiving the Committee on Climate Change’s sixth carbon budget advice, to ensure that the cap is net-zero consistent.
My noble friend Lord Moynihan, the noble Baroness, Lady Bennett, and the noble Lords, Lord Bilimoria, Lord Bradshaw and Lord Grantchester, all raised linking a UK ETS with the EU ETS and the status of negotiations with the EU. As noble Lords will appreciate, negotiations are still ongoing and it would clearly be wrong of me to prejudice the outcome of those discussions. We are continuing discussions with the EU on carbon pricing, and we have also been clear with the EU that we are open to considering a link if it is in both sides’ interests. We have been clear that, whatever decisions we take on carbon pricing and whatever the outcome of those negotiations, we will ensure that the UK will have an ambitious carbon pricing system, in line with our net-zero commitments.
The noble Lord, Lord Grantchester, asked why the cap, while 5% lower than the EU ETS, has been set at 156 million tonnes above current emission levels. The cap we are setting at the start will enable a smooth transition from the EU ETS to the new UK ETS to provide certainty for business. Demand for allowances is expected to come from the banking of allowances for future years or as a hedge against price increases. As such, some headroom is crucial to allow for these behaviours to continue without risking price spikes in the early years of the system. This has been acknowledged by the Committee on Climate Change in its advice to us. This initial cap is already more ambitious than the UK’s notional share would have been if we had stayed in the EU ETS. I reassure the noble Lord that once we have received the Committee on Climate Change’s advice on the sixth carbon budget, we will consult next year on a net-zero consistent cap. It would not be right to set the level of the cap before we have received this advice, but I reassure him that we are seized of the urgency of making this decision once this advice has been received.
I confirm to my noble friend Lord Moynihan that international credits cannot be accepted for compliance with the UK ETS. This is the same as would have applied in the EU ETS during the same period. With the UK ETS we will continue to lead the world in carbon pricing, which is why we plan for the UK ETS to be the first truly net-zero consistent emissions trading scheme.
My noble friend asked how the devolved Administrations will be actively involved in the decision on the eventual carbon pricing mechanism. This concern was also raised by the noble Lord, Lord Bradshaw. We have worked closely with the devolved Administrations throughout the development of the UK ETS. Their views on the ETS and the potential carbon emissions tax have been communicated clearly and are understood by the UK Government. The final policy decision will be made collectively by the UK Government, but with full consideration given to the devolved authorities’ views. We will of course work with them to ensure that they have the support needed to implement either policy option.
My noble friend also asked for the likely date of the first UK ETS auction in 2021 and about the operation of a market stability reserve. The current proposed timing for introducing UK emissions allowance auctions is the second quarter of 2021. We will not bring in a supply management mechanism like the MSR from day one because an SAM cannot be operational in a stand-alone UK ETS until approximately mid-2022. This is due to the requirement for at least one year of verified UK emissions data. We will have a transitional auction reserve price in place to prevent very low allowance prices and ensure minimum price continuity. We will consult separately on the design of a stand-alone SAM if it is required in due course.
The noble Lords, Lord Grantchester and Lord Bradshaw, and others asked questions about whether the Government will proceed with the UK emissions trading scheme or a carbon emissions tax. We understand businesses’ need for policy certainty and will provide it as soon as we can. This instrument is required to establish a UK ETS, either stand-alone or linked. It is critical to ensure that this can be delivered for the end of the transition period.
I think I have answered most questions. I will read Hansard and, if I have not, I will reply in writing.
This Order in Council, laid under the Climate Change Act 2008, establishes a UK-wide greenhouse gas emissions trading scheme, which will drive cost-effective emissions reductions across our intensive industries, and our power generation and aviation sectors. As we reach the end of the transition period, this legislation will ensure that the UK has a domestic carbon pricing policy fit for the net-zero future that we have led the world in committing to. The UK was a pioneer in carbon pricing and trading almost 20 years ago and has taken a leading role in the continued development and improvement of the concept through our participation in the EU ETS. We have therefore designed the system with the benefit of that knowledge and experience.
In this way, many features will be familiar to businesses. We will fulfil our promise of a smooth transition to our future carbon pricing policy. At the same time, launching a UK ETS will allow us to have autonomy to pursue our climate goals in the way that works best for UK. In some areas, we have already taken the opportunity to make the system work better for the UK and we will continue to do this as the UK ETS evolves over time. Most crucially, we will consult on aligning the emissions cap of the UK ETS with our net-zero commitments. We will seek to implement changes by January 2023 and no later than January 2024.
Alongside the UK ETS, the Government have an ambitious range of policies in place to help industry to reduce cost and decarbonise while supporting a clean, green recovery from Covid-19. These schemes must of course be supported by an effective carbon pricing policy. With the EU ETS having covered around a third of UK emissions between 2013 and 2020, carbon pricing is a key tool for achieving our carbon emission reduction targets at the least cost to business.
As a point of clarification, one of the difficulties we have in hybrid sittings is that those present cannot be permitted to follow up and ask additional questions, simply because those participating remotely cannot do so. But should any of those present wish to pursue these matters with the Minister I am sure she would be amenable—I can see her happy smiling face—to doing that should it be required.
My Lords, I remind you all to hose down your desks and seats before you leave.
Arrangement of Business
My Lords, the hybrid Grand Committee will now resume. Some Members are here in person, respecting social distancing, while others are participating remotely, but all Members will be treated equally. I must ask Members in the Room to wear a face covering except when seated at their desk, to speak sitting down and to wipe down their desk, chair and any other touch points before and after use. If the capacity of the Committee Room is exceeded or other safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes. The time limit for debate on the following order is one hour.
Infrastructure Planning (Electricity Storage Facilities) Order 2020
Considered in Grand Committee
My Lords, the draft order was laid before the House 14 July 2020.
Electricity storage will play a crucial role in helping us meet net zero by 2050. It provides flexibility so that renewable generation, electric vehicles and heat pumps can be integrated on to the system. Deploying smart and flexible technologies, such as storage and demand-side response, could save up to £40 billion by 2050.
We currently have around 4 gigawatts of operational storage in Great Britain. National Grid estimates that we could need up to 40 gigawatts by 2050. This Government are committed to creating a best-in-class regulatory framework for storage by removing barriers, reforming markets and investing in innovation through actions set out in our 2017 smart systems and flexibility plan. Reforming the planning system to remove barriers and introduce a more appropriate planning treatment is a key action for storage under this plan.
Currently in England and Wales, where storage facilities are above 50 megawatts and 350 megawatts respectively, planning consent must be sought from the Secretary of State under the nationally significant infrastructure projects—NSIP—regime. Where facilities are below these thresholds, they are consented by the relevant local planning authority.
Evidence collected through a consultation published in January 2019 demonstrated that the 50 megawatt threshold is distorting sizing and investment decisions in England. For example, there is a clustering of storage projects sized just below the 50 megawatt threshold, and projects have been split into multiple 49 megawatt projects to avoid consent through the NSIP regime.
Following consideration of this evidence, in October 2019 the Government consulted on removing electricity storage, except pumped hydro, from the NSIP regime in England and Wales. We received 28 responses from industry, which were broadly supportive. The NSIP regime was established to streamline the consenting process for major infrastructure projects where the benefits are national, but the planning impacts are local. Here, it is appropriate for the Secretary of State to weigh up this planning balance.
For batteries and more innovative forms of storage, the planning impacts are low compared to pumped hydro and other forms of generation. Therefore, the extra time and cost of the NSIP regime is not proportionate and limits the size of new projects to 50 megawatts. We have not seen any stand-alone battery storage facilities deploy above 50 megawatts. This order removes these technologies from the NSIP regime, meaning consent will generally be sought from the local planning authority. To ensure consistent treatment and a level playing field in economic competitiveness across the locations, this will also apply to Wales where the NSIP threshold is currently 350 megawatts.
If storage was removed from the NSIP regime only in England, there would be different approaches between England and Wales, as only consents for generating stations below 350 megawatts have been devolved to Wales. This would result in storage facilities of any size in England not being consented under the NSIP regime, whereas in Wales, storage facilities above 350 megawatts would be consented under the NSIP regime. Under the SI we are debating today, electricity storage, except pumped hydro, will generally be consented by the relevant local planning authority in England and Wales.
