HL Deb 20 January 1983 vol 437 cc1588-610

7.36 p.m.

Lord Mottistone rose to ask Her Majesty's Government what action they are considering to relieve industry of the present high costs of energy with particular reference to electricity.

The noble Lord said: My Lords, I beg leave to ask the Question standing in my name on the Order Paper. My Question is: To ask Her Majesty's Government what action they are considering to relieve industry of the present high costs of energy, with particular reference to electricity. If I had thought more carefully, I should perhaps have been more polite to the Government and said: To ask Her Majesty's Government what further action they are considering to relieve industry, et cetera. It being a Question, I shall be unable at a later stage to thank those noble Lords who are to take part in the debate. At this stage, therefore, I should like to do so. In particular, may I thank my noble friend Lord Avon who is to answer the Question, and at the same time congratulate him on being in a position so to do, and to be doing so on behalf of his own department. It is a great pleasure to me and, I am sure, to your Lordships to see my noble friend in this position.

I have to declare an interest. This Question was put down at the request of the CBI, with whom I am closely associated. It is mainly their view which I shall be putting to your Lordships. Both they and individual sectoral organisations have made consistent representations over the last two years regarding the level of United Kingdom energy prices and the threat which they pose to international competitiveness. It is this particular point, the threat to international competitiveness, which I shall seek to make the most important. It is very important for us that everything which can be done to make it possible for industry to be competitive in the world today should be done. Large organisations which have their eyes cast inwards, as some of our energy-producing industries have, should be aware of the absolutely vital effect that they have not only on the companies which produce goods for export, but also on the multifarious other companies which support the major ones. There has been some relief in certain respects. We acknowledge and welcome the £250 million assistance given to industry in the 1981 and 1982 Budgets. I hope that in the Budget which is about to be presented the same tendency can be continued, with particular emphasis on the points which I shall make later.

The CBI also welcomes the gas freeze and the electricity prices standstill envisaged for 1983. However, problem areas remain—particularly for electricity intensive industries, and the CBI continues to seek further relief from the severe burden borne by such industries and continues to drive for competitive United Kingdom energy prices. United Kingdom electricity prices to energy intensive users is now the main area where significant price disparities exist in comparison with some of our European competitors. At the December NEDC meeting the Secretary of State for Energy presented a paper which constituted the results of his department's review of electricity pricing, and particularly the CEGBs bulk supply tariff. The department's paper endorsed the long-run, marginal cost approach to electricity pricing, and also broadly endorsed the existing tariff structures—particularly as they applied to large and intensive users. However, a number of changes in the BST have been proposed in the light of the supply industry's service capacity, which has enabled the Secretary of State to announce that there will be no increase in the average level of prices in 1983.

Clearly, the CBI welcomes that, but it is very concerned that the effects of these changes are likely to be such that the electricity intensive industries will be those subjected to actual price increases. This is the very sector on whose behalf the CBI has been campaiging for lower prices. The CBI supports long- run marginal costs as the theory for electricity pricing, but by its nature it is very imprecise when applied in practice; it involves a whole range of assumptions. As a result, there are inevitable large margins for ever as far as individual companies are concerned.

Turning now to comparisons, the CBI is still completing agreed, updated energy price comparisons for October 1982 but based on electricity council figures for 1st October 1982. The level of prices to high load factor industrial consumers in England and Wales is higher by up to 25 per cent. than in Western Germany; 30 per cent. than in Belgium; 40 per cent. than in France; and 50 per cent. than in Italy. Although there have been considerable exchange rate fluctuations since October, these cannot erode the differentials of this order of magnitude—and indeed, they have not done so. The CBI has always acknowledged that for the majority, numerically, of industry United Kingdom electricity prices are broadly in line with Continental levels, with the exception of France, where industrial prices tend to be lower at all levels of consumption.

The problem area is the large and high load factor users who are among the 1 per cent. of industrial users who account for 50 per cent. by volume of industrial electricity consumption. The sums of money involved in helping these consumers are not large. For example, £200 million would go a considerable way towards bringing their prices closer to those of their Continental competitors. The ramifications go beyond the confines of the intensive industries themselves and include the knock-on effect on other sectors of manufacturing industry which are dependent upon some of these energy intensive processes, as I indicated at the beginning of my speech. For these reasons the CBI continues to press for further action.

