HL Deb 08 February 1993 vol 542 cc504-24

8.23 p.m.

Lord Rochester rose to ask Her Majesty's Government whether they will ensure that electricity prices for major energy users such as ICI are internationally competitive.

The noble Lord said: My Lords, some of this country's finest companies are large and intensive users of energy. In my submission their efforts to improve the United Kingdom's exports and balance of trade are being severely damaged by unwarranted increases in the price of electricity since privatisation of that industry in 1991. The increases have arisen from an arbitrary reallocation of electricity supply costs under the new pool-based tariff system, compounded by inadequate competition between National Power and PowerGen. In my view it is essential for the viability of UK manufacturing industry that those failings should be corrected through fundamental changes in energy policy.

I am particularly concerned about the position in ICI, the company in which I worked for nearly 30 years. The price which ICI has to pay for electricity to produce chlorine, caustic soda and hydrogen—in other words chlor-alkali manufacture—at Runcorn has increased by almost 60 per cent. since April 1991 and is now totally out of line with the prices paid by international competitors. That has put at risk the entire UK manufacturing sector based on chlor-alkali production.

ICI is the second largest producer of chlor-alkali in Europe, and the fourth largest in the world. The UK manufacturing sector based on that production is estimated to make a positive contribution to the balance of trade of £1.5 billion annually. An extremely wide range of chemical intermediates and final products arises from that manufacture. Besides caustic soda, examples are bleaches essential to public health, industrial and dry-cleaning solvents, plasticisers and oil additives, paint pigment, agrochemicals and pharmaceuticals. Most of those intermediates and final products are traded internationally, and if the sector is to be competitive internationally it must have competitively priced feedstocks. One of those is electricity, used for the electrolytic decomposition of brine into chlorine and caustic soda.

ICI uses approximately 1 per cent. of all electricity generated in England and Wales at its Runcorn site alone. That site uses more electricity than the whole of the city of Liverpool and is the single largest electricity consumer in the UK. The company has around 4,000 employees working in chlor-alkali and derivatives in the Runcorn area, and a further 3,000 employees supporting those operations on other UK sites. In addition, it is estimated that there are between 10,000 and 15,000 non-ICI employees working as contractors and in downstream businesses in the UK, all directly dependent on chlor-alkali manufacture. I no longer have a financial interest to declare in this matter, but your Lordships will understand how keenly I feel about the potential loss of so many jobs in the company in which I worked, largely in the area in which I still live.

As electricity prices have escalated, ICI has already found itself unable to bid for some tranches of traditional export business. Despite devaluation, at present pool prices up to 15 per cent. of the company's chlor-alkali production capacity cannot be used economically. ICI's view is that unless the price it pays for electricity is returned to an internationally competitive level, its manufacture of chlor-alkali and derivatives will progressively wither away, as major reinvestment will no longer be justified and areas of its business will fall to competitors.

That is no idle threat, for the process has already had to begin with the recently announced closure of 10 per cent. of capacity as declining export competitiveness has reduced demand. Withdrawal of domestic production of the chemical intermediates and bulk products that are supplied to downstream processors in the UK means that those processors will have to find other sources for their raw materials from overseas, and their finished products will thus become extremely vulnerable to direct competition. Uncompetitive electricity prices may thus lead progressively to the demise of the entire UK manufacturing sector based on chlor-alkali production.

The harsh, survival-oriented, cost-cutting measures within the business that ICI has already had to take in attempting to restore profitability are in marked contrast to the increases in half-year profits announced last November by National Power and PowerGen at a time of deepening recession. That evident imbalance between supplier and customer supports ICI's strongly held view that the complex set of regulations put in place with privatisation has not created a fair and competitive market in electricity.

I do not for a moment suggest that privatised utilities should be debarred from making profits; they are essential to finance future investment and to benefit shareholders. But here is a situation where in my view excessive profits are effectively endangering maybe 20,000 jobs and are being made at the expense of one of this country's greatest exporters and, incidentally, an acknowledged leader in the fields of industrial relations, training and safety. The noble Lord the Leader of the House is reported to have become the Chairman of a Cabinet Committee set up to alleviate the scourge of unemployment. If ever there was a case where for both economic and social reasons jobs in manufacturing industry should be safeguarded, this is surely it.

I could go on, but I do not wish to weary your Lordships unduly with statistics. I am satisfied that, as a result of the price increases to which I have referred, ICI has in the past two years been placed at a severe disadvantage to its major chlor-alkali competitors in Western Europe and the USA, where electricity prices are currently between 25 per cent. and 40 per cent. less than those paid by ICI. I am also satisfied that the company's chlor-alkali cost base is internationally competitive in every respect save that of electricity costs. Substantial investment is needed now, but it simply cannot be justified at current electricity prices. Thus, while producers in other countries are reinvesting in their assets, ICI may be forced into further plant closures.

As the noble Baroness, Lady Denton of Wakefield, well knows, ICI has been involved in lengthy discussions with the electricity generators, regional electricity companies, the electricity regulator and the DTI, but has so far been unable to obtain a realistic electricity price for its chlor-alkali business. I indicated earlier that in my view there is an urgent need to correct flaws in the present pool pricing system in the course of a fundamental review of UK energy policy. But ICI cannot afford to wait for the outcome of such a review. That is why, in evidence to the DTI coal review—for that is a forum which is highly relevant to this problem—the company has put forward an interim solution. Essentially it is that the system marginal price component of the pool selling price for single site consumers with a demand over a certain threshold should be discounted according to size of demand down to the marginal cost of efficient coal-fired generation.