This SI could unlock investment in larger storage projects, supporting low-carbon jobs and decarbonising the energy system. Additionally, we estimate that this could save industry between £500,000 and £7 million annually. These savings are due to the reduced administrative costs associated with the local regime and a reduction in infrastructure costs where projects now choose to co-locate rather than build separately.
Once the legislation is passed, in England the industry will still be able to use Section 35 of the Planning Act to request that the Secretary of State direct a project into the NSIP regime for consent if it so wishes.
This order does not remove pumped hydro storage from the NSIP regime. This technology has significant planning impacts and often requires several other consents, which can be granted under the NSIP regime, making it a more efficient consenting route. Further to this, the pipeline for pumped hydro storage projects is located in Wales and Scotland due to their favourable geographic sites. The threshold for pumped hydro storage to be consented by the relevant Ministers as opposed to the local planning authority is 10 megawatts in Wales and 50 megawatts in Scotland. Therefore, retaining the 50-megawatt threshold in England better aligns with the treatment of pumped hydro across Great Britain.
Should Parliament approve this order, a parallel order will be required to amend the Electricity Act to ensure that consents for electricity storage fall within the local planning regime. We will ensure that this applies for facilities onshore and offshore, and we are working closely with the Welsh Government, who intend to put requisite legislation in place for storage, except pumped hydro, located offshore in Welsh waters.
This order will ensure that storage is treated appropriately in the planning system, according to its planning impacts. It removes a key barrier and unlocks the potential for large-scale storage projects, which are critical for meeting net zero. I beg to move.
My Lords, I am grateful to the Minister for that introduction to this document. I am no great expert in power supply, but I find it interesting that the Government still see a difference between power generation and power generation and storage. They both generate power, but one of them takes the power when it is not being used and stores it, as in pumped storage.
As the Minister said, it is pretty unlikely that there will be any pumped storage of any significance in England, because the geography does not really suit. I was interested in her remarks about what I understood to be pumped hydro offshore. If that is really something that we should be looking at it has even greater potential for environmental damage, because presumably you would be using salt water rather than fresh water. I can see a lot of people not liking to have to create a new salt water lake somewhere in England, and I hope that that never happens.
It would be helpful for us in considering this to hear from the Minister exactly where the other storage will come from. She quite rightly said that there would be enormous demand for power storage in future, because of how we will be using electric cars and other electrical vehicles, including electric trains. One of the big potentials for power storage is in using people’s car batteries at night, provided that there was some kind of control system, so the power can be put back before people want to use their cars in the morning. It seems that there will be an enormous demand for storage, which must take into account when there is no wind and it is dark, so there is no solar energy.
I question whether this measure will be sufficient. I have no problem with the order in itself, but I worry about whether we will have enough in future and what the options are. I am sure, when the Minister comes to respond, she can put me right on all those things.
My Lords, it is a pleasure to follow the noble Lord, Lord Berkeley. I share his interest in vehicle-to-grid storage, as I shall reflect shortly, although I would place perhaps greater stress on the need for demand-side management, rather than thinking of electricity as water in a tap that you can just turn on whenever you want.
I note that the study carried out for the Government estimated that the benefits to the UK of a smart and flexible energy system could be somewhere between £17 billion and £40 billion by 2050. Batteries are clearly a crucial part of that, so I welcome the modest progress marked by this statutory instrument and the encouraging words of enthusiasm for battery storage from the Minister.
I often go back to the words of Steve Holliday, CEO of National Grid, in 2015, who stated that the idea of large coal-fired or nuclear power stations to be used for baseload power was outdated. He said:
“From a consumer’s point of view, the solar on the rooftop is going to be the baseload”,
and that energy markets
“are clearly moving toward much more distributed production”.
What was implied in that was a great growth of storage as well as renewable generation—local, household and business based. We can only regret the lost half decade in which progress has been so achingly slow. For example, I have often heard from a great community and social enterprise, Sheffield Renewables, which develops funds and builds, owns and operates renewable energy schemes. It has had some great successes, but been frustrated again and again by inadequate and unstable government policies.
In all these issues, with the previous SI that we were debating and this one, we must not lose sight of the fact that the best possible energy—the greenest, cleanest and cheapest energy—is the energy that we do not need to use. Every form of electricity generation and storage, and every form of energy production, has a cost, both financial and environmental. In recent weeks the International Energy Agency has been getting highly enthusiastic about extremely low-cost solar. This is something that must not be forgotten.
The previous debate focused on the importance of home energy efficiency and decarbonising heating. It is surely the correct order for us to be doing this, speaking about battery storage next, as part of a broader focus on ensuring that we can move towards a renewable-powered world. I would particularly like to see government policy promoting household batteries and rooftop solar, particularly in social housing, where the benefits come close to those who need it most—community distributed systems with distributed benefits. I saw examples of highly successful pilots of that five or more ago, but we have yet to see widespread rollout, although I note that Portsmouth council has just installed battery systems in 13 housing blocks, with a further 20 on the way.
When we talk about storage there is often a focus on batteries, but we also need to look at research and development and policy support for heat and chemical storage, which may well be cheaper and more suitable for some applications. However, in talking about vehicle to grid—I come back to my enthusiasm for that—many years ago I visited the Eden Project in Cornwall, which was already using it. It powered it office from cars and it was all powered up by solar. It is disappointing that we have not seen that taking off in what is now a very mature technology.
I conclude by welcoming the removal of what has clearly been the distorting impact of the NSIP regime on battery storage and the retention of the 50-megawatt threshold in the case of pumped hydro, reflecting, as the Minister did, the potential environmental and local impacts of that. On hydro more generally, I cannot but reflect on my visit to innovative hydro schemes on small farms in Wales a few years ago, which put income into small businesses and communities. There was a sudden change in government policy and that entire business collapsed. With energy policy, boom to bust and sudden changes in direction and policy simply have to end. We need to see consistent long-term stable policies to take us in the right direction in this climate emergency.
My Lords, I come to this debate not to oppose the SI in any way, but because I have a long-standing interest in renewable energy and storage. For nearly two decades, I was vice-chairman of the Parliamentary Renewable and Sustainable Energy Group. I have had a solar roof on a property of mine in Leicestershire for nearly 20 years, which was actually supported by the Labour Government, who were trying to increase usage of solar roofs. So I come to this with some knowledge of renewable energy and depressingly little knowledge of storing electricity. That has been the big problem—how to store renewable energy, which can generate when the wind is blowing hard, but storing it has been much more expensive.
I welcome this SI because it removes obstacles to storing electricity that might otherwise remain. The Dinorwig power station near Llanberis in Snowdonia opened 36 years ago and is the biggest pumped hydro in England and Wales. I have visited it in the past; it takes electricity that might be surplus to requirements—for example, in the middle of the night when there is no peak demand—and uses it through hydro a peak demand. That is one way of storing it. I once visited a similar place not far from me in Leicestershire, a small-scale plant owned by a gentleman who uses wind power from a wind generator to pump water uphill into a pond; he then lets it go when he needs lots of electricity at home. That is on an entirely different scale, but is very valuable. Of course, we have all put electricity into heat sumps; you heat the water up, then you have electricity within the water—or hot water, at least.
It always worries me that government policy can be a sledgehammer to crack a nut. Indeed, sometimes it changes rather quickly, as the noble Baroness, Lady Bennett, just said. But this is a good thing. Can the Minister tell me how battery development is proceeding? I know that it is proceeding. If she does not have the details immediately to hand, perhaps she might write to me with them.
My Lords, this is not really my territory. I hesitate to come into this discussion but I will not delay noble Lords long. I note that the Delegated Legislation Committee in the other place dealt with this proposal in 13 minutes and, even then, the Minister commented on the widening of the discussion beyond the SI itself. That has already begun to happen in this discussion.
