§ Motion made, and Question proposed, That this House do now adjourn.—[Mrs. McGuire.]
1.28 am§ Mr. Gareth R. Thomas (Harrow, West)Even at this time of night, it is a great pleasure to speak about combined heat and power, which has been called the Cinderella of energy policy because its many environmental, economic and social benefits have not been fully recognised. Recently, that has changed and CHP is at the core of the UK's drive to attain diverse, secure and sustainable energy.
Combined heat and power enables the supply of electricity and heat, usually in the form of steam, from a single fuel source at high conversion efficiencies—typically 70 to 80 per cent. Demand is met by CHP at a lower level of fuel consumption, generating significantly lower carbon dioxide emissions. CHP can also be linked to community heating. A network of heating pipes can supply homes, businesses and a wide range of other consumers. CHP is essentially about energy efficiency. Conventional power stations are typically 34 per cent. efficient. The much-talked about gas-fired combined cycle gas turbine power stations are, according to the Department of Trade and Industry, on average just 48 per cent. efficient. Only when CHP plant is brought into play do we get efficiencies of more than 70 per cent.—and up to 80 per cent. with some small-scale CHP schemes.
In the past few days, the royal commission on environmental pollution has published a detailed and thorough analysis of what we need to do if we are to be serious about tackling climate change. It calls for reductions of up to 60 per cent. in UK carbon emissions and sets out a series of scenarios for achieving that. It says that we need a new way of looking at energy policy—one that does not focus just on electricity production, but recognises and develops the market for heat. In that context, the royal commission has emphasised that CHP is a technology of which we need to make much wider use. Many global corporations increasingly recognise, too, that their future lies in part with combined heat and power. It is significant that a major global energy player, ABB, should announce just two weeks ago that it was reinventing itself by divesting itself of more conventional power-generating technologies and that, in future, it would focus on knowledge-driven products. For ABB, that includes wind power, micro-turbines and, in the context of this debate, combined heat and power. Other global companies like ABB, such as BP Amoco, are already at the fore of developing their CHP capacity. I am sure that more big energy players will now follow the global market leaders.
Indeed, in the UK, CHP is at work at more than 1,300 sites, including the Palace of Westminster, throughout Whitehall and at Kodak in my borough where many of my constituents work. Kodak has its own 70 MW combined heat and power plant. Like other major industrial sites that have switched on to CHP, its scheme saves it money directly and helps the site compete effectively by reducing a core business cost. I gather that, in the constituency of my hon. Friend the Minister, both Sunderland general hospital and the Crowtree leisure centre have put combined heat and power schemes to work.
314 I am delighted to say that the Labour party has had a long-standing commitment to CHP. In our manifesto, we said that we would be
committed to an energy policy designed to promote cleaner, more efficient use and production, including a new and strong drive to develop … combined heat and power.Just six weeks after we took office, my right hon. Friend the Deputy Prime Minister launched, with the backing of the Combined Heat and Power Association and the Confederation of British Industry, a high-level campaign designed to raise awareness of CHP in the minds of business leaders. We said, too, that we would introduce a pro-CHP bias in the planning regime for new power plants and that we would set a target of at least 10,000 MW of CHP by 2010. Both those commitments are in place and 1,400 MW of new CHP capacity has been approved in the past three years, although, as I shall outline later, it remains to be seen how much further capacity will be built in current market conditions.Each new CHP scheme produces its own set of benefits, with distinct rewards for the businesses with the foresight to commit to CHP. One particular example is Kemsley Mill, a major UK paper producer, where PowerGen CHP has installed and financed an 80 MW CHP scheme. Some £4.5 million per annum of energy savings have been achieved, with a reduction in primary energy use of 31 per cent. Carbon dioxide emissions have been reduced by 320 kilotonnes per annum, sulphur oxide emissions have been eliminated and nitrogen oxide emissions reduced by 92 per cent. That has improved local air quality, and traffic movements have been reduced and noise levels have come down significantly.
CHP also offers us considerable opportunity for our social exclusion agenda. St. Pancras Housing is one of more than 60 residential CHP schemes that the Combined Heat and Power Association has helped to develop. The St. Pancras scheme, at this pioneering housing association's head office next to Euston station, has cut the energy bills of 100 tenants by 20 per cent. Three years ago, it was able to get rid of standing charges, and the metering system that it uses puts to shame the ones that many of us have at home. I urge my hon. Friend the Minister to ensure that, in the work of the Government's ministerial group on fuel poverty, the real benefit of CHP and community heating is not overlooked and is reinforced.