I do not propose to talk about gas because it is getting late, but I should like to make mention of oil. United Kingdom oil product prices, inclusive of tax and duty, have remained higher than the weighted average EEC level throughout 1982. United Kingdom heavy oil prices, inclusive of duty, have been higher than those of major EEC countries throughout 1982; the major element of disparity being the higher level of duty levied in the United Kingdom. Comparable figures, which I will not read out to your Lordships, show that Britain has a higher pound per tonne cost for heavy oil than any other of the European countries, with the exception of Denmark and Ireland, with which we compete so closely.

While we are talking about oil, I should remind your Lordships that oil required for heating in the horticultural industry over the past year, and in particular for the growing of tomatoes, was higher in cost than that for the Dutch, with whom we are in strong competition, because the Dutch heavily subsidise their oil. Indeed, this caused the European Commission to take them to court; but by the time that the European Commission had got around to taking the Dutch to court, and by the time the Dutch had done anything about it, the damage was done and many tomato processors in this country went out of business as a result. By the time they had done so, the Dutch had achieved their object. I mention that as an example of where, although it is contrary to the Treaty of Rome and the Dutch were at fault, we in this country really must look to the needs of particular people along a narrow front, in order to ensure that competition is fairly conducted and is not unfairly created by Government action in being slow to realise what is going on in the world outside.

I turn now to a letter I have received from my noble friend Lord Drumalbyn, who wrote to me saying he was sad he could not be here this week and asking me to make two points to my noble friend Lord Avon; one for consideration and the other for investigation. My noble friend Lord Drumalbyn writes: It really is time that the Government stopped pussy-footing about this. The very least they can do is to appoint a committee of chartered accountants, or even a single firm, or even a single person, to establish the true costs of supplying electricity to large industrial users and to recommend a properly graded scale of charges related to costs of supply and to consumption by industrial users".

The Government might care to give serious thought to this approach; setting up a body perhaps only temporarily, to look at the problem of competition with our neighbours.

My noble friend Lord Drumalbyn adds as a postcript, and maybe the noble Lord, Lord Kirkhill, will be interested to lean this: The Scottish electricity boards have been behaving particularly badly. I understand that in response to the Government's express wishes they have offered reductions of charges less than half as great as those offered by the English authorities in return for undertakings by customers to reduce or interrupt consumption at the bidding of the supplier".

Perhaps the noble Lord, Lord Kirkhill, would care to comment on that. If it is so, then I hope he can see a way of putting this right.

In conclusion, there has been a measure of success in the concerted campaign that has been conducted by industry, and the individual sectors of industry concerned, over the past couple of years. There is greater recognition of the need for competitively priced energy. The assistance given in the last two Budgets, the continued gas price freeze and the 1983 average electricity price standstill are all to be welcomed—but despite these achievements, the largest single problem area remaining, and the one to which I hope my noble friend Lord Avon will particularly reply, is electricity prices to high load and high load factor users.

7.50 p.m.

Lord Kirkhill

My Lords, the issue we discuss this evening is a matter on which many of our leading industrialists have voiced public disquiet in recent months, and Lord Mottistone has, therefore, performed a signal service in initiating this debate. Incidentally, in congratulating the noble Earl, Lord Avon, upon his becoming an Under-Secretary of State at the Department of Energy, with the consequence that that department will now have a most compelling voice in this House, it may nevertheless be pertinent to remark that there will soon be more partisan occasions when his considerable talents and debating fortitude will perhaps be tested rather more than may be the case this evening.

My contribution to your Lordships' conclusions tonight will be brief; I have an inescapable—one always says that, but it is true—dinner commitment which I must attend, and I apologise in advance that I shall therefore not be present at the winding-up. But until the end of last year I was chairman of the Hydro Board, so the problem has been claiming some of my attention in recent months.

