§ Mr. T. H. H. Skeet (Bedford)
I beg to move,That this House, while recognising the need for industrial fuel costs in the United Kingdom to be competitive with companies operating abroad, especially the energy intensive industries, and the need in the long term for the United Kingdom to maintain such an advantage through the rapid development of nuclear electrical generating capacity and other energy sources both to enable the Government to sustain the economic prosperity of the nation and to compete with the French who aim to have about 75 per cent. of their electrical capacity nuclear by 1990, urges the Government to pursue energy and transport policies which take full account of the importance of accommodating both objectives.I hope to establish three things. First, that the concessions made to the energy-intensive industries are inadequate, considering that British companies, dependent on relatively expensive energy must compete for international trade. Secondly, in the long term, there is no alternative to a robust nuclear power programme, both to reduce electricity costs and to sustain the living standards of the United Kingdom. Thirdly, part of the economic success of the United Kingdom will depend on reasonable energy and transportation costs for industry, and a 20p additional duty on gasolene and derv is no help.
The response of industry to the Government's Budget proposals is not unexpected. In a letter to me dated 19 March, the British Steel Corporation estimates thatthe proposed postponement of some of the increases in gas prices until December 1981 will save the Corporation about £2 million out of their total gas bill which is about £80 million … This reduction is welcome but only stops our relative position getting even worse, when we need action to remedy the present disadvantageous position.The activities report 1979–80 of the Chemical Industries Association states:Oil products which we purchase are typically 25 per cent. more expensive than in the other major EEC countries, gas prices for comparable supplies are 30 per cent. greater, and electricity costs for comparable loads 40 per cent. higher. In total, we have calculated that we are now paying each year around £200 million more for the energy which we need than if we had located the same plants in West Germany or France. A sum of this magnitude represents about one quarter of our annual investment programme, and an even greater proportion of our likely profits within the industry in 1980.Croda International Ltd. is threatened with an increase in costs for gas alone of £100,000, in spite of the Budget. Electro-Furnace Products Ltd., manufacturers of abrasive products at Hull, finds that a further 15 per cent. increase in electricity tariffs will be only slightly reduced by the Budget concessions. The British Paper and Board Industry Federation states that, due to several factors, including the high cost of energy, prices for paper are up to £100 per tonne cheaper imported than made in the United Kingdom. Since January 1980, 18 mills have closed. The General Aviation and Manufacturers and Traders Association states: 1188The implication of Budget taxes on aviation gasolene was between £2.40 and £2.50 a gallon, allegedly the highest in the world.The CIA summarises its energy cost disadvantage as £171 million a year and its concessions from the Budget total only £16 million per year.
Turning to electricity, France has the advantage of nuclear and hydro-electricity. The Federal Republic of Germany has the advantage of brown coal for power production. The United Kingdom has North Sea oil and gas and inland supplies of coal, but, unfortunately our indigenous resources are not inexpensive. Industry is well aware of the disparity in the price of energy for bulk consumers between this country and Western Europe.
The position of energy-intensive users of electricity is unique. The NEDC report of 27 February confirms what industry had been saying for at least a year. It found that, while the price of electricity to 95 per cent. of individual industrial customers was broadly in line with prices on the Continent, those customers account for only 50 per cent. of the industrial electricity consumption. A fortiori, the remaining 5 per cent. of large industrial customers accommodated the other 50 per cent. of supply.
Nevertheless, it was noted that by the end of 1980, both United Kingdom gas and electricity prices were moving significantly ahead of those charged to some major competitors on the Continent. High load factor users were disadvantaged as compared with France and Western Germany by a range of between 10 per cent. and 35 per cent. The Chemical Industries Association and others regard this as a very conservative estimate.
There are, of course, factors which distinguish the United Kingdom system from that on the Continent. The system of EFLs is unique to the United Kingdom. They play a significant role in determining gas and electricity prices to large industrial consumers. For example, the EFLs of both industries were relaxed to take account of the cost of small measures designed to help large industrial consumers—£73 million for gas and £45 million for electricity. Accordingly, as EFLs are tightened, the burden of tariffs to meet them is increased; conversely if they are reduced. Governments are often reluctant to admit this, but this is a fact. Rate of return is also a significant factor which may upgrade price.
The Government claim that energy prices cannot be expected to reflect fluctuations of exchange rates, but that is not the approach of OPEC In relation to oil. While exchange rates are within the control of Governments, they are indubitably little to do with industry, which is, nevertheless, dependent upon them. It may possibly be noticed that high exchange rates are essential if the Government are to maximise their benefits from North Sea oil, and they enable the United Kingdom the more effectively to liquidate foreign debt. The Government have paid off £2 billion of foreign debt since taking office.
§ Mr Tim Eggar (Enfield, North)
I should be very interested to hear what evidence my hon. Friend has to show that Governments can control exchange rates in the current world financial situation
§ Mr. Skeet
In the first place, we can do something about North Sea oil if we restrain the amount of production which comes from it. On the other hand, it is quite possible, too, to alter one's interest rate structure, which would have some bearing on exchange rates. If my hon. 1189 Friend would like to follow some further research on this matter, I refer him to Kay and Forsythe, who produced a rather interesting paper on this subject.
§ Mr. Skeet
The third point of difference between the two is that United Kingdom electricity is primarily based on indigenous coal—so far as the CEGB is concerned, 70 per cent.—and the output price per unit is largely determined by the input price of local coal, which has already priced itself out of the international market. The position should be compared with that in France, where electricity is 16 per cent. nuclear and 29 per cent. hydro and where extensive use is made of low-priced imported coal. In the Federal Republic, to take the RWE as an example, the country is 60 per cent. based on brown coal, which, on a thermal equivalent basis is about half the price of United Kingdom deep-mined coal.
I say in passing that the CEGB must maintain an ability to import coal to attain flexibility in its operations.
The next point is that natural gas is not generally available to the CEGB and fuel oil is taxed to the extent of £8 per tonne—in fact, virtually the highest figure imposed in Western Europe.
§ Mr. Arthur Palmer (Bristol, North-East)
The hon. Gentleman refers to the need for the CEGB to import coal, and that is perfectly true. Does he understand that the new policy of his Government is creating great difficulties for the CEGB in this respect because of the agreement that it has with the National Coal Board?
§ Mr. Skeet
I appreciate that; but the agreement with the NCB is such that if coal prices rise out of line that would breach the agreement and the CEGB would no longer be bound by it. I agree that we should use indigenous coal as much as possible, but when there is a price differential between the imported coal and that which is produced locally, it is up to the mining community to ensure that prices are compatible. It is only right to say that the CEGB is responsible to its customers throughout the United Kingdom, in exactly the same way as the National Coal Board.
The last point about the difference between the two is that the West German pricing system is calculated to aid large high load factor users. Relatively speaking, the United Kingdom contains few HLF consumers. Marketing structure and United Kingdom marketing policies differ from those obtaining on the Continent.
The matter of energy prices has been argued for about 18 months. Remedies have been slow to emerge. A major study has been instituted of bulk supply tariffs. The recent Budget made an adjustment of £45 million to the electrical industry's EFL to permit a greater flexibility for heavy intensive electrical users. The Electricity Council, however, told the Government that area boards could not significantly reduce prices to large industrial consumers. The legal, financial and tariff framework would appear to preclude this.
There have been recommendations extending the load management system under which industrial customers are entitled to discounts if they agree to lower their power load at times of high demand. Thus, greater discounts will be 1190 granted for much shorter notice. But the chairman of the Tioxide Group Ltd., which manufactures titanium pigments, has said:We have negotiations with our local regional boards and we hope to achieve a saving of about £100,000 in our electricity bill for the forthcoming year. These changes in pricing for electricity and gas … are trivial in face of the huge differences that now exist between United Kingdom and European prices.He went on to say:In the case of electricity our bill for the electricity consumed in producing last year's output would have been £4.45 million if it had all been charged at the price prevailing in the United Kingdom last month— February. If, however, the price in the United Kingdom had been the same asthe price was in France last month, the bill would only have been £3.33 million.To take another example, that of a smelting company in the United Kingdom, whose name I have been asked not to divulge, it compares its electricity prices locally as being 2.5p per Kw. hour, with those in Western Germany of 1.4p, Italy 1.6p, and the Netherlands under 1p. Energy accounted for 40 per cent. of the costs of converting the new materials into metal.
ICI may be forced to close its chemical plants at Runcorn unless there is some alleviation in electricity charges. Eighty per cent. of the cost of producing chlorine is electricity, and Budget concessions so far revealed are regarded as so much window dressing.
The Chemical Industries Association marks the differential between the United Kingdom and West Germany pricing as being 0.58p per Kw. hour and with France 0.93p per Kw. hour.
An elimination of fuel oil duty has been suggested to the Government but rejected by the Chancellor of the Exchequer in his Budget on 10 March. Direct negotiation of rates between the CEGB and certain categories of heavy intensive energy users has also been recommended by Electric Arc Steelmakers, thus eliminating area boards, but this has so far drawn little response from the authorities.
A joint EEC approach was recommended by the Under-Secretary on the eve of the publication of the NEDC report, but this should not preclude, in my judgment, a revision of tariff structure while changes are being considered and negotiated. A witch hunt over subsidies is not likely to be productive and the exercise could be protracted.
A short-term and medium-term nuclear programme, vital to the United Kingdom, seems unfortunately to have run into difficulties.
The case for an extensive nuclear programme is compelling, particularly in view of the long-term need to reduce energy costs and maintain both the competitiveness of British industry and the prosperity of the nation. While OPEC-based oil continues to escalate in price and labour-intensive coal moves irresistibly forward, it is remarkable to find that that method of producing electricity is so much less affected by inflation. The electricity produced has become appreciably cheaper, and that is likely to become an established trend.
The CEGB estimates that Heysham 1 AGR is expected to produce electricity at 2.31p per Kw hour, compared with the second half of Drax, which is coal of 3.59p and Littlebrook D, oil, of 6.63p.
The French estimate for PWRs is even more instructive. Those were given by M. Hug, head of the equipment and planning department of Electricité de France when he
1191 addressed the all-party minerals group last week in the House—nuclear energy 1.4p per Kw hour, coal 2.7p to 3p, and oil 4.5p.
On the basis of generating costs alone, a large programme would be justified in the United Kingdom. The current programme of one station per annum from 1982 to 1992 and costing £9.7 billion could advance to between £18 and £24 billion if construction is delayed. It is accepted that the two AGRs—Heysham in Lancashire and Torness in Scotland—may be completed by 1988, but there are serious doubts whether the building of a United Kingdom PWR will be started before 1984, and a commercial demonstration fast reactor by the end of the 1980s.
I see the likely timetable being as follows: the PWR Sizewell B inquiry to start in 1982; the duration of the inquiry, report and debate in the House will be 1983; authorisation and start of construction will be in 1984 and commissioning in the early 1990s. It is argued that there is insufficient demand and too much surplus capacity to justify embarking on a programme of any size, but that is a fallacy.
There is no Government commitment to any reactor types. The feasibility of constructing them will depend on an estimate at the time and, as the Under-Secretary said on Monday, the ability of the industry to cope. The present nuclear programme of about 15,000 Mw will not generate electricity before 1990 at the earliest.
§ Mr. Palmer
The hon. Gentleman seems to be taking so much for granted about the development of the nuclear power programme. The House would like to know his view about what will happen if the public inquiry into the PWRs—I was never enthusiastic for such an inquiry—rejects the scheme completely. If it is to be a genuine inquiry, we must not rule out the possibility. What will happen then?
§ Mr. Skeet
If the PWR is rejected as a possibility for the United Kingdom, that would be a great misfortune. But we must take what the public suggest. In those circumstances, I suggest that we go straight to the fast reactor, but the Government have given the pledge that, if an inquiry occurs, we cannot have two inquiries running simultaneously. One would follow the other. I am certain that the hon. Member for Bristol, North-East (Mr. Palmer) will appreciate that the United Kingdom is accumulating a great deal of plutonium. The fast reactor will incinerate it. It is no good keeping it in store. It might just as well be utilised with depleted uranium. That will probably accommodate some of the arguments of the Friends of the Earth, which sees plutonium as a great danger. If it is incinerated it would not be dangerous.
By the 1990s Britain will have 20,000 Mw. of electrical plant which is over 30 years old. It has been contended that the current programme is insufficient to sustain generating capacity at its present level. Approximating our present generating capacity at 57,000 to 60,000 Mw. and further assuming a 40-year life for existing stations, 1,500 Mw. of new capacity per annum would be required simply to maintain the current position. That has not been provided in the present programme.
The CEGB's most recent estimate of demand—I know that that has been questioned—is that between 64,000 and 90,000 Mw. of capacity will be required by 1998. That 1192 implies new plant of between 18,000 and 40,000 Mw. based on a growth in GDP of 1.5 per cent. to 3.5 per cent. by the year 2000.
New plant will be required to provide additional capacity to compensate for many of the older stations that must be retired. That is assessed at between 20,000 and 40,000 Mw. The present disposition of CEGB stations is about 75 per cent. coal fired, 15 per cent. oil fired and 11 per cent. nuclear. There is every reason to believe that those proportions should be changed to give the board a better balance in generating capacity and a more effective and competitive system.
There is a further need to keep the British nuclear-fired station building programme intact with associated building and engineering skills and technology. The industry was denied orders in the 1970s and, if fresh orders are not maintained annually, the whole industry could wither away and the staff emigrate to other industrial States.
The success of our nearest competitor, France, is outstanding in building nuclear power stations. I shall compare the two. First, there is frequency of ordering. Electricité de France completes one standard 900 MW reactor every two months. Nuclear generating capacity advanced from 7,700MW to 14,000MW in 1979 alone. No nuclear power station has been ordered in the past 10 years in the United Kingdom. The current orders cover Torness and Heysham, both of which should be completed or commissioned by 1989. No further nuclear power stations will be completed before the 1990s at the earliest.
In France PWRs are completed in under six years and commissioned within one and a half months. In the United Kingdom building time is long due to industrial disruption, a significant example being Dungeness B on the Isle of Grain which is oil-fired.
Let us consider the energy balance of France. Between 1979 and 1990 oil-fired stations will be reduced from 56 per cent. to 30 per cent. Nuclear, in 1979 at 4.5 per cent., will rise to 30 per cent. Coal and gas will remain the same at 30 per cent. In 1979 hydro-electricity was 8 per cent. and will fall to 5 per cent. and renewable sources will rise from 1.5 per cent. to 5 per cent.
Those are the significant points that I wish to convey. In 1985, 50 per cent. of French electricity will be nuclear. The comparative figure in the United Kingdom will be 20 per cent. Following the completion of the 1982–92 10-year programme, if it is completed, by 1992 the figure will rise to 30 per cent., but by 1990 70 per cent. of French electricity will be nuclear-generated.
I have compared generating costs and will repeat them in broad outline. In France nuclear energy costs 1.4p per KW hour, coal 2.7p to 3p and oil 4.5p. In the United Kingdom nuclear costs 1.35p, coal 1.52p and oil 1.9p. When the new stations come into operation, the cost of Hartlepool, which is nuclear will be 2.28p, Drax, which is coal, 3.59p and Littlebrook, which is oil, 6.63p.
A string of nuclear reactors around the perimeter of France could provide electricity for the rest of the European Community, which had the opportunity of taking the nuclear route, but failed to do so through the timidity of Governments. Is the projected new cable across the Channel really to be built for the ultimate beneft of the United Kingdom or of France?
§ Mr. Peter Rost (Derbyshire, South-East)
My hon. Friend is making a most powerful case in comparing the electricity and nuclear industry in France with ours and the 1193 resultant costs. He has also compared the estimated costs of two new AGRs. But surely he should bear in mind that there are many uncertainties about by how much the cost estimates will be exceeded. As the Select Committee on Energy has commented in its report, one of the great uncertainties is whether we shall be able to build the nuclear power stations at the same prices that our competitors are building them. Although we want nuclear power in this country—and I very much want to see a French programme developed—it will not necessarily produce the competitive electricity that we desire.
§ Mr. Skeet
I share my hon. Friend's anxiety. I have read the Select Committee report. I suggest that we have a Select Committee to consider the Select Committee report to give us guidance on the matter. However, if we develop the PWR we shall have a standardised form and shall be able to reduce our costs. Therefore, my hon. Friend is advancing an argument for the PWR which I fully accept.
My hon. Friend the Under-Secretary said on Monday that there was some disagreement between the CEGB and the National Nuclear Corporation. That matter was their business, but this issue is the business of the Government as well. Before the United Kingdom proceeds, suitable arrangements or a similar relationship will have to be established between the public utilities, the CEGB, the South of Scotland Electricity Board on the one hand and the NNC on the other. Perhaps a careful study of electricity in France and its relationship with Framatome and others would be rewarding. Today, organisational problems are possibly more important than technology.
According to the NEDC report of 27 February, the price of gas to more than 95 per cent. of industrial consumers is broadly in line with the price on the Continent. However, that accounted for only about 15 per cent. of industrial gas consumed. By the end of 1980, gas price disparities with Europe had emerged for these large users, which on average were estimated to be about 2p to 3p per therm for interruptibles—that is, 10 per cent.—and 3p to 5p per therm for firm gas, which works out to between 10 and 20 per cent.
Many firms regard those estimates as modest. The British Gas Corporation has in the past two or three years had a statutory monopoly in the purchase and distribution of natural gas and has followed a rigid pricing policy not altogether compatible with Continental practice. The corporation has provided no incentive for large users, such as steelworks, to imporve their load factor, and many people will be excused if they regard themselves merely as captive customers.
Initially, firm contracts were to correspond with the appropriate petroleum product—gas oil—the price of which has been advancing fast in the past year to more than 40p per therm. In the summer of 1980, certain modifications were introduced. Firm contracts were to be assessed at 75 per cent. of the gas oil price, which in effect figured at 70 per cent. as the corporation did not claim compensation for movement in the sterling exchange rate against the major European currencies.
This was followed by Budget concessions. The BGC decided to peg renewals at the level obtaining in December 1980 and January 1981. A cost adjustment of £73 million was made to the EFL for the industry, reducing it from 1194 minus £390 million to minus £317 million, and the provision was designed to run from 1 March 1981 to 1 December after which it is expected that substantial increases will be made. According to the National Federation of Clay Industries Ltd., it becomes a matter of urgent importance that we should know now what is likely to happen after that date. My suspicion is that there will be upgrading in price.
Renewals were thus to be negotiated at about 29.3p per therm. New contract customers, of whom there are not many, were still expected to pay the full equivalent gas price for the first year after which they would be charged at the renewal rate.
Interruptibles, priced at about 24.5p per therm, will rise to 25.5p on 1 April 1981 and thereafter remain at that figure until 1 December 1981. In practice, there are serious doubts about what arrangements have been made for interruptibles. I hope that the position will be clarified today. I know what the Government intend, but when one goes into the regions one hears entirely different views.