Crucially, CHP also benefits the environment. The CHP industry has cut UK carbon emissions by over 9 million tonnes in the past 10 years. Every gigawatt of CHP that is put to work cuts UK carbon emissions by some 1,000 tonnes, making it one of the most cost-effective ways of making those cuts; hence the royal commission's strong support for CHP in its report. The Government believe that over half of all industrial carbon savings could be delivered by the wider use of CHP.
CHP also helps us to build a competitive economy. In the right circumstances, local generation is a key way of improving business performance by reducing costs. It does that by removing the need for costly long-distance transmission of power and by being highly efficient in the process. The challenge, surely, is to ensure that we have a regulatory framework that continues to deliver and enhance those rewards. I was pleased to hear that my right hon. Friend the Minister for Energy and Competitiveness in Europe confirmed that the Office of Gas and Electricity 315 Markets will focus on that in its new environmental action plan. I hope that Ministers will now concentrate on monitoring Ofgem's implementation of that action plan.
A practical example of that exists at BP Energy, which has worked with English China Clays at its Marsh Mills and Par Harbour sites in the south-west and put CHP to work, delivering energy savings of some £972,000 per annum.
CHP also holds out the prospect of vital new investment and extra jobs. The UK CHP industry has invested over £1 billion in helping the UK to improve its business performance through the better use of combined heat and power. Achieving our new CHP target will, in turn, stimulate some £3 billion of new private sector investment.
Energy for Sustainable Development, a leading EU energy consultancy, suggested in a recent report that if we can achieve just two thirds of our CHP target by 2010, there could be an estimated 34,000 new jobs in the CHP sector.
Local councils also have a crucial role to play in the development of CHP, and I welcome the specific support that the Government have already given to the development of new CHP schemes in Southampton, Manchester and Tower Hamlets, all of which have developed effective partnerships with the private sector. Manchester city council and the London borough of Tower Hamlets have private finance initiative pathfinder schemes, which have secured the support needed from the Department of the Environment, Transport and the Regions to attract significant private sector investment.
The scheme that London Electricity has developed for the Barkantine estate in Tower Hamlets will, I hope, help to demonstrate how CHP can assist in harnessing the private sector to tackle the challenge of social exclusion that blights all too many inner-city communities. I hope that the Government will take forward and recognise that potential in their work on fuel poverty.
Despite that, only a small part of the potential for CHP is being exploited. The energy technology support unit has suggested that there is the economic potential almost to quadruple the use of CHP in the UK. Figures from the Building Research Establishment suggest that 1 million homes could be connected to CHP by 2010. BG Technology estimates that, in the long term, between 4 million and 6 million houses would be suitable for domestic CHP.
Why are we under-achieving on that potential? Uncertainty in the market is making investment decisions difficult. Talk of electricity prices falling by between 10 and 30 per cent. in the next couple of years and predictions of medium-term gas prices rising by almost as much add to the uncertainty of the impact of the new electricity trading arrangements. Inevitably, customers want to wait and see what happens.
Essentially, the market arrangements that Ofgem is busily building seem to focus largely on those with the capacity to trade large volumes of power in new computer-based energy markets. The trading screen seems to be replacing the reality of a power station. Smaller players do not have the capacity for year-round, 24-hour trading arrangements. As the Director General of Ofgem has outlined to the Combined Heat and Power Association, more work needs to be done to enable the small players sensibly to band together and trade. That 316 problem has been reinforced by the sheer costs for small players of getting involved and representing their position effectively. I hope that the Minister will urge his colleagues in the Department of Trade and Industry seriously to consider the issue of market inequality among the players in the industry.
CHP is about long-term decisions: the short-termism of today's energy market is therefore a key issue which the Government will need to consider in their forthcoming CHP strategy. All arms of the Government, too, need to make sure that they are consistent in their view of the industry's potential. There is concern that we do not have the measures in place to achieve the Government's new 10 GW target. I understand that the DTI's energy projections appear to be based on an assumption that the 10 GW CHP target will not be met. I also understand that that view was echoed in a recent address to the Society of British Gas Industries.
The Government's climate change consultation paper also appears to place a less firm emphasis on CHP than the DETR's previous consultation document, despite strong support for CHP in the responses. I hope that my hon. Friend the Minister and his colleagues will remain resolute in their commitment to the CHP target and give the industry the confidence it needs to invest by making sure that their message is consistent. Some further concerted and cross-cutting departmental action is needed.