I recognise of course that the Government are averse to intervening in the operation of the market. But what is looked for here is the creation of a true market, not some tampering with it through the provision of a subsidy. In the discussions to which I have referred, ICI has found that it is not within the power of the electricity generators to negotiate terms on the basis of an ordinary commercial relationship, but rather that the generators are bound by regulations which preclude them from engaging in a normal bargaining process. Yet if the end result is the collapse of UK chlor-alkali production, that will also be highly damaging for the electricity industry. It is only the Government which can now take effective remedial action.

In this case the Government still own 40 per cent. of PowerGen and National Power, and as the major shareholder they could reasonably exercise their influence to ensure that ICI and other large industrial users of energy are fairly treated. Moreover the European Commission would presumably see nothing wrong in such companies receiving what would amount to bulk purchase discounts, for these are common features of business in this country and no doubt elsewhere in the Community.

The right reverend Prelate the Bishop of Chester asked a Question on this subject last November. Unfortunately he cannot be here today, but he has asked me to say that he continues to be extremely concerned about the devastation which will result in his diocese if this matter is not dealt with rapidly. When the right reverend Prelate asked his Question the noble Baroness, Lady Denton, referred to a statement by ICI that there were environmental and other reasons for significant expenditure at sites such as Runcorn. That is undoubtedly so, but such expenditure pales into insignificance when compared with the savings that would accrue from a substantial annual reduction in the price of electricity, continuing over many years; and without those savings, that expenditure may not be undertaken at all. It is reasonable to think that in the light of recent profits from electricity generation, improvements in productivity and prospective reductions in the price of coal, a significant electricity price reduction for major users of energy should be readily affordable and that it need not be introduced at the expense of either smaller companies or the ordinary domestic consumer.

In asking this Question I am most anxious that nothing I have said and nothing that the noble Baroness, Lady Denton, may say in reply should prejudice a satisfactory solution of the problem. I gladly acknowledge that the noble Baroness's department has been giving careful, and I do not doubt sympathetic, consideration to it. I have, however, thought it right that at this crucial moment before publication of the White Paper, which is to follow the DTI's coal review, I should raise the matter in your Lordships' House. Indeed in my view it is imperative that in that White Paper a solution should be put forward. I very much hope that the Government will now take action that will relieve my anxieties, and those of literally thousands of others on Merseyside and elsewhere whose livelihoods are at stake, and in that way demonstrate the value that they place on safeguarding the long-term international competitiveness of this country's manufacturing industry.

8.35 p.m.

Lord Skelmersdale

My Lords, it is traditional and of course courteous to congratulate a noble Lord who initiates a debate in your Lordships' House. I am afraid that I cannot do so this evening. What I can do, and do most sincerely, is to commiserate with the noble Lord, Lord Rochester, on the need to return to this subject almost three months after the Starred Question of the right reverend Prelate the Bishop of Chester on 18th November.

It now appears that in this time, in spite of many meetings, the inability or perhaps, although I hope not, the unwillingness of the various generating and pricing authorities involved to act on electricity prices for large-scale energy users means that between them they are in danger of damaging a great British industrial process and losing some 4,000 jobs directly and another 3,000 to 9,000 in terms of the knock-on effects. The noble Lord will agree that estimates vary somewhat widely.

The noble Lord has outlined the problem with his usual skill, and there is no need to repeat it in detail. We must though go a little further into the major cost of electricity in the production of chlorine, which amounts to 70 per cent. of the variable costs and 50 per cent. of the whole. It is therefore readily understandable that a major hike, such as we have seen in electricity prices, to large-scale users—I emphasise "large-scale users" because elsewhere, as my noble friend Lady Denton has made clear on another occasion, prices have fallen—will reduce competitiveness with our foreign competitors and see a downturn in the industry here as a short-term result, leading to contraction and even death in the long term.

Many years ago—I suppose that it was not so long ago really—your Lordships' Select Committee on manufacturing industry, chaired by my noble friend Lord Aldington, made this very point with reference to ICI. I cannot cope with kilowatt hours when the use is so enormous. I prefer to use megawatts. When we learn that foreign electricity costs are between £23 and £25 per megawatt hour and our own are now £32, it is quite clear that we must see how we got into that situation and, more importantly, how we can get out of it. There are two reasons for the former.

First, pre-privatisation, large industrial users were subsidised at the expense of smaller ones. My noble friend must be right when she says, as she did on 19th November, that the QICS scheme is essentially incompatible with a competitive market. I would gently remind her that while the generation market is becoming competitive in this country, albeit over-dominated as yet by two large producers, the sales market is decidedly not.

For the second reason we must go back to the Electricity Act itself. It is not a non sequitur when I say that I am a large consumer of chocolate bars. If I buy them in a sweetshop they cost me 25p. If I go to the local cash-and-carry and buy by the outer they cost me about 21 p —the economies of scale and buying in bulk. If in my business I buy single boxes of padded bags for packing my goods, I pay a certain price for each bag. But if I buy 10 boxes of the same sized bag the cost per bag is reduced by means of a discount on the total bill.

Moving (perhaps more applicably) into the realm of heavy industry, my late father used to sell British diesel engines in South America. While his bosses in London allowed him to negotiate slightly on individual engines, when it came to multiple sales he was able to offer substantial discounts per unit.