Discussions on industrial electricity prices usually focus on large high load factor consumers. While electricity charges undoubtedly constitute a significant part of the costs of those consumers, they in fact affect only a very small number of industrial consumers. For example, in England and Wales, of 200,000 industrial consumers just over 3,000 have demands of over 1 Mw and only 170 of those have load factors over 70 per cent., which is the generally accepted percentage defining a high load factor. In Scotland there are approximately 375 industrial consumers who have demands of over 1 Mw and of those 18 have load factors over 70 per cent. Within that group only 45 have demand in excess of 6 Mw and only three of those have load factors over 70 per cent. I would, therefore, point out to your Lordships that the largest 1 per cent. of the loads account for about 50 per cent. of industrial electricity consumption, and it is, of course, in this area that problems have arisen.

In 1980 the National Economic Development Council formed a task force to examine the reasons for price disparities within the EEC, and the task force reports subsequently showed that on the lower loads and load factors British prices are comparable to those in Belgium and Germany, cheaper than those in Italy or the Netherlands but more expensive than those in France. Moreover, I should particularly stress that prices in France are considerably below those in all other European countries. For very large loads at high load factors, with the exception of Italy in one special case, the French prices are the cheapest in Europe.

The outlook for British prices is now becoming favourable because the devaluation of sterling since October last has improved the relative position. Another helpful factor is that France, Germany and Italy are all expected to raise their prices by about 10 per cent. in 1983, whereas our prices, as Lord Mottistone has just mentioned, are going to be held at the same general level as pertained in 1982.

I should perhaps emphasise to your Lordships that the task force indicated the main reasons for price disparities as being exchange rate movements, the natural endowment of some countries with cheap fuel sources, and price concessions or subsidies to certain industrial sectors and/or consumers. In France cheap prices are attributable to the significant proportion of hydro-electric generation which occurs and the major nuclear programme developed there, which accounted for nearly 38 per cent. of French production in 1981. One other factor which is not insignificant is that the French electricity utility lost 8 billion francs in 1982, which does amount in effect to some sort of subsidy. In Germany lower prices can be attributed to the availability of brown coal, special accounting provisions particular to that country and preserved arrangements for certain groups of consumers, which, as I understand it, are generally in the process of being phased out.

Finally, it is worth my mentioning that the range of prices in industrial Europe is fairly narrow in an international context. The range found in Germany alone encompasses that for the industrial areas of the EEC, while in the United States industrial prices in the most expensive areas—for example, New York—are four times those of the hydro-electric based utilities of the North West. Nevertheless, although I have just indicated that there is considerable evidence to show that the British price position is becoming more favourable vis-à-vis the EEC, the present Government's somewhat oppressive view of the nationalised industries, emphasised by their manipulation of the cash limit not only this year but in previous years, does not augur well for the prospect of that more substantial redress which many industrialists consider to be imperative.

Lord Bruce of Donington

My Lords, before the noble Lord sits down, would he clarify one point? When he said 8 billion in the case of France, was he referring to francs or pounds or dollars?

Lord Kirkhill

My Lords, perhaps I did not speak as clearly as I should have done, but certainly I was referring to francs.

7.58 p.m.

Lord Tanlaw

My Lords, I am very grateful to the noble Lord, Lord Mottistone, for drawing the attention of the House to this complaint—which it is—from industry about making us uncompetitive with our overseas competitors. I have already given the noble Earl my congratulations rather hastily during the flurry of Question Time, but, if I may repeat them again in the calmer waters of the evening and an Unstarred Question, I look forward to some interesting debates on his new subject.

I have taken at random evidence, of which there is plenty, in support of the kind of plea being put forward by Lord Mottistone. The evidence I have taken is that of the British Paper and Board Industry Federation on the EEC Commission's communication, Investment in the Rational Use of Energy. I think that it is fairly representative of the kind of views put forward by British industries which are heavy users of electricity. It would seem that the overall concern is that there is no clear or consistent Government policy vis-à-vis energy, which leaves the industry—in this case, the paper and board industry—in a permanent state of uncertainty.

This, of course, applies to all heavy users of electricity. They get little consolation from the Government's attitude that market forces should be allowed to dictate events. As we have heard from Lord Mottistone, the market forces are negative, in the sense that their competitors have access to cheaper electricity. Therefore, if one takes the Government policy to its final conclusion, the market forces encourage paper and board to be made in Europe or in those areas where there is cheap electricity, and not in the United Kingdom. That is absurd and obviously not practical.