In his pre-Budget statement to the House last November, my right hon. Friend the Chancellor announced that CHP would be exempt from the new climate change levy. That was widely welcomed, but it now seems that Customs and Excise is determined to put up the price of CHP power by putting the levy on power exports from CHP schemes. That seems entirely illogical in environmental terms and will significantly distort inter-company competition as some companies will get power levy-free when they use it themselves. Those that buy it in across the grid system from a CHP plant will have to pay the levy. I urge the Government to do what the Chancellor said last November and just exempt CHP from the levy. That is essential to counter the current market conditions—in particular, gas prices are rising—and the potential impact of the new electricity trading arrangements.
The excellent Utilities Bill, which is going through Parliament, will set the market framework for at least the next 10 years. In particular, the new energy efficiency standard of performance provisions are most welcome. I hope that my hon. Friend the Minister can confirm that they will give Ministers the power, should they choose to use it, to introduce arrangements for CHP similar to those planned for renewables. We also need to ensure that the Government have the powers to take a lead on embedded generation. The royal commission specifically said:
Embedded generation represents a major strategic challenge for the National Grid Co plc, both technically and financially as well as for the distribution companies. We did not see any signs that the company has yet appreciated the scale of the challenge or begun to take the steps needed to place itself in a position to respond to it …The commission recommends that the Government should therefore take the lead in addressing those challenges. I hope that my hon. Friend will be able to comment on that.I also hope that the Government will reinforce their drive for CHP in their planning consents regime for larger power plant to encourage power station developments, 317 but not just to take the easy option and build less efficient electricity-only power plant. We need to encourage companies to seek out customers for heat—or, indeed, for cooling—and in doing so move beyond purely short-term rewards to achieve the best environmental impact possible from the fuels that they use.
Focusing on CHP presents the Government with a real opportunity to create the conditions for a sustainable and competitive energy market and to lead the world in the drive for an entirely different energy agenda that brings together the benefits of liberalisation and the challenge of environmental change.
§ The Parliamentary Under-Secretary of State for the Environment, Transport and the Regions (Mr. Chris Mullin)My hon. Friend the Member for Harrow, West (Mr. Thomas) has raised an important issue and I shall do my best to reply to the points that he made. However, we may have to follow one or two up in correspondence.
Combined heat and power cuts energy costs for industry, business, the public sector and domestic users and significantly reduces greenhouse gas emissions. It has a vital part to play in helping the United Kingdom to meet its climate change commitments. That is why the Government are committed to promoting the widest use of CHP wherever possible. Only yesterday—although by now it must have been the day before yesterday—I visited Hickson and Welch, a chemical company in Castleford, where an impressive new CHP system is under construction. As my hon. Friend said, there are several such schemes in Sunderland. He referred to the one at Sunderland general hospital, which I opened some years ago.
The United Kingdom's combined heat and power capacity has already doubled in the past 10 years. It is now reducing energy costs by more than £500 million annually and cutting CO2 by approximately 4 million tonnes of carbon a year. Some of the biggest savings are in core industries such as steel, chemicals, paper and food and drink production. United Kingdom business and the environment are therefore benefiting. As my hon. Friend rightly said, CHP and community heating also have a part to play in alleviating fuel poverty.
As part of the draft climate change programme, the Government have announced that the target is at least to double CHP capacity to 10,000 MW in the coming decade. We are taking practical measures to encourage CHP. For example, the exemption of good-quality CHP from the climate change levy is the clearest possible evidence of our support. Schemes that fully meet the good-quality criteria that we are setting will not pay a levy on their fuel inputs, heat outputs or on electricity generated when it is used on site or sold directly to other users. That provides a strong incentive to invest in CHP. However, I duly note my hon. Friend's comments on the restriction on electricity exports, and I can assure him that the Government will keep the levy's operation under review.
Combined heat and power will also be crucial to helping energy-intensive users to meet efficiency targets under negotiated climate change levy agreements. Indeed, that will be vital in some sectors if the agreed energy or 318 carbon savings are to be achieved. Eighty per cent. discounts on the levy are the reward for sectors that deliver the agreed targets.
Combined heat and power is one of the technologies that is eligible for enhanced capital allowances. In 2001–02, £100 million will be available, and up to £140 million the following year, with more to follow if take-up is good. As energy services companies make up a large part of the CHP market, we are considering changes to legislation so they are not excluded. Low-carbon technologies, such as CHP, will also be promoted by a new body called the Carbon Trust.
