§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Fitzpatrick.]
12.12 am§ Richard Younger-Ross (Teignbridge)I am pleased to speak in a debate on combined heat and power. Its timing is appropriate—although at this time of night I use the word advisedly. I am also pleased that we are spending 10 times as long on this debate as we had for the entire Third Reading of the Anti-Terrorism, Crime and Security Bill.
The Government often say that they are in favour of CHP schemes. Indeed, the Deputy Prime Minister, when he was also Secretary of State for the Environment, Transport and the Regions, said in a letter to companies in June 1997:
We strongly supported CHP in Opposition, and in Government we will positively promote it. The benefits of CHP are becoming increasingly important—CHP can reduce energy costs and increase UK competitiveness. It also reduces the UK's CO2 and other emissions and helps to combat climate change".The Government have reiterated their support for CHP schemes and gone as far as saying that they wish to double the output from 5 GW to 10 GW of power by 2010. The commitment even found its way into the Labour party manifesto.As that level of commitment goes back four years, why have there been 1,400 job losses in the sector this year? In addition, why has Centrax in my constituency seen its orders for CHP units cut dramatically? When it was forced to announce 250 job redundancies recently it was not able to move any from the aerospace division to the gas turbine and CHP division. Again bearing in mind the Government's commitment to CHP, why does another local company, British Ceramic Tiles, advise me that the CHP unit that it bought two years ago is mothballed because it cannot afford to put it on line?
Why are companies such as British Sugar having difficulties? British Sugar recently said that it was encouraged by the Deputy Prime Minister's letter to invest some £70 million to upgrade two of its CHP plants, at Wissington in Norfolk and at Bury St. Edmunds. Those are now showing heavy losses, and the company has pulled its plans for investment of a further £100 million in two plants which would have added about 150 MW to the Government's CHP target and saved a further 150,000 tonnes of CO2 emissions per year.
Is there a lack of joined-up government thinking on CHP? Was the Deputy Prime Minister simply speaking out of turn in his 1997 letter, or are the Government's actions light years behind their promises? If the latter is the case, I suggest that they take the advice of Professor Stephen Hawking, who can advise them on the time relativity paradoxes of Government policy. The Chancellor of the Exchequer stated in November 1999 that he would end the climate change levy on CHP. I do not expect that the Minister will tell us the contents of the statement to be made by the Chancellor tomorrow, but I hope that we will see a commitment to honour the promise made two years ago.
The Combined Heat and Power Association has raised several concerns about the lack of progress, and it has written to the Minister several times to ask for help. I ask 806 him to consider its questions, because it has claimed that, without Government action, there will be a crisis in the industry. It is looking for action, not words, saying that
the overall reduction in the level of the CCL reduces the viability of CHP",because the incentive to achieve energy efficiency targets using CHP is reduced, despite the Government's claim that CHP accounts for up to half the cost-effective savings in reduced levy sectors and will benefit from such agreements.The CHPA says that there is also a problem relating to the Government's incentives. The Government introduced a concession that businesses could claim enhanced capital allowances on investment from good quality CHP, but finance leasing does not qualify. They have announced that plant and machinery that is part of good quality CHP will be exempt from the assessment of the rateable value for a site or business. However, only the electrical generator qualifies, and heat generation is excluded.
We need incentives, not disincentives, for CHP, and action, not consultation. The Government must accept that CHP needs to be exempt from the climate change levy and, as I said, I hope that we will hear more about that tomorrow. I also hope that the Government accept that they need to support changes in the new electricity trading arrangements and to work through Ofgem to reduce the penalties that are currently imposed on CHP units. I hope that the Government will consider placing an obligation on suppliers to purchase from CHP units. Currently, there is a scheme requiring power to be bought from renewables. I am not suggesting that it should be bought at the same rate, but two thirds of that cost may be appropriate.
§ Mr. Barry Gardiner (Brent, North)The hon. Gentleman mentioned the new electricity trading arrangements, or NETA. Does he accept that the Government deserve credit for the introduction of NETA and that generators and suppliers are expected to balance anticipated generation and demand with contracts for the sale and purchase of electricity through that system? The balances and imbalances are therefore cashed out. On balance, NETA has been extremely positive improvement on the previous pool arrangements.
§ Richard Younger-RossIn the context of CHP schemes, I disagree with the hon. Gentleman. BCT, the company that I cited earlier, is not affected by the climate change levy because of the industry of which it is part. Its complaint largely concerns the effects of NETA on that industry. NETA might work for larger suppliers, but it disadvantages smaller suppliers. I hope that the Government recognise that; indeed, I am asking them to look at changes to NETA to help smaller suppliers.