Bulk tariff discounts were rejected, although many people feel that they will eventually come. The elimination of the £8 duty on heavy fuel oil was rejected for reasons that I shall refer to later.
In fairness to the Secretary of State, one should say that he has asked the BGC to consider what further assistance it could justifiably give to the large bulk users on firm contracts in energy-intensive industries, but that is not the only area of concern. Fuel oil plays a multi-role in the European energy scene. It may prove profitable to examine its functions.
First, it is used directly for burning under boilers, and thus competes with coal. I say nothing further in that regard. Secondly, it is used as the basis for assessing the price of interruptible gas in the United Kingdom and, not infrequently, firm gas on the Continent. Ruhrgas has stated that its normal policy is to link its prices to those of competitive fuels. In the case of heavy industries, the competing fuel is normally fuel oil, while for commercial and domestic use it is gas oil. The Minister may shake his head, but he does not have the facts. In many other EEC countries, it is indexed to the fuel oil price, often carrying a premium.
In a letter to me on 19 March, the British Steel Corporation suggests thatbase prices for firm supplies of gas should be equivalent to the average before-tax price of heavy fuel oil, plus a small premium to reflect low sulphur heavy fuel oil. Base prices for interruptible supplies would be the same 'marker' fuel oil price less a discount as on the continent. There should be a reduction in the price available for large quantity takes.In the United Kingdom, two-thirds of consumption at levels above 1 million therms occurs on an interruptible basis. For example, in the paper and board industries it is more than 90 per cent., in the chemical industries more than 70 per cent., and in the steel industries more than 35 per cent.
The choice of firm or interruptible contracts is not at the election of customers. In fact, firm contracts to which the Budget concessions mainly apply are not relevant to large industrial users. It seems that competitors in Europe are obtaining prices related to the cheaper heavy fuel oil, while firm contracts in the United Kingdom are related to the more expensive gas oil.
My next point concerns the third function of fuel oil. It is used for determining the price of North Sea natural gas. The BGC must pay for Norwegian Frigg gas indexed
1195 to fuel oil duty. According to the chemical correspondent of the Financial Times on 20 February, there is a variant of this theme. Frigg gas is indexed to 50 per cent. of heavy fuel oil, 25 per cent. of the crude oil price and 25 per cent. of the Rotterdam spot market price for heavy petroleum products.
The formula for ethane pricing for the gas which will be derived from the North Sea gathering pipeline is still to be negotiated, but it could involve 45 per cent. of the difference between the calorific value of crude oil and fuel oil when crude oil is based at more than $35 a barrel. Unfortunately, fuel oil is taxed heavily in the United Kingdom, and that creates problems.
Industry has called for the abolition of the fuel oil duty, which now totals £8 a tonne. The Chancellor of the Exchequer rejected that suggestion and simply stated that he would keep the matter under review. The tax was introduced in 1963 for the protection of coal. It was later used as a revenue producer. Apparently, it is now being retained to safeguard the BGC.
Ironically, the latter has been subjected to a levy on gas which favours the Treasury. According to the Budget Statement, the tax could not be reduced as it would make gas from the Norwegian Frigg field more expensive for the BGC. The Prime Minister mentioned that on 3 December when she stated that if the revenue was lost it would have to be replaced from another source. Some transparency in Government operations would be welcome. Perhaps the Minister will clarify the issue. We remain optimistic.
More recently, the Treasury announced that it had decided to make a concession costing between £2 million and £3 million, predominantly in favour of refining operations. If a limited concession can be made to assist a minority of interests engaged in this specific activity, why cannot the facility be extended to include a broader class of deserving cases? The tax should not be applied to any oil used for blast furnace injection, which is the experience on the Continent, and many other cases could be considered for complete exemption.
Did the BGC negotiate on the basis that the Frigg contract for the purchase of Norwegian gas indexed to the price of fuel oil cum tax inhibited a change in the British tax in the national interest? I cannot believe that that was contemplated. It must have been completely oblivious of the fact that taxes rise and fall, and surely it was not capable or removing British sovereignty over that British domestic tax. Are steps being taken to ensure that the negotiations over the gas price from the gas-gathering pipeline do not compound the same error?
There is a further question. Why should the Government protect the State monopoly—the British Gas Corporation—and at the same time fail to relieve the burdens imposed on the many private sector industries—and, indeed, the CEGB in the public sector, all of which have been prejudiced by the continuation of the fuel oil duty on the other?
§ Mr. Eggar
I do not have much sympathy with the Chancellor's argument, but he said that the disbenefit to the economy of an increase in gas prices, which would inevitably work through either to industrial consumers because there would be an increase in gas price or to the Revenue because a fall in revenue would result from the reduction of the monopoly levy, would outweigh any benefit to industry from a decrease in heavy fuel oil tax.
§ Mr. Skeet
I do not agree. The heavy levy being imposed on the gas industry could be remitted, and for much gas the price is anything between 2.87p per therm. Averaged out, that is a good price.
I shall give further examples of the burden that industry is having to bear. The CEGB alone is expected to pay £35 million in fuel oil duty in the year ending 31 March. ICI is exposed to a £10 million per annum cost penalty simply as a result of the failure to remove the fuel oil duty. Excised duty on fuel oil costs the British pulp and paper board industry £7.2 million a year, and fuel oil duty for the British Steel Corporation is roughly between £8 million and £9 million at a consumption rate of about 1.2 million tonnes a year.
I hope that the Under-Secretary will breach the confidentiality of which he spoke in answer to a question that I put to him the other day, and will tell us the true explanation. I do not see why the British Gas Corporation should hide behind confidentiality.
It is also argued that United Kingdom fuel oil prices do not fluctuate in conformity with those on the Continent. According to Shell UK, since 1976, United Kingdom fuel oil prices have been higher than those in France, West Germany and the Netherlands in only 15 out of 60 months. In 10 months of that period, United Kingdom prices were the lowest of all those countries. However, it is more significant that for the greater part of that period United Kingdom prices were in the middle range. That supports the Government's case.
However, the Chemical Industries Association takes a different view. According to its statistics, historically the fuel oil price before duty and other charges favours United Kingdom buyers over Continental purchasers for only brief periods. According to its chart, between July 1979 and February 1981—a shorter time interval, of course, than the one I just mentioned—the price of heavy fuel oil, excluding taxes, was higher in the United Kingdom compared with the EEC average for 17 months and lower for five months. According to the British paper and board industry, during 1980, heavy fuel oil in the United Kingdom cost up to 20 per cent. more than in most other European countries, and considerably more than in the United States and Canada.
The fact remains that a rational energy policy must recognise that the fuel oil duty has outlived its usefulness and should be removed. That would provide a welcome stimulus to energy-intensive users.
I do not wish to speak at length, because I know that other right hon. and hon. Members wish to speak, but there are several other matters that I should mention. One concerns horticulture—glasshouse growers. They have been very patient, but I sense that something will be done in this connection. One answer would be to refer these issues to the Commission and hope that it will deliver a stern note to the Dutch Government about subsidies, and so on. Another would be to act through the European Court, but that would involve a long-drawn-out process. I suggest that some interim proposals would be better.
I imagine that other hon. Members will mention iron foundries, but there are 600 iron foundries in the United Kingdom, half of which are situated near my constituency in th East and West Midlands. They buy their foundry coke, which is a high grade metallurgical coke, from National Smokeless Fuels Ltd., a subsidiary of the National Coal Board. There is an amazing difference between our costs and those charged in Europe. For
1197 example, Great Britain's price is roughly £103 per tonne compared with £77 per tonne in Germany and £63 per tonne in France. I realise that significant State aid is given by several countries to coal mines, but perhaps the Government will take that fact into account.
National Smokeless Fuels Ltd. faces reality. It holds about a year's stock of foundry coke and exports small quantities of it at prices that are 35 per cent. lower than the prices it charges in the United Kingdom. I hope that the Government will take that on board, and bring forward proposals in that connection.
I turn to the question of transport costs. The prices of both gasolene and derv were substantially increased in the Budget. According to the Freight Transport Association, that should add about £300 million per annum to the cost of operating goods vehicles. A further increase in the vehicle excise duty yielding about £60 million per annum for goods vehicles would certainly add to industrial costs, all of which would inevitably be passed on to the consumer. At most, the Chancellor should have restrained the increase in the tax to lop a gallon on both gasolene and derv, or, even better, make no increase on derv.
Several matters have to be borne in mind on derv—that is, diesel fuel. United Kingdom prices are significantly higher than those in the rest of the EEC. Inevitably, that affects heavy transport lorries which carry our food, clothing and so on, and also diesel trains which carry the people who live in suburbs in and out of London. The relative figures per litre are that the United Kingdom pays £35, the Netherlands £20.8, France £23.8 and Germany £24. In the list the United Kingdom comes first, Switzerland second, Austria third, France fourth, Belgium fifth, and Finland sixth. So we hold the most creditable position—or otherwise—at the top of the list of prices paid for derv.
Whether we are talking in money terms or in real terms, we must consider what we pay for derv in relation to the wages in the territories concerned. The number of minutes worked needed to buy a gallon of derv in three countries is interesting. The figures are based on derv prices in midMarch—post-Budget—and the gross hourly earnings of male manual workers in October 1979, which is the latest date for which comparable figures are available. In the United Kingdom 44 minutes need to be worked, in France 35 minutes, and in West Germany 25 minutes. Two factors are taken into account—first, the retail price that is paid at the pump, and, secondly, earnings in the respective States. When those factors are taken into account, derv is much more expensive by any standard in the United Kingdom than it is on the Continent.
We have the sixth most expensive petrol prices in Europe behind Italy, Denmark, Norway, Yugoslavia and France. The other Western European countries are below us and it is signifcant that only Italy and France in the Common Market have petrol prices that are higher than ours. When one takes into account that their earnings are higher than those in the United Kingdom, it can be seen that we are being soaked by a heavy tax. Some interest should be taken in that matter to ensure that the motorist is given an opportunity and is not flayed by taxes.
§ Mr. David Crouch (Canterbury)
Is my hon. Friend aware that members of the Road Haulage Associaton have increased their freight charges by 5 per cent. since the Budget?
§ Mr. Skeet
Yes, and it is only 5 per cent. at the moment. The charges will go up even further when the price increases begin to sink in. The RHA may also have noticed the wildness of price cutting on gasolene.
Mobil put up its petrol prices this morning and Esso did so a few days ago. Prices will go higher and will have a consequential effect on derv prices.
To sum up, the external financial limit partly determines price and has nothing to do with market forces. The limitation of EFL should be recognised. Secondly, the tax on fuel oils of all grades introduced in 1963 to benefit coal and later used as a revenue producer is absurdly high. It should be either reduced or abolished. There is no reason why the CEGB should pay the tax.
Different basic data are used in the EEC to determine industrial gas prices. In the United Kingdom, gas oil is the norm, but in Europe fuel oil is not infrequently used, with or without a premium. Gas prices for heavy energy-intensive industries should be assessed on a common basic oil product, for example, fuel oil. The United Kingdom should share that with the EEC as a fuel oil-related gas price.
Electricity tariff structures should be modelled on the European system, favouring energy-intensive industries and encouraging high load factors. The distorting influence of the sterling exchange rate is largely the result of North Sea oil and high interest rates. The Government establish the latter and the Government—certainly not heavy industry, which is struggling for survival—are the largest beneficiaries of the former.
Competitive energy prices are essential to a healthy industry. Simply referring disparities to the European Commission is not good enough and cumulative Government intervention to date has not been effective. In addition, the United Kingdom nuclear power programme is only a shadow of that of the French and the balance should be corrected.
An additional tax on derv will only add to industrial costs and, in order for industry to be competitive in a free Europe, both energy and transport costs must be competitive. It must be apparent to all that a firm nuclear commitment of the required scope is inescapable and that to contract out of that sector would be nonsense for an island such as ours lying off the coast of Europe.
Further, as the United Kingdom lies outside the golden triangle of Europe, preoccupation with transport costs is of no less consequence than are energy considerations. France is ideally situated at the crossroads of Europe and is replete with a nuclear programme large enough to accommodate its future objectives. To rectify our omissions will take time, but to ignore the measure of our time will make every one of us culpable of gross neglect.
§ Mr. Arthur Palmer (Bristol, North-East)
The House is indebted to the hon. Member for Bedford (Mr. Skeet) for using his good fortune in the ballot to discuss an important and topical subject. His speech was comprehensive and at times had a lecture-like quality about it—perhaps that was an advantage—and he covered virtually everything, though I remind him that he left out the price of candles.
1199 I intend to deal with nuclear energy policy, which the hon. Gentleman mentioned at some length. I speak with fairly up-to-date investigatory experience as a member of the Select Committee on Energy, which has been looking into the British nuclear power programme basing its investigations on the statement made in the House by the Secretary of State for Energy in 1979.
The hon. Member for Bedford was right to point out that nuclear-generated electricity is the cheapest. That is not simply because of our good fortune in having the Magnox stations which were built a fair time ago when money was much cheaper. If we have to replace old coal-fired plant it is also cheaper to do so by nuclear plant than by even up-to-date coal-fired plant.
Of course, those output price calculations do not take fully into account development costs that have been borne in other areas. It is always difficult to find out how much of the cost should properly fall on the generating boards, whether the CEGB or the South of Scotland board, and how much is or was properly attributable to the Atomic Energy Authority, which is a direct charge on public funds. A simple comparison of coal or oil-generated kilowatt hours and nuclear-generated kilowatt hours does not always tell the full story.
§ Sir Ronald Bell (Beaconsfield)
Is there not a further difficulty in making a comparison of costs, because the initial costs of a nuclear power station are the prime costs and were incurred when the value of money was changing? Is there not a considerable temptation to assess the costs without taking into account the fact that the pounds used at the time of construction of those power stations are equivalent to many more pounds now, when one is considering unit costs?
§ Mr. Palmer
An attempt is made by the generating boards to deal with that problem by adjusting depreciation allowances. Whether the calculations are made on the basis of replacement costs or historical costs is a matter for accountants, who have their prejudices. However, the hon. and learned Gentleman has made an important point. Nevertheless, with my stated reservations on cost calculations the House should not doubt my firm belief in the need for nuclear-generated electricity as one road to lower energy costs.
The Select Committee has a majority not of sandal-wearing, brown-bread-eating Socialists but of practical, hardworking, Conservative businessmen. Yet it has been suggested that our report is anti-nuclear. What nonsense. We took for granted the nuclear element in the general energy formula. We were not arguing for or against nuclear power; it was a question of relative cost and use of national resources. How much of our national investment should we devote to nuclear development against claims from other directions? The speech of the hon. Member for Bedford seemed intensely theoretical to me. The hon. Gentleman seemed to ride over every difficulty as if something put on paper represented reality. The truth is that the nuclear power industry's growing pains have led to many difficulties. There is no guarantee that those difficulties will disappear in the future, I regret to say.
The Select Committee looked at matters not in any antinuclear spirit but realistically, facing the energy scene as it is likely to be rather than as we would wish it to be. The hon. Member for Bedford referred to France. The Select 1200 Committee spent two or three days in France. We met representatives of Electricité de France, the manufacturers and official agencies. We were impressed by the speed and the economy with which the French are constructing their nuclear power stations but the fact remains that the French energy scene is not the same as the British. There are substantial differences. In considering nuclear development in Britain and France, account must be taken of the fact that France has pushed ahead with a large nuclear programme because its coal resources are small and because it has little direct access to oil or natural gas.
Britain is doing better with nuclear energy than the Federal Republic of Germany, which has a human and social problem. There is vast opposition to nuclear power in the Federal Republic. On the whole this country has escaped it.
§ Mr. Skeet
It is all very well to say that French coal production at 22 million tonnes a year is small compared with ours. What interests industry is costs. If the French have cheap electricity in the future, what will happen in the United Kingdom? We shall have high cost industry. That is the material factor.
§ Mr. Palmer
I do not disagree, in a general sense, with the hon. Gentleman. I have argued that we need more nuclear generation. I hope that we are working towards that end. But one is blind to the facts if one imagines that one can translate France's experience into British practice. To do that is unrealistic.
I want to cover what the Select Committee report said and not what some people have claimed it said. We expressed doubts about the CEGB load forecasts and the overall energy rejections upon which they are based. We questioned the need for an over-large programme of replacement of coal and oil fired stations by nuclear plant. We recommended more effective conservation and speedier conversion of present oil fired power stations to dual firing. I see that the hon. Member for Derbyshire, South-East (Mr. Rost), who worked extremely hard on the Committee, is present. The hon. Gentleman will agree that we were concerned about the high planning and plant margins retained by the CEGB and the South of Scotland Electricity Board.
I believe that the South of Scotland board is carrying a plant margin of 70 per cent. which seems a little excessive. We have to guard against load shedding for the future, but that is too much for comfort. We probed both the South of Scotland board and the CEGB—particularly the former—about the weak inter-connection between the grid system south of the border and that north of the border. One can only conclude that the reason for that is political. If the organisation of the South of Scotland board had not been split from the rest of the generation and transmission system, I have not the slightest doubt that grid lines spanning the border would have been tremendously reinforced, thus sharing margins. The South of Scotland board, once it reached agreement with the North of Scotland board about generation, planning and grid construction, seemed, both for political reasons, and perhaps for reasons of Scottish prestige, to reach similar agreement with the Central Electricity Generating Board. In the matter of reactor types, the Committee acknowledged the paper cost advantage suggested by international experience of the PWR over the AGR.
I want to emphasise a point of the greatest significance. We examined PWR cost under United Kingdom
1201 conditions. We were not convinced that PWR prices in the United States, France or Germany could be translated automatically to accord with conditions in the United Kingdom. We noted the CEGB's apparent resignation to a cost penalty of 34 per cent. for building the PWR in United Kingdom conditions. There is indeed a difference, as the CEGB seems to accept, in building a PWR in the United States, which has had its own problems, and building a PWR in United Kingdom conditions with different problems.
We examined reactor types for the future. We were of the general opinion that Britain should concentrate on one reactor type. Hence I do not entirely agree with the contradictory enthusiasm of my colleagues on the Committee for CANDU. I see no objection to CANDU as a reactor. I was greatly impressed when I saw it myself at Pickering seven or eight years ago, but one cannot support reactors as if they were football teams.
§ Mr. Palmer
That is true. The argument also applies to the PWR to some extent. If there were to be a move to CANDU, it should have been done a considerable time ago, when we had the advantage of our own SGHWR. There was a technical similarity between our own steam generating heavy water reactor and CANDU. They were not identical, but manufacture could have been combined if we had made a move on these lines 10 or 12 years ago under a joint British-Canadian programme, which would probably have won international markets.