The same applies to gas post-privatisation. Section 14(3) of the Gas Act states: In fixing tariffs … a public gas supplier shall not show undue preference to any person or class of person … but this subsection shall not apply in relation to tariffs fixed under that subsection with respect to the prices to be charged for therms supplied to any premises in excess of 25.000 therms in any period of 12 months". Subsection (4) continues: a public gas supplier may enter into a special agreement with any consumer for the supply of gas to him on such terms as may be specified in the agreement if—(a) the tariffs in force are not appropriate owing to special circumstances; (b) the agreement provides for a minimum supply of gas to any premises in excess of 25,000 therms in any period of twelve months". If we turn to the relevant section of the Electricity Act we see that the situation is totally different. Section 18(4) specifically states: In fixing tariffs … a public electricity supplier shall not show undue preference to any person or class of persons, and shall not exercise any undue discrimination against any person or class of persons". The difference in treatment of large users has totally disappeared. I think my noble friend will want to give a straight answer to a straight question. Why is there a difference? I believe that that is the key question to emerge from today's debate, and I hope that we shall get the key answer.

An obvious remedy is to allow the generators or the regional electricity companies to make a different contract for base load (or what I call large but erratic load) customers. I am not alone in that view. In a recommendation of the recent report of the Trade and Industry Select Committee of another place it said in paragraph 301 on page 118: We also recommend that urgent steps be taken to introduce demand-side bidding in the pool and to provide large scale users with unvarying demand to be able to bypass the pool and contract directly with generators". That is the final recommendation in the report, although in paragraph 301 it also recommends that the nuclear levy should be tapered so that larger users pay a lower percentage. I cannot see that that will help the situation we are discussing today as the levy is temporary and it will be unfair not to make it a cost per unit. In addition, it is too small on its own to solve the problem of differential electricity costs. A more fundamental solution is required.

It has been suggested that there should be a dedicated power station. Indeed, I made that suggestion myself on 19th November. My noble friend rather misinterpreted my supplementary question when she replied that there was nothing to stop ICI or anyone else having their own power station. She is quite right. However, the lead time for a power station from the time of deciding that one is needed through the planning and consent period to actual production can be anything up to 15 years, though I understand that since I had the honour to serve in the then Department of Energy the period has been reduced to about eight years. Whole industries can be dead and buried in that time. What I meant was, would the Government allow ICI or whoever to buy an existing power station from a generator? Fiddler's Ferry has been mentioned in this connection because of its short transmission lines to ICI's plant, but I am sure there will be others appropriate to other firms in other parts of the country.

In my view, a very bad alternative would be—could a power station owned by an existing generating company have its output determined not by the pool but dedicated to a particular large-scale user? I say that it is very bad because it will necessitate a radical reappraisal of the rules of the pool. That is bound to come sooner or later but I am afraid not in time to save the chlor-alkali industry.

There have been complaints that ICI, the Chemical Industries Association, the Energy Intensive Users Group and the Major Users Energy Council have been in a round of talks with the regional electricity companies, the DTI, the generators, the pool and OFFER. They have been told that none of them has a solution within the law. Thus, they have been passed from pillar to post and nothing concrete has emerged. We have reached the point where only the Government can step in and knock heads together. They should do it urgently. If it means changing the law either along the lines that the Select Committee and I have advocated or in some other way, so be it. It would be no crime or U-turn but merely a sensible adjustment to a very complicated Act that no thinking person expected the Government to get right at their first attempt. I remind the House, and my noble friend in particular, that it took about 120 years to get the rating system to the point where we left it for other systems of local government finance. It is unreasonable to expect a massive legislative sea-change to function properly overnight.

8.46 p.m.

Lord Wade of Chorlton

My Lords, I am grateful to the noble Lord, Lord Rochester, for putting down this debate for discussion this evening. The plant is very close to my home. The impact of the unemployment that will result from the possibility of ICI cutting back its chlorine plant will be a very heavy blow to that part of Cheshire, particularly the area between Chester and Warrington and the fringes of Manchester. We have already had a serious problem arising from the situation at Leyland DAF. Being chairman of NIMTECH—the North West Technology Centre—I am aware of the very definite plans by major companies throughout the North-West to get rid of staff over the next four or five years.

It is clear that very many of our manufacturing companies in the North-West will be faced with heavy redundancies within the next few years. The idea that we may see 10,000 or 11,000 people—that may well be the figure—become unemployed in Runcorn will represent a very serious disaster for the whole of Cheshire and the surrounding areas. In my view it is right to ask the Government to look very closely at the suggestion that ICI has put forward as a possible solution. I believe that ICI has been very sensible about the way it has tackled it. It is aware of government policy on electricity and have taken it into account. The proposals it has brought forward for Fiddler's Ferry seem to me to be a solution that merits careful attention by the Government. More importantly, it draws the attention of the whole of government more closely to the impact of high energy prices.

I have always believed that if we want to have an effective economy, one of the key factors is low energy cost for industry. That is a factor which is always noted by our competitors; it is a factor that is very obvious from those we are now competing with on world markets. Unless government tackle that in a very positive way, our competitiveness at all levels of industry will be seriously affected. I believe that certain pressure groups within and outside government are of the view that we should increase energy prices to try to make an impact on environmental factors which are not necessarily proved to be right but which many people believe. We ought to make very clear that those who wish to see high energy prices as a method of solving an environmental issue will have a very serious impact on employment levels in this country. As we raise energy prices, the impact on employment and the success of our industries will be greater and greater as time goes on.