§ Mr. GardinerI agree that there are problems with NETA. However, does the hon. Gentleman not accept that, on the whole, NETA has been positive for the industry? There is a problem for CHP, as opposed to renewables, because it typically produces excess electricity to produce the required heat output for the host site. Such problems arise because of the demand to balance within NETA CHP's overproduction and its variable supply to the market, and that needs to be resolved by Government action.
§ Richard Younger-RossIf one follows the hon. Gentleman's logic, CHP schemes would not exist because 807 they need to be protected from that eventuality. NETA simply does not work for CHP schemes. There are two ways round that; one can change NETA or require suppliers to purchase from CHP schemes. One has to do one thing or the other; one can even do both. I hope that the Minister will comment on that in his summation.
I know that the Minister has spoken and written on this matter many times. On 8 March, he gave a written answer in which he said:
We have introduced a range of incentives to stimulate CHP growth, including exemption of Good Quality CHP from the Climate Change Levy, subject to EU clearance and eligibility for enhanced capital allowances. Electricity generating plant and machinery will also be exempted from business rating from 1 April 2001. A comprehensive strategy will be launched in the coming months to ensure that our 2010 target is achieved with the help of the measures already announced and other new measures designed to stimulate growth further."—[Official Report, 8 March 2001; Vol. 364, c. 272–73W.]I accept those good intentions, but the industry needs action now. Measures can be undertaken to stimulate the industry. I am certain that if we can make progress soon, it will be good not just for jobs in the United Kingdom—jobs in my Teignbridge constituency are desperately needed at present—but for the environment.
§ The Minister for the Environment (Mr. Michael Meacher)I congratulate the hon. Member for Teignbridge (Richard Younger—Ross) on choosing CHP for this Adjournment debate, which will enable us to examine what, I accept, are very serious problems facing the industry. It gives me an opportunity to emphasise again the Government's determination to achieve our CHP target of at least 10,000 MW by 2010.
The recent Ofgem report on the initial impact of NETA on smaller generators suggested, as I made clear in parliamentary answers, that the export of power from CHP has fallen by about 60 per cent. since its introduction. Some estimate that the figure may be closer to 80 per cent. That is obviously extremely serious.
The hon. Gentleman mentioned the loss of 250 jobs, which is about 25 per cent. of the work force at Centrax in Newton Abbot. Centrax makes jet engine components for Rolls-Royce, which produces jet engines for the American executive jet market. Centrax also makes gas turbines for use in the general power generation sector, not just CHP. The job losses occurred largely as a result of the events of 11 September.
Orders for jets are no longer being received, as the airlines have cut back. Whereas Centrax might have been expected to build five or six turbine sets during the next six months, it is possible that only one will be built. In addition, the European market is in similar circumstances as a result of the transitional period following the deregulation of energy sectors. There are, therefore, special considerations in the case of Centrax, which is, I think, the only UK company associated with CHP that has announced job losses. However, I am aware that the association believes that in the current circumstances, there may be further job losses in the pipeline. I accept that the situation is extremely serious.
The hon. Gentleman is right about NETA. It poses particular problems for smaller generators. The asymmetry between falling electricity prices and rapidly rising gas prices has added to the problems. NETA is a 808 matter for Ofgem and the Department of Trade and Industry. My Department has been working closely with the DTI to identify the action necessary to address the adverse impact that NETA appears to be having on the smaller embedded generators, which is identified by the Ofgem review. The Government have issued a response to Ofgem's review and through that are consulting on ways to ensure that CHP and the renewable generators can operate effectively under NETA.
My hon. Friend the Member for Brent, North (Mr. Gardiner) is right about the gains in NETA in general, relative to the pool price that existed before, but it is undoubtedly a problem for the smaller generators. We are examining ways in which we can reduce or eliminate those problems.
§ Mr. GardinerThe obvious and effective solution would be to remove CHP from the NETA balancing mechanism, because the plants are small and the costs imposed on the rest of the energy market by that action would be minimal. That might give CHP the opportunity to run as it did before the market changes, removing the impediments to continued operation. Does my right hon. Friend agree that at present, where a CHP plant is selling surplus electricity as a supplier, it is subject to the renewables obligation? Given the environmental credentials of CHP, it seems perverse for the renewables obligation to be applied. Removing CHP from that obligation would improve the economics of CHP.
§ Mr. MeacherMy hon. Friend makes some good points. I agree that those are indeed the barriers. As part of our approach to reducing the problems, a cross-Government/industry working group has been set up to examine exactly the barriers that he describes, and the barriers to the consolidation of smaller generators under NETA. We must make sure that any measures put in place will help CHP generators, and I am determined to work with my hon. Friend the Minister for Industry and Energy to ensure that they will.