It was an opportunity missed but that time has passed. I think that my colleagues, who were in the majority, are wrong. I understand their enthusiasm for CANDU but I do not think that we can go back along that road now.
On future orders, there is the serious problem of the public inquiry over the pressurised water reactor. The CEGB's proposed first site is at Sizewell in East Anglia. The board is doing a great deal of public relations work in the area, where there is already an AGR station, to convince local inhabitants that the PWR is perfectly good, perfectly safe, and will provide employment. I have no doubt that that is so, but the CEGB is jumping the hurdle too soon of the public inquiry which is different from normal planning consents or the intervention of the nuclear inspectorate. At the nuclear processing inquiry at Windscale the judge in charge was asked whether there would be a similar inquiry into the PWR. The then Labour Government said that there would be such an inquiry. That was a hasty decision. I fear that the present Government have no alternative but to continue with the idea, but that will give tremendous hostages to fortune.
If the inquiry is genuine rather than merely window-dressing we must allow for the possibility that the PWR will be rejected. If that happens, where do we turn? On that issue members of the Select Committee fell out, although not on exact party lines. I took the view that we must proceed normally with AGRs, with gas-cooled reactors, until there were no difficulties or obstacles to proceeding with pressurised water reactors.
1202 The Government were right, as a safeguard, to approve the construction of the Heysham and Torness AGR stations. Also, the stations create work and keep the design teams together, particularly in the electrical manufacturing industries on the north-east coast. I should resist strongly any departure from an AGR programme, for a long time yet.
§ Mr. Palmer
I am glad to hear the hon. Gentleman's optimism, but if there is a genuine inquiry, not a charade, we must allow for the possibility that the PWR will be turned down. For that reason we must continue, for the time being, with the gas-cooled system. The costs of that system, both at Hunterston B and Hinkley Point, are encouraging.
Alternative energy sources are not unrelated to the nuclear power programme. I am all for finding every possible source of electricity. When the fossil fuels run out eventually—they will become much more expensive before they do—there will be an electricity renaissance in Britain. The growth in the use of electricity will extend enormously, particularly with the electrification of the railways and the need for road transport to use electricity.
We shall need energy from all possible sources. We must conserve energy and develop projects such as district heating schemes. We must also examine renewable sources. For most, the output is likely to be small and the efficiency low. The development of wave energy is probably a long way off.
One massive renewable contribution can, however, be made. It is within our grasp. There are no problems involved in the techniques. The only problem is the size of the project and the political will. I refer to the Severn estuary, where a vast amount of energy is available. That has been recognised for up to 60 years. Many inquiries have been conducted. The Select Committee on Science and Technology a few years back recommended that a modern invesigation should be carried out into the possibilities of a Severn barrage. I was chairman of that Select Committee.
We are now using so much electricity that we could use the possibilities of the Severn to the full. If we had constructed a barrage 30 or 40 years ago it would have been well up-river towards Gloucester. English Stones was the site favoured by the Brabazon committee. If that had been built we should have needed another one by now to make a significant contribution, since the total national electricity load has grown so much.
Today it is possible to construct a Severn barrage at a point that would give the optimum return. That is generally thought to be from Weston-super-Mare across to Barry on the Welsh coast. The further one goes down the estuary, the smaller is the tidal advantage, but if one goes too far up the estuary one can not impound sufficient water. So there are favoured positions.
A Committee, as recommended, to investigate the possibilities of a Severn barrage was appointed by the previous Government and endorsed by the present Government. It sits under the chairmanship of Professor 1203 Sir Hermann Bondi. It is likely to report in two or three months. I know that because I have the privilege of serving on the Committee. I have done my best to find time to work hard, as have other members of the Committee.
A Severn barrage could give the country 8,000 MW or more of electrical capacity. It follows the lunar rather than the solar cycle for availability. That is sometimes awkward for using the energy but it could give the country the equivalent output of three or so large modern power stations. The initial cost is enormous but the running costs are very low.
I must not give the Committee's secrets away although much of the evidence has been disclosed. It is thought that under present conditions electricity from a Severn barrage would have a competitive cost per unit up to say the point of 50 per cent. of the electricity energy of Britain being generated by nuclear methods. If the proportion is above 50 per cent., which would lower prices but necessitate bringing some of the nuclear stations off the base load and more on to the peak, we should have to examine with care the relative cost of the Severn barrage limits.
I cannot believe that Britain will move to 50 per cent. or 60 per cent. of its energy being derived from nuclear sources within the next two decades in spite of the demand of the hon. Member for Bedford. So I urge the Government to take the Severn barrage report seriously.
It would be most unfair to all concerned with the work of the Committee and perhaps a misuse of the money that has been spent on investigations if once again a Severn barrage report were placed in the pigeonhole. As I have said it is not a scheme that requires the development of any particularly new techniques. The committee has looked into what was thought to be a difficulty at one time—namely, closing the gap. Following consultations with eminent engineers from many countries is is now agreed that that can be done. The scheme is feasible technically and the costs appear to be working out in the right direction. That will become more and more so if the world price of oil continues to soar.
The scheme would provide an enormous amount of work during construction. It would be a great fillip to the reputation of British engineering. It would probably turn Weston-Super-Mare into a booming second Aberdeen, which might be an advantage—I do not know. There are strong supporters of the scheme on both sides of the Bristol Channel. Support is not confined to the Saxon shore so I trust it has behind it the enthusiasm of my hon. Friend the Member for Merthyr Tydfil (Mr. Rowlands), who will speak from the Open Front Bench.
I realise that the scheme would involve the deployment of a great slice of national resources. However, I am sure that if the barrage were constructed it would make a lasting contribution to British energy needs. Future generations would probably call us blessed because for once we had the nerve to do something big and to add much to British enterprise. One way to help ourselves climb out of the industrial depression is to spend on a large scale upon capital works that last such as railway electrification. Let us add the Severn barrage to the list of capital works to be entered on this century.
§ Sir Hugh Fraser (Stafford and Stone)
I congratulate my hon. Friend the Member for Bedford (Mr. Skeet) and the hon. Member for Bristol, North-East (Mr. Palmer). 1204 My hon. Friend and the hon. Gentleman are undoubtedly the two experts on these matters in the House. I thank there both for their powerful contributions.
My hon. Friend the Under-Secretary of State will be pleased to know that my contribution will be confined to a few minutes as I have to catch a train. Some of the rude things that I shall say about his Department will be limited in time if not in space.
First, how are the plans progressing for the North Sea gas-collecting pipeline? It is a key investment, and there seems to be a delay. At the same time, one of the other Departments is talking about building a Channel tunnel. That appears to be a complete reversal of priorities. Surely the priority is to bring ashore gas that is now being wasted. If I have left the Chamber by the time that my hon. Friend is called on to reply, I hope that he will answer that vital question.
I deal next with the impact of fuel prices on industry and agriculture. I back the Government the whole way in their general policy. I am much more optimistic than some who forecast what will happen. However, it is necessary now to engage in what used to be called pump-priming, to give industry and agriculture some relief. I found it odd when the Minister said in the past that the gas structure would be based on a concept of inflation plus 10 per cent. That is one of the silliest things that a Minister has said since one said that it was nice to clean one's teeth in the dark.
Unlike many others, I am not a monetarist. That is because I am not an expert in these matters. Monetarists would argue that the way to achieve efficiency in industry was to introduce a structure of inflation minus 2 per cent. An industrialist could say nothing more stupid to his work force or his management than "We shall sell to the consumer at inflation plus 10 per cent." What control can anyone have over wages or efficiency if that line is taken? I hope that we shall soon hear no more about inflation plus 10 per cent.
Agriculture and industry have immediate problems The Government could do much more to help. They should intervene to take action on some of the industrial and agricultural gas tarrifs. They should similarly intervene on the price of diesel oil.
§ The Under-Secretary of State for Energy (Mr. Norman Lamont)
I know that in the past my right hon. Friend has courageously given strong support to the Government's view that the Gas Corporation has been right to seek real increases in domestic prices. I am sure: that he would not wish to leave the House with the misleading impression that the statement that prices would rise in real terms applied to domestic and industrial prices. That will not apply to industrial prices, which are subject to entirely different criteria. I think that my right hon. Friend supports the policy on domestic pricing.
§ Sir Hugh Fraser
I do indeed. However, the form of words used by the Government was extremely stupid. It could merely have been said "Domestic prices will rise, and rightly so". It was a great mistake to tie prices to a semi-monetarist formula.
I was talking about agricultural and industrial consumers. Domestic consumers can switch off appliances, but industry cannot do that, and nor can the fanner. There should be greater intervention in some tariffs, and that the Government have so far failed to do. 1205 I know that they like to say that they are not interventionists, but there are moments when intervention is necessary.
The proposal for gas users is merely to hold prices steady this year for some. That is not good enough. Leaving aside international currency adjustments, it is clear that many of our European competitors, and certainly our American competitors, pay far lower prices for their gas than do firms in Britain. Those that have branches in France, for example, can easily make a comparison. It is clear that there is a 15, 20 or 25 per cent. difference. That needs adjustment.
I hope that my hon. Friend will seriously consider some of the farming tariffs. A surcharge is applied when more than a certain amount of electricity is used at a time of peak load. The surcharge is certainly applied to milk farmers and to those who have dairies, who have to use a great flood of electricity at certain times of the day. I was talking to my Staffordshire farmers yesterday, and they are aware that the surcharge has increased in the most amazing way over the past 18 months. I hope that some adjustment can be made.Farming is in a bad way in Britain. I hope that my hon. Friend will come down from his lofty perch of non-intervention and adjust some of the tariffs that are being charged. Such adjustment will have an immediate effect.
The price of diesel oil is extremely important to farmers. I shall not go into the figures, but there is clear evidence that the price of derv in Britain is higher than anywhere else in Europe.
§ Sir Hugh Fraser
It is an issue that requires profound thought. A rebate should be made available to farmers. It is conceivable that such a rebate could be confined to agricultural use or to various forms of transportation. The tax on petrol is unpopular but necessary, but there must be some readjustment for the price of derv.
I shall sum up what I have been trying to say during the last six minutes. It behoves the Department of Energy to apply its considerable talents and brains to ensure that a stimulus is given to industry and agriculture so that we can turn the corner a little more quickly than we otherwise will. I hope that that will be done this very day.
§ 11 am
§ Mr. W. E. Garrett (Wallsend)
I, too, would like to congratulate the hon. Member for Bedford (Mr. Skeet) on introducing the motion.
At one time in the debate I thought that we would exclusively discuss the merits or otherwise of nuclear energy. If we apply our minds to the motion, we see that it mentions the need for industrial energy to be at the best possible price. I declare an interest as I am secretary of the all-party group for the chemical industry. The hon. Member for Bedford is an active member of that group. I pay tribute to the Chemical Industries Association for its long and constant campaign to highlight the crazy economic policy on energy for industrial use, which has been practised by successive Governments. Not only the chemical industry but many industries have suffered because of the uncompetitive pricing system.
The key to the problem of our energy policy lies in the coal industry. I was disappointed that the hon. Member for 1206 Bedford spent so little time on that aspect of the matter. The crisis, which has worsened over the years, is due to the inability of successive Governments to have a national fuel policy. Such a policy does not mean the creation of a vast bureaucratic machine, but in a Government Department someone should be advising the Minister, whichever party he represents, on the need to co-ordinate policy on the energy resources which are available to the country.
In 1973, when OPEC introduced a massive increase in prices, the warning signals should have been raised. There was only one source where the danger became apparent and where some initiative was taken, namely the National Coal Board. With the National Union of Mineworkers and the Government, who were brought in at a later stage, it initiated a policy for producing coal. The idea was to reverse the decline in coal production and to emphasise the place of coal in the general economic strategy.
The plan was drawn up in 1974, and the NCB updated it for the period to 1985. In recent months, the strategy has been updated to the year 2000. The year 2000 is not far away. Some hon. Members will see it, with a bit of luck, and we shall be able to see whether the board's strategy of assessing coal production relative to the needs of the nation is correct. However, electrical energy used in industry is still, in the main, generated by coal and is likely to be so until the year 2000 because nuclear energy will not be able to take over that predominant role.
I do not object to the nuclear energy industry. The simple explanation for that is that I am a member of the Amalgamated Union of Engineering Workers, and I have been a member all my life. I realise that the nuclear energy industry provides much employment for members of my trade union, which is good.
§ Mr. Garrett
That is an important facet. There is one nuclear station there and another may be built in future.
An agreement was made to produce more coal. The policy was to make substantial investment in new pits and to improve the capacity of long-life pits. In 1981, there was improvement as a result of that investment policy in 1974. During the past two years, output from the long-life pits has increased by 7 million tonnes. Output for the coalface and all the pits is 7 per cent. higher than it was two years ago. That shows that the investment policy of 1974 is beginning to pay off. Output per man year in 1980–81 is again 7 per cent. higher than two years ago. In fairness, that means that there has been a big improvement in attendance by the miners. That is a satisfying result.
Coupled with that, there has been improvement in general efficiency. The question which now arises is why that efficiency as a result of investment in 1974 is not reflected in lower prices to the consumer, especially the CEGB, which takes 75 million tonnes a year. Lower prices to the CEGB would mean that it could charge less to industrial users, who are the biggest consumers of the CEGB. The answer to that question lies in the massive interest rates on the capital expenditure loans made to the NCB which the Government demand.
In 1974–75, the NCB capital expenditure on manning was £112 million. It paid interest of £36.2 million. In 1978–79, the NCB invested £454 million and paid interest on money borrowed of £138 million. In 1979–80, the board's capital expenditure was £617 million and it paid
1207 interest of £184.7 million. Having to face such massive charges, one can understand why the board is in an uncompetitive position. It is not that the industry is inefficient. Other European coal industries——
§ Mr. Garrett
I could not answer that question unless I looked up the information in the Library.
The cost of deep-mined coal in Belgium is £58 per tonne, in France £45, in West Germany £41 and in the United Kingdom £29. On that basis, the coal industry is competitive. On the other hand, subsidies must be considered. The figures for direct subsidy by the EEC to the coal industries in Europe in 1979 are as follows. When I read out those figures, I am sure that the House will recognise that the United Kingdom industry is at a disadvantage.
In Belgium, from EEC sources the subsidy was £34 per tonne; in France, it was £18 per tonne; and in West Germany, it was £14.9 per tonne. The United Kingdom is well down the list and receives only £1.5 per tonne in the form of subsidy from EEC sources. At the same time, West Germany subsidises its coal industry to the tune of £1,385.7 million, whereas the subsidy to the National Coal Board is only £495.4 million.
§ Mr. Skeet
The hon. Gentleman is talking about subsidies, but he is not talking about production. Belgium's production of coal is only about 7 million tonnes. In France, it is only about 22 million tonnes. In Germany, it is about 92 million-tonnes. We in the United Kingdom produce about 120 million tonnes, and the miners have ideas to bring it up to 135 million tonnes or even higher. Surely it makes a big difference if one takes account of the levels of production in the different countries.
§ Mr. Garrett
I recognise the scale and size of the coal industries in those countries. However, that does not change the basic fact that there is an imbalance per tonne in the degree of subsidy which the EEC is prepared to give to support Europe's coal industries. With the EEC's policy as it is at the moment, there is a disadvantage to the users of energy in industry.
It is curious how hon. Members on both sides of the House tend to become too much involved in their political philosophies. I can remember when coal was very cheap, and industry got the benefit. When I was employed in ICI, the company was a great user of coal, before petrochemicals developed to the extent that they have today. However, the trade union side could never obtain the true commercial price per tonne of the coal used in the company's many plants. We were never able to break the confidentiality surrounding it. If there had been some openness about the competitive figures being charged to the different sections of our industry, we would have been able to argue our case more reasonably and more objectively and thereby establish the true cost of energy for industry.
In the past, people said that too much subsidy was being given to the nationalised industries—to the National Coal Board especially. In my opinion, the National Coal Board has used its subsidies wisely. It has attempted to get across a policy to produce a fair energy price for everyone. 1208 However, the board is saddled with massive interest charges which make its prices not only uncompetitive in this country but also uncompetitive with European prices. It is this uncompetitiveness which is making United Kingdom industry suffer. Until we can unify our approach to energy, this chaos in the United Kingdom energy policies will continue.
If this debate does anything, it must highlight the concern which hon. Members on both sides of the House feel about the failure to devise an energy policy. I have no intention of castigating the present Minister or the Government of which he is a member, because we all share the blame throughout the post-war period for failing to get down to a pricing policy for energy which recognises that there is no free competition with the countries which are our main industrial competitors.
If we bear that in mind when an energy policy eventually is thought out, United Kingdom industries in both the public and the private sectors will soon show that they can compete on equal terms, and that means on the basis of a sane and sensible energy policy.
§ Mr. Tim Eggar (Enfield, North)
I listened with considerable interest to the hon. Member for Wallsend (Mr. Garratt), and I appreciated greatly the frankness and honesty with which he ended his remarks. To a degree, I agree with him.
The hon. Member for Bristol, North-East (Mr. Palmer) made a plea for the Severn barrage. I hope that the Government will look carefully at this project, but we must be very careful when we consider estimates of the cost per unit of electricity produced. The bitter and unavoidable fact is that, consistently, on major construction projects there have been dramatic overruns in projected costs. I do not know whether the cause is an unfortunate social or industrial problem, but we have to recognise that, time and again, the British construction industry fails to deliver at reasonable cost levels. We have to treat any estimate of electricity generation costs from the Severn barrage with a considerable degree of scepticism. What is more, the unit costs will have to be a good deal less than alternative nuclear generation costs before there is a reasonable case to be made for going ahead with the project.
I pay tribute to my hon. Friend the Member for Bedford (Mr. Skeet) for initiating this debate, although most of his speech seemed to consist of an appeal to the Government for subsidies of one kind or another for all the various energy producers. I have the greatest respect for my hon. Friend and for his views. I have always admired his robust approach, especially to the denationalisation and privatisation of the various nationalised energy industries, but I find his latest foray into industrial energy costs somewhat inconsistent with his general philosophical approach to these matters.
§ Mr. Eggar
It is an interesting argument that says that because, perforce, we have to subsidise one section of our 1209 industry—unfortunately, nationalised industries—therefore we have to subsidise all the others. That is a slippery slope, and I should not want to pursue an argument of that kind on as steep an incline as my hon. Friend apparently does.
When we consider industrial energy costs, it is vital to put matters into perspective. As far as I have been able to discover—and it is difficult to get clear figures—the highest industrial energy user, in terms of the percentage of his total input costs accounted for by energy, has a relationship to wage costs where a 1 per cent. increase in wage costs is equivalent to a 4 or 5 per cent. increase in energy costs.
When we talk about increasing industrial competitiveness and ensuring that British industry is competitive with those of other countries, we have to say to industrialists that, although we can do a certain amount on energy costs, the answer to improving their competitiveness lies with them in their ability to reduce their wage costs. It is important to set that in perspective.