Another factor to which I draw the attention of government is because of the problems that are now arising in ICI and the problems that will arise in many of our traditionally high-employment heavy industries in the North-West, the pressures just described, and others in the United Kingdom, will make it more and more difficult for them to be competitive in a world where we have to be very aware about costs. Cheshire County Council were aware of this, and in the early 1980s it put together some important strategic plans for Cheshire. It realised that there was going to be a complete change in the way that people would have to be employed. It also realised that it would have to attract inward investment, and look for the right site potential to bring in that investment. It realised that there was going to be a movement in employment from the heavy industries that were slowly going to die and move away to the new types of industry that we would have to attract to bring in world-wide investment.

It put forward these proposals, and took care in the background work that was carried out. It was turned down by the Government. The Government in 1989–90 refused to accept Cheshire's proposals, which were going to lead to much greater employment opportunities in the county. They did it for environmental reasons; for planning reasons; or because, if you like, they were influenced by short-term single issue pressure groups that never thought for a moment of the impact they were going to have on employment and the development of industry.

I support what the noble Lord, Lord Rochester, and my noble friend Lord Skelmersdale have said: it also draws attention to the need for the Government to make clear that the most important thing they can do on any issue that comes before them is to ensure that we stimulate our economic growth; that we create opportunities for employment; and that we make sure that businesses can grow and create wealth. Until the moment has been reached that we have some wealth in this country to do the things that we ought to be doing —until we have that priority—we shall continually come up against the problems of this company and that company running into difficulties.

Time is running out. I was recently appointed to one of the hospital trusts. I find it fascinating and a great challenge. But it worries me that we have to take the kind of financial decisions that should not be a matter of concern in this country. We have the talent, the resources, the ability to create the wealth to do all the things that we want to do, but not if it is said that there is something that is more important than creating wealth. It is like having a business that says it is no longer important to make a profit; it is more important for somebody to have a Rolls-Royce; or for the scenery to be good, or to have something else. Very soon there is no profit. That is what is happening in this country to a degree that we have not appreciated because the problem is growing stage by stage.

The difficulties of ICI and of many of our other great and powerful companies in the North-West are going to get worse and worse until we face up to this problem and realise as a country and a Government that it is industrial development and the creation of wealth that should always be in the forefront of our minds.

8.53 p.m.

Lord Auckland

My Lords, there are few Members of your Lordships' House who have more experience of the chemical industry than the noble Lord, Lord Rochester. I have been a long-standing member of the all-party parliamentary chemical industries group, but I have never worked in the industry, as my comments will no doubt reveal. I intend to make a short speech, because I am not going to get involved in the technicalities of this argument as I am not qualified to do so. But it is worth remembering that in our export league the chemical industry has an important place. Unless we get this matter right our competitors in Europe and elsewhere are going to take advantage of all this.

It is also interesting that everything that we wear, see, eat, drink or touch has a chemical component in it, probably manufactured by ICI. I am not making a plug for ICI. I have no reason to do so. I have never worked for that group, but it is a company that over the years has served this country well. Therefore, the Government need to look carefully into this question. Unless we can get the energy question right here, unemployment will get worse. The Cheshire County Council and the leaders of all three political parties have endorsed this argument, and, after all, Cheshire is an area where unemployment is a real problem, particularly in neighbouring Merseyside. Therefore, I hope that the Government will take seriously what the noble Lord and those in the industry have said. They are not protectionist, but they are trying to keep going an industry that has served this country well.

8.56 p.m.

Lord Sefton of Garston

My Lords, I apologise for not having put my name down on the list of speakers, but it was due to circumstances that I could not control. My purpose in intervening is, first of all, to follow the noble Lord, Lord Wade, in his enthusiastic demands that the Government should intervene. Evidently that is what is needed. My qualification for speaking on this matter is that for 22 years I was chairman of the Runcorn Development Corporation. For two of those years I was a member of the Runcorn and Warrington Development Corporation. I must have been considered fit to do it because it was a Tory Government that moved me from one to the other, and it was a Tory Government that appointed me to the Runcorn Development Corporation.

About 10 years ago the present President of the Board of Trade paid me the compliment of coming along to Runcorn when he was being designated by some people as Mr. Liverpool; the Minister for Merseyside. He came to see me because he was worried about the closeness of Runcorn to Liverpool, and I suppose he took into consideration that I had been the first chairman of Merseyside County Council, which subsequently was abolished. It was a great pity. There was nothing we could do about that.

He came to see me because he realised that the closeness of Runcorn meant that whatever happened at Runcorn subsequently affected Liverpool, and that whatever happened in Liverpool subsequently affected Runcorn and of course Cheshire, which had made tremendous strides in proposing developments that could help us with our problems. However, all in all, it boils down to what the Government will do.

The Minister came to Runcorn at a time when Runcorn was doing very well, thank you very much, from ICI. Of course ICI was one of the main reasons why Runcorn was designated. We had the opportunity to build a new town, to bring people in, and we already had a basic settled population that was mainly a population of working people in Runcorn. That was a tremendous asset. We nurtured it and did all that we possibly could to help Runcorn in the context of the new town. I must say that ICI did a tremendous job towards the creation and development of the new town. It was a good partnership.