Thirdly, there is the problem that the Department of Energy has implied on many occasions, as well as stating publicly, that its primary concern is for the energy supply industry and not for the energy consumers. This is another plea from industry. It does not know to whom it should turn for advice and guidance on the cost of energy for its future plans. This concern, coupled with the lack of a consistent Government policy—those are the industry's words, not mine—regarding the pricing and marketing of all forms of energy, is often cited as a major reason for hesitation in making energy project investment, especially by those companies which have to commit themselves to a one-fuel policy.

Perhaps I may hesitate here for a moment and consider the position of industry not knowing where to turn. If industry goes to the CEGB it is told quite clearly that the CEGB's role is to supply electricity generation as cheaply as possible to the area generating boards, whose responsibility it is to market electricity at varying prices which depend on their own economic situation. The noble Lord, Lord Kirkhill, has already indicated how this is done. Therefore, industry can get such information as generation costs from the accounts of the CEGB, and it would appear that nuclear electricity at Heysham I can be produced at 2.59 pence per kilowatt hour, while it is intended to be produced from Drax B, a coal-fired power station, at 3.84 pence per kilowatt hour. The only trouble is that if one asks the CEGB what electricity will cost from the Sizewell B PWR reactor, it appears not to know the answer. It seems a little late in the day not to know what the CEGB hopes for from the PWR reactor at Sizewell. I shall be quoting briefly from the CEGB statement of case for this inquiry which gives some indications that are not very encouraging.

Industry may also go to the Electricity Council, which has been quoted, for help; but its role is only to co-ordinate electricity supply. It does not have the power to set the price for electricity generation or to market electricity to the consumer. It just has an advisory role. Therefore, what body, if any, can industry approach in order to obtain some sensible answers about making long-term investment in an industry that will demand heavy calls on electricity? The answer is, none. Therefore, the CBI and other interested bodies are right to worry about the Government's view—and this applies to successive governments—on how to be guided on investment when large amounts of electricity are required.

My first question to the noble Earl, therefore, is: can he clear up the matter and state quite categorically whether he can give a price per kilowatt hour for electricity produced from the PWR reactor at Sizewell B? We hope to get that information this evening.

I come back to the suggestion that I made during the recent debate on the fast breeder reactor. Is there not a case for giving some powers to the Electricity Council, which is either the ultimate quango or has a real job to perform in stabilising the situation, with the ability to produce long-term contracts for industry with reassurances on energy prices? Why not give the Electricity Council the powers of the old Heat and Power Board which could at least spread across the country a unanimity of prices? It is here that I must disagree with the noble Lord, Lord Kirkhill. From the evidence submitted by the British paper and board industry, it would appear that the United Kingdom, in European terms, has the highest cost for energy, which went up as far as 5 pence per kilowatt hour. Prices varied from 5 pence per kilowatt hour to 2.75 pence per kilowatt hour. This referred to purchased electricity in Europe and we did not compare at all well with our competitors. I believe that competitors in Holland, France, Germany, Finland, Canada—which is not in Europe, I agree—had the lowest purchased electricity cost at under one penny per kilowatt hour. This is why it is very important, not only for us on these Benches who have an interest in energy, but for all industry, to know the Government's and the CEGB's targets for the production of electricity and at what cost.

I turn now, because I could not get an answer from the CEGB on the intended price of electricity from the Sizewell B power station, to the CEGB statement of case, appendix L, on the Sizewell B public inquiry. This contains a graph which shows that in 1990, under various scenarios, the cost per kilowatt hour, which will be sold at 1982 monetary values, will be in the region of 4 pence per kilowatt hour—that is, from 1990 to the year 2010. This is still considerably in excess of the charges made by our European competitors for electricity today. This target is put forward for a future which has a high nuclear content of electricity generation.

Referring to the statement of case, Appendix D, table D6, may help the noble Lord, Lord Mottistone, in some of his answers to the CBI. This gives the United Kingdom fuel prices to final users in the year 2000. This is compared with the price of electricity to industrial users in 1979–80. This is where I can set an easy problem for the noble Earl. The price is given as 91 pence per therm. I am not very good at mathematics, but could the noble Earl ask the experts who are at his disposal, but not at mine, what that is in terms of pence per kilowatt hour? We can then debate this using the same units. I am sure that, whether it is in the submission of evidence or in the CEGB accounts, pence per kilowatt hour is used as the yardstick for assessment. Unfortunately, with the Sizewell B power station the CEGB seem to be being difficult by switching to pence per therm. If that can be converted, we can all talk about the same comparative unit costs.