In saying that, I do not mean to belittle the considerable problems that our industries have had to face over the past year or so with the dramatic increases in nationalised industry charges, rates and other costs over which they have little control. They must recognise, however, that every call for a subsidy or a reduction in energy costs must mean a decrease in Government revenue or an increase in Government expenditure, either of which means a rise in the PSBR of just the kind that the CBI wishes to avoid because it will be a rise in current rather than capital expenditure. If we accept the view of the Chancellor of the Exchequer that the lower the PSBR, the lower interest rates will be, every time we ask for a subsidy or a decrease in costs to industry we are putting further away the chances of a reduction in interest rates. Industry must take that into account.
I wish to deal briefly with the three main energy costs—electricity, heavy fuel oil and gas. We must face the fact that our cost base for electricity generation is, has been and will continue to be higher than that of some of our competitors, particularly France. It is no good saying that we can produce electricity at the same cost. France has geographical advantages, through hydro schemes. One must also pay tribute to its single-minded determination to go ahead with its nuclear programme against far greater political opposition than exists in this country. France has shown a political courage that has not been shown by either Government in this country over the past 20 years. One must also pay tribute to the single-mindedness of the French in deciding to go seriously into ordering PWRs, to try as far as possible to standardise PWR generation capacity, and not to go for the most advanced technology because they recognise that that inevitably increases costs and reduces standardisation. That determined decision has led to a powerful French nuclear construction capability, which we have not matched.
All that we have shown over the past 20 years has been the old British capability for discussing problems ad nauseam and coming up with non-decisions or compromises. The result is that far too low a percentage of our electricity is generated by nuclear means. We have effectively destroyed any capability of our domestic industry to compete for the provision of nuclear stations world-wide.
1210 For the worst possible reasons, in my view, we have opted for the AGR system. Quite apart from the considerable technical problems associated with moving up from the Magnox to the AGR system, it is ill-suited to British industry's construction capabilities. The AGRs have been significantly delayed, there have been considerable cost over-runs, and, having gone into operation, there has been a dramatic under-performance as compared with the planned generation capacity. It has been an appalling story. It is time that the Government recognised that it was an experiment that the country could ill afford and went wholeheartedly and single-mindedly towards a major PWR ordering system to replace expensive oil and coal-fired generating capacity.
Having said that, I agree with my hon. Friend the Member for Bedford that before setting out on that course we must have a wide-ranging inquiry into all aspects, not just the siting aspects, of PWR ordering and the PWR nuclear generation system as a whole. I very much hope, however, that we shall have one major inquiry, and not then find that each further station proposed results in a further major inquiry, with all the delays and expense associated with that. Let us get the inquiry out of the way in connection with the first generator.
§ Mr. Eggar
I concur with my hon. Friend's view. The initial inquiry must be as wide-ranging as possible, to avoid the risk that future PWRs will be delayed by lengthy and equally wide-ranging inquiries that are neither necessary nor in the national interest.
Apart from the oil-fired system, for which the costs are more or less equivalent to those in Europe, the other method of electricity generation is the coal-fired system. I am a tremendous supporter of the British coal industry. It is right that we should pour the hundreds of millions of pounds that we have into updating the British coal industry. I am deeply saddened, however, when I see the good will that exists among Conservative Members being frittered away by the NUM, and possibly also the NCB, as we saw over the recent threatened national coal strike.
If a sensible and coherent coal policy is to be agreed across the Benches, there must be a more responsible attitude by the NUM. The viability of the entire industry is being undermined by inefficient pits which have no geological reason to continue production and which need massive subsidies. The NUM's insistence that those pits continue in production regardless of the economic costs is undermining the viability of the British coal industry for the future. It is time that the Opposition pointed that out, because the present head-in-the-sand attitude is doing no good to the future of the industry and is making the lives of Conservative Members who believe in that industry very difficult.
§ Mr. Crouch
I believe that my hon. Friend is overstating the case, without a depth of knowledge of the coal industry. I do not agree with his comments about all Conservative Members. For generations the NUM and the NCB have understood the need for closures. We saw nothing so successful as the decline of the coal industry
1211 carried out without a strike when Lord Roberts was chairman of the NCB. A remarkable diminution of the numbers employed was achieved during that period, without any trouble. The trouble at the moment is that one must still tread gently when talking about closing pits and putting people out of work, even when the economic facts stare one in the face. Nothing is more calculated to irritate people than a proposal to close, say, 25 or 50 pits, all at the same time.
§ Mr. Eggar
I recognise my hon. Friend's tremendous interest in and knowledge of the coal industry, but "Plan for Coal", to which both parties subscribe, contemplated a system of pit closures, of which only half have taken place. That is one reason why the NCB was in severe financial difficulties. We shall not do the future of the British coal industry any good unless we accept that fact.
§ Mr. Skeet
Does my hon. Friend recommend that we build more coal-fired power stations? The nuclear industry has on average, only three deaths per 100,000 employers a year. In coal mining it is 25. His proposal would consign more miners to their deaths. Would not increased nuclear generation give us a more humanitarian society and minimise deaths?
§ Mr. Eggar
That is true.
We should construct more coal-generated electricity plants. If they are sited near newly-developed mines they will be competitive, which will be in the national interest. Their construction is not incompatible with proceeding with a considerable nuclear generation construction programme.
Industry must accept that, for a number of years, our electricity cost pattern will be greater than that of other European countries. A significant reduction in electricity costs would mean a massive additional subsidy, because of the poor return on capital earned by the CEGB.
No one has claimed that heavy oil fuel should not be sold at world prices. Over the past five years prices in this country have been remarkably similar to those on the Continent. Any small differential that exists is caused by fuel oil duty, and there is an argument for reducing it. My hon. Friend the Member for Bedford shakes his head and points to a graph that I, too, have seen. There is a difference in the way that fuel oil is charged for on the Continent. We have longer-term contractual prices, but on the Continent a spot price basis operates. Continental prices respond more quickly to changes in crude oil prices, and in particular to prices on the Rotterdam spot market.
The Chancellor of the Exchequer rejected a decrease in the price of heavy fuel oil. His reason was basically that the advantages to industry would be outweighed by the disadvantages associated with the increase in the price of Norwegian gas. That is a curious argument. For a number of years gas prices have been linked to fuel oil prices—and perhaps also to gas oil prices and the Rotterdam spot prices—by an escalator provision. It has always been understood that when the cost of fuel oil falls so should the cost of gas, but it would make sense not to include the cost of the tax on fuel oil in the linkage, because tax is 1212 controlled by the Government and can be arbitrarily altered. I therefore have difficulty in understanding how the relationship works.
§ Mr. Eggar
There are only two reasons for the extraordinary relationship. The first is incompetent negotiation by the BGC. The second is more sinister. To take a charitable view—and my charity tends to run out when considering the BGC'—the BGC had a competitive advantage in pricing compared with fuel oil, and the linkage was introduced to safeguard that advantage. My hon. Friend the Member for Birmingham, Northfield (Mr. Cadbury) is concerned with me in these matters and will wish to deal with the BGC's monopoly powers. but this latest example illustrates how a nationalised industry can, consciously or unconsciously, work against the national interest, which is a further reason for breaking the corporation's monopoly.
Industry has expressed the greatest concern about gas prices. The argument for lower prices is simple. It is our gas, it is cheap, and industry should enjoy the benefit. The logical approach is to say that gas is oil in another form and should therefore be priced at a comparable price per therm. The calorific cost of oil and gas should be equivalent.
Unfortunately, in Europe that approach has not been followed directly. Therefore, it is difficult for us to pursue it in Britain in the logical way that I would wish.
I recognise that one of the most successful linkages of gas to oil prices is in Canada, where the Toronto gate price for gas is 85 per cent. of the oil price equivalent. and therefore it is accepted by everyone that when the oil prices go up, gas prices rise. Gas has ceased to be the same sort of political football in Canada as it is here, although I must accept that the whole question of energy and energy pricing in Canada is far more politically sensitive even than it is in the United Kingdom. My point is that the linkage between the price of gas and oil is not as politically sensitive as some might fear.
The main political argument, and the argument that we in the House must settle, about the pricing of gas is how the benefit of the economic rent arising from cheap gas supplies in the southern North Sea should be distributed, and which sector of the economy or the Government should gain that benefit. One thing is certain—the gas producers do not get it. They earn a relatively low return on capital, and that fact is recognised by the exemption of gas producers from petroleum revenue tax and special petroleum duty.
§ Mr. Palmer
The hon. Gentleman is dealing with a very interesting point. Would it not be a good thing if we now separated the wholesale taking of gas from its retail distribution?
§ Mr. Palmer
I think that the monopoly taking of gas should be available to every aspect of the energy industry in Britain, and that gas distribution should be left to the gas boards as something separate.
§ Mr. Eggar
I could not agree more with the hon. Gentleman. I trust that his support for this development will be noted by the Minister. I assume that the hon. Member for Merthyr Tydfil (Mr. Rowlands) will agree with his hon. Friend and that at long last we shall have a common approach to this important aspect of gas policy.
As I was saying, I think that we are all agreed that gas producers do not get the benefit of the economic rent from the southern North Sea. Nor does industry at present get the benefit of that economic rent—with the exception of one or two major energy users. ICI is always cited as an example in that regard. Under both Governments in the past 10 years the BGC's profits have been made out of industry. There have been no other sources of profits for the BGC. It is important to remember that.
The economic rent over the past 10 years has gone to the BGC itself. We have seen the considerable profits that it has earned. I am not against profits. I do not think that the profits that the BGC has earned have been totally unreasonable, but they have decreased the efficiency of the BGC, and we have seen the difficulties and problems that are associated with a monopoly industry.
§ Mr. Eggar
I am coming to the levy.
The other sector of the economy that has benefited has been the consumer. There are two reasons for that. The first is that it has been politically advantageous to Governments of both parties that gas prices to the consumer should be kept artificially low—and artificially low they have been kept. They are now half of those in France and Germany. It is a political advantage, not only to the Government of the day, but to the BGC, because the BGC likes to have control, to have a political handle with which to operate and effectively use as a lever against the Government.
I believe that the Government have acted absolutely correctly in trying to reclaim some of the economic rent that has been going to the consumer and to raise gas prices by 10 per cent. in real terms over a three-year period. I still think that at the end of that process gas prices will be artificially low. I said at the time, and I say it again now, that I very much regret that the Government did not choose to link domestic gas prices to oil prices, at whatever percentage of oil prices the gas prices would be. Therefore, I welcome the move to take away the economic rent from the consumer. I also welcome the move to take it away from the BGC by doing it through the monopoly levy. That seemed to me to be long overdue.
We must also recognise that that monopoly levy means that more revenue will be coming to the Government, and this will have an effect on the public sector borrowing requirement. Every reduction in gas prices to industry effectively means a decrease in the revenue coming to the Government from the monopoly levy, because the cash 1214 limits, the EFLs, have to be altered, and the net effect of that is a reduction in the monopoly levy. The net effect of that in turn is an increase in the PSBR, and we are told by the Chancellor of the Exchequer that the net effect of an increase in the PSBR is an increase in interest rates. Therefore, by calling for a reduction in gas prices, industry is acting directly against its own recommendations provided by the CBI.
§ Mr. Jocelyn Cadbury (Birmingham, Northfield)
Obviously my hon. Friend is right in saying that if we do not keep up the price of gas, or if we hold it down, less revenue will come from taxation, but there is no guarantee that the tax will find its way back to industry. It may well be frittered away in different areas. This debate is about the effect of energy prices on industry.
§ Mr. Eggar
I accept that point. Clearly, in the circumstances, I would argue very strongly that the problem with the PSBR at present is that it is a borrowing requirement that goes to meet excess current expenditures, rather than excess capital expenditures, which is in many ways equivalent to providing specific help to industry. I take the point. Although the whole question of how one distributes Government spending is a key area at which we must look, I do not think that it is immediately relevant to this debate.
I welcome the concessions that were given to industry in the Budget. Quite clearly, over a longer term, specifically on gas prices, we should move towards making gas prices equivalent to those paid by our European industrial competitors. I suspect that if one takes into account the rise in European gas prices, the change in the exchange rate and the concessions made in the Budget by the end of this year one will find that industrial gas prices are fairly comparable to those paid on the Continent. Clearly, if that proves not to be so it may be appropriate then to say to the Government "Perhaps a bit more of a concession should be made. Perhaps we should see a bit more of the economic rent that is accruing to the country from the southern North Sea being directed towards industry." But the Government have made concessions and we should give these time to work through and see how matters develop.
Industry must adjust to the fact that electricity costs are higher in this country than they are in many competitive countries. As a result, industry must accept that the costs of electricity will probably be higher over the medium term. Until we have the effects of a substantial nuclear programme, which I hope will come, our costs will be higher than those of competing European producers. I accept the Government's judgment that the dis-benefits to the country of reducing heavy fuel oil tax outweigh the benefits. We must give industry a chance to see whether the concessions on gas prices go a significant way—as I suspect they will—towards reducing the gap, which applies only to energy-intensive industries, between our European competitors and ourselves.
§ Mr. Edward Rowlands (Merthyr Tydfil)
I shall touch on some of the points made by the hon. Member for Enfield, North (Mr. Eggar) and rather than respond to him directly I shall pick them up as I proceed.
I add my best wishes and congratulations to the hon. Member for Bedford (Mr. Skeet) on giving the House an 1215 opportunity to debate industrial energy costs and energy pricing policy. I shall devote most of my remarks to the impact of the NEDC report and the Budget and the Chancellor of the Exchequer's response to the report. It would have been a sad and sorry tale if the only response to the detailed and skilfully prepared report by, the NEDC on our industrial energy costs was one or two paragraphs in a one hour 50 minute speech by the Chancellor of the Exchequer. As the Chancellor's speech covered only parts of the report, it has left in its wake a considerable degree of uncertainty and confusion about what the benefits and concessions mean. It is opportune for us to debate industrial energy costs, and especially the consequences of the Chancellor's Statement together with the NEDC report.
We were told that the Budget was supposed to be a Budget for industry. Many Opposition Members, firms and industrialists fear that it was not a Budget for industry but a Budget for further industrial decline. Before the Budget firms in my constituency and others had pinned their hopes on relief in two areas other than interest rates. They had hoped for a concession on the industrial insurance surcharge, and meaningful assistance on energy costs. Those were the two priorities that I found in talking to many companies and firms in manufacturing in my constituency and in various parts of the country. They had prayed and hoped that the Budget would help. Both subjects figured prominently in the comments made by firms and industrialists to whom I spoke because they are special burdens falling on United Kingdom companies, whereas among our European and American competitors costs are shared.
What has happened? On the surcharge we have heard nothing, but we can debate that on another occasion. I believe strongly that it was one of the quickest and easiest ways to give immediate assistance to industry when cash flows are tight and margins narrow. Towards the end of the year many manufacturing companies will be facing considerable cash problems. It could have worked selectively for the manufacturing sector, rather than trying to cut the surcharge or abolish it across the board.
Industry had great hopes for support from the Budget and the Chancellor in the second area of industrial energy costs. I am not being partisan when I say that the response to the Budget and the concessions has not been one of welcome. On the contrary, there has been an almost universal condemnation that it was too little and almost too late. Any examination of the tesponse of industry and hat of the Chancellor and Secretary of State for Energy towards the demands of industry and the NEDC report on energy pricing more than justifies and proves that criticism and condemnation. It can be justified by an analysis of what is likely to happen as a result of the concessions.
That should not surprise many hon. Members who have followed the subject, because from early days when the problems of industrial energy costs first arose—a good 18 months ago, as the hon. Member for Bedford charted comprehensively—the Government's response has been one of indecision and muddle. That is a generous interpretation of events. Many hon. Members on both sides of the House in Question Time after Question Time have drawn attention to the indecision and muddle of the Government's handling of the growing problem of our industrial energy costs and their competitiveness with those of the Continent.
1216 Recently there was a perceptive comment by Sue Cameron in the Financial Times, who summed up this process rather well. She said:The Department of Energy's initial response was to put its head down and hope that complainants would go away. When that failed Ministers entered into an unseemly argument with manufacturers over the real price of gas.Messrs Howell and Lamont might have recognised that the chemical industry was likely to be rather better at adding up energy bills than they and their officials. But the pair of them managed to create a sizeable credibility gap by insisting that what mattered was the average price of gas—no matter how distorted by a few large cheap contracts, no matter how irrelevant to the price being charged for most industrial gas supplies.I find that comment a not inaccurate description of the history of the past 18 months—if one were looking back as the hon. Member for Bedford did—and the Departmental and Government's response to the growing problem of industrial energy costs.
We held our breath and hoped that the unseemly squabbling and nitpicking over whose figures were right would come to a timely end with the dramatic announcement of the establishment of the task force. The NEDC was asked to report urgently 12 months after industry had pointed out that the problems existed. We were promised a comprehensive and speedy response to that report and its findings.
Alas, we again underestimated the pigheadedness of our energy financial masters and their unwillingness to respond comprehensively and speedily to what turned out to be an excellent report. But the Government's response has served to compound some of the confusion and muddle that preceded the establishment of the NEDC task force. The reaction from industry has not been one of universal welcome. Indeed, in some firms there has been disbelief, anger and a degree of confusion and uncertainty about how much the concessions announced in the Budget will mean to them.
Let us first consider the question of electricity prices. The hon. Member for Enfield, North spent some time discussing them and they have been a theme running through the speeches today. There is a fundamental issue and argument on which I shall touch later about our electricity, deriving as it does from our coal industry and not from the fantastic nuclear programme that some hon. Members would like us to embark upon, including, sadly, on this occasion the hon. Member for Bedford, with whom I often agree, though not today. Even the most enthusiastic supporters of a nuclear programme could not argue that such a programme if commenced now, or even five years ago, would have a material effect on electricity prices in the short to medium term.
We might as well start from that point, and discuss how in a time of deep recession we can effect some improvement in the energy costs of industry, particularly electricity costs.
The NEDC report clearly showed that large bulk users were disadvantaged compared with their European and Continental competitors. There was a considerable degree of agreement in that part of the report, even about the margins. The witnesses from the CEGB, the electricity boards and the chemical industry agreed on the comparative costs of electricity to chemical companies in the United Kingdom and on the Continent.
The chemical industry put a figure on that disadvantage. It felt that before the Budget the additional burden arising from electricity costs was £99 million. Is 1217 it the Government's view that that figure represents the additional cost disadvantage resulting from electricity costs?
As hon. Members have said, the chemical industry has come forward with a post-Budget estimate. It says that the relief offered as a result of the Budget concessions is, at its most hopeful, £10 million. In other words, the supposed effect of a major concession on energy prices and costs to one industry is a paltry 10 per cent. of the original estimated and agreed cost disadvantage. Do the Government agree with that estimate? Can that figure be placed on the concession to intensive industrial users?