However, in my experience of Runcorn, I met many people, although I did not have the pleasure of meeting the noble Lord, Lord Rochester. I detected from my information about ICI at Runcorn that we must not go on supposing that ICI had a permanent life on Merseyside. It started of course because of the salt beds at Winsford. Everybody seemed to grasp the idea that the basic raw material was there and to feel that therefore ICI had a long life there. But I was beginning to hear rumours about brine pipes going to the North East.

Indeed, 20 years ago we were talking about the possibility of ICI being damaged by electricity charges—and that was when we had some control over the electricity industry. I happened to be a member of Manweb at the same time, so I had some knowledge of what could be done with regard to adjustments in that area. More importantly, however, we had the idea that, if ICI was threatened by high energy prices, something could be done to ameliorate the situation. But now we have given up any worthwhile control over the electricity industry, as is evidenced by the fact that the noble Lord, Lord Skelmersdale, suggested that we needed a change in the Act of Parliament. That is not a bad thing—

Lord Skelmersdale

My Lords, I did not go as far as the noble Lord has just gone, which is to suggest that we have lost control. We have plenty of control through Acts of Parliament, the regulating bodies and so on. What we must do is to use that control. I am sure that the noble Lord will agree with that.

Lord Sefton of Garston

My Lords, of course. It all boils down to the same thing—that if we need to change an Act of Parliament or to create a new Act in order to assist the electricity industry so that it can assist ICI, it means, in effect, that we do not have that control at the moment. We would have to go to Parliament to get it. I am simply pointing out that, while there was a relationship between the Government and the electricity industry which would allow them to help ICI, it gave the company some hope. But now all that has gone—and ICI knows what the situation is.

As I was saying, I had long heard rumours about brine pipes to the North East. Recently I have heard rumours about getting rid of the salt deposits near ICI at Northwich. That worries me. I am at one with the noble Lord, Lord Wade of Chorlton, in saying that we should be demanding some intervention. As I have said, the present President of the Board of Trade came to see me at Runcorn. I pointed out to him that the problem in Liverpool—associated with Runcorn —was that Liverpool had lost its reason for existence. It was no longer a junction between another mainland mass and Europe. Therefore, something big had to be done to give it a new reason for existence. I said, "If you don't do something, then in a very short time the population of Liverpool will start to go down because it will drift to somewhere else". I shall not quantify it. However, over those 10 years, the population of Liverpool has decreased by 350,000 from 850,000 to about 500,000 now. That seems to indicate that I was right in my prediction.

We then started to talk about the periphery of Merseyside—and it then became obvious why Mr. Heseltine had come to Runcorn. He wanted to see what its development prospects were. I said, "Only one thing is absolutely certain. You must not rely on the permanent presence of ICI at Runcorn". Although that was pooh-poohed, there now seems to be a danger.

I conclude on this note. It would be a tragedy of immense proportions if, governments of all natures having decided to build a new town at Runcorn, the same decimation that has afflicted Liverpool then overtook that new town. But that will happen. Since that meeting with Mr. Heseltine, I have read extracts from his book and heard speeches. I do not want the Minister to answer any of this in detail because I should like the Government to keep an open mind and to look seriously at the problems affecting ICI. However, I should like to ask this: in view of the statement by the President of the Board of Trade about intervening in the morning, the afternoon and the evening and in view of the statements in his book about how we should intervene to save industry, do the Government intend to intervene at all over the question of ICI and high energy prices?

9.4 p.m.

Lord Ezra

My Lords, my noble friend Lord Rochester has been right to raise this issue at the present time. It seems to go beyond the case of ICI at Runcorn. First, it affects all intensive energy users. Secondly, it raises questions of energy policy, industrial activity, unemployment and overseas earnings. All these issues come together in the particular case which has been raised tonight. I should like to comment briefly on each in turn.

Energy policy is being carefully reviewed by the Government at the moment. We shall soon no doubt be seeing the results of their considerations in the long-awaited White Paper. As has already been pointed out, the Select Committee's report referred to the situation of the intensive energy users. There does not seem to be any doubt that, under the present arrangements for electricity sales and under the legislation to which the noble Lord, Lord Skelmersdale, referred, some long-term changes will be required. We have had so many changes in this country of a structural nature in industry and are left with so little of our industrial activity based on the heavier end that special care needs to be taken to preserve what is left.

It is noticeable that when the Commission proposed the carbon energy tax, to which the noble Lord, Lord Wade of Chorlton, referred, it gave special exemption to the intensive energy users because it knew that any increase in their charges could be very serious indeed. The noble Lord, Lord Skelmersdale, referred to the substantial difference in prices paid by similar users on the Continent. He mentioned that according to the information it provided, ICI at Runcorn is paying £32 per megawatt hour compared with continental prices of between £20 and £25. So it is essential that in any re-arrangement that gap should be closed.

There are two ways how that should be done. First, there should be a fundamental review of how electricity pricing is arrived at. That must take account of intensive energy users, which it does not at the moment; but, as is well recognised, that could take time to work out, and so an interim solution seems highly desirable. The interim solution put forward by ICI, and taken up in the Select Committee's report, is one that is capable of being applied, if the Government are so minded.

To wait until a full scale review of the operations of the pool and electricity prices is carried out could take some time, could require legislation; and, as was rightly pointed out by my noble friend, ICI does not have that time at its disposal if it wishes to maintain its position in the marketplace. So there needs to be a great deal of rethinking in the energy sector. When we come to industrial policy, we must also give a thought to the fact that we must retain not just a balanced activity in the industry; but, if anything, we must widen and extend our industrial base.