There seems to be little controversy surrounding the SI. The 2019 consultation drew 28 responses from industry, which were broadly supportive. However, is not the question that needs to be addressed on what additional funding will be given to local authorities to ensure that there is sufficient expertise and capacity for local planning officers to make fully informed decisions about these planning requests? That is especially important, considering the technical nature of these planning proposals, which will not be spread evenly across the country. If the answer to that is in the fees charged for planning applications, how can we be sure that sufficient professional expertise is available to the local authority? How can we stop that being provided by consultants advising local authorities, which might be the very reason why this scale of project was seen as an NSIP?
Going a bit broader—I realise that this is trespassing—energy will be a key part of the Environment Bill. Members of the House understand the legislative pressures as we come to the end of the transition period for leaving the EU, but there will be little opportunity for the House to discuss that Bill when it eventually comes to us. Can the Minister ensure that we get on to ASAP?
Lastly, I want to echo some of the things that have already been said. One thing that we have learned during these strange times of Covid-19 is the importance of going local. Microgeneration is increasingly important. It does not necessarily depend on the national grid and is potentially much more flexible. We have lots of examples, but we need rapidly to generate more, from 93 solar panels on the roof of Salisbury Cathedral and local community energy schemes to micro hydro and the potential for electric vehicles to discharge into the grid. This is all highly regulated, so how is the development of microgeneration to be progressed more quickly so that we will be better able to live more sustainably with locally generated electricity?
It is a pleasure to follow the right reverend Prelate. I thank my noble friend the Minister for introducing this piece of legislation.
I presume that this legislation is potentially very exciting, if it means that we rely less on, and reduce our dependency on, nuclear, at a time when there is a great question mark over what nuclear facilities will be built. Is my noble friend in a position to say whether the Government or an organisation such as the National Infrastructure Commission have done an audit of the number of current facilities? My noble friend mentioned one, but there are multiples of 49 gigawatts round about. Do we know how many there are and where they are based?
I want to make a plea to the Government through my noble friend the Minister. As far as possible, where renewable energy is to be stored in this way, can it be stored as close as possible to the source of the energy’s production? For example, if it is from wind farms, which are often deeply unpopular if they are onshore, can it be stored as close to the source as possible, and can it be used by the local community? My noble friend has not said that there will any grief but, as the right reverend Prelate alluded to, there sometimes is in local communities, and we need to carry them with us. This could be a massive gain. Having got an onshore wind farm, local communities will then go on to benefit from a constant stream of renewable energy, once the energy has been released from the battery storage.
Can my noble friend say a bit about how electricity is to be stored once it has been released back into the national grid? As far as I am concerned, overhead pylons are a complete no-no. We do not way any more of them. I frequently visit my family in Demark, and I see these massive low-lying overhead pylons. They are very unsightly and they are generally dangerous for low-flying aircraft and helicopters. They could also have an impact on greater use of the new generation of drones that is coming along. That is yet another argument for why electricity should stay as local as possible to the source of its production. Can my noble friend rule out electricity being transported by overhead pylons as it comes on stream? Can my noble friend also confirm that this will help us to deliver low-carbon heating? If that is the case, how would that progress?
I confess that I am not sure how battery storage works. Can my noble friend assure me that, if this is to be treated as part of our critical infrastructure—as in the terms of Sir Michael Pitt’s report and the review following the massive surface water floods that we had in 2008—any electricity storage unit covered by the planning procedure before us today, however large it may be, will not be stored in a flood plain or an area that is potentially prone to flooding? Obviously, if it can be buried at sea, this is not an issue, but I would like my noble friend to put my mind at rest that we will not face challenges by losing electricity that has been stored in this way because of a future flood.
I broadly welcome the thrust of the order. The fact that it has not attracted a huge amount of public interest is obviously reassuring. It fills the gap between renewable energy that cannot be stored and being in a position to store it and bring it back on stream at such a time as it is required. Can my noble friend put my mind at rest that we will carry local communities with us, that electricity will be used as close to the source of its provision as possible, and that we will not have any hideous infrastructure such as pylons as a result of what we are passing today?
My Lords, I thank the Minister for her introduction to this SI. I declare my interest as a vice-president of the Local Government Association.
Also, until May last year, I was an elected councillor on South Somerset District Council. The Minister may know that South Somerset has invested in electric battery storage both to help to balance its budget and to play its part in helping England and Wales to reach their carbon neutral objectives. South Somerset is running a number of initiatives that could contribute to helping the country reach its carbon-zero targets by 2050.
The draft instrument that we are debating today is clear, as is the Explanatory Memorandum that accompanies it. The Government are changing the regulations so that electricity storage facilities over 50 megawatts do not have to go through the national significant infrastructure projects process, thus avoiding the involvement of the Secretary of State. All electricity storage applications will now go to local planning authorities, regardless of their size. The exception is for pumped hydro schemes, for which the threshold remains at 50 megawatts in England and Scotland.
This is definitely a step in the right direction. Local councillors and planners should be able to make decisions about infrastructure projects in their area. In direct contrast to my comments in the previous debate this afternoon, I congratulate the Government on taking this step to improve local democracy and speed up the process.
However, I want to comment on the timeline for the process that has brought us to this debate. In January 2019, the Government ran a consultation on the treatment of electricity storage. This included retaining the 50-megawatt NSIP threshold as it applied to stand-alone storage projects, at the same time amending the 2008 Planning Act to set a new NSIP threshold for composite projects. The consultation ran until 25 March 2019. As the Minister said, the Government then conducted a follow-up consultation, which ran from 15 October to 10 December 2019. This was a period when the country as a whole had its mind on other things.
In July 2020, the Government published their response to the consultation and introduced two statutory instruments, to come into effect on 14 July 2020, for the proposals to be dealt with under the Town and Country Planning Act in future. We are getting used to the Government laying instruments one day and implementing them 24 hours later but, given that the consultation finished on 10 December last year, a timelier implementation could have been achieved with a bit of forethought. The noble Baroness, Lady Bennett of Manor Castle, referred to slow progress.
Other Peers have mentioned other forms of energy generation and storage but electricity storage is vital to making the best use of renewable energy. The noble Baroness, Lady McIntosh, raised the issue of pylons; I will be interested to hear the response on that.
I note that, when the other place debated this SI, it took precisely 15 minutes to do so, as the right reverend Prelate the Bishop of Salisbury mentioned. Despite there being 13 MPs present, only two spoke, along with a Minister. It would be good if some of our debates took only 13 minutes, although I doubt that the quality of the debate would be very good.
That said, I fully support this SI and welcome the fact that local planning authorities will be able to deal with this issue themselves instead of having to go through the lengthy NSIP process.
I thank the Minister for her clear explanation of the order before the Committee. This simple order, which corrects an error from the Energy Act 2016, will make a key difference in the development of much-needed battery storage for the development of renewables and the pursuit of net zero. I am happy to approve the order in that respect.
The threshold of 50 megawatts for determining the avenue of planning requirements was always an impediment to progress. It is disappointing that the Government had to wait for the outcome of linked strings of 49.9 megawatt facilities to appreciate the position— a lesson that took the Government four years to appreciate.
The government consultation also highlighted industry’s concern that the pumped hydro storage threshold needs to be increased to 200 megawatts. The Government rejected that on the grounds of a lack of evidence. Does the industry need to repeat the experience for the Government? Is the Minister convinced that there is no lack of vision in this respect, and that faster progress could not be achieved by raising both thresholds above the 50-megawatt level? What evidence would the Minister’s department need? Would consistency across the devolved Administrations always be considered the more important aspect? However, avoiding the considerable extra burden of the NSIP regime is of great importance to the technology.
During the passage of the Energy Act 2016, there was a lot of general debate on battery storage, underlining the clear necessity of its development to capture greater benefits from renewable and low-carbon technologies. The key element of support for the development of battery storage revolves around how to categorise it under the regulatory framework. The case was made for the creation of a separate licensing regime, either as a subset of generation or as a stand-alone regime.
The smart systems and flexibility plan, and its follow-up in 2018, set out the intention to make changes to both arrangements as well as to the threshold arrangements. Can the Minister give the Committee any information on when further progress will be made with the battery licensing part of that intention? I understand that the department has completed preparatory work to define storage in primary legislation. Will the energy White Paper, which is now long overdue, include these aspects within its appraisals of future plans? Will there be answers in time for COP 26? What indications can the Minister give on that today?