We are entitled to know whether the Government agree with these estimates. If they disagree, they should reveal their own estimates of the benefit to the chemical industry. Does the concession to the chemical industry amount to £10 million, even though the pre-Budget cost disadvantage was put at £100 million?
§ Mr. Skeet
I hope that the hon. Gentleman will not distort the facts. He has talked about electricity prices. However, the CIA's case dealt with liquid fuels, natural gas and electricity. The total disadvantage is not £99 million but £171 million. I hope that he will deal with this matter comprehensively.
§ Mr. Rowlands
I am being as modest as I can. I have chosen one aspect of energy costs, namely, electricity. I have compared electricity costs to the chemical industry before and after the Budget, but, as the hon. Gentleman rightly points out, the total cost is about £170 million. In that respect, the concessions are even less generous and more paltry than the figures I have quoted.
We should like the Government's assessment. Do they agree with the figures that have been quoted by the hon. Member for Bedford and myself? There is no point in Ministers saying that this is a matter for the CEGB, the electricity boards and the companies, and that the Government have nothing to do with it. The Government have everything to do with it. These concessions were announced as a major piece of budgetary policy and, therefore, must be justified by the Government.
The Budget placed a figure of £45 million on the electricity concession to industry. But no one in industry to whom I have spoken has been able to explain how that amount has been arrived at. Is it a carefully computed cumulative figure arrived at from the knowledge of what the concession will mean for different industries? Is it a sensibly constructed figure, or is it a figure which has been plucked out of the air? Is it the minimum that can be offered as a sop to appease the baying hounds who have complained about energy costs? What is the rationale behind the £45 million? Why should it be £45 million rather than £50 million, or even £35 million? I understand that the Minister will give a comprehensive reply to the debate. He should therefore explain how the figure of £45 million was arrived at.
Since the Budget, there has been a growing doubt about the ability of industry to benefit from the concessions suggested by the CEGB, particularly with regard to load management. I gather that a number of load management proposals have been made. However, many companies argue that there is serious technical and dommercial coubt about the viability of accepting the 15-minute interruptibility provision, which is the only basis on which they will 1218 benefit from the load management concession. they believe that its value, even to some of the largest energy users, will be illusory. The hon. Member for Bedford described the benefit as trivial. If so, we shall create an even greater sense of cynicism and resentment than that which existed prior to the Budget.
§ Mr. Palmer
One of the most unfair advantages enjoyed by the gas industry over the electricity supply industry, because of its monopoly position on the wholesale side, is that, while the electricity supply industry is obliged to give a 24-hour service whether or not it is economical, the gas industry can pick and choose.
§ Mr. Rowlands
I appreciate that point. I was not fully aware of it and I am grateful to my hon. Friend for drawing it to my attention. As the House knows, he is extremely knowledgeable about the electricity industry.
One of the major budgetary concessions related to electricity prices, but on the morrow of the Budget it is already falling apart when subjected to analysis.
I listened to the interesting speech of my hon. Friend the Member for Bristol, North-East (Mr. Palmer) as well as to the speech of the hon. Member for Bedford, who said that the fundamental electricity costs were related to the source of supply, be it coal or nuclear power.
I shall not discuss the Select Committee's report at great length today. It is a serious report which deserves a full scale debate in its own right. Perhaps the Minister will say when we may expect the Government's response to that report. We should bide our time and keep our powder dry for that major debate, which I am sure will come, though I share my hon. Friend's view—and, I understand, the view of the Select Committee—in casting considerable doubt on the demand forecasts of the CEGB and the tremendous proportion of national resources that would be needed for a massive PWR programme which was last envisaged by the Government in 1979. On Monday at Question Time, the Under-Secretary hedged his bets more than he had done on previous occasions and said that it would be subject to demand and national resources. Another reason, why it should be subject besides the problems of the public inquiry, to cautious consideration is the exciting possibility of the Severn barrage and the committee chaired by Professor Sir Hermann Bondi.
I was interested to hear my hon. Friend say that the costs of the Severn barrage were coming out right. We await the report with interest. A Severn barrage will have a tremendous impact on national resources. So we shall have to think hard before accepting the blind and bold view taken by the hon. Member for Enfield, North, who wants to go ahead with the project as quickly as possible. He wants a public inquiry, of course, but I wonder what would happen if the public inquiry turned down the whole PWR programme.
I turn to the subject of gas prices. If the relief on electricity prices turns out to be trivial or marginal—it should not be forgotten that industrial users will pay a 15 per cent. increase on 1 April, as well—what has been the effect of the Budget on gas prices for industry? This mean proposal has cruelly deceived heavy users because they believed theat they would benefit from th concessions.
There is one aspect of the concession that I should like to mention. The Under-Secretary will recall that it was my recommendation during our debates on the gas levy that we should have a gas stabilisation programme for 12 1219 months on both firm contracts and interruptible supply contracts to industry. I said that it would give much-needed relief in 1981—a time of deep recession—and enable Britain to be competitive again with our Continental competitors. I put it forward as a genuine and serious proposal, and I costed it during the Gas Levy Bill debates. I said that it would cost £100 million to stabilise both firm contracts and interruptible supplies for the 12 months.
When I first heard the Chancellor of the Exchequer propose a freeze on prices, I welcomed it—that was, until I saw what had been done. It is not a concession for 12 months; it is a concession for, at best, about eight months. We see the meanness and the pettiness of the Government's proposals. It would surely have been better to be generous and bring forward a full 12 months' benefits for industrial consumers. The cost would have been £100 million, less than one-quarter of what the Government will get from the levy on the industry in 1981–82.
Even worse has been the confusion that followed the Budget about industries and firms that are on interruptible supplies. I hope that the Under-Secretary will make a comprehensive statement on the Budget concession to those firms on interruptible supplies.
What are we to make of a letter in the Financial Times from Mr. Horner, whom I telephoned on the matter, the managing director of Hickson and Welch (Holdings)? It said:In our group the major chemical manufacturing subsidary's interruptible gas supply contract came up for renewal on November 1, 1980. In recent years gas contracts have been renewed at a fixed price per therm for 12 months. For the second half of last year, however, such contracts were based on a price per therm for three months increased by 1p per therm for the following 9 months. In our case the average price for the 12 months on this basis represented an increase of some 24 per cent. over the previous year's figure.When the Chancellor announced that gas prices to industry would be held at 1st January, 1981 price level until December 1, 1981, we believed initially that we might expect the price for the first 3 months to be held until December 1, 1981, i.e. that the extra 1p per therm for 9 months would not be invoked. Not so! The freezing of the price applies only to non-interruptible contracts. In our case we are advised by British Gas that the contract terms remained the same … I hope these facts will explode the myth which seems to be current that the large industrial users of gas gained significant concessions from the Budget.A firm in my constituency wrote to me in similar terms. I shall quote the letter, because this matter has caused considerable confusion among firms who had thought that they would benefit from the Budget. It says:Our protest is that as we have within our group several important gas contracts which attract an increase of 1p a therm as from the end of the first quarter"—that is, February—March this year—we fully expected that we should benefit from the Budget by the withdrawal of this projected increase until at least 1 December. To our dismay we learnt that this much-needed help extends only to smaller-volume firm gas contracts".In other words, the heavy users of gas, whom we were trying to help and who are basically on interruptible supplies, will receive no benefit from a concession in freezing or withdrawing the escalated price increase included in their contracts. I hope that the Under-Secretary will tell us whether Mr. Welsh and Croda International Ltd. in my constituency have been cheated of the concession that they believed they had been given by the Chancellor. Surely the 1p a therm escalation provision that is written into some contracts should be withdrawn and the 1220 full benefit given to interruptible supply contractors as happened for the eight-month period for those on firm contracts.
I turn next to the question of foundry coking coal and the coal industry. The NEDC report dealt not only with electricity and gas but with foundry coking costs, too. It also contained something about the British Coal industry, which the hon. Member far Enfield, North failed to quote. I shall draw his attention to that passage. The report was written not by the NUM, which causes the hon. Gentleman so much displeasure, but by the NEDC. On the subject of foundry coke it says, in relation to the coal industry's costs in the United Kingdom as opposed to the Continent:We have the cheapest indigenously produced coal in the European Community. EEC rules only allow subsidisation down to the level of the imported price of coal. Other countries both subsidise their home production more heavily and import more from third countries. Government aids to indigenous production in the Community are listed in Table 10: total aid to coal in Germany is £36/tonne, in France £66/tonne and in Belgium £106/tonne compared with £2/tonne in the United Kingdom.These subsidies have the effect of making higher cost coal than the United Kingdom's competitive with imports.He added:Exchange rate movements have made a major contribution"—to foundry coke prices—but other factors have also been important—the higher level of subsidy applied elsewhere to basically higher cost coal production and also indirect aids to coke oven operations. The United Kingdom subsidies for their coal industry are less than the maximum which even the EEC rules would permit.The hon. Member for Enfield, North should not portray the British coalfield as an inefficient, high-cost operation. Of course it has higher costs than the United States or Australia, but in European terms it is a competitive and powerful industry. If we damaged it irrevocably, as some of the proposals of the hon. Member for Enfield, North would do, there would be disastrous consequences.
§ Mr. Eggar
I wish to correct the erroneous impression of my views that the hon. Gentleman is creating. I am totally committed to the long-term development of a strong British coal industry, but l am sad because I believe that that commitment has been undermined by the willingness of the NUM to refuse to back closures that are necessary and would be beneficial in the long run to the efficiency and competitivenes of the coal industry.
I recognise that our subsidies are lower than those in Europe, but we have always enjoyed a competitive advantage over Europe in coal production. We are more efficient and we have better seams and coal deposits. Surely it is reasonable that we should not have such high subsidies.
§ Mr. Rowlands
I am trying to correct the image of the British coal industry as a massively subsidised industry and the suggestion that all our competitors are superbly efficient. The continued denigration of the industry by some Conservative Members—I am glad to hear the hon. Member for Enfield, North say that he is not among them—is sad and dangerous. However, we welcome the growing conversion among Conservative Members; and, as the hon. Member for Canterbury (Mr. Crouch) pointed out, many Conservative Members have always understood and appreciated the value of the coal industry.
§ Mr. W. E. Garrett
The hon. Member for Canterbury (Mr. Crouch) has been a long-standing supporter of the coal industry. He has knowledge and understanding of its 1221 problems, and that is not the privilege of other Conservative Members. If they had his understanding, we would have better results from the Government.
§ Mr. Rowlands
I wholeheartedly agree with my hon. Friend. The embrace of the Opposition may do the hon. Member for Canterbury enormous damage, but he is an independent-minded Member and I am sure that he will survive our congratulations.
We should have a statement about the Government's response to the foundry coke aspects of the NEDC report. We have not had a word on that subject except the Secretary of State's statement in reply to a supplementary question on Monday that "it is all very difficult".
The hon. Member for Enfield, North continually paints the NUM as a group of Luddites. The hon. Member for Canterbury promptly corrected him. The NUM has presided over a decline in its membership of unprecendented proportions in the past 20 or 25 years. It did so in the 1950s and 1960s on the basis of many false and doubtful assumptions abour energy, fuel supplies and costs, particularly the glorified view of the way that nuclear energy costs would come down.
The NUM presided over that massive decline without strikes or Luddite activity. The union is rightly saying to the Government—and I hope that they have been listening—that we should learn the lessons of the past. Accelerated pit closure programmes mean that we lose coal supplies for ever—because a closed pit cannot be reopened—and take out of industry its most valuable resource, that of manpower. The miners come only from mining communities. If those communities are closed, the main source of manpower for the industry is shut off. That is one of the problems facing the German coal industry.
§ Mr. Nicholas Lyell (Hemel Hempstead)
I hope to have the opportunity of making a strong speech in support of the coal industry, but does the hon. Gentleman recognise that the failure to close uneconomic pits is acting as a haemorrhage to the future of the industry? The problem must be tackled sensibly so that many of the men can be deployed into better pits.
§ Mr. Rowlands
I do not disagree with that statement. Indeed, that is exactly what we have been doing. Between 1974 and 1979 we closed or merged 13 pits in South Wales. That was a high proportion of the pits and they were closed with the agreement of the NUM and the NCB. With corresponding capital investment, miners were deployed into neighbouring pits. The problems in the recent crisis was that that careful and sensitive balance between investment and development and the closure of exhausted pits was to be broken.
§ Mr. Rowlands
No. The hon. Gentleman made a long speech and has intervened two or three times. The hon. Member for Hemel Hempstead (Mr. Lyell) hopes to speak and he can answer the points that I am making.
§ Mr. Rowlands
No. I have given way two or three times. Other hon. Members wish to take part in the debate and the hon. Member for Enfield, North is being greedy. He should be sensitive to the wishes of his hon. Friends.
1222 No one denies or underestimates the difficulties facing any Government in achieving a consistent and relevant energy policy at a time of great volatility of prices. The dramatic oil price increases of 1974 and 1979 shattered all forecasts as well as the economic prospects of many nations.
In the past 18 months, British industry has also had to bear the additional burden of rocketing exchange rates. The double blow of the exchange rate and energy costs has undermined the ability of our industry and many of our firms to compete with Continental and international firms. That would have been bad enough. Our indictment of the Government's industrial energy policy is that it has exacerbated and added to the problems of the competitiveness of British industry. The Government have failed to appreciate that, in the depths of a recession, an energy-rich nation such as ours could help British industry and British firms. The right hon. Member for Stafford and Stone (Sir Hugh Fraser), in his speech today and during the proceedings on the Gas Levy Bill, has also made this plea.
Instead of helping British industry and British firms by offering help over energy costs, the Government have exacerbated the problem. I understand that British Gas, in March and April last year, told the Government that if they continued with their industrial pricing policy, prices would go out of line with those on the Continent. I have asked the Minister this question in a previous debate. I hope that he will reply. What was the advice of British Gas last March on comparative gas prices to industry if the increases were proceeded with?
§ Mr. Norman Lamont
I will answer the hon. Gentleman's question. Will he say on what basis he makes his allegation?
§ Mr. Rowlands
I am asking a question, as I have done before and the hon. Gentleman did not give me an answer. If it appears to be an allegation, I shall withdraw it.
I put the matter in the form of a question. What indications were given to the Government by British Gas last spring, when industrial prices were being fixed and the industrial pricing policy of British Gas was being discussed, about the comparative costs to industry of British Gas prices and gas prices on the Continent? Was it ever stated by British Gas that the consequences of proceeding as the Government wished would mean that its prices were higher than those of our Continental competitors? I believe that the problems associated with the Government's energy pricing policy could have been foreseen. The additional burden placed on British industry at a time of deep recession, with all the other pressures on costs and margins, is unforgiveable.
That is the indictment that the Opposition make of the Government's industrial energy pricing policy throughout 1980 and 1981. I wish we could have given a wholehearted welcome in this debate to what would have been a conversion to a sensible and sensitive response to the demands of industry as a result of the Budget Statement. I am afraid that I cannot do so. A number of firms are deeply worried and concerned that the concessions on gas and electricty prices will prove marginal or illusory. The sense of resentment, bitterness and cynicism is reflected in the correspondence from industrialists. They are not card-carrying members of the Labour Party.
1223 I do not know Mr. Horner's politics—I believe he is president of the Chemical Industries Association—but he says:The Department of Energy philosophy is—'hang on lads, the other prices will eventually catch up with ours.' In the meantime, however, with every month that passes, profits are being eroded, the opportunities for generating cash for new investment are diminished. If we fail to recognise this then I fear that these industries will slowly die in the United Kingdom and production will concentrate in overseas countries where a greater realism prevails.That is not a statement from the Labour Party. It is a statement that represents the view, I suppose, of those who are basically supporters of the Government. If the Government will not listen to the Opposition, they should listen to them. I hope that not only in the speech of the Under-Secretary of State but also in the further review of industrial energy prices that is now needed the Government will see sense and give greater assistance to industry in 1981, thereby saving both jobs and firms in this country.
§ Mr. Jocelyn Cadbury (Birmingham, Northfield)
Like other hon. Members, I am grateful to my hon. Friend the Member for Bedford (Mr. Skeet) for bringing forward this issue of industrial fuel costs for debate. This is a subject of vital significance for industry. In the industrial Midlands, where I come from, there is real concern about energy prices. Sometimes this concern amounts to despair. I have to agree to some extent with the remarks of the hon. Member for Merthyr Tydfil (Mr. Rowlands), that some of the concern is expressed by people who are traditionally friendly towards Conservative Governments.
Throughout the last year there has been a confusing debate between the suppliers of energy and the Department of Energy, on the one hand, and British industry, on the other, about whether United Kingdom industries had to pay higher energy prices than their foreign competitors. Eventually, the Government took the wise decision to set up the NEDC energy task force. While I welcomed the move, I feel that it would have been better for the relationship between the Government and industry if the task force had been set up at least six, or even nine months previously. At least we now have a degree of consensus about energy price differentials in Britain and the rest of Europe.
The report bears out to a great extent the claims of industries such as the chemical, steel and clay, which are heavy energy users, that energy costs in Britain are significantly higher than in other European countries. I am talking about intensive energy users. For the majority of smaller industrial customers, electricity and gas prices are shown by the report to be roughly in line with prices on the Continent.
The report states that by the end of last year gas prices to heavy users were 10 per cent. higher in the United Kingdom for interruptible supplies, and between 10 and 20 per cent. higher for firm supplies, than they were for equivalent consumers on the Continent.
The report shows that high load factor users of electricity in Britain have to pay substantially higher prices than in France and Germany. French and German prices for intensive users are between 10 and 35 per cent. below equivalent prices in the United Kingdom. In Germany, 1224 electricity prices decline sharply as the load factor rises. In other words, the Germans give substantial incentives to large industrial customers.
I have been informed by the British Independent Steel Producers Association that for two identical steel plants, one in Germany and the other in the United Kingdom, the cost of electricity to make one tonne of steel is £13.80 in Germany and £21.20 in the United Kingdom. The differential is £7.40, or about 5 per cent. That is a significant amount if one considers the total cost of the product. It must have an influence on whether British steel producers can produce steel profitably.
It is no wonder that our steel producers have problems in competing in world markets. Apart from the rise in sterling, there is no doubt that United Kingdom energy prices have done great damage to the private steel sector. The report states that United Kingdom foundry coke prices are 30 per cent. higher than in the rest of Europe. It is hardly surprising that the British foundry industry finds it virtually impossible to price its products competitively.
The Chemical Industries Association estimates that, if one takes energy costs as a whole, one finds that the British chemical industry is paying about £170 million more for its energy than it would if its plants were sited on the Continent. Such large disparities in energy costs have hit the British chemical industry hard. It must be one of the reasons for the dramatic fall in ICI's profits last year.