The noble Lord, Lord Skelmersdale, referred to the report of the Select Committee on Overseas Trade, chaired by the noble Lord, Lord Aldington, which, over seven years ago now, made that point. So, it would be wrong if, instead of trying to enlarge our industrial base to ensure that it has the necessary variety between different forms of activity, certain deficiencies in the electricity pricing system were to diminish that base still further. In this case, the intensive energy users are all large scale employers. Not just the chemical industry, but the steel industry and the cement industry would be affected. They are intensive employers as well as being intensive energy users. So the impact of the present electricity pricing system on major sectors of industrial activity could be serious.

The impact could be dramatic on our overseas trade. As my noble friend pointed out, with the one case of ICI at Runcorn, the adverse impact on our balance of payments could be as much as £1.5 billion —half of that deriving from direct overseas trade and the other half from the supply of products in the home market which, if they were not supplied by ICI, would have to be imported. That is not a condition which we can regard with equanimity. Our balance of payments is already sufficiently in deficit for us not to run the risk of widening the gap still further. ICI, and the other chemical companies which come into that category, the cement industry and steel, continue to make substantial contributions to our balance of payments. Their competitive position must be safeguarded.

The short-term solution that has been proposed is feasible. It would not have an adverse impact on any other users, pending the time when a full scale review of the operation of electricity prices can be undertaken, so that proper regard can be given to those who consume large quantities of energy. I trust that when the Minister replies, she will be able to confirm what she has already said; namely, that the Government are taking this matter extremely seriously, and that we may look for some indication as to how they propose to deal with this in the forthcoming White Paper.

9.12 p.m.

Lord Peston

My Lords, perhaps I may apologise to your Lordships for the fact that my name appears in disguise on the list of speakers. I gather that that is a result of sheer incompetence by at least one of my noble friends; but as your Lordships are aware, my noble friend Lord Donoughue and I speak with one voice.

I shall start with at least one disclaimer: I do not intend to speak about the energy review. We shall have a chance to do that on another occasion. I hope that when we eventually have the coal industry review and all that goes with it, it will be based on a long-term energy strategy and not on some short-term expedient. I agree with those noble Lords, notably the noble Lord, Lord Wade of Chorlton, who said that what industry requires generally is low-cost energy, low-cost electricity. That is right. We have the paradox that the best way to deal with environmental pollution caused by carbon usage and all that is to make the polluter pay. It is difficult to strike the right balance there, but I am bound to say that as a matter of economics it is puzzling to me that one would simultaneously say that one would tax the wrong use of energy but then excuse intensive energy users from that tax. The whole point would be to place the tax as strongly as possible on the energy-intensive users. Again, the paradox must be sorted out in terms of relating the environmental question on the one hand to the efficiency question on the other hand.

I assume that we are not discussing ICI. I have no intention of going into the detail of that company. I do not accept what I understood the noble Lord, Lord Ezra, to say—that a special case should be made for ICI.

Lord Ezra

My Lords, perhaps I may clarify what I said. I mentioned the fact that there is a whole category of intensive users. I mentioned the steel industry, the cement industry and the rest of the chemical industry.

Lord Peston

My Lords, I am grateful. I believe that whatever solution we find must apply to all those users. In other words, it cannot possibly be to find a device which makes electricity cheaper for ICI. We are, therefore, in agreement on that matter.

Two principles are involved. First, we want low-cost electricity. In particular, we are concerned about the economic future of energy-intensive manufacturing industry because it is in a tough, internationally competitive environment. We are also restricted by the Electricity Act. I took part fully in the debates in this House on the privatisation. I understood that via the so-called X minus Y rule the price of electricity was supposed to fall in real terms. The whole point of regulating the industry was to achieve a real fall in the price of electricity. That was supposed to reflect rising productivity and it was supposed to be an incentive to efficient power generation. We again have before us the great puzzle that while the real price of electricity is supposed to fall, allegedly the real price of electricity to the ICI plant has risen by 60 per cent. We must ask how that has come about.

I agree with most of what was said by the noble Lord, Lord Skelmersdale. However, the notion that what has happened is a surprise is not correct; it is certainly not a surprise to me. If the noble Lord cares to look at some of the speeches which I made during the passage of the privatisation Bill he will see that I argued that privatisation would lead to mistakes in pricing. I argued that the merit order pricing system which we had under the nationalised industry produced an optimal price structure for the British economy. I also argued that post-privatisation we should no longer have that structure. Therefore, I am not in the least surprised that there are anomalies.

However, I am genuinely surprised that the price to a particular client has risen in real terms by 60 per cent. I should not have predicted anything as anomalous as that and I should like the Minister to give an explanation. It makes no sense to me at all. In particular, it makes no sense that an intensive user, a big customer, is experiencing the biggest increase in price. That puzzles me. I expected the opposite to happen, especially when the tariff was supposed to reflect or to simulate what would happen in an effectively competitive environment. When the industry was privatised we were promised that its cross-regulation would lead to a tariff structure which corresponded to competitive conditions. I find it amazing that that has led to the price rise that has been described tonight.

I differ slightly with other noble Lords, therefore. I see nothing inevitable about the price rise to ICI. I see it simply as action which the privatised industry is taking in order to make a great deal of money from its monopoly position. I agree with the noble Lord, Lord Rochester, because I too have no objection to industries making profits as long as they make them in a competitive environment. However, I have very strong objections to industries making profits using monopoly power.