My hon. Friend asked whether the new electricity trading arrangements would be CHP friendly. I can confirm that they will. We are working with the Department of Trade and Industry and the regulator, Ofgem, to ensure that the new electricity trading arrangements allow smaller, locally based embedded generators, such as CHP and renewables, to operate efficiently.
Ofgem and the Government are looking ahead to, and preparing the UK for, a future in which embedded generation plays a much larger part than it does at the moment. We want to ensure that CHP and other embedded generation is treated on the same basis as conventional generation. We also want to ensure that it has fair access to the wider networks at fair prices, and that it is fairly rewarded for the benefits that it brings to the network through its focus on local solutions on sustainable energy.
Our work on embedded generation will cover individual domestic customers and renewables, which also need effective access to the market. It will consider net metering arrangements. That exercise involves the embedded operators and users, generators, distribution network operators, the Government, and the regulator. There is consensus that energy is moving into a new world, and we want UK systems, structures and regulatory regimes to be ahead and ready.
The stricter consents policy for power stations has had a positive effect on CHP. As my hon. Friend rightly says, some 1,400 MW of CHP capacity have been approved in the past three years, including more than 1,200 MW under the stricter consents regime. We expect the majority of that to be built. Indeed, some 500 MW are already under construction and expected to come on line this year or next year. However, as with all commercial decisions, it is for the companies concerned to decide when, and whether, to proceed with any given project.
This stricter policy is due to be lifted as soon as the new electricity trading arrangements are in place, which is expected to be in the autumn. We have restated our strong commitment to CHP and have made it clear that we will require developers seeking consent to show that they have explored the opportunities to use CHP. My right hon. Friend the Secretary of State for Trade and Industry said that in a statement on 17 April. We shall be discussing with developers the information needed, and I note my hon. Friend's comment that the system must be robust.
Our action in derating electricity generating plant and machinery in good-quality CHP schemes from April next year is further evidence of our commitment to treat CHP fairly, putting all CHP schemes in industry in line with those in the generating industry.
319 I can confirm that the Government are taking powers under the Utilities Bill to set energy efficiency standards of performance obligations on energy suppliers to encourage and assist consumers to use less energy. For the avoidance of doubt, let me say that CHP is defined as a form of energy efficiency, so energy companies can attain their obligations through supporting CHP—for example, in community heating.
The Government can also set specific CHP obligations, if they wish to do so. At present, we do not envisage that being necessary. We believe that the CHP exemption from the climate change levy, exemption from business rates, enhanced capital allowances, the review of CHP's access to the grid and other measures will deliver the new CHP target, but the power is available, if it is needed.
Studies have shown that the economic potential for CHP in the UK is between 10,000 and 20,000 MW—that is, up to 25 per cent. of the UK's electricity generation capacity by 2010. We have set our new target of at least 10,000 MW in this context, and we remain convinced that it is realistic and achievable. The discussion at the Society of British Gas Industries which my hon. Friend quoted has been misreported.
We will shortly publish a comprehensive strategy on which we will consult widely to bring together all the positive measures that I have outlined. A cornerstone of the strategy is the encouragement of good-quality CHP, as that is the key to maximising environmental and economic benefits. We have consulted on proposals for a CHP quality assurance programme to assess and monitor all types and sizes of CHP. That is crucial for operating the climate change levy for good-quality CHP.
320 The proposals provide a practical method for accurately measuring the quality of individual CHP installations, and they gained broad support from the industry and others. On 17 May, my right hon. Friend the Minister for the Environment announced the key decisions following consultation. The Government's full response will be published shortly.
All these actions are designed to stimulate CHP growth, which means new CHP users. To help them make the most of the opportunities available, we have launched the CHP club, which is a new initiative designed to help CHP users to exploit the opportunities available. Run under the energy efficiency best practice programme, it is particularly targeted at new and potential CHP users, as well as helping existing users to extend their schemes.
The club will provide members with a single point of access to all the facilities open to them. It will enable users to access information, exchange experience, ask questions, and share good practice. By providing independent, authoritative advice, and by enabling users and potential users to share their knowledge and practical experience, the club will act as a hub of support for CHP. The CHP club will play an important role in unlocking the UK's CHP potential.
I hope that I have said enough to reassure my hon. Friend that the Government take the issue seriously. If there are points in his remarks that I have not properly addressed, we can follow them up later.
§ Question put and agreed to.
§ Adjourned accordingly at six minutes to Two o'clock.