How have the energy price differentials arisen? It would be wrong to blame everything on the British energy supply industry or the Government's policy. The Government's bold steps to revive the nuclear industry have undone some of the damage done to the nuclear industry by the last Government. They have given Britain the chance, in the long run, to have supplies of cheap nuclear-generated electricity. That is a plus for the Government, which will be remembered for a long time.
The Government can do little to control a number of factors affecting existing energy prices. The dramatic appreciation of sterling in 1980 contributed to the present disparity in energy prices. The French benefit greatly because 45 per cent. of their electricity is generated from nuclear and hydro-electric stations. The French also use a long-run, marginal costing system which assumes a future idyllic era when a high proportion of cheap electricity will be generated from nuclear stations. That amounts to a subsidy of a sort.
It is true that the Germans, the French and the Belgians all subsidise their coal industries to a vast degree. However, the factors that I have mentioned do not account for more than a proportion of the differentials between our prices and the prices of the other Europeans. Many of the causes of high energy costs in Britain are self-inflicted. Other Europeans are subsidising energy—for example, the French subsidise their electricity and the Germans subsidise their coal—while we are taxing energy in the form of a tax of £8 a ton on fuel oil.
That has repercussions on gas prices, as the price of oil is used as a reference for the price of gas. There is no good reason why, in the past, the electricity supply industry should not have adopted the German policy of an aggressive and imaginative marketing strategy towards its largest customers. Our large industrial customers would have been helped if rather more imagination had been used in the past.
One is forced to the conclusion that the domination of the energy market in the United Kingdom by two of the 1225 world's largest monopolies—the Central Electicity Generating Board and the British Gas Corporation—is one of the main reasons why prices are not competitive in the United Kingdom.
Measures were included in the Budget to give relief to industry on energy prices. I regret that I have found widespread disappointment among industrialists at the package announced by my right hon. and learned Friend the Chancellor of the Exchequer. However, unlike the hon. Member for Merthyr Tydfil, I am sympathetic to the problems faced by my right hon. and learned Friend in maintaining his fight against inflation, which I fully support. I understand his reluctance to increase Government borrowing still further by giving large handouts to industry. I sympathise with him over finding himself in such a tight situation. However, it was a great disappointment that nothing was done to abolish or reduce the £8 a ton duty on oil. I ask my hon. Friend the Under-Secretary of State to explain why it has not been possible to remove the oil tax from the calculation that has been used to set the price for gas. There seems to be no logical reason why the oil tax should be included in the calculation.
What do the concessions amount to? The freezing of gas prices until December is to be welcomed. However, gas prices for heavy energy users are already too high. They will remain substantially higher than the prices that our competitors abroad are having to pay. That will apply for the rest of the year. The freeze is of limited value.
A specific anxiety was expressed to me yesterday by certain industrialists to whom I talked. A number of chemical companies have been informed by the British Gas Corporation that, despite the announcement of a freeze, interruptible contracts that come up for renewal before December will be renewable not at the current price, but at higher prices. Is the freeze on gas prices really a freeze?
Bearing in mind the large differentials between the prices paid for electricity by United Kingdom intensive energy users and the prices paid by their French and German competitors, what does the concession on electricity amount to? In industry's view, the concession is marginal. It has yet to be defined clearly by the CEGB.
I hope that my hon. Friend will comment on two concerns that are being voiced by industry. First, there is the so-called category C proposal, which was referred to by the hon. Member for Merthyr Tydfil. Under this proposal companies can obtain some relief on the price that they have to pay for energy if they are prepared to reduce their electricity consumption within 15 minutes.
I have been told by a number of industrialists that there are few companies in this country that could take advantage of that proposal and shut down and shed some of their load in 15 minutes. In France there is a similar scheme, which operates on the basis that there are two hours in which to shut down some of the electricity. That is more realistic.
There is considerable vagueness surrounding the proposal that the area electricity boards should exercise greater flexibility in negotiating prices with heavy electricity users. Perhaps my hon. Friend will specify the criteria that are to be used to determine who will receive those concessions. That is also causing considerable concern to the industry.
1226 While these proposals on electricity pricing are better than nothing, it is disappointing that there are no plans to develop a truly competitive pricing structure along German lines. The Government must do much more to help industry on energy prices than they have in the recently announced package, which is only a pallative. We must look at the deeper reasons for our relatively higher energy costs.
I am convinced that the energy supply industry in this country is fundamentally inefficient. I accept that there are many differences, as my hon. Friend the Member for Enfield, North (Mr. Eggar) said. There are geographical differences. One cannot directly compare resources in this country with those in France and Germany. One of the main reasons for our relative inefficiency is that we have giant British monopoly suppliers of energy who do not face the discipline of the market place. They are not governed by the commercial pressures faced by private industry. One does not have to delve far into the electricity supply industry to discover that it is riddled with the English disease. There is not just the failure of the electricity industry to market its product aggressively, which is what the rest of us in the private sector must do, but, far more serious, the consistent inability of the industry to complete power stations on time, as my hon. Friend the Member for Enfield, North said.
Dungeness B is currently 10 years behind an initial schedule of five years. Therefore, it will take 15 years to complete that power station, which is catastrophic. Partly because of the delay, the cost of that power station will be five times the original estimate.
No fewer than nine CEGB power stations currently under construction will be delayed by a total of 37 years. For every year of delay the costs escalate by about 20 per cent. It is true that in this country we are notoriously bad at managing large construction projects. That is not confined to the energy industry. It is true of other industries, too. The record of the CEGB in this area is one of catastrophic failure. For that reason I welcome the Government's decision last year to order an investigation by the Monopolies and Mergers Commission into the electricity supply industry.
It is not realistic to expect the private sector to move into generating electric power on a large scale, because that will not be profitable for the private sector. However, it would be possible to follow another route, and I ask my hon. Friend to bear this in mind. It would be possible to decentralise the CEGB and split it up on a regional basis. At least one could then compare performance and pricing between one regional utility and another. That is what happens on the Continent and in the United States.
I deal finally with the British Gas Corporation. Armed with its formidable monopolistic powers, the corporation can behave as an absolute dictator. It can charge what it likes. It has complete control over which customer gets a firm supply or an interruptible supply or whether he gets supplies at all. It has treated industrial customers in an arbitrary manner, and sometimes it has treated them with contempt.
In the case of gas supply, the private sector could be introduced on a substantial scale, and I ask the Under-Secretary of State whether the Government have had any further thoughts about abolishing the British Gas Corporation's monopoly purchase right, together with its 1227 monopoly of distribution. I know that my hon. Friend is sympathetic to this idea, and I shall be interested to hear how far it has got.
There is no reason why private companies should not be allowed to produce gas in the North Sea, bring it ashore themselves and sell it direct to industrial customers. If that were done on a large scale we should soon see a greater availability of gas and, in the longer run, we should find that prices were very much more competitive.
It is only by reducing the overwhelming power of the giant State suppliers of energy, either by regionalising them or by introducing private competition, that we shall ever make energy prices competitive. Everything else is mere tinkering. Until we carry out the radical changes that are needed, British industry will continue to pay far more for its energy than will its foreign competitors. This means that the existence, for example, of our chemical and steel industries, which are fundamental to the country's economic infrastructure, will continue to be threatened.
§ Mr. Peter Rost (Derbyshire, South-East)
I am pleased to be called immediately after my hon. Friend the Member for Birmingham, Northfield (Mr. Cadbury), because the theme of my remarks will be along similar lines to his. I, too, believe that our high energy costs are largely self-inflicted. The reason is not just our system of taxes and tariffs, which we can tinker with to ameliorate the difficulty in the short term, but principally the long-term structural problems that we have incorporated into our system of State energy monopolies.
The NEDC report has establised the facts. I do not think that we need to argue about them. My hon. Friend the Member for Bedford (Mr. Skeet) made a powerful case, emphasising that industry is in need of immediate help. Here the Government must look again at what can be done.
If we are to get a competitive industrial energy costing system, and if we are to get our energy at prices similar to those paid in competitor countries, we have to do more than just tinker with tariffs, subsidies and taxes. We have to to what our competitors do. We have to make our energy industries more efficient. That means, first, a major structural reform. That will require the radical approach which some of us hoped the Government would be a little more vigorous in pursuing. We have to break up the nationalised monopolies in gas, coal and electricity. It is easy to say that. It is far more difficult to implement it. But I do not believe that it is impossible to make a start that will begin to change the structure to help industry.
Looking, for example, at the electricity supply industry on the Continent, we see that France has a vigorous and economic nuclear programme, which of course will make electricity very much cheaper than it can be produced here. We are paying heavily for the neglect and procrastination of the past 10 years, and I hope that we shall at least do something about that.
It is not just the nuclear programme that makes electricity less expensive on the Continent. It is because the utilities are less over-centralised and less monopolistic. There is more regional autonomy, and this creates a more commercially competitive atmosphere, even if the utilities are not all in the private sector, although some of them are. They go into partnership with private sector industry on joint power station construction and with local authorities to produce combined heat and power. They sell heat to those who need it.
1228 Millions of people on the Continent benefit from about 3,000 district heating schemes, many of which are partnerships between utilities and industry. Industry gets electricity cheaply because it is a by-product of the production of heat. In this country our electricity is very costly because we throw away into our rivers two-thirds of the fuel in the form of heat from our cooling towers. It is no wonder that our electricity costs are higher. In Germany, about 30 per cent. of electricity is produced as a by-product of heat. Here the figure is about 15 per cent., all of it in industry. In many other European countries electricity is produced more efficiently and economically than it is here because there is less over-centralisation in State monopolies.
I believe that the Government can and should do something about this if they wish to remedy the longer-term structural imbalances in our energy prices. Solutions are available. Some have been suggested by my hon. Friends. We must restore genuine competition in the production and sale of heat and electricity. We must also promote a more vigorous nuclear programme that is as efficient as those of other countries, at the kind of cost and time scale in completing power stations that other countries achieve. We may then begin to make some impact on producing electricity at prices of the kind achieved by our competitors.
If industry is complaining now about the cost of electricity and the uncompetitiveness and inefficiency of the nationalised monopoly, what will it say in three or four years time when the French will be producing 50 per cent. of their electricity by nuclear means at one-third of the cost for which our nuclear programme is being constructed? What will that do to our competitive position?
I have always been a staunch supporter of the coal industry. There is no doubt that it is the fuel of the future, but it will not be the fuel of the future unless we can produce it more efficiently. It is all very well to say that closures of uneconomic pits are going ahead, but they have not gone ahead to schedule. This has resulted in the average cost of coal rising by more than it should have done and thus depriving the coal industry of capital investment funds. If the industry had made the profit that it could have made, it would have had more funds available to invest in new fields. That is what should have happened. As with any industry that has to remain competitive, less economic units must be closed so that resources are not drained away in subsidies for uneconomic units of production if the industry is to expand and become more efficient.
We know that we can produce coal at lower prices. Fields in the East Midlands and the new fields at Selby produce coal at a fraction of the average price. If our electricity industry and the rest of our industrial sector had the benefit of that, rather than having to pay the average price to cover the great losses on a small proportion of production, we should still be competitive. Industries would not be closing down due to the cost of fuel, electricity prices would be lower, and the coal industry would benefit because its market would be expanding rather than contracting. That situation will come about only if the Government act more radically over the monopoly in the coal industry.
There is no justification for a 100 per cent. nationalised monopoly, even if there was when the industry was first nationalised. Why should BP have to hunt around the world to buy and efficiently develop coalfields because it 1229 cannot do so here? Why can we not have genuine competition? Why cannot potential new coalfields be offered for tender, in the same way as North Sea oil blocks, to enterprises such as BP and other major mining concerns with marvellous experience? That would give the coal miner an alternative employer, probably offering far higher earnings in return for higher productivity. The NCB would be put on its mettle. It would have to shake itself up and get rid of the bureaucratic waste and inefficiency that it can cover up bcause it is a monopoly. Coal miners complain that there are too many chiefs and not enough Indians.
§ Mr. Rost
I agree. Moreover, I want the market in coal to expand, which means more coal production. If the NCB believes that some pits are uneconomic and should be closed, why not offer them for sale to miners' cooperatives or to private sector mines, of which we have many?
The Government must tackle the nationalisation Act and allow mines with more than 30 miners to operate in the private sector. The number could be increased to 100, 200 or 300. Let the private sector have an opportunity to show up the inefficiency of the nationalised industry, just as Freddie Laker has shown what could be done with British Airways if he were allowed to run it.
Let me deal next with the gas industry. My colleagues have said that it is no use the Government trying to defend the high price of gas while maintaining the monopoly. It is time that it was broken. Oil companies that find gas in the North Sea should be allowed to use a joint pipeline on land and offshore and to sell the gas direct to the highest bidder. The BGC would then have to compete for its supplies and become more efficient. Moreover, more supplies would become available and we should get more gas, instead of its being flared in the North Sea. Had we had a free market, and not a State monopoly, the pipeline would have been built by now. The British petrochemical industry would be thriving instead of collapsing, because it would have had cheap feedstock on stream much earlier. It is time that the Government tackled the longer-term structural problems of energy pricing—the monopolies that are holding up more cost-effective energy production.
The consumer, whether industrial or domestic, should be considered. Unless we produce energy at competitive prices we shall have to seek more and more subsidies to prop up waste and inefficiency in the nationalised monopolies, which is no solution. We must tackle the heart of the problem. As with BL, the BSC and British Aerospace, the Government must deal bravely with the structural weaknesses in the nationalised energy monopolies. Unless they do so we shall continue to be condemned to uneconomic and uncompetitive energy pricing. Our competitors are not hampered by the same misfortunes.
§ 1.5 pm
§ The Under-Secretary of State for Energy (Mr. Norman Lamont)
My hon. Friend the Member for Bedford (Mr. Skeet) has given the House a valuable 1230 opportunity to discuss energy prices, which, as I am well aware, is a question of considerable controversy. Perhaps I dare confess to him that, not just at this moment but over the last few months, no man in England has wished more than I that energy prices were lower than they are. All the zeal of the Chemical Industries Association does not equal my desire that energy prices should be lower.
My hon. Friend has spoken today with considerable knowledge and expertise, as he always does in these energy debates. The other day one of my officials told me that he happened to bump into my hon. Friend at a party. I do not know whether my hon. Friend knew to whom he was talking, but he asked the official from my Department how busy he was. The gentleman explained where he worked, to which my hon. Friend said "When Parliament gets back next week and I start putting down questions, you will soon be a lot busier." My hon. Friend has been exactly like that. His study of and interest in energy questions has been of great value to the House.
I very much agree with much of what my hon. Friend has said, particularly those parts of his speech which were echoed by my hon. Friend the Member for Derbyshire, South-East (Mr. Rost), who talked of the need for greater efficiency in our nationalised industries. This is at the heart of the problem, particularly the problem of electricity prices. We must get our electricity supplied at more competitive prices, and that relates to the question of the efficiency of the coal industry.
I take what my hon. Friend the Member for Derbyshire, South-East said about the structural changes. We are addressing our minds to these problems. We have said that we intend to remove the monopoly of the electricity supply industry, and I assure my hon. Friend that the only reason why we have not been able to do so earlier is simply the usual constraint of time in the House. However, as I have said to my hon. Friend previously, we have a vehicle in mind for this change. I am very much in agreement with what both of my hon. Friends have said on this matter.
I suppose that it is inevitable that attention should be concentrated on the present and instant remedies for today's problems, sometimes with little regard for consequences. But in our policies it is essential to respond flexibly to both short-term and long-term considerations and to consider the impact of short-term measures on our ability to provide continuing, adequate and secure energy supplies.
It is only since 1973 that the industrialised world has come fully to realise the extent of its dependence on continuous and secure energy supplies. I make no apology for making that statement, which is made in every energy debate that we have. We must make that point because it is so little understood. Any hon. Member who does not tell his constituents that the era of cheap energy is over and that energy prices are likely to rise faster in future years than prices in general is doing his constituents no service.
The price of oil is now 20 times what it was in 1973. These enormous price hikes are not just a temporary phenomenon; they are likely to continue. They are continuing against a tight oil supply situation, in which proven reserves of oil are no longer keeping pace with consumption. In 1970 there was 35 years' supply of oil in proven reserves. By 1977 that had fallen to 33 years' supply, and by 1979 it had fallen to 27 years' supply. It is inevitable that gas, a competing alternative fuel to oil, should be affected by that situation as the two fuels are 1231 interchangeable and also because gas reserves are finite. It is not often appreciated that the proven gas reserves in the world are less in energy terms than proven oil reserves.
I understand, and sympathise with and do not blame people for, what they say about the problems of energy costs. But the problems are not the same as those of the rates, water and inefficient utilities charging for air, using their monopoly power. But it is a problem of scarcity of energy in the world and that drives up the price.
The price of energy has risen particularly steeply in the past two years, but the overwhelming reason is not Government revenue raising, as is alleged, or costs passed on by the nationalised energy industries, regardless of efficiency. I acknowledge my hon. Friend's point and we want to improve efficiency. The main effect has been the sudden increases in world oil prices working through to the other fuels in the energy market.
The hon. Member for Wallsend (Mr. Garrett) had the candour and friendliness to say that this sort of thing has gone on for a long time. I should point out—not, I assure the hon. Member for Merthyr Tydfil (Mr. Rowlands), to make a party political point—that the experience we are now having with gas and electricity prices happened after the great oil price hike of 1973–74. The consequences rippled through for several years. From 1974–75 to 1978–79 industrial gas prices rose by an annual average of 28 per cent. Electricity prices between 1975 and 1978 by 96 per cent. Indeed, the domestic consumer did not escape either. Domestic electricity prices in two successive years increased by 37 per cent.
I do not wish to spoil the Friday atmosphere and I am not seeking to make a party political point, but the oil price hikes ripple through the system. It has happened before. It is not unique to the present time. Nor is the phenomenon unique to the United Kingdom. Industrial gas prices in France have increased by 130 per cent. since the beginning of 1979, in Germany by 70 per cent. and in the Netherlands by 80 per cent. It is a severe burden for industry and this kind of argument and debate is happening in all those countries as well as here.
The one note of cautious and qualified optimism is that it seems that the worst effects of the oil price increases are now behind us. For example, last year industrial electricity prices rose by an average of 24 per cent., according to the wholesale price index. This year the estimate of increases announced by the Electricity Council averaged about 15 per cent. That allows for the increases in the industry's fuel costs. In the current financial year, which has a few days to run, the average increase in industrial gas prices in revenue per therm has been over 30 per cent. In the coming year, it is more likely to be under 13 per cent.