The importance of energy storage’s linkage to the grid through different microtechnologies and the inclusion of schemes to small businesses and households were highlighted by other speakers. We all await the necessary technology improvements to make further progress and will wait to hear how the Government may enhance this with complementary schemes for local communities.
I thank your Lordships for their valuable contributions to this debate. I conclude by emphasising the importance of the changes contained in this SI. The Government are committed to removing barriers to the deployment of electricity storage. The Government and Ofgem’s 2017 smart systems and flexibility plan sets out a range of actions that will be taken to enable the transition to a smarter and more flexible energy system.
This SI will remove electricity storage, except pumped hydro, from the national planning regime in England and Wales. It will result in an appropriate planning treatment for electricity storage. Sizing and investment decisions will be based on a project’s economic potential or capability to store renewables, rather than whether it falls under the NSIP threshold. We estimate that this legislation could save the industry between £0.5 million and £7 million annually.
The noble Lord, Lord Berkeley, asked about pump storage in England—actually, in all places—offshore. To clarify, we are applying this onshore and offshore for legal consistency. We are not aware of any developments of offshore storage. However, storage located offshore, should it be developed, would need to seek planning permission. In Wales, it would need a marine licence from either the Marine Management Organisation or Natural Resources Wales, so there is an element of future-proofing this legislation.
The noble Lord, Lord Berkeley, and the noble Baroness, Lady Bennett, asked whether, given the enormous demand for storage in the future, this will be sufficient in meeting the demand for storage. We are taking a number of steps to remove barriers, reform markets and invest in innovation through the 2017 smart systems plan, including ending double payment of network and policy costs and making it easier to connect to the grid. We have made good progress in improving the regulatory and investment landscape for storage, and we are working closely with industry to develop the next phase of work under the smart systems plan.
The noble Baroness, Lady Bennett of Manor Castle, also asked about promoting household batteries. I wholeheartedly endorse her enthusiasm for these—and indeed for solar panel roof tiles. We have made good progress in improving the regulatory and investment landscape for storage, and we are working closely with industry to develop the next phase of work under the smart systems plan, including addressing barriers to domestic storage. The noble Baroness also made the point that saving energy is at least as important as generating it, which we should all keep in mind.
My noble friend Lord Robathan asked about the progress of battery storage development. There is currently about one gigawatt of battery storage in the GB system; the majority of this has been deployed since 2015. There are about nine gigawatts of storage in the planning pipeline, six gigawatts of which is battery storage and three gigawatts of which is pumped hydro.
My noble friend also asked about investment in new types of battery technology. We have launched a range of innovation competitions as part of our £70 million innovation funding for smart systems. This included a £20 million competition for demonstrating innovative storage technologies. As well as this, we have allocated £317 million to the Faraday battery challenge.
The right reverend Prelate the Bishop of Salisbury asked what additional funding will be given to local authorities. They already have experience of dealing with storage projects below 50 megawatts. We expect, with this legislation, to encourage projects to deploy at a larger scale rather than bring forward new projects. We are working with MHCLG to update the planning practice guidance to refer to storage. I will write to the right reverend Prelate on the possibility of future opportunities to discuss the Environment Bill. He also asked about support for rooftop solar generation; I will write to him with further detail on the actions that we are taking to support this.
In response to my noble friend Lady McIntosh of Pickering’s question about making electricity storage flood-proof, although her point is also applicable to other energy infrastructure, the planning system requires developers and decision-makers to consider the impacts of flooding on the projects in question. This will require consultation with the Environment Agency and other relevant bodies to ensure that any risks to infrastructure are thoroughly considered at every stage of the decision-making process. Following Sir Michael Pitt’s recommendations, guidance for local authorities in relation to this matter is now set out in the National Planning Policy Framework.
My noble friend also asked that local communities be involved in these decisions. These changes mean that storage facilities will generally be consented by the local planning authority, involving local communities in such decisions.
The noble Lord, Lord Grantchester, asked about the threshold for pumped hydro storage. There is no evidence to suggest a higher threshold is needed here. The analysis shows that the planned impacts of pumped hydro will be in an order of magnitude higher than other storage technologies, meaning that the NSIP regime is the most appropriate planning route. A 50-megawatt threshold is consistent with hydro generation, which has similar planning impacts.
The noble Lord also asked about our commitment to define storage in primary legislation. This is an important commitment, and one that we will honour when parliamentary time allows.
Several noble Lords asked about the development of pylons. I am afraid that I cannot give a detailed answer now; I will write to them on this.
To achieve net zero at the lowest cost, we will need significant levels of flexibility to integrate high volumes of low-carbon power, heat and transport. This will require a significant increase in the deployment of electricity storage. The changes contained in this order help to unlock the potential for large-scale storage facilities critical for meeting net zero.
To close, I will once more emphasise the importance of this order in removing a key barrier to the deployment of large-scale storage facilities. Approval of this order will help to bring forward such facilities, supporting low-carbon jobs and enabling us to maximise the output of our renewable generation and progress towards meeting net zero.
I remind Members to sanitise their desks and chairs before leaving the room. Thank you.
Arrangement of Business
My Lords, the Hybrid Sitting of the Grand Committee will now resume. Some Members are here in person, respecting social distancing, others are participating remotely, but all Members will be treated equally. I ask Members in the Room to wear a face covering except when seated at their desk, to speak sitting down, and to wipe down their desk, chair and any other touchpoints before and after use. If the capacity of the Committee Room is exceeded or the safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes.
Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020
Considered in Grand Committee
My Lords, this statutory instrument was laid before the House on 24 September 2020.
Since the emergence of Covid-19, businesses have received billions of pounds in loans, tax deferrals, business rate reliefs and grants to support them and help save jobs. The Government’s recently launched winter economy plan has a further package of targeted measures to provide ongoing essential support as social restrictions are reintroduced in many regions of our country. However, the Government recognise that while most businesses have been able to reopen and many have received significant financial support, some continue to face uncertainty and financial difficulties.
This statutory instrument will help companies by extending most of the temporary measures introduced by the Corporate Insolvency and Governance Act 2020 which were due to expire on 30 September. The extensions to various parts of insolvency and company law will protect companies from aggressive creditor action, promote company rescue and give greater flexibility to businesses by allowing them to hold their annual general meetings in a way which is consistent with social distancing measures.
The Government recognise that these measures have a significant impact on the normal working of insolvency legislation and the rights of creditors. Therefore, it is right that they are not extended for longer than they are needed. We think it is right, therefore, that any consideration of an extension, and for how long, should be done on an individual basis, rather than in the round, taking into account all the circumstances and potential impacts. We will continue to monitor the situation closely and will act swiftly if evidence demonstrates the need to act further.
The temporary insolvency measures being extended are: first, the suspension of serving statutory demands and the restrictions on filing petitions to wind up companies until 31 December 2020; secondly, certain modifications to the moratorium provisions and the temporary moratorium rules, which are extended until 30 March 2021; and, thirdly, the small supplier exemption from termination clause provisions, which is also extended until 30 March 2021.
During these difficult trading times the temporary suspensions on serving statutory demands and restrictions on winding-up petitions have helped many essentially viable companies by removing the threat of aggressive creditor action at a time when many businesses are unable to operate at full capacity due to continuing social distancing restrictions.
Since the introduction of these measures there has been a decrease in the number of compulsory liquidations by 67%, compared with the same period last year. Not extending these measures may lead to essentially viable companies that would be able to pay their debts but for the virus being put into a value-destructive compulsory liquidation. Such an outcome would put jobs and investment at risk and would not be a satisfactory outcome for creditors or the economy. Extending these measures further will instead give confidence and support to companies that are doing their best to stay open in these unprecedented times.
Noble Lords will know that the Government have already extended the temporary suspension on the right of commercial landlords to forfeit the tenancies of businesses until 31 December 2020. This will give further protection to tenants who have only recently been able to restart trading after the restrictions introduced because of the pandemic.
Most landlords and tenants have been working together to reach agreements on debt obligations. However, there remains a risk that some landlords might use aggressive debt recovery tactics against companies struggling to meet rent commitments in these difficult trading conditions. These measures taken together will support such businesses.