We are working to encourage energy efficiency and CHP through a range of initiatives. Let me give the hon. Member for Teignbridge a few examples. Next April, the UK will launch the world's first economy-wide emissions trading scheme with £215 million of Government support over five years. That will deliver emissions reductions from business and offer an incentive for investment in low-carbon technology, including CHP. I assure him that there is no question of CHP not being able to take full advantage of trading. That is one way in which we can try to address current problems.
The climate change levy was introduced on 1 April this year. As the hon. Gentleman said, good-quality CHP-generated electricity that is used on site or sold to known end users is exempt from the levy, as is the fuel used in the vast majority of CHP schemes. I recognise that a problem remains regarding exemption for exports via licensed suppliers. I shall return to that point in a moment.
§ Richard Younger-RossWhat would be the cost to the Exchequer if that climate change levy was taken away?
§ Mr. MeacherI cannot give the hon. Gentleman an immediate figure. The Government agree with the 809 industry that the problem remains significant and we have been examining it closely. I shall write to him about the exact cost.
Our commitment does not stop there. Some £50 million in the next two financial years will be available for innovative community energy schemes based largely on CHP. That will help save carbon, tackle fuel poverty and encourage urban regeneration—a win, win, win situation. Micro-CHP is another exciting example that offers great potential for energy efficiency improvements. My right hon. Friend the Secretary of State for Environment, Food and Rural Affairs last month announced proposals for a large-scale pilot in 6,000 fuel-poor households to assess the suitability of the technology. If that is successful, our Intention is to include micro-CHP in my Department's main fuel poverty programme, which is substantial.
The hon. Gentleman asked what the Government were doing in terms of our commitment to CHP, so I point out that those are real, solid commitments. We are working closely with colleagues in other Departments to ensure that energy efficiency remains a key element of Government policy. Over-arching that work, the performance and innovation unit is reviewing the broader strategic issues associated with energy policy and will make its report to the Prime Minister by the end of the year. From meetings with its authors, I know that the unit has fully grasped the very important contribution that CHP has to make.
That will help to reinforce the CHP strategy that my Department is developing in close collaboration with other Departments. I am perfectly aware of frustration about the delay in publishing the strategy. The hon. Gentleman will be pleased to know that I have been lobbied very strongly about the matter. To ensure that the strategy can be of real value in helping us to achieve the Government's target, it must be robust. I hope that he will understand me when I say that it requires a great deal of interdepartmental discussion. We now expect to publish the strategy for consultation at about the turn of the year. I am happy to recognise that that is not as soon as I would have liked.
I recognise that one of the measures that would provide a considerable boost to the CHP industry—the hon. Gentleman emphasised this point—would be full exemption from the climate change levy for CHP-generated electricity. I assure him that I have raised the issue with my colleagues in the Treasury, but I must point out that, as he will recognise, taxation issues are a matter for my right hon. Friend the Chancellor of the Exchequer. I am afraid that I cannot say anything more 810 on the matter in view of tomorrow's pre-Budget report. The hon. Gentleman will not have long to wait, but I am afraid that he will have to wait till tomorrow.
Beyond possible fiscal measures, we are considering a wide range of other policies as part of our strategy. They include extending enhanced capital allowances to cover long-life CHP assets and further exemption from business rates. I am acutely aware that CHP is a long-term investment and that greater certainty about future energy prices would help reduce significantly the financial risks for CHP developers. Earlier, I referred to the unevenness in recent price movements. Those fluctuations have clearly not helped. It has been suggested that not only a renewables obligation, but a CHP obligation would provide the necessary certainty. We have reserved the powers in the Utilities Act 2000 to implement such an obligation. We shall consider it carefully with other measures.
The Government will continue to champion what the hon. Gentleman correctly described as the great benefits of CHP to the environment and the economy. We are committed to pursuing the necessary policies to restore confidence and get us moving again towards our 2010 target. Clearly, the CHP strategy is the key issue, and hon. Members can expect it to be published around the turn of the year. 'That is the earliest date to which I can reliably commit the Government.
Combined heat and power needs to flourish again and I am committed to doing all that I can to ensure that it does.
§ Richard Younger-RossThe Minister said that the report would be published near the end of the year and that a consultation period would follow. That could continue for some time before any action was taken. Will he consider introducing all the elements that he can before that? Some matters are non-controversial in the industry, if not in Departments. Help is needed as soon as possible to get the industry back into gear. It is downsizing when it should be increasing.
§ Mr. MeacherI acknowledge that. I have outlined several measures that we will introduce. I do not want to postpone publication for a month and then hold a long consultation period. Clearly, we must take action early so that the policy on the ground is changed. I have mentioned various measures such as enhanced capital allowances and exemption from business rates. However, apart from the CHP obligation, the most important is the exemption of the export of CHP via licensed suppliers from the climate change levy. The hon. Gentleman needs to wait only until tomorrow for that.
§ Question put and agreed to.
§ Adjourned accordingly at twenty-one minutes to One o ' clock.