The pricing measures to be taken by British Gas—to which I shall return later, because a number of hon. Members have asked questions about it—will help to ease the position, but I have no crystal ball. It is inevitable that energy prices in the long term will continue to rise in real terms because of the underlying shortage and the security problem. However, in the short term, prices may ease, but that depends on what happens to the world oil market. It may seem attractive to some hon. Members to go for a wholesale reduction in energy prices across the board. My hon. Friend the Member for Enfield, North (Mr. Eggar) addressed his remarks to that argument. I very much agree with him. I do not believe that an across-the-board reduction in energy prices would be right. It would be wrong on two counts.
1232 First, Government borrowing must be limited and constrained. While the NEDC report drew attention to the price disparities affecting bulk users, it supported the view that the prices paid by the overwhelming majority of United Kingdom users are in line with European prices. It would be wholly unjustifiable to raise taxes or borrowing, or both, to enable prices which are in line to be reduced further.
Secondly, it would be expensive. Thirdly—here I echo the view of my hon. Friend the. Member for Derbyshire, South-East—it would not be a service to industry to subsidise its running costs. It is essential that industry gets the price signals and takes account of the fact that, alas, higher prices are here to stay.
Understandably, many hon. Members have referred to the NEDC report. It concluded that gas and electricity prices for the vast majority of industrial consumers—more than 95 per cent.—remain in line. However, for an important category of bulk users, who represent a large proportion by volume of energy consumed, prices at the end of the year were out of line. The first major reason given was the strengthening of sterling against Continental currencies. In acknowledging that sterling made a significant contribution to the widening of energy prices, the report pointed out that in mid-1980 prices were broadly in line and that it was the movement of the exchange rate which pushed them apart by the end of the year. Secondly, some countries have different resources and programmes, such as nuclear and hydro. Thirdly, there are differences in market structures and pricing practices.
We have considered the report fully in our discussions with the industries. In his Budget Statement, the Chancellor announced briefly the measures which the supply industries were proposing to take. It may be convenient if I give a fuller explanation of those changes.
There has been some criticism of the Government's response. Some hon. Members have said that it was too late and too little. I remind them that these were not the first measures which the Government encouraged the industries to take. A year ago, the British Gas Corporation, with the approval of the Government, moved from the 100 per cent. relating of firm gasprices to gas oil down to 75 per cent. During the period of the Labour Government, gas prices were more closely related to gasoil prices than they are today.
I acknowledge that companies are facing problems with their gas bills, but we should remember that gas is used by a minority of consumers. Many firms which rely on oil have to pay much more for their energy than those which have the benefit of gas.
The second concession announced by the Government related to firm gas consumers on initial three-year contracts at higher prices It was decided that the price should fall to the prevailing firm renewal rate after the first year. That was not an insignificant concession. It affected 10 per cent. of industrial firm gas consumers.
We took a number of other steps. We encouraged the area boards to offer maximum flexibility and to approach their customers to make sure that they were getting the benefits of that flexibility. Therefore, the Government cannot fairly be accused of not having taken measures at an early stage to try to ease this difficult problem.
§ Mr. Skeet
In talking about renewals, and I understand what the Minister says about firm contracts, what exactly will happen to interruptibles? There seems to be much 1233 doubt in the regions about the matter. When people go into gas offices, they are told one thing, and they are told something entirely different by the Department. Can he explain that? Does the Minister intend to make a formal response to the February report, or are we to accept the response that he is making now?
§ Mr. Lamont
If my hon. Friend will allow me, I am just coming to the measures that we announced and I shall explain them in some detail. I hesitate to do so because it is a complex matter, but I shall try. British Gas has extended the relaxation of industrial pricing policy that was introduced last year. It means that renewal prices for all gas purchased on contract by industrial customers will be held at their present levels until 1 December 1981. In addition, the provision in existing renewed contracts for firm gas, that the price should be increased by 1p a therm each quarter, will not be applied over the same period. To make due allowance for this, the Government are adjusting British Gas's effective external financing limit by £73 million.
That effective ceiling means that British Gas will hold its December 1980 contract renewal prices and will not raise prices in response to movements in oil product prices for the rest of the year.
For those industrial consumers on firm contracts, the new concessions mean that their prices will be about 10 per cent. lower at the end of the year than they would otherwise have been. For those receiving interruptible gas supplies, the prices at which they renew their contracts have not changed since September 1980 and will not reflect any increases in heavy fuel oil, including those that are currently being announced by the oil companies.
If that increase is 6 per cent. on the duty-inclusive price, as seems likely, it will represent a benefit to the gas consumer of the same order, worth about 2½p a therm. It means that the renewal price on firm contracts will be held. The 1p per therm escalation will not happen. Of course, if a firm has a contract at well below the current renewal price and the contract comes up for renewal, it will move to the renewal price. In other words, the renewal price is being frozen. That is the position on firm contracts.
On interruptible prices, the renewal price will be frozen, with the proviso that the 1p increase after three months—there is an adjustment after three months of the contract—will continue. [HON. MEMBERS: "Oh."] That is important, because it means that the interruptible gas price will be below the heavy fuel oil price.
My hon. Friend the Member for Birmingham, Northfield (Mr. Cadbury) asked about the relationship between firm price gas prices and heavy fuel oil prices. The firm gas price is now close to that of heavy fuel oil. It is 29p a therm for firm gas, compared with about 27p a therm for heavy fuel oil. The price for interruptible gas is 24p to 25p a therm.
§ Mr. Lamont
My hon. Friend should recognise that the price will be significantly below that of the competing oil products. The price is lower than might have been expected. As I said, gas prices to industry will rise this year much less than in recent years.
§ Mr. Rowlands
The Minister's comments will cause widespread resentment among the large intensive users of gas. They heard the announcement that prices were to be frozen at 1 January 1981 levels. Many had an escalation provision of 1p per therm after the first quarter of the year and they expected that to be revoked. The Minister has announced that they will not receive that benefit.
I thought that we were supposed to be directing assistance to the large intensive users. But they will be penalised. What would it have cost British Gas or the Government to eliminate the 1 p per therm escalation provision?
§ Mr. Lamont
I cannot answer that question, but I will find out the answer and write to the hon. Gentleman. However, I assure him that the concession will be a considerable benefit to industry and there will be a gap between the interruptible and the HFO prices. Our firm gas prices are close to those of heavy fuel oil.
The new flexibility being introduced by the supply industry from 1 April should be of particular benefit to the larger consumer. Similar measures are being introduced by the Scottish boards.
First, there will be a new load management arrangement which will mean that larger industrial customers will be able to cut their electricity costs if they can reduce their demand possibly at short notice. Secondly, additional flexibility will be introduced by area boards into their special agreements with industrial customers, to reduce the impact of rising energy costs. Area boards are finalising the details of that second item, but it is expected that the assistance will fall mainly to those large industrial customers in the major manufacturing sectors, including chemicals, steel, cement, paper and metal melting.
It is expected that a few hundred customers will benefit from the additional flexibility being offered, a number of whom will benefit from both concessions. The benefit is likely to range possibly up to 8 per cent. in a few cases where customers can reduce most of their normal demand at short notice. Those arrangements will enable the electricity industry to reduce the operation of high-cost plant, but the industry will also forgo some contribution to its fixed costs which will reduce profitability. In recognition of that, the Government are adjusting the industry's external financing limit by £45 million.
I do not think those measures unreasonable in view of the fact, which has not been acknowledged in the debate, that the electricity supply industry is expected to make a loss in the current financial year. Many bulk electricity consumers with high load factors are already paying a price close to the short run costs of supply.
I noted what my hon. Friend the Member for Bedford said about institutional and legislative constraints, but the fundamental problem is that our electricity costs are higher than those in other European countries. I have gone over the matter with the electricity industry and tried to find a way in which bulk users could receive greater help, but on many special agreements we are already close to cost.
It may be asked whether we could not have more flexibility. We could in one sense—if charges were put up for the 95 per cent. of consumers who are in line. On many special agreements we are already down to cost.
I remind the House that a 10 per cent. cut in electricity and gas prices would cost about £450 million. I cannot believe that that would be the best use of half a billion
1235 pounds even if the Chancellor was willing to give it to me. For industry overall, energy costs are about 4 to 5 per cent. of total costs. Any help for industry should be more selective and cost efficient.
My hon. Friend the Member for Bedford mentioned ICI and its chlorine production. The Government are aware of the problems. We have discussed various options to ease the problem which I expect that ICI is exploring with the electricity supply industry. The report in the Financial Times, like many reports on these matters in the Financial Times, was very inaccurate. No suggestion has been made that ICI should build a power station.
These measures are aimed, so far as possible, at the larger users. Industry should benefit by about £120 million through the measures. In addition, we have introduced a scheme aimed at increasing coalburn. Coal is the cheapest fuel available for non-premium energy uses. The Government recognise that in the current recession many firms cannot easily convert to coal. That is why we have announced the £50 million scheme for grants up to 25 per cent. to be committed over two years. I hope that the House accepts this proposal as a positive and constructive step.
I apologise, Mr. Deputy Speaker, for taking so much time, but many questions have been asked. I know that there has been strong reaction to the Government's action on duty on oil product prices. Oil product prices in the United Kingdom—unlike those in some other countries—are subject to no controls.
Following the duty increases that the Chancellor announced in the Budget, the actual price of petrol at the pump is lower in real terms than it was at peak in 1974 and the level of tax is about the same in real terms as in 1974. As the House knows, it has been traditional in the United Kingdom to duty derv at the same rate as petrol. That is in contrast to the practice in many other countries where the tax system encourages use of diesel vehicles, and diesel cars have larger shares of the market than in the United Kingdom.
The Government recognise the burden which the tax increases on derv have placed on industry, even allowing for the fact that the costs are widely spread, that VAT is rebated and that the real level of duty is no higher today than in the early 1970s. The Government have had to weigh many factors. One has been the inability of United Kingdom vehicle manufacturers to meet competition from abroad for diesel cars.
My hon. Friends the Members for Bedford and for Enfield, North raised the question of the heavy fuel oil tax and the price of heavy fuel oil. The price of heavy fuel oil in the United Kingdom was out of line with that on the Continent for much of 1980, although I agree with my hon. Friend the Member for Enfield, North that, over the longer term, the price of heavy fuel oil, including the tax, has not been out of line with that in the majority of countries in Europe. It was out of line for much of 1980. The position changed at the end of the year. It may be changing again although the post-tax price paid today remains in line with Germany, which is broadly the pattern that held during the 1970s.
We have made it clear to the companies that we expect prices to remain competitive and that the Government will be following the position. Consumers, too, of course, have an important part to play in their own purchasing negotiations in ensuring a vigorously competitive market.
1236 My hon. Friends the Members for Bedford and for Enfield, North raised the question of the duty and the Chancellor's statement in the Budget. As the Chancellor explained in his Budget Statement, reducing the level of duty would, in particular, affect the cost of gas purchased by the British Gas Corpoation. The main effect stems from contractual terms made some years ago governing the cost to BGC of imported gas. The terms were, of course, freely entered into by the sellers and the BGC. The BGC believes that the way in which price indicators have moved over the years shows that the terms were well negotiated from their point of view and the national point of view.
A side effect of the movements—which would have been difficult to predict—is that changes in the heavy fuel oil duty can have a large effect on the cost of gas to the BGC. Reducing the duty would, therefore, result in a large resource loss across the exchanges. The Chancellor decided that the wider national interest would best be served by keeping the duty at its present level.
§ Mr. Lamont
I am afraid that I cannot give more details about the contracts. Parties other than the BGC are involved. It is not open to me to reveal—
§ Mr. Deputy Speaker (Mr. Ernest Armstrong)
That is not a point of order. It is a matter for the Minister. If the Minister does not give way the hon. Gentleman must resume his seat.
§ Mr. Rowlands
Further to that point of order, Mr. Deputy Speaker. The Under-Secretary of State has said, in effect, that the Chancellor of the Exchequer will never be able to reduce the tax on heavy duty oil because it has an effect on contracts. The House deserves a better explanation.
§ Mr. Lamont
I turn to another part of the speech of my hon. Friend the Member for Bedford. I agree with the need for our energy industries to be as efficient and as competitive as possible, but I add a word of caution. It would be wrong to argue that prices should be fixed by comparability. We have grown used to arguments about wages and how they cannot be fixed by comparability. The same applies to energy prices.
Fixing prices by comparability might mean that the electricity industry would make a loss or it might affect the ability of the gas industry to meet demand. There is a problem in meeting peak demand for gas because of the movement of people towards gas consumption.
Energy prices cannot be adjusted simply to match exchange rate fluctuations. The NEDO report showed that exchange rate movements were part of the problem. In the 1237 electricity industry with its marginal profitability it would not be easy or right to adjust prices according to exchange rate movements. Prices must cover costs and clear the market in this country.
My hon. Friend the Member for Bedford commented on cash limits. Cash limits in the energy industries are set on the pricing assumptions of the industries themselves. Their pricing decisions are reflected in the external financial limits. When decisions are made to alter prices EFLs are adjusted in the Budget. EFLs are not used to achieve a level of price which is desirable for the Government.
My hon. Friend made comments, which were echoed by my hon. Friend the Member for Derbyshire, South-East and the hon. Member for Bristol, North-East (Mr. Palmer), about the nuclear power programme. I agree with the hon. Member for Bristol, North-East that it is easier to say, "We should have a large programme that is the size of the French programme," than it is to bring such a programme into being. The industry has not had orders. It went a decade without a nuclear order in Britain. The building industry is somewhat run down and it has to strengthen itself. We are encouraging it. In strengthening the management we hope that we are constructing for the future.
The programme which was announced by the Government followed consultation with the Central Electricity Generating Board and the nuclear industry on what they considered was the desirable level of ordering. Perhaps what my hon. Friend the Member for Bedford wants will come into existence later. We must start modestly. I recognise that it is a modest programme, but, it will require an enormous effort. It is a great challenge to the industry. I note that I carry the hon. Member for Bristol, North-East with me. I hope that my hon. Friend will accept that we are driving ahead as fast as we can with nuclear power.
I accept what the hon. Member for Bristol, North-East said about the dangers of having expensive nuclear power. We must keep within our construction costs. We must get better site management and we must build to time and to cost, or all the theoretical advantages of nuclear power will be endangered.
The hon. Gentleman asked about the Severn barrage committee. I can assure the hon. Gentleman that the committee is soon to report to my right hon. Friend and that this important issue will be given serious attention. The Government increased substantially the funds available to the committee for its work; that shows the importance that we attach to it.
I recognise the foundry coke problem. We shall consider whether any Government action to reduce coke prices is justified. Like other trading concerns, the National Coal Board and National Smokeless Fuels have the strongest interest in the long-term health and survival of their customers. They have to take these factors into account in setting their prices and the NCB has already reduced the price for coking coal that it charged to the makers of foundry coke to world market levels. The Government will consider the position.
I am grateful to my hon. Friend the Member for Bedford for introducing the debate and for doing so in such an informed and comprehensive way. I assure him that we shall seek ways in which our energy industries can become 1238 more flexible and in which pricing policies will be more flexible. We shall continue to have discussions with the industries about that.
The rise in energy prices that we have seen in response to the rise in oil prices may now be slowing down somewhat. I understand the severe problems that industry faces because of rising energy prices. Energy is not only a cost to industry. Energy is important in itself. Secure energy supplies for the longer term are as important to Britain as defences. We must bear in mind the cost in future years. We must bear it in mind that our self-sufficiency in oil will last for only 10 or 15 years, perhaps a relatively short period. It is therefore important that our energy should not be squandered and that prices should reflect both costs and markets.
This debate is taking place in many Parliaments in many countries. Worldwide energy prices are rising. The consequent problems are challenges both to economies and political systems. Britain is well positioned because of its energy resources. I assure my hon. Friend that the Government's policy is to ensure that our energy riches are used in a way that benefits both our industry and our national economy.
§ Mr. Donald Anderson (Swansea, East)
I am glad that my hon. Friend the Member for Bristol, North-East (Mr. Palmer) mentioned the Severn barrage. This is a potential positive public investment directly within the control of the Government, at a time when there are so many uncertainties in energy policy and so many areas that are outside their control. The Minister said, for example, that costs had moderated over the past year, but he had to add that no one knows what will happen as a result of OPEC decisions, which are largely outside the control of the Government, and which will feed through into our industrial costs.
I share with the Minister a more relaxed view than that of the hon. Member for Bedford (Mr. Skeet) about the development of our nuclear industry. France has a peculiar problem, and perhaps it has less stringent planning laws than we have for its nuclear programme. We are not subject to the same pressures as are the French Government, because of our coal and North Sea oil resources. Therefore, we can afford to sit back to some extent and learn from the experience of the French Government and the rapid development of their nuclear industry.
The scale of our industrial decline and the contribution to that of the energy cost component were brought into sharp focus by the Department of Employment figures published yesterday. Since mid-1979 manufacturing employment has fallen by about 12 per cent. That shows that de-industrialisation in this country is proceeding apace. One of the major cost components of that will be energy pricing. The more one examines the past decade since the fivefold OPEC price rise, the more one is convinced of the fundamental importance of energy policy and energy pricing to our manufacturing industry. The Government have a major role in that.
The chairman of the British Steel Corporation recently gave evidence to the Select Committee on Industry. He said that all the problems of British Steel, over which Governments of both parties have agonised since the Beswick review, could be solved by an adjustment in the exchange rate. That may be an exaggeration, but it is clear 1239 that such a cost component can have fundamental implications for a basic industry. Energy costs can have similar effects on the British Steel Corporation.
The Minister will note that the bulk users of energy have not responded nearly as enthusiastically as he would have wished to the Budget concessions. The further and better particulars that he gave today will not add to that less than enthusiastic response to the Government's Budget proposals for bulk energy users.
The hon. Member for Bedford mentioned the effect of transport policies. That area is within the control of the Government, though many of the variables of an energy policy are not. One he mentioned was derv pricing. I hope that, equally, he will see the importance of the coming decision by the Government in their response to the joint rail electrification review, which can have a similar benefit in our total energy policy.
We were assured by the Minister in answer to a question on Wednesday that the Government would publish their response within two months. I hope that the Under-Secretary will bear in mind that if the fifth option set out in the joint report published in February of this year were accepted by the Government, it would lead to a saving of 120 million gallons of oil per annum. That is a small, but significant, percentage of total oil consumption, and it would allow the oil saved to be put to premium usage in industry, agriculture and elsewhere.
I go no further down that line, but it is an element in our total energy policy that is within the control of the Government. Because of the scarcity of oil, and because of the cost of oil, with various projections that the real cost will double over the next 20 years, the energy impact of the Government's decision is decisive. When the Government announce their response to the rail electrification review, I hope that they will give full weight to the energy component of the case.
§ Mr. Fred Silvester (Manchester, Withington)
I always think, whenever I pop into energy debates, that they are full of experts. It is a mystery to me how the average hon. Member even tries to understand the conflicting views on a proper energy pricing policy. I hope, therefore, that I shall be forgiven if I approach this subject in a somewhat simpler manner.