At 1979–80 prices, the cost of electricity to the industrial sector is still nearly seven times higher than coal. According to this table, given in evidence by the CEGB in its case for Sizewell B, the price of its electricity—against a high nuclear background—will still be three times more expensive than coal. It is still considerably more expensive than gas, whether of the interruptible or uninterruptible sort. It is two and a half times more expensive than gas and three times more expensive than interruptible gas and five times more expensive than coal.

The worry which I have is that, if electricity is to replace gas as the main space heater in the year 2,000, for which it is designed and for which this whole programme of electricity generation has been designed, it will be very difficult, at the prices shown in the case, to support the CEGB's case for more nuclear power.

Therefore, I should like to ask the noble Earl one final question which concerns the price of coal. The price of electricity today from coal-fired power stations is clearly dependent upon the price which the CEGB can negotiate from the Coal Board—that is, it is dependent upon the price of coal. The question which I want to ask the noble Earl—and it is very important and extremely relevant to the future and to Lord Mottistone's Question—is: why should the CEGB have to buy coal from the Coal Board at an average price which includes the very high cost of keeping uneconomic pits open? There is an artificially high price which contains an element—indeed, a large element—of subsidy.

If there is a vast surplus of coal, which there is at present, and there is a need to maintain electricity at a low cost, is there not a very strong case for allowing the CEGB to purchase coal from the pithead at the best price it can? I believe that it would be able to do so very economically and, indeed, in direct and profitable competition with its other choice, which is importing coal from Poland or Australia. In my view this may make a major contribution towards bringing down the cost of coal-fired electricity and possibly giving an extension of period to the coal-fired power stations—including the new ones like Drax B which I have already mentioned. I believe that the answer to these questions will be most helpful not only to myself and my party but also to the noble Lord, Lord Mottistone, and the whole of British industry, which does not know where it stands. Indeed, we none of us know where we stand about the future price of electricity. That is why the Unstarred Question that has been raised this evening is relevant and requires an answer.

8.12 p.m.

Lord Boardman

My Lords, like other noble Lords who have spoken in this debate, I am most grateful to my noble friend for raising this Unstarred Question because it goes to the heart of industrial costs. I must begin by declaring an interest because I am chairman of a company which is a very large consumer of fuel, or at least it is in my view. It spends some £30 million a year on fuel and for certain operations the fuel cost, the energy cost, represents sometimes as much as 40 per cent. of the total costs of production as regards certain products. Therefore, the price at which energy is available, relative to the price at which it is available to our overseas competitors, is critical.

Along with my noble friend I acknowledge what has been done so far. But I must say that it is not yet enough. I shall avoid swapping statistics or perhaps even following the noble Lord, Lord Tanlaw, on his costing information. From my experience when I was the Minister responsible for the energy industries, I find that one can become very lost in the figures and the variety of ways in which they can be presented. However, my noble friend put his finger on what I consider to be the central matter when he referred to the comparison of the costs of some of our major competitors. I believe he said that in October the United Kingdom costs were 25 per cent. higher than those of West Germany; 40 per cent. higher than those of France; and 50 per cent. higher than those of Italy. Those are very frightening figures and they are certainly not under-estimates because they were provided by the electricity industry itself and they were certainly borne out by my own experience of our operations in this country and in some of the other countries. Of course, the gap is even wider in North America. Yet it is with those countries with much cheaper energy costs that we have to compete in world markets.

I remind your Lordships that the high energy users also tend to be the high employers, whether they be the steel industry or some other industry. Indeed, if one looks at what I think are called the "Energetic Gang of Seven" who got together on prices—namely, the British Manmade Fibres Federation; the British Independent Steel Producers' Association; British Paper and Board Industry; the British Steel Corporation; the Chemical Industries Association; the Glass Manufacturers' Federation; and the National Federation of Clay Industries—one finds that they are industries which are very severely affected by energy costs. As your Lordships will have noted from the list that I have read out, they are also very high employers of labour. I fear that high energy costs have meant a fairly dramatic loss of jobs and the knock-on effect of that is not inconsiderable.