While we believe that the extension of the statutory demand and winding-up provisions will be particularly welcomed by commercial tenants, it applies to all business sectors of the economy. A range of other legal options is available to creditors seeking to recover debts that are unaffected by the changes being made here—for example, it is possible to bring a civil claim to recover a debt—but it is important to note that these measures aim to encourage forbearance and do not extinguish any existing creditor rights or interests.
I turn to the other measures related to the moratorium. While support from government measures has meant that there has been suppressed demand to date for the new moratorium procedure, I am pleased that companies, particularly smaller ones, are beginning to make use of them. During normal economic conditions, moratoriums are intended to include important criteria that must be met before a company can enter into one. These criteria protect the integrity of the moratorium, which should be used only for companies with a realistic prospect of rescue.
Noble Lords will know that it was recognised during the debates on the Corporate Insolvency and Governance Bill that a temporary relaxation of these criteria would help fundamentally viable companies impacted by the pandemic to make use of the moratorium. These regulations extend some of those temporary relaxations to 30 March 2021. They, first, allow a company subject to a winding-up petition to access a moratorium by simply filing the relevant documents at court, rather than having to make an application to the court; and secondly, disapply the rule that prevents a company from entering a moratorium if it has been subject to certain insolvency measures within the last 12 months—for example, a company voluntary arrangement, an administration, or a previous moratorium.
The temporary modifications to moratoriums that are being extended relax the eligibility criteria for obtaining one, enabling a greater number of companies in financial distress access to rescue or restructure options free from creditor pressure. This extension recognises the extraordinary and temporary difficulties being caused by coronavirus and will make the moratorium as widely available as possible. The regulations also extend the temporary administrative rules for the moratorium that enable it to operate, as contained in Schedule 4 to the Corporate Insolvency and Governance Act.
The final measure to be extended in the insolvency framework is the small company supplier exemption from the prohibition of termination clauses, which this instrument extends to 30 March 2021. Termination clauses are often found in supply contracts between businesses. They are triggered when a company commences a formal insolvency or a rescue procedure, allowing the supplier to terminate supply immediately. They can also be used by suppliers to demand ransom-type payments to maintain the supply of essential goods or services that may be vital to continue trading and the withdrawal of which could jeopardise any potential rescue. Their prohibition means that contracted suppliers cannot terminate contracts or take other steps, such as demanding additional payments, simply on the basis that the company has entered an insolvency procedure or a moratorium. The measures give an important protection to distressed companies while they attempt a rescue.
However, in the current circumstances such a provision could hit small suppliers hard, potentially endangering their own solvency. While small businesses represent 99% of the business community, 64% of turnover is through businesses that do not fall within the definition of a small business. It therefore continues to be right to temporarily exempt small suppliers from the prohibition, thus allowing them to terminate supplies should they need to protect their own business.
Turning to annual general meetings, the Corporate Insolvency and Governance Act 2020 introduced temporary flexibilities around the way companies and other qualifying bodies could hold general meetings. This allows companies to balance the requirements of legislation and their constitutional arrangements with the prevailing coronavirus restrictions. In doing so, companies can safeguard the well-being of their employees, shareholders and members. This is crucial in the operation of the UK’s strong corporate governance regime, which makes sure that company boards are fully held to account by their members. Without an extension, this scrutiny would be made increasingly difficult.
Despite the fact that, in large part, the season for annual general meetings is behind us, we know that there remain over 100 large companies still to hold an AGM between now and the end of the year. To that we must add the multitude of smaller companies, charitable incorporated organisations and mutual societies that have similar obligations. The extension in these regulations will give companies comfort that they can continue to convene these and other general meetings safely and consistent with their legal obligations.
Overall, the package of temporary measures introduced by the Corporate Insolvency and Governance Act in June this year has been widely welcomed by businesses at this crucial time. We have been told by business that these measures have been essential in supporting them, with many companies now able to trade without the threat of aggressive creditor action being taken against them, and with the availability of new tools to help them to restructure and rescue themselves. I commend these regulations to the House.
My Lords, I chose to re-engage with the legislation—in which I played a part as the Bill passed through Parliament—to make just two very small points, which I am reinforcing from the time when I contributed originally.
My first point is to agree to and support the regulations, as I supported the Bill, but to draw the Minister’s attention to the fact that there has been some change since we last debated this. In terms of the geography of impact, the situation has dramatically changed. Areas have been designated tiers 1, 2 and 3. Those areas which have moved into tier 3, primarily in the north of England —in fact, wholly in the north of England, with the exception of Nottinghamshire—face interestingly contrasting challenges. Some businesses will of course benefit from the compulsory closure and the compensation and support that will therefore be available, both to individual employees and to the businesses themselves. That is to be welcomed. With tier 2, those businesses that are not mandated to close will feel the impact of what is, quite dramatically, a change in the economic activity in the area.
The area that I know best, which is the city of Sheffield and the Sheffield city region, moved into tier 3 from midnight on Friday evening. It is quite clear that the message that goes out, which affects people’s general activity levels, is that they should effectively be in lockdown. The consequence of that, and the economic change that it has brought, means that we will have a differential impact. I wonder whether the Minister would feel that there could be a differential date on the aspects of the legislation which relate to 31 December in particular, but also to 31 March. What leeway exists for the Government to be able to come back if that is necessary? If not, parts of the country will be hit in a very different way from the south. We are painfully aware, I think—and if we are not, we live in a cave in Derbyshire—of the real concern about the divide in our country and the impact that has.
My second point is about the level of debt overall, which has grown exponentially. Obviously, this legislation is intended to assist in terms of the immediate impact on business and the capacity to be able meet legitimate bills. I share the concern, articulated by the Minister, in relation to the supply chain. We have a real challenge there. I also feel that given the accumulation of the debt, it would be useful if he could say whether the Government have any plans to deal with the cliff edge and the transition from the legislation as it stands at the moment to the spring of next year. As it turns out, what has changed over these weeks is the apparent extension of the challenge of the virus, throughout the winter and into the spring of next year. Action must be taken to prevent the exact calamities that he referred to in moving this Motion.
My Lords, it is a great pleasure to follow the noble Lord, Lord Blunkett, and particularly to agree with points he made about the challenges of the north and areas that he knows extremely well. I thank the Minister for outlining the position with regard to the Corporate Insolvency and Governance Act 2020. It is, of course, a mixture of permanent provisions—in particular, the creation of the concept of the moratorium—and temporary provisions, or possibly, as we are beginning to see, semi-permanent ones. The moratorium of course represents a very substantive change in relation to the law on insolvency, perhaps the most material change since the changes brought about after the recommendations of the Cork committee in the 1980s.
I have several questions for the Minister in relation to points that are being presented to us, although, like the noble Lord, Lord Blunkett, I certainly support the Minister’s position. First, why do we have different dates for the extension? Why is it not all being extended, for example, to 30 March? Why is there a different date for the extension in restricting the use of statutory demands and the supplier exemption from the scope of the prohibition on termination clauses in supply contracts? I cannot quite see why that should be. In the same area, can the Minister say something about why the restriction on the use of wrongful trading is being ended totally? That is not being extended and I wonder why.
No consultation has been carried out in relation to this legislation, and I understand that that is because it is on a temporary or semi-temporary basis, as it has been going for less than a year. Given that it can be extended seemingly indefinitely, I wonder whether, if it is extended beyond a year, we will have formal consultation and a proper impact assessment.
In fairness, the memorandum refers to there being some discussion with companies and says in paragraph 7.9 that
“some 120 companies would be negatively impacted should the extension not be granted.”
I found that a little surprising in that it seemed a relatively precise figure—although it does say “some” 120, to be fair—and a very small number, considering that we have more than 4,200,000 companies registered. It is some 0.0025%; surely there must be other companies that would be impacted as well. What are these 120 companies? Are they all the same genre? Are they all small companies, medium companies, large companies? I quite understand that the Minister will not want to name them, but how is it that just 120 companies seem to be negatively impacted? How were they identified and why, seemingly, so few?