I now turn to the regulator. The performance of the regulator is less than impressive. I put it at its mildest because it is late in the evening. The noble Lord, Lord Ezra, referred to a review of pricing policy and pricing structure. I have asked myself why we need such a review. I had thought that the whole point of having a regulator was to regulate in order to achieve an efficient pricing structure, in particular, a pricing structure which both stimulated competition and produced prices which allowed our manufacturing industry to be competitive and to survive. I believe that in part what has happened is as a result of regulatory failure rather than anything else and is not inevitable. Although I am intrigued and shall reflect further on what was said by the noble Lord, Lord Skelmersdale, about the possible need for a change in the law, I am not convinced of that. But I am convinced that we need a regulator who will do his job properly. I turn now to the noble Baroness's department. I read the words of her honourable friend in another place on this subject. In the very strict sense of the word, I thought that her honourable friend's response was pathetic. I do not say that in a pejorative sense. There was a genuine sense of pathos in that I felt that he wanted to do something but was wringing his hands and had no idea what to do. He claimed that the department had no powers. He claimed also that, if it did have powers, they could not be exercised because of EC competition considerations. Speaking as someone who is strongly pro-European and pro the Community, I hate it when we are told that we cannot do what is right for our industry because of Community considerations. I should like to believe that the Community does not prevent us from doing what is right for our industry.

I bear in mind that the Government own 40 per cent. of both the power generating firms. If I owned 40 per cent. of a firm, I believe I could get it to move slightly in my direction as regards policy. In fact, I believe that I could do that with much less than 40 per cent. Therefore, I believe that the department could do more than wring its hands.

My final conclusion is the same as that of other noble Lords. We know the outcome that we want—a viable industry generally and specifically we want the energy intensive plants to prosper. One can anticipate, because we have been down this road before, all the reasons why we cannot do anything. I hope that I too am not being pathetic, again in the strict sense of the word, when I say to the noble Baroness that I would like her to tell me something that she is going to do rather than what she is not going to do.

9.21 p.m.

The Parliamentary Under-Secretary of State, Department of Trade and Industry (Baroness Denton of Wakefield)

My Lords, first, I thank the noble Lord, Lord Rochester, for raising this interesting matter this evening. As the noble Lord, Lord Ezra, said, it covers many areas which are of enormous importance to the future of this country's economy.

The North-West has some very worthy champions from whom we have heard this evening. That must include the right reverend Prelate the Bishop of Chester, who is not able to be with us on this occasion.

I may speak more softly but I could not agree more with my noble friend Lord Wade that wealth creation is a key issue. There can be no achievement of our other aims unless we are able to create wealth. I confirm that the Department of Trade and Industry believes that wealth is based on manufacturing. I do not underestimate the contributions of service industries but we are committed to the manufacturing industries of this country. No one in my department would underestimate the contribution which ICI has made to the economy.

The noble Lord, Lord Sefton, has longer experience than I of working with the President of the Board of Trade. However, intervention is "on behalf of" and not "in". "On behalf of" has already benefited the North-West when the Government fought to retain the European fighter project and the recent visit of the Prime Minister brought back orders for British Aerospace. The North-West well understands intervention "on behalf of".

I thank noble Lords who recognise the extent to which my answer must be constrained by ensuring that I do not pre-empt the coal review. I assure the noble Lord, Lord Peston, who I am delighted to see sitting in that place this evening—though I suspect not as delighted as the noble Lord, Lord Donoughue— that I am not wringing my hands, but it would be wrong of me to touch on issues which are matters for the coal review.

I can state that the Government's energy policy is designed to secure energy supplies at the lowest possible prices. I agree with my noble friend Lord Wade and the noble Lord, Lord Peston, that environmental issues are a key anxiety. However, I recall my maiden speech, in which I suggested that having green banks and blue sky is rather irrelevant if everybody is out of work. That is a tightrope which we must all walk.

The Government's energy policy is designed to secure, among other aims, energy supplies at the lowest possible prices, diversity of supply, and to meet the customer's needs with maximum efficiency. The Government believe that these aims can best be achieved by opening up the electricity market to competition wherever possible, by exposing the electricity utilities to private sector disciplines and by ensuring that customers' interests are looked after by an independent regulator.

When we privatised the electricity industry, therefore, we created from the outset competition in the generation of electricity, and introduced competition into the supply of electricity. Competition in both of these areas will continue to increase as, for example, more independent generators come on to the system. We also appointed the Director General of Electricity Supply, who is responsible for promoting competition and ensuring that the competitive market operates properly and is refined where necessary.

We believe that on the whole this policy has been successful. All customers whose maximum demand is more than one Megawatt can now shop around in a competitive market for their supplies at the keenest possible prices. The introduction of competition has brought significant benefits to most of these customers. I am delighted to assure the noble Lord, Lord Peston, that the average electricity price paid by industrial customers overall has fallen significantly—by 6 per cent. in real terms—over the three years since privatisation. Medium and moderately large industrial customers have seen even bigger real reductions in their electricity bills. That is an important point.

Contrary to the impression given earlier in this debate, average electricity prices paid by large and medium users in the United Kingdom remain around the middle of the range of EC prices, lower than those in Germany and Spain, comparable with those in Italy and higher than those in France, for example. We appreciate, however, that some very large industrial companies which are intensive users of electricity have experienced significant price increases, against this general trend. The price of electricity is, of course, particularly important to these companies. We recognise that.