Over the years when I have pursued this question in various capacities, one tends to receive a variety of excuses and I should like to refer to one or two of those and to comment upon them. The first and most common one is that the other countries will catch up. They are always going to catch up, but somehow they never do so—the others always seem to have an advantage. I hope that my noble friend when he replies will perhaps avoid some of the excuses that I have been given in the past or perhaps put them over more effectively.

The second excuse is that the rate of exchange affects comparisons and, in fact, whatever figures you gave before the rate of exchange altered, they are completely invalid now. But the unfortunate aspect of that is that it seems to be used whether sterling is high or whether sterling is low. The result on industry is just the same: we are paying more than our competitors.

We are also told that we are bound by obligations to others. An example of that is the heavy oil fuel duty where we are paying £8 per tonne against many other countries who are paying nothing—Italy pays 0.44p a tonne; Germany £3.85; Belgium nothing, and so on. We are told that we are committed to pay this level of heavy oil fuel duty because of contractual arrangements. That may be so, but I cannot believe that it is past the wit of Government to make some other adjustments to compensate for this burden which industry is bearing.

We are reminded, and no doubt rightly, of our EEC obligations and the fact that we should charge prices comparable with market prices. The absurdity of some of that was illustrated in a leader in the Financial Times last month when it criticised and said that it was an absurd argument for the CBI to ask for energy prices comparable with its overseas competitors and that France with its hydro power had natural advantages which should be reflected in its relative costs. What about our natural advantages? What about our North Sea oil and gas? Should they not too be reflected in our relative costs? The argument about our obligations with regard to price parity with our European partners and the like does not seem to me to hold up very well.

The noble Lord, Lord Tanlaw, referred—and in my view rightly so—to the coal industry and coal prices which form an enormous part of the electricity generating boards' bill. One of the reasons that one is sometimes given for high electricity prices is that they are necessary to protect our coal industry. Are miners' jobs more important than the jobs of my employees in making magnesia in Hartlepool or refractories in Worksop?—because the price of electricity and the price of energy have been putting them out of their jobs. I ask why I should be forced to make men redundant in Hartlepool or Worksop in order to keep miners producing uneconomic coal at expensive pits in, for example, Kent. I wonder whether that argument can be sustained or should be sustained.

One is then told that another reason is that the Government are precluded from showing undue preference to any class of persons. That is a matter of apportionment of the costs—indeed, once you are satisfied that the costs are necessarily and properly incurred—between the various users. I know from my experience as Minister for Industry of the great variety of choices there were on how to apportion costs, and one could perfectly well and properly justify a lower level of costs on our industrial base.

The differential between our domestic and our industrial prices of energy seems to me to be quite a nonsense. The price of electricity to heavy energy users is much too high and if that price has to be recovered elsewhere, the right place to look is the domestic consumer. If we contrast the gap between our industrial prices and our domestic prices with comparable figures overseas, I believe that it will underline the disparity that is to be found in our apportionment system. We provide cheap energy for people to boil eggs and then we kill off the industrial goose that lays those very eggs. I am sorry, but I believe that this is a nonsense.

The other problem against which one comes up is what I call the "passing-of-the-buck" problem. Industry complains to the Department of Industry and is promptly referred to the Department of Energy which, after due consideration, passes the problem on to the Treasury, and the Treasury then pass it back to the Department of Industry. Perhaps the Ministers in these departments might get together and have a concerted policy. We have great advantages in this country. We are self-sufficient in energy. Why not use it to the advantage of our country and of our industry? I believe that we should adopt the slogan of that very famous firm of private retailers: "We are never knowingly undersold". I see no reason why we should not have that as part of our industrial energy policy. Then industry can compete on fair and equal terms with that overseas. We can use the very great industrial skills of this country free from the burden of costs which are being generated by something of a monopolistic bureaucracy.

8.23 p.m.