The Explanatory Memorandum also asserts that there is support for an extension of the temporary provisions of the Act, which I do not doubt, but from a range of shareholder representative groups. Can the Minister say a bit more about that? Who are these groups and what, precisely, did they say? I thank the Association of Business Recovery Professionals—R3, as it is known in common parlance—for a briefing on this. While supporting the measures in a general sense, it notes, correctly in my view, a point that the noble Lord, Lord Blunkett, also made: that the measures cannot be prolonged indefinitely. What is the Government’s view on this? I appreciate that it is a fast-moving situation, but some clarity on the Government’s approach to the making and extending of these rules would be useful, particularly given the level of corporate debt in the economy.
I also mentioned the lack of consultation on an impact assessment. I would be grateful if my noble friend the Minister could say something on that, should the regulations keep being extended.
Perhaps I may refer lastly to something that the Minister touched on, which is the position on meetings. I very much support and welcome that; it is perhaps long overdue. I do not know why this is not being done on a permanent basis because, in the Zoom world in which we live, we now know that many corporate meetings will be held like this anyway. Why can we not facilitate it on a permanent basis, as other countries have done? In the common law of our country, the Byng v London Life Association case allows company meetings to be held without one person being in the physical presence of another. We would need to put that on a statutory basis to replace some of our current requirements in legislation. Can my noble friend say something on that, too? However, I am very content with the general position in relation to the legislation. I just have those points and questions to put to him.
My Lords, I too welcome this statutory instrument and the extensions that it brings. I slightly question the timing of us having this debate. As I understand it, these regulations came into force a month ago. If we are to see further extensions, can they be put before Parliament in advance of their coming into force rather than a month later?
I will ask two fairly brief questions. First, similarly to the question of the noble Lord, Lord Blunkett, while the extensions are welcome it is clear that as the crisis continues—especially as we continue to tighten restrictions—the problems for many businesses continue to grow. Debt levels are inevitably rising. When conditions improve, as we all hope they will, and the temporary provisions expire businesses will not recover instantly. It will be a slow process as the economy, I hope, picks up again. From a cash-flow perspective the recovery period is often the most dangerous part of the cycle, as businesses need to build up stocks and so on before they start to see the revenue coming through. What thoughts does the Minister have about how we protect businesses during that recovery period—I hope this is not a bit premature—once these temporary provisions have come to an end?
Secondly, I particularly welcome the extension of the exemption from the contract termination clauses for small companies. As the Minister will recall, I am concerned that those clauses would have a disproportionate impact on the smallest companies. He referred to the same point in his speech; that is the reason for the extension. But that is potentially true for the smallest companies even in normal times, as well as when the crisis has ended and the extension has expired. Can he confirm whether the Government will keep this under close review and take action if the contract termination clauses have a negative impact on very small companies once the exemption period has ended?
My Lords, I add my congratulations to my noble friend the Minister on bringing forward and introducing these regulations. However, as the noble Lord, Lord Vaux, said, it is regrettable that the debate comes so late after they have been introduced. I will ask a number of brief questions.
Do the Government know how many companies have actually relied on the moratorium provisions, which we have discussed on previous regulations, and to what extent? I welcome these provisions and it would just be helpful to know how many have been operated. In paragraph 7.7 of the Explanatory Memorandum, reference is made to the need for
“temporary rules … to remain in place to allow time for permanent rules to be drafted”,
which would require “further secondary legislation”. Can my noble friend explain to us today what the timetable is for these permanent rules to be brought forward? Are they already in train and has the consultation period been embarked upon?
I am sure that my noble friend will keep an eye on the extent to which creditors are suffering from the fact that these protections have been given. Is he aware of any particular difficulties being incurred by them?
Overall, I welcome the thrust of the regulations. The deadline is today being extended to 31 December. Like my noble friend Lord Bourne, I ask my noble friend the Minister whether he envisages bringing forward a further extension to that timetable, which is likely to be needed.
I also echo the concerns expressed by the noble Lord, Lord Blunkett. Across the north, businesses are being particularly hard hit at this time. Many retailers in areas that are in lockdown are looking at potential liquidation. These regulations will obviously be welcome to them, but it seems that they are being discriminated against, as they are suffering greater restrictions than those operating in other parts of the country. I look forward to my noble friend’s reply. I support the main thrust of the regulations and welcome the opportunity to discuss them.
My Lords, this statutory instrument could have been an opportunity to correct some of the flaws of the Corporate Insolvency and Governance Act. The most notable flaw is the scope for financial creditors to game a moratorium and suck out assets and cash through the lending terms applicable to new lending during the moratorium period. My colleagues and I were particularly keen to see protection for small creditors, who are likely to be the victims of such strategies by financial creditors. We also sought to move into the highest priority for repayment these same small creditors, who lack the deep pockets to cope with a deferral of payments due to them. The Government have sadly missed this opportunity to act and small creditors, usually small goods and services suppliers, are the losers.
The purpose of this SI is to extend measures in the Act related to Covid in order, as the Government say, to relieve pressure on businesses dealing with the virus. That makes sense to us; we do not object to the SI. The need for it comes as no surprise, as the impact of the virus on businesses is far more prolonged and deeper than the Government anticipated in some rather misplaced bravado of June and July. As business groups have indicated, the revised measures recently announced by the Chancellor are welcome but fall short. The combination of the virus, the likely loss for many of the Christmas market and economic Brexit, even with a deal, is so acute that we will sadly return to this matter many times.
On termination dates for measures under this SI and other places in the Act, it is very difficult for business to deal with the uncertainty of dates that keep moving. I wish that the Minister might agree to put pressure on his colleagues to get some good, solid forecasting from the OBR and a full appreciation of the economic difficulties and crisis that we face in order to put in place strategies that might have a rather longer life and do not require constant extension and revision. Although the measures can often be good in themselves, the uncertainty that surrounds them tends to undermine a great deal of their effectiveness, which I think we would all agree is a shame at a time like this.
My Lords, I thank the Minister for introducing the SI in his customary clear way. We support the measures that are in it. The speeches from the Minister and other noble Lords who have spoken today have recalled for me the happy days, and indeed nights, that we spent on the Bill. It is good to see that some of the debate’s issues are still very live.
Most of the questions that I was going to ask have been asked by others, and I look forward to them getting a response from the Minister. The two that were most interesting, in my mind, included why the Government had chosen not to extend the measure about wrongful trading from directors. We had reservations about that when it was introduced in the Bill in the first place; it has not been continued, and I wonder whether he could explain the Government’s thinking on that point, a point made by the noble Lord, Lord Bourne of Aberystwyth as well.
On the Explanatory Memorandum, the noble Baroness, Lady McIntosh, raised the question of the numbers. We do not seem to know quite how many companies are taking advantage of the breathing space; perhaps the Minister could throw a bit more light on to that. She also raised the arrangements for temporary procedural rules to enable an operational moratorium and the question of whether they might become permanent—and, if so, on what timescale.
The noble Lord, Lord Bourne, asked why we were not moving forward with the technology to allow AGMs to be held virtually. I note that at paragraph 11.1 in the Explanatory Memorandum, the Government plan to produce best practice guidance on holding AGMs flexibly—better late than never, perhaps. I would be grateful to know what the timetable might be for making it permanent.
I have two points to finish. My noble friend Lord Blunkett’s points were really interesting. I hope that the Government will think hard about how they might anticipate the differential effect of the crisis across the country. My noble friend talked about the north, but it is also true in Scotland, Wales and Northern Ireland, where there are very different responses by companies, corporate bodies and individuals to this. Some consideration will need to be given to the differential impact of tiers 1, 2 and 3—and, possibly, 4 and 5, if they ever come—on companies big and small, and how we might deal with that. I hope that there has been some thinking done.
Finally, I noticed that the word “viable” comes a lot from Ministers when speaking about the crisis and on funding that might be available from the Government to take us through. What definition of viable is being used here, exactly? I am an accountant by background, although I did not practise very much, but I do not recognise viable as a term used in the accountancy profession. It is usually much harder edged and backed up by figures. “Viable” seems a very soggy way in which to approach this. Perhaps the Minister could expand on that when he comes to respond. However, to reassure him, we back this SI.
I thank all noble Lords who contributed to this short debate. I know that many also contributed to the legislation when we originally introduced it. There is a great deal of expertise in the House on this subject, and I am grateful to those who have thought to opine further on the extensions that we have introduced.