Prior to the privatisation of electricity these companies received favourable terms for their electricity under the QUICS scheme, which passed on the savings from cheap coal to some, but not all, very large customers. We believed that this sort of cross-subsidy scheme, which provided favourable terms for electricity to some companies but not others, was incompatible with the competitive market. This remains our position.

I would remind your Lordships that one company's subsidy is without doubt another company's cost. The balance is not an easy one to strike. I should point out, however, that large customers such as ICI pay significantly less than, say, domestic customers because it is more expensive to supply domestic customers. The Electricity Act ensures that discrimination will not take place. However, large users are supplied more cheaply because it costs less to supply them. That is, I think, fair logic. The loss of these favourable terms is the main reason for the price increases which some very large customers have experienced. Restoring these favourable terms would mean that other classes of customer, including other industrial customers and domestic customers, would have to pay more for their electricity.

We could have a lengthy debate—but this is not the time of night to do so—about the size of the increase in prices that some large users of electricity, such as ICI, have experienced. I do not wish to go down that route today, although I hope noble Lords will recognise that I do not necessarily accept as fact every figure that has been mentioned in this debate. Without at all diminishing their importance I must point out that the increases to the large customers must be put into context. A price increase of 60 per cent. for ICI Runcorn has been mentioned. That is a somewhat selective choice of example and it is somewhat misleading. It is taken from a point in March 1991 when ICI's prices were particularly low and takes no account of inflation. Figures produced by ICI itself show that electricity prices at the Runcorn plant increased by some 8 per cent. in total in real terms over the last four years. That is closer to the scale of real increase which large users have seen.

Nevertheless, we fully appreciate the difficulties that some very large customers face. The situation is compounded because, notwithstanding the average figures, we understand that some large users of electricity elsewhere in Europe may receive electricity on more favourable terms which cannot be justified by lower costs of supply.

I know that anxiety has been expressed about a number of more general issues relating to the operation of the market which are of particular concern to large users. For example, I am aware of the criticism of the rises that took place in prices in the electricity pool between May and August of last year. I recognise the importance of pool prices to the companies that we are discussing. I stress that we are talking about companies and not one particular company. However, the director general, who is responsible for ensuring the satisfactory operation of the competitive market, has investigated the matter. He is entirely independent, and his report concluded that the pool price had previously been held at an unsustainable level, below generators' costs. The coal review will take account of the director general's findings.

I am also aware of the criticism from large users that the level of competition in generation is inadequate. The director general has accepted the earlier recommendation of the Energy Select Committee that we should consider whether a reference of the generators to the Monopolies and Mergers Commission was necessary by 1995.

We believe that the best way to resolve this matter is to ensure that the operation of the UK market takes full account of the specific characteristics of large users. The director general has made significant progress in improving the workings of the market. His pool price investigations identified unjustifiable bidding practices by the generators, which have been corrected. I am sure that that work will continue.

As the noble Lord, Lord Peston, said, the DTI has been in dialogue with OFFER and large users, including ICI, for some months about whether the market is working properly. That dialogue continues, and I assure your Lordships that the electricity prices paid by large users are one of the issues that are being considered in the coal review. Obviously I cannot anticipate the conclusions of that review, but, I can assure the House that we have the concerns of large customers very much in mind and that we have noted the recommendations that were made by the Trade and Industry Select Committee last month.

We continue to work to bring down artificial constraints and barriers to competition across Europe so that companies abroad cannot receive favourable terms which cannot be justified by lower costs of supply. The Government strongly support the European Commission's proposals for the liberalisation of the EC electricity and gas markets. It is also open to companies who know of competitors elsewhere in the EC who are receiving unjustifiably favourable terms to refer that to the Commission for investigation.

As your Lordships know, it is my policy to try to answer specific questions which are raised in debate. There is no reason why a large user should not strike a commercial deal with a generator to buy existing stations. The director general is responsible for ensuring that the competitive market works properly. If generators refuse to deal with ICI or any other large company on a commercial basis, then that matter should be taken to the director general.

On electricity and prices in Europe, sometimes areas have the benefit of greater natural resources such as hydropower. I do not believe that a resulting subsidy race, if we were to enter it, would be any better than the suggestion—firmly rejected in this House that we should match tariff for tariff in lighting GATT protection.

The noble Lord, Lord Rochester, stated, and others agreed, that electricity industry profits are a good thing if they come from improved efficiency. I know that, for instance, in the North West, Manweb has invested about £210 million in customer service improvements. That is important for the industry. However, the director-general will be able to consider company profits when he resets the price formula. He has said that he well understands customers' worries about the level of company profits.

My noble friend Lord Skelmersdale raised the question of the precise difference between the gas and electricity Acts. I try to give straight answers. I shall therefore write to my noble friend.

In summary, therefore, the Government believe that most industrial customers have seen significant price reductions since privatisation. We fully appreciate that some very large customers have seen significant price increases against the general trend, and we are working with them to see how the electricity market can be improved.

We are looking at a number of proposals to help these large users as part of the coal review. We have taken on board all suggestions, including ICI's own evidence to the DTI Trade and Industry Committee. The Government intend to publish a White Paper setting out the conclusions of the coal review as soon as we can in February. I am sure that your Lordships will draw this issue to my attention during the debate on the outcome of the review.

Perhaps I may once again express my thanks to the noble Lord, Lord Rochester, for airing the issue today. I hope that I have been able to give a little comfort in this area.

House adjourned at twenty-three minutes before ten o'clock.