I wish to put a number of points to my hon. Friend the Under-Secretary because he knows that I sit for a Manchester seat and that the decisions about energy pricing policy are more crucial in areas of deep industrial decline than they are in other parts of the country
I make no point about it, but it is curious that, apart from the hon. Member for Wallsend (Mr. Garrett), most of the speeches in this debate have come from hon. Members representing the southern part of the country. That may have something to do with the fact that today is Friday, but it is important to recognise that the subject of this debate is of special significance in my part of the world.
I take as an example the chemical industry. The percentage of people employed in that industry in the North-West is twice the national average, and that is only one example. Therefore I approach this subject as a layman, and I listen to those who run these large energy-consuming industries.
For a long time we have all been worrying about the problem of high energy costs. For that reason I began by 1240 listening to the Government, who said that industry had got its figures wrong. For a long time my hon. Friend's Department gave that impression, if it did not say it in precise terms. Then we had the discussion in the NEDC, and the Government came away saying that the big consumers in industry had not got their figures wrong, after all, and that therefore they would make a concession.
That makes me wonder. My inclination is to say that the people running industry know their business better than do the people in Whitehall. However, when my hon. Friend says that they have got their figures wrong, I take his advice. But then he says that they have not got their figures wrong, after all. So when people in my area tell me that the Government have still got their figures wrong, I am minded to take my hon. Friend's comments with a little more salt than I did previously.
I wish to give two examples. I listened carefully to what my hon. Friend said. I hope that I am wrong, but I do not believe that what he said today will make it any easier when I try to explain how we have made life better. Manchester Steel, for example, which has an electricity bill of £4 million to £4½ million per year, believes that electricity prices are 15 to 25 per cent. lower on the Continent. I am not an expert. I do not know how these calculations are made, but that company reckons that on a cost per billet of £125 per tonne, £20 to £25 is accounted for by electricity costs. That is a very significant proportion.
I understand that under the new arrangements Manchester Steel has been offered a category C load management agreement, which means that it must be able to take up to an extra 365 hours shutdown per year under the interruptible contract arrangement. My hon. Friend will appreciate that for a major steel works to shut down for an extra 365 hours a year, compared with about 50 at present, is a substantial change. Although there is no obligation to shut down, it is understood to be a probable effect that the supply will be interrupted to that extent. I hope that the House will not hold me or the company to those exact figures, but they are roughly correct. To switch off for that amount of time would probably save about £130,000 in electricity costs, but about £1.5 million would be lost in turnover.
The net effect of the negotiations seems to be that the electricity authorities are seeking ways to offload some of their costs and pass on the savings, but the nub of the matter is that the basic costs of our competitors on the Continent are lower. I listened with care to my hon. Friend, and I understand his view that, particularly if the price charged is near rock bottom on covering costs, it is difficult to make further adjustments. I have listened with great care to most of the debate, although I popped out once or twice. No one seems to have made out a case for saying that energy pricing is based on a real market. It is created by a series of abritrary decisions in a very closed market. We all know that we control both coal and electricity costs, and we can move the costs around. It is to some extent up to us where we put the losses and the gains.
§ Mr. Alfred Morris (Manchester, Wythenshawe)
The hon. Member has referred to one of the problems of Manchester. If he would curtail his speech and use his best endeavours with at least one of his colleagues, we might today be able to debate all the problems of the city of 1241 Manchester. As he knows, there is a very important motion on the Order Paper on this subject. I appeal to him to help me to ensure that it is considered.
§ Mr. Silvester
I give the right hon. Gentleman full marks for trying, but he knows as well as I do that unless the first debate on a Friday is very limited, the chances of a motion such as his being reached are always slight. The point that I am making is of great importance to the city of Manchester, and I wish to make it. I cannot control my hon. Friends. It has been a serious debate, seriously taken. I am sorry that the right hon. Gentleman drew second place, but that is the luck of the draw.
We should understand the situation facing, for example, the Manchester Steel Company. What is on offer? Even if the charges are accepted, the company calculates that it will get only 3 per cent. off its energy bill. We are talking of much greater differences.
I understand the difficulty of making the calculations, but we must not regard energy pricing as an academic exercise in which there is a clear answer. Industrialists believe that other Governments support their industries. Instead of acting as an arbitrator, we should see what we can do to assist companies that believe that they are at a competitive disadvantage. The Government seek long-term solutions to the problem, but industries are facing difficult short-term problems. The Government must consider that.
My hon. Friend the Under-Secretary said that he wants the aid to be selective and cost-effective, but the best way to ensure that is to consider individually the small number of high energy consumers. We must not be purists, but should look to see which industries have costs above those of their competitors. Let us give British manufacturers the benefit of the doubt where they believe that they are in an uncompetitive position, and not concentrate too much on achieving a long-term balance.
§ 2.2 pm
§ Mr. Nicholas Lyell (Hemel Hempstead)
I congratulate my hon. Friend the Member for Bedford (Mr. Skeet) on introducing a debate on the importance of competitive industrial fuel costs.
One theme in the debate has been the cost of fuel to industry. I wish to deal with a broader fundamental point concerning our major energy-producing source—coal. we should consider future investment, but we must remember that in the past seven years we have invested massively in coal. Coal is the heart of the country. It is found from North Yorkshire down to the green and pleasant land of Oxfordshire. Rich veins of coal are available to us, although there may be controversy in respect of the Vale of Belvoir.
It is right to invest in coal, whether in the heartland or in the remaining productive seams in the North-East and South Wales, but we must deal with the haemorrhage affecting the giant. King Coal is a giant, but he is suffering from an ulcer. If in a few minutes I can highlight the prospects for King Coal and get the country to face the way in which this giant athlete is being held back by that ulcer, which is to some extent bleeding him to death, and whose flow of blood we can staunch, I shall be happy to have sat here for as long as I have during this debate. I apologise for the fact that I could not be present at the beginning of it.
1242 Potentially, this year, we are losing, in our failure to keep up with the pit closures which had been planned, £74 million. That is the loss this year to the National Coal Board on the 23 pits which were lined up for closure. Those 23 pits produce 4 million tonnes of coal. Coal is valuable, but not every bit of coal is valuable. It depends on where it can be produced, at what cost, and—thinking of the gallant men who work in those pits—under what conditions.
Whereas through our investment at, for example, Selby, where £900 million has been invested, we are producing 10 tonnes per man shift, in the older pits, where it must be comparatively dreadful to work, we are producing only 1½ tonnes per man shift. In our existing highly productive coalfields we are producing 4½ tonnes per man shift. That is excellent. It is three times the other rate. But we must not flinch from tackling the problems of closing those pits which are no longer economic.
One does not forget the human factors. Thirteen thousand people work in those 23 pits which we ought to be closing. Not all of them will be flung out of jobs; far from it. More than two-thirds of them will be transferred into new and better pits. That is a fact provided by the NCB. Of the remaining 4,000 or so, a great many are over 55 and the redundancy and termination payments are more generous, rightly, than have ever been known. The country must understand that we must tackle this problem.
I shall finish my speech within two minutes because I do not want to prevent my hon. Friend the Member for Canterbury (Mr. Crouch) from being called, as he has so generously allowed me some time to speak.
What I have said has been said against the background of the fact that there is a tremendous opportunity for coal if we can keep our costs competitive. Today the cost of producing coal as a ratio to that of oil, as a result of the recent rises in oil prices, has dropped from 90 per cent. of the cost per unit of energy produced to 50 per cent. Coal has to be down at that sort of ratio if it is to be competitive in the future, because we all know that it is a tremendously heavy, expensive and bulky material to produce. But if we can produce it competitively, there are opportunities for export markets and increased markets in Britain.
There is not merely a chance but a real expectation that industrial use in this country, which is only 10 million tonnes a year at present will rise during the next decade or two to 50 million tonnes a year with competitive coal and sensible use of this resource, of which we have such a massive quantity under our fields and towns.
There is opportunity for exports to Europe. European use of coal this year is about 60 million tonnes. It is likely to rise by the end of the century to 350 million tonnes if we can remain competitive. It will be as a result of our investment in new pits and existing pits.
I should have loved to have more time to expand on this subject in detail. We must tackle the major problem, which is to phase out and redeploy the men who work in the pits which are so desperately under-productive, and in which it is difficult to work, and get them working in those pits in which it is difficult to work, and get them working in those pits in which they can earn high wages in good conditions, and make a profit for themselves and for the country.
§ Mr. David Crouch (Canterbury)
I congratulate my hon. Friend the Member for Hemel Hempstead (Mr. Lyell) 1243 on his speech, albeit he had to speak in a hurry. But he has put the balance right on the point raised originally by my hon. Friend the Member for Enfield, North (Mr. Eggar) who spoke about closures. I intervened then on closures and tried to make it clear that of course I am not against closures. We recognise the economic force of having to close pits which are due to exhaust and where coal is suddenly becoming scarce and uneconomic. My hon. Friend has corrected the balance because he has described his own faith in our coal mining industry and recognised the great economic value of the coal on which we sit and the need to work the whole industry efficiently to extract that coal.
I shall refer to "Plan for Coal" because my hon. Friend the Member for Enfield, North seemed to think that by referring to pit closures I was forgetting that "Plan for Coal" had referred to the need for pit closures. That document was published by the National Coal Board and accepted by all parties. It was accepted all round that closures were necessary but the document said something else. I will quote from that powerful pamphlet which has now lasted for six years. It said that in addition to closures and the need for them there is a need for expansion and investment in the coal industry—first, to extend the lives of existing pits before they become exhausted; secondly, to increase output levels at existing pits that are profitable and seen still to be profitable; thirdly, to spend a great deal of money on opening new mines.Those are the three areas.
I have said that miners might feel anxious because of the changes that have occurred since 1974–75. One other point in "Plan for Coal" referred to the need for more coking coal with a steel output of 35 million tonnes a year. Today, the British Steel industry is pegged to 15 million tonnes. The demand for coking coal has gone almost completely. It has diminished enormously. No wonder miners feel anxious when they see the market for coal that was written up so bravely in 1974 now appearing to diminish. If that is not true of the long term, at least it is going through a serious hiccup.
"Plan for Coal" also raised the hopes of everyone concerned with the industry, particularly those who work in it. It said:Because of the new opportunities for coal, there is a strong case for at least maintaining—and if possible expanding—the size of the industrywithMajor schemes of this sort, and extending the lives of the pits due to exhaust".We must take the whole report for what it said. It referred not only to closures but to the need for expansion, even spending money on pits due to exhaust. That was accepted.
I wanted to try to get the balance right because this matter arose in the debate. The debate is about industrial fuel costs. I have studied the NEDC report. I received a copy from the Library the day it was published. The report was produced by a task force with some urgency. It was issued on 4 March, a week before the Budget, and revealed a great truth which major users of energy have been trying to get over to the Government for a long time. That is that heavy industrial users, our basic industries such as chemicals, cement, steel, paper and board—we still have such an industry—were finding costs a grave disadvantage. As heavy users of energy they were finding that the 1244 equivalent cost of energy in France and West Germany was as much as 25 per cent. or 30 per cent. lower than the British cost.
The Government responded on the very day that the NEDC report was published. I remember feeling encouraged when the Secretary of State issued a statement that very evening which seemed to suggest that the report was accepted and that the response would be a good one. He seemed to echo my own feeling that something had to be done to remove this disadvantage from major sectors of British industry.
We then had to await the Budget. But when the Budget Statement was presented, I was amazed at how little the Government intended to do to implement the joint recommendations of the task force.
§ Mr. Tristan Garel-Jones (Watford)
While the report was being produced, the fluctuation in exchange rate, even during that relatively short period, was such that the position of some of the fuels being looked at had changed entirely by the time the report wa published. Therefore, does my hon. Friend agree that the exchange rate is vitally important?
§ Mr. Crouch
I agree that the exchange rate fluctuated. However, if my hon. Friend has patience, he will realise that its effect is minimal on the factors that I shall mention.
I felt that the Government gave very little help to heavy energy consumers. In fact, my feeling is that there was little understanding of what it was like to be in an industry which had to spend a great deal on energy. It is true that the Chancellor made a concession of nearly £120 million in respect of gas and electricity and another £50 million, which we should not forget, in respect of grants to industry to pay for conversion to coal. However, I maintain that he gave away nothing. It was a book entry only. He was forgoing an additional link-up for the gas and electricity industries until 1 December this year. Everyone expected my right hon. and learned Friend to do something about the duty on heavy fuel oil. We expected that to go, or at least to come down to the average level of duty in the EEC, particularly in France and Germany.
The cost of such a giveaway would have been £350 million. It sounds a large amount, but it is small enough in the context of industry. The chemical industry alone earns the country more than £2 billion a year in net transactions across the exchanges, despite the heavy fuel costs and other costs with which it is burdened.
Unfortunately, that did not happen. The Minister today spoke about the failure to reduce the tax on heavy oil and the complicated contracts negotiated by the British Gas Corporation to import gas from Norway. I know the figure involved. It is not a question of $30 million affecting the price, nor is it a question of costing the BGC more to have bought the gas from Norway had the duty been removed. It is much more fundamental.
We had hoped that the Norwegians would have joined us in the £2 billion North Sea gas gathering scheme, and we did not want to do anything which might have disturbed them and made them feel less friendly towards us. In my opinion, it was not felt worth while to upset the Norwegians by removing the tax on oil. Therefore, British industry must still carry this serious extra burden, which is not carried by industry on the Continent.
The Chancellor froze gas prices, and I understand that the cost of so doing is about £73 million—perhaps not to 1245 the country, but to British Gas. British Gas has been forced to peg its prices. The corporation did not reduce prices. Sir Denis Rooke does not reduce anything, and it is difficult to get past him. He merely held prices at their present frozen rate for eight months until 1 December.
Let us look at those prices. United Kingdom prices for firm supplies will stay at about 29.3p per therm, and about 25p per therm for interruptible supplies up to 1 December this year. I can see no concession on interruptible supplies. The chemical industry is one of our major industries, and it takes 70 per cent. of its supplies in interruptible form. The chairman of a large chemical producer, Tioxide International Ltd. wrote a letter to my hon. Friend the Member for Bedford (Mr. Skeet) about the concession that is offered on gas. He said:This is a reduction in the price of gas by the end of the year, compared with the original intention, of 9 per cent.So the 9 per cent. has not gone on.This, however, only applies to firm gas and no change is proposed in the pricing of interruptible gas. The bulk (84%) of our gas was taken as interruptible gas and the benefit to us from these changes would have been very small, a reduction in our gas bill of about £8,000".That is peanuts.
I quoted the prices of firm supplies at 29.3p. We are to be held to that price this year. At least the price is not going up, so we should be grateful for small mercies, but the present price in the Netherlands of firm gas supplies is 18.5 per therm. That price is estimated to rise by the end of the year to 27p, but it is still not as high as the price that we have to pay now.
Much has been said today about the British Gas Corporation. My view is that it is rather a law unto itself. But what will it do on 2 December, its prices having been frozen up to 1 December? I suspect that it will try to recoup what it lost in what it sees as a period of insufficient profits.
The Government have given something away on electricity, at a cost of about £45 million to the Electricity Council. Load management and greater flexibility may help heavy energy users, but we shall have to wait and see. However, I am grateful for small mercies.
The concessions on gas and electricity are only a marginal improvement, compared with the existing cost disadvantages which still obtain relative to the Continent, as is shown so vividly in the NEDO report. For example, in 1980–81, the tariff price in West Germany for a big user was 23 per cent. below the new United Kingdom price, and in France the price was 36 per cent. below. Moreover, the slight movement of exchange rates has not interfered with that vast difference in prices.
The Government concession may affect the differential by about 8 per cent. or 10 per cent. But by how much are British tariffs likely to go up in April? I understand that it is likely to be 15 per cent. Can we expect EEC prices to go up by the same amount? It is too late for me to ask the Minister now, so we shall have to wait and see what those other countries do.
It is extraordinary that the Government have failed to appreciate the crisis that is facing British industry over energy costs, particularly for the big energy users. After all, the big users are the cornerstone of our industrial economy—the steel industry, the chemical industry and 1246 the cement industry. Even the paper and board industry is still one of our major industries, trying to survive under difficult conditions.
A paper mill which has been in my constituency for 250 years is outstandingly successful. It is part of the Wiggins Teape group and it produces highly specialised paper for major Japanese producers such as Mitsubishi. The three paper machines in that one mill earn £8 million a year in exports, out of a total production of £13 million. That is a great achievement in an industry that is going through a difficult time, but that company is suffering considerably because of increased prices that put it at a disadvantage with its overseas competitors.
I have a feeling that Ministers are not listening, or do not want to hear what it is like in the front line of industry where costs can be seen exactly and the bottom line of the balance sheet can be determined. Industry is not clamouring for money grants or loans—and I do not support industries that do so. Industry merely wants the Government to take some of the burdens off its back. Burdens such as the duty on heavy oil could be removed without great cost and some burdens are the last straw because they take us out of competition on price.
The Government have a duty to assist industry by looking at the matter again with a view to removing burdens wherever possible because they are greatly handicapping our opportunities as an industrial and exporting nation.
There is great concern about when the recession will bottom out and when industry will be able to get on the road to recovery. I am also concerned that industry should be ready on the starting line to take part in the race of recovery. We shall be facing fierce competition, particularly from our fellow members of the Common Market, and we shall start not as favourites, but at fairly long odds and at the back of the field. In that position, we should not be made to carry such a great weight as a handicap. We should be given a fair chance—no more than an equal chance—and that is what I hope for on energy costs.
When the recession bottoms out and we start to recover—I hope that it will be within 12 months—we must succeed. That is what worries so many people who ask whether we shall win the race. I believe that we can do so, but only if we have another look at energy prices and ensure that we do not have to run with a heavy burden on our backs.
We are the only nation in Europe that is self-sufficient in energy resources. We have coal, oil and gas, but we pay more for them. It is not industry's fault. Is it the fault of the British Gas Corporation or the Electricity Council? Perhaps it is. Many of my colleagues have argued that those bodies would be helped if there were competition to make them see the facts of life and they could not tell the Government what prices they should be allowed to charge.
As we have to accept that we have nationalised energy producers, the Government must look at them critically and provide the competition. If they will not reduce their prices to a competitive level with those in Europe, the Government must tell them that something must be done. If it is discovered that we are taxing our energy industries too heavily, the Government must make the necessary sacrifice. That would certainly have my support.
We pay so much for the abundance of energy that we own that it appears that something must be wrong
1247 somewhere. We can find out what is wrong only by going out into the field. I sometimes think that in the ivory towers of the Department of Energy in Thames House—
§ It being half-past Two o'clock, the debate stood adjourned.