I thought that the debate started off well with an excellent contribution from the noble Lord, Lord Blunkett, who, rightly, highlighted the difficulties of businesses in areas such as his own dear Sheffield which are subject to tier 3 restrictions. The Government very much recognise the ever-changing context in which we operate, but I hope he is assured that the Government are keeping all these measures under review in light of the ongoing development with the pandemic, in order to act in a proportionate way should it prove necessary to do so. I can further offer assurances to the noble Lords, Lord Blunkett and Lord Vaux, and to my noble friend Lady McIntosh that the measures included in the order are being kept under review as part of this. We would not hesitate to move swiftly to extend them further if that is necessary to support business in a proportionate and viable manner.
My noble friend Lord Bourne raised questions on the differing dates of the extensions within the regulations. The reason for that is that they were assumed to be the best and most viable dates at the time, following consultations with various organisations and other government departments. However, as I said earlier, we will keep those measures under review. The temporary measures all have significant impacts on the normal working of various parts of insolvency legislation and the business community. The term of extension for one measure may not be desirable or needed for another. We think it right, therefore, that any consideration of an extension and for how long should be done on an individual basis, rather than in the round, taking into account all the circumstances and potential impacts.
My noble friend Lord Bourne and the noble Lord, Lord Stevenson, asked further about why restrictions on wrongful trading were not being extended. Careful consideration was given to whether to prolong each of the separate temporary measures introduced by the Corporate Insolvency and Governance Act; a package of targeted measures remains in place to assist companies in financial difficulties. We reached the view that a further extension of the prohibition restrictions on wrongful trading was not required at this time.
The end of the suspension represents the return of an important protection for creditors. As always, it is a question of getting the right balance. At the beginning of the pandemic, company directors faced a very uncertain future with regard to trading conditions. Now that the suspension has been in place for seven months, they will have had time to make a better assessment of the impact of the pandemic on their companies’ viability. We therefore considered it right to restore that provision.
The points made in the debate have highlighted the importance of the measures being extended by these regulations and the necessity of extending them so that businesses continue to benefit from them. The Government have considered the ongoing impact of Covid-19 and the potential impact of each measure to determine how for long each measure should be extended, if at all. Government officials have been in close dialogue with business and professional groups about these measures and the impact that they are having. Given that the Covid-19 crisis is still with us and businesses are still dealing with its impact, the consensus is that the measures being extended are still necessary.
The number of corporate bodies benefiting from the company law measures—my noble friend Lord Bourne referred to 100 companies—are public companies with obligations to hold AGMs with a variety that is testament to our varied business sectors. Countless other companies will benefit from having flexible general meetings in the coming months. The flexibilities are intended to be temporary and only for the purposes of assisting bodies in coping with Covid-19 restrictions. Once the measures and powers expire, meetings will continue to be held as normal and in line with the body’s normal constitution.
The Companies Act 2006 already gives companies the ability to hold general meetings in a virtual form but, generally, they would need to secure shareholder consent to appropriate changes in their articles of association. Ultimately, it is for companies and shareholders to agree what flexibilities they want over the longer term. We do not think it appropriate to mandate that meetings be held in a particular way. These measures give bodies the flexibility to hold meetings in a safe way, including through the use of electronic means. This will allow companies to respond appropriately to changing circumstances where required. I am happy to confirm for the noble Lord, Lord Stevenson, and my noble friend Lord Bourne that the Financial Reporting Council has published guidance on AGMs on its website.
The noble Lord, Lord Vaux, asked how to protect businesses in recovery after the end of the measures for which it is clear that the restrictions have changed. Government support has evolved; its goal remains to protect people’s jobs and livelihoods. As the path of the virus and the threat to the economy become clearer, government action needs to support jobs and businesses while at the same time allowing the economy to adapt to the new normal.
The noble Baroness, Lady McIntosh, asked me about the uptake of the measures, and I can confirm to her that two companies have obtained a moratorium under the Insolvency Act 1986, as amended by the Corporate Insolvency and Governance Act 2020. One company had a restructuring plan under the Companies Act 2006 amended by this Corporate Insolvency and Governance Act 2020 sanctioned by the court. The restructuring plan, which was backed by creditors and sanctioned by the court in September, has allowed the airline Virgin Atlantic to restructure its debts, and to attract in excess of £1 billion of investment and international press attention. I think we can see that the legislation has worked in this respect: it has saved a company that was in difficulties because of the pandemic. We all know what has happened to airlines and the aerospace industry so, in this particular regard, the legislation that we slaved over has proved to be valuable.
Other noble Lords raised questions on the regional uptake of the measures and the impact of different-sized businesses; we are constantly keeping all these measures under review, and they will be reviewed on an individual basis. The low number of cases of each of these new legislative tools since the Act came into force is very likely to be as a result of the range of Government support which is still available and still being provided to companies—as noble Lords will be aware, and as I mentioned above—including the range of temporary measures that have recently been extended for a further period.
These temporary rules on the moratorium need to remain in place to allow time for the permanent moratorium rules, which require further secondary legislation, to be drafted. The law requires that the England and Wales rules require consultation with the Insolvency Rules Committee, which of course will take some time. It would also be undesirable to require businesses to adjust to new procedural rules at a time of great economic uncertainty, such as having to adapt to changes in government fiscal support and other regulatory support as a result of coronavirus.
The noble Lord, Lord Stevenson, asked on the point of viability for insolvency. I accept his point that this is not a term normally used by accountants of his persuasion, but it is being generally used as a term to indicate which companies would be profitable otherwise than for the impact of Covid-19. Over the past few months, businesses have continued to face an exceptionally challenging time, with many unable to trade or their ability to trade at full capacity restricted due to social distancing measures.
These regulations will provide the much-needed continued support for businesses to concentrate their best efforts on continuing to trade and to build upon the foundations for economic recovery in the United Kingdom. Careful consideration, as I said earlier, has been given to extending these temporary measures, and the Government will monitor the situation very closely before making any decisions about any further extensions, including, of course, consulting further with businesses, their representatives and shareholder bodies. With that, I commend these regulations to the House.
Arrangement of Business
My Lords, the hybrid Grand Committee will now resume. Some Members are here in person, respecting social distancing, others are participating remotely, but all Members will be treated equally. The time limit for debate on the following statutory instrument is one hour.
Adjacent Waters Boundaries (Northern Ireland) (Amendment) Order 2020
Considered in Grand Committee
My Lords, I shall start by setting out the context of why we are making this amendment, which is purely technical, now. We are seeking to change the Adjacent Waters Boundaries (Northern Ireland) Order 2002 to accurately reflect the southern boundary of the Northern Ireland zone. The legislation was not amended when the UK Government legislated for its exclusive economic zone—EEZ—in 2013. This was a technical omission, probably due to an oversight at the time. We were alerted to the issue following correspondence between Defra and DAERA in the context of the Fisheries Bill. Given the references to the Northern Ireland zone in the Bill, DAERA wrote to Defra in February 2020, highlighting the legislative defect in the 2002 order.
The Exclusive Economic Zone Order 2013 designated the area of the United Kingdom’s exclusive economic zone. The 2013 order did not revoke the Fishery Limits Act 1976, which set out British fishery limits for the UK at the time. Instead, the Marine and Coastal Access Act 2009, under which the 2013 order was made, amended the 1976 Act to align the British fishery limits with those of the UK exclusive economic zone.
The Adjacent Waters Boundaries (Northern Ireland) Order 2002, which defines the limits of the territorial sea of the United Kingdom that are to be treated as adjacent to Northern Ireland—known as the Northern Ireland zone—was not amended when the UK Government legislated for its exclusive economic zone in 2013. As a result, the co-ordinates for the southern boundary of the Northern Ireland zone in the area outside Carlingford Lough are out of line and do not follow the UK EEZ boundary line.
The order before noble Lords is therefore required to realign the co-ordinates under the Northern Ireland zone with those under the UK EEZ. The area of water in question is outside the Northern Ireland zone boundary line, but inside the EEZ and approximately 35 square kilometres. It can therefore be described as a pocket of uncertain jurisdiction.