Lord Swinfen

My Lords, most of what I wanted to say has already been said by other noble Lords and said very much better than I can. But I should still like to make a couple of points which I think are important. The energy-intensive industries in this country are those that produce the raw materials for very many other industries. So if their costs are high, the base costs for other industries are high and this, in turn, puts up the cost of products that we have for export and for our own home consumption. When the cost of electricity is high in comparison with the cost of electricity to similar manufacturers abroad which are feeding their own final industries, it means that their final products are cheaper than ours and enter this country at a lower price than similar products that we produce ourselves.

It is extremely important to keep the price of electricity as low as possible to aid our own exports, which will help to provide employment. The more we export, the more employment we shall have. At the same time, if we can keep the cost of consumer products which are produced in this country low, that will push out similar products that are currently being imported. This will assist our balance of payments; it will also give more work in the industry that is producing goods for sale in this country as well as abroad.

I understand that the average price of electricity will not be increased in 1983. However, I was rather surprised to find on inquiry that, despite this, the price to intensive industrial consumers will increase by 3 per cent. this year, which means that their costs will go up. Inevitably, they will have to put up the cost of their products to our other industries and, therefore, reduce competitiveness all round. If the Government can arrange that the cost of electricity to high users is maintained at the same price throughout the year, I think that this will be of inestimable value to the country as a whole.

I realise that the price of electricity will need to be revised at the end of 1983 because, unfortunately, inflation has not come down to zero, although the Government are working in that direction and are, I think, doing a good job on it. But, if they can arrange for there to be no increase at all in the price of energy to high users in industry for, say, the next two or three years, this will improve our competitive position with our overseas competitors. But, if they find that that is totally impossible and unacceptable because of rising costs of production, they should ensure that any increase is held to a minimum, and preferably not more than 50 per cent. of any inflation.

8.27 p.m.

Lord Bruce of Donington

My Lords, the House will be most grateful to the noble Lord, Lord Mottistone, for having introduced this Unstarred Question, because the noble Lord always speaks with authority in conveying to your Lordships the broad and general views of the Confederation of British Industry on these and kindred matters. Before making the few remarks that I shall make, I should like officially to offer my felicitations to the noble Earl, Lord Avon, on his new governmental position. We wish him well in the task that he has to carry out, and although we shall be in disputation from time to time, we have no doubt that the noble Earl will pursue his debates in this House in the very pleasant and constructive way which has been his custom in the past.

This debate on the costs of energy for industry takes place at a most critical time. Your Lordships will have seen the article in the City section of The Times of yesterday. It may not have attracted all that amount of public attention because, as usual, it did not feature in the popular dailies. It stated that industrial output is now at its lowest level for 17 years. This is the context within which this Unstarred Question should be considered, because industry at its present low and depressed level—and on this occasion I shall refrain from dealing with the broad reasons as to why this disaster has occurred—makes it very necessary for any Government of any political complexion whatsoever to do all that they possibly can to assist what remains of British industry at this time.

As the noble Lord, Lord Boardman, pointed out, the industries which are the very large energy consumer industries are some of the basic and fundamental industries of this country. To the list that he mentioned the food manufacturers should also be added as being very large consumers of energy. In fact, according to the EEC papers that have been put out on this, 30 per cent. of all energy consumption in this country is consumed by industry.

I was a little surprised that the noble Lord, Lord Mottistone, expressed his gratitude for the freeze that was anticipated for 1983, particularly after his pungent reference to the fact that 50 per cent. of industrial consumption of electricity was in the users of the high load factor. We are indebted to the noble Lord, Lord Swinfen, who made a speech of some brevity but also of some pungency, for the information that in those cases the rise is going to be 3 per cent. during the current year. Not exactly a freeze!

What really can be done? Sometimes we have the impression—and we are deliberately given the impression—that the Government are committed to the free play of market forces. Members on both sides of the House will have listened to the admonitions, some of them pontifical and some of them urbane, that have come from the Government Benches concerning the basic validity of market forces. But of course in the field of energy, as we well know, this has never applied since this Government has been in office, or more particularly since 16th January 1980, almost exactly three years ago. Your Lordships will recall that the noble Earl, Lord Gowrie, who at that time was speaking on electricity matters, announced the Government's direct intervention into prices in the energy industry.