As I said, this legislative defect has created a management issue for the Department of Agriculture, Environment and Rural Affairs—DAERA—and the Government, as there is now an area of sea that lies inside the UK’s EEZ but outside the Northern Ireland zone and which cannot be managed by DAERA in relation to sea fishing. In addition, the area of sea that raises this issue straddles the border with Irish waters. This does not affect any other areas of UK waters. The rectification of this legislative defect prior to the end of the transition period will avoid management and enforcement issues for DAERA in relation to sea fishing.
As I set out at the beginning, this is a purely technical correction and we see no controversial issues arising. I hope the Committee will agree. Since we are not seeking to amend the UK EEZ itself there has been no requirement to negotiate any changes with Ireland. However, I can confirm that we have notified it of what we are doing. On that basis, I beg to move.
My Lords, I thank the Minister for his explanation of these regulations. As he said, they are purely technical.
In that regard, I welcome the noble Lord, Lord Murphy; as a former Secretary of State for Northern Ireland, he will be well aware of the southern boundary in Northern Ireland, in terms of Carlingford Lough. It was in my former constituency when I was a Member in the other place, so I am well aware of the beauty of Carlingford Lough and Carlingford Bay, with the Mourne mountains to its rear and the vast expanse of rich fishing grounds. It is also a major tourist resource.
I have had an opportunity to talk to the local fishing industry in the County Down fishing ports of Kilkeel and Ardglass. It believes that this amendment is necessary to align the southern boundary of the Northern Ireland zone to match the boundary of the UK EEZ, as the Minister pointed out. Apparently, this change was not made at the time, in 2013, and DAERA has been trying for several years to get it fixed. It will bring certainty for fishing vessels, as they will know which jurisdiction they are in.
Previously, there was a zigzag line in Carlingford Lough along that part of the sea border between Northern Ireland and the Republic of Ireland. When the EEZ was agreed, part of that line was straightened out. The effect was that the industry gained an area north of the new EEZ line and lost similar south of the EEZ line. The problem was that the area gained north of the new EEZ line was in UK waters but, as the Minister said, was not legally part of the Northern Ireland zone. At the same time, the area south of the new EEZ line was still part of the Northern Ireland zone according to the adjacent waters boundaries order but was in fact part of the Republic of Ireland.
In many ways, there is now legal certainty for the fishing industry over what is in the County Down fisheries zone and what is not, and who has the power to enforce. No significant change to the territory is involved. However, I have some questions for the Minister. He indicated that the Irish Government were notified. Were they consulted or were they simply notified that this was going to happen? Did they give any particular response? Was the Warrenpoint Harbour Authority consulted or notified, because it is a major harbour authority and dock with a lot of employment in the mouth of Carlingford Lough? There are lots of other recreational facilities situated around Carlingford Lough. Were they consulted? If so, what was their response? I ask this because several years ago, when I was a Member in the other place, I—along with the then Secretary of State for Northern Ireland, Owen Paterson—was part of a delegation. We went on a boat from Kilkeel down into Carlingford Lough; we did not realise that we were on the southern side and somebody had to inform the southern authorities that we were there.
Furthermore, was the Foyle, Carlingford and Irish Lights Commission consulted? If so, what was its response? It is a north/south body set up under the Good Friday agreement, which does a lot of good work in Lough Foyle and Carlingford Lough. It is particularly interested in the marine environment and the potential for tourist and economic development. I would like to know whether it was consulted or notified.
What impact will this redrawing have on the voisinage agreement, which is now subject to legislation in the Republic of Ireland? Before that, there was a Supreme Court judgment in Dublin regarding reciprocal fishing rights. It started off as a gentleman’s agreement between the old Stormont Parliament and the Irish Parliament, the Dáil Éireann; it was signed by the then Prime Minister of Northern Ireland, Terence O’Neill, and the then Taoiseach, Seán Lemass, way back in the mid-1960s in a period of rapprochement. It is important that those reciprocal fishing rights continue for the fishing industry in both north and south.
I would like to know what actual consultation, or notification, took place with the fishing industry, particularly with the two fish producer organisations: the Northern Ireland Fish Producers’ Organisation, and the Anglo-North Irish Fish Producers Organisation, which is known now as Sea Source.
When we are talking about fishing and particularly about the Irish Sea, which is an adjacent part of Carlingford Lough, there will be two jurisdictions: the EU represented by the Irish Government and their fishermen, and the British Government and the County Down fisherman. Are we nearer a deal in respect of fisheries and in terms of trade? It is important that there is a deal.
Finally, it is important that we have the jurisdictions marked out, but it is also significant that this is an important area for tourism, and nothing should blunt that. Perhaps the physical embodiment of that economic co-operation, particularly when we are talking about the UK markets Bill, would be the Narrow Water bridge project. This would put one part of the lough in Northern Ireland at Warrenpoint, and the other side of the lough in County Louth. That would be a fairly short journey, but it would be the actual, physical infrastructural embodiment of reconciliation: a north-south project across the lough. That would do so much to foster relations.
I am happy to support this order, in so far as it is not hindering anybody. It will tidy things up, and it will ensure that Northern Ireland’s County Down fishermen have access to both onshore and offshore waters, under DAERA jurisdiction. I am quite happy to note this, and to allow the order’s passage.
My Lords, it was an extremely useful contribution by the noble Baroness, Lady Ritchie, because of her enormous local knowledge and, of course, her experience as Member of Parliament for South Down, covering Carlingford Lough, and dealing with former constituents who are fishers there.
The Opposition will not oppose this order, obviously. It rectifies a mistake, as the Minister has said, in existing legislation. This is an area of water that is inside the United Kingdom waters’ exclusive economic zone, but officially outside the Northern Ireland zone. As he said, it means that the Northern Ireland Department of Agriculture, Environment and Rural Affairs can manage the water there. It should be able to do so, particularly with regard to sea fishing, as he said, in Carlingford Lough.
I am particularly impressed by the points made by the noble Baroness, Lady Ritchie, with regard to consultation. It will be very interesting to hear the Minister’s response to that. He has obviously mentioned the Irish Government themselves, but the other bodies, including the north-south body, are important in these matters. Although this is a technical statutory instrument —no one opposes it—it touches on the much more controversial area of fishing, which is currently the subject of negotiation between the European Union and the United Kingdom. These are hugely significant issues and I look forward to the Minister’s reply.
In this particularly short debate, I want to thank the noble Baroness, Lady Ritchie, and the noble Lord, Lord Murphy, for their general support for the order. I am perhaps not so surprised, because it is uncontroversial, as both of them will know.
I was pleased to listen carefully to the noble Baroness, Lady Ritchie, particularly because she was referring to her former constituency. She knows the area very well. I was grateful to her for a sort of tour d’horizon from her own personal input, particularly focusing on her long-standing local knowledge. She is right that this order will provide legal certainty.
Most of the noble Baroness’s questions focused on the important matter of consultation. She asked whether we had consulted the Irish Government. The amendment is to align the Northern Ireland zone. It does not require us to consult the Irish Government, but we will of course keep in touch with them on this issue.
On that same point, the noble Baroness asked whether the people of the Carlingford Lough area had been consulted. We do not have to consult them and have not done so, but we will notify the relevant bodies, including DAERA, about this order. I hope that that gives the noble Baroness some reassurance. I further reassure her that there is no impact on the voisinage agreement.
The noble Baroness is right to say that the order is pretty uncontentious. On fisheries, negotiations are of course ongoing, and we hope that a deal will be forthcoming. We have always made it clear that, having left the EU, we are, and should be treated as, a separate sovereign nation, including having full control of our fishing rights. I hope that that there will be a good solution to that.
I also reassure the noble Baroness that there is nothing in the order to blunt the tourism trade in Carlingford Lough. I gather that it is a very pretty area.
A number of questions were raised, particularly by the noble Baroness. I will check Hansard, but I hope that my response has covered all the points. I again thank the noble Lord and the noble Baroness for their support.
My Lords, that completes the business before the Grand Committee this afternoon. I remind Members to sanitise their desks and chairs before leaving the Room.
Committee adjourned at 6.32 pm.