He announced direct intructions as to the financial targets which in future would have to be adhered to by both the gas industry and the electricity industry by setting down certain returns on capital employed, based on some mythical concept of current cost accounting and expressed as a percentage thereof. This was a device which was denounced some time later by the noble Lord, Lord Weinstock, as a lot of mumbo jumbo. It insisted at any rate on a 9 per cent. return on net assets on a curent cost accounting basis, and on a similar basis for gas.

He announced at the time that this would result in price levels being set for the next succeeding years at 10 per cent. above the rate of inflation. No option was given to the electricity industry, no option was given to the gas industry, to let market forces operate and to enter into their own independent contracts within what they considered to be financially feasible rates of return, and which they considered proper. They had no option at all. If the noble Lord wishes to question that, I have the speech here.

They were told at the time that it was the gentlemen of Whitehall who knew best as to what return should be obtained; what capital should be invested; what return on capital should be required. Both the gas and electricity industries were given instructions to adapt their tariff rates accordingly. There was no free play of market forces at all. It was a complete violation. I have no doubt that had the noble Lord, Lord Cockfield, been on the Front Bench at the time, he would almost have had apoplexy listening to that. I can only assume that he did not read afterwards the speech of his noble friend Lord Gowrie. It was a blatant intervention. So for the Government to sit back and wring their hands over the matter and to disclaim responsibility is completely unjustified.

What, after all, is the Department of Energy for? According to its official description: The Department of energy is responsible for the development of national policies in relation to all forms of energy, including energy conservation and the development of new sources of energy". I have been in your Lordships' House for a long time now, but during the last three years it has seemed to me that the greater part of the energies of the Department of Energy have been spent in flogging off national assets to the City friends of their party. This is where the most time has been spent. All the energy of the Secretary of State has been devoted to selling off assets. Not to make a profit out of them, but in point of fact so that they can add to the ordinary income cash flow of the Government. This is what has been done.

Where has the preoccupation been by the Department of Energy with the problems of industry? Or should there be any preoccupation by the Department of Energy with the problems of industry? Is industry a sufficiently important economic segment of the country, as against the City of London and the landed estates and the farms? Is it of sufficient significance to be given serious assistance and serious constructive thought by the Department of Energy? It is no mean department. It costs the country £14 million a year, and it employs 1,140 people, with an average salary bill of rather over £11,000 per person. That goes right down to the doorman. What are they doing to help industry?

These questions are not put offensively to the noble Earl at all. But every now and again surely we in this country can take a step back away from the cocoon of Westminster and ask ourselves: just what are these people there for? Just what are they doing? If they are not helping industry, what useful purpose do they serve? They can enunciate very learned documents and advice, and even give financial assistance towards the conservation of energy. But, as the noble Lord, Lord Boardman, will know, and the noble Lord, Lord Mottistone, will know just as well, because they both have experience of industry, there are many firms in this country that could adopt energy-saving methods and fuel substitutions if they in fact had the finances to do so. But these require considerable investment, and the investment climate is not suitable at this time, still bumping along at what is euphemistically called the trough of the depression. Now is not a time when this can be done.

In any case, such energy conservation measures as may be suggested by the Ministry relate mainly to the environmental aspects of industry—the temperature within the works, savings due to climatic losses and so on—but they do not relate in the main to the basic consumption of primary electricity driving the machines themselves.

The case was made out formidably by my noble friend Lord Kirkhill, but more particularly by the noble Lords, Lord Mottistone, Lord Boardman and Lord Tanlaw, that there are considerable price differentials between ourselves and Europe. In my experience—and I have questioned Ministers frequently in the past three years on the subject—any time it is suggested that the prices of British energy are uncompetitive compared with those on the Continent, that is denied or side-stepped. But the figures produced today by Lord Mottistone, reinforced by Lord Boardman and added to by Lord Swinfen, surely prove the case.

Why are the Government so reluctant to do what other countries, particularly in Europe, do in setting, as a deliberate act of subsidy, the prices of energy to industry? Is it because it is against a particular economic principle? They do not have one. On the one hand, they say they are all in favour of market prices exerting the level, and on the other they promptly go against that by fixing their own prices, irrespective of market forces. So that principle will not stand.

I commend to the Government a different kind of principle altogether, one touched on by the noble Lord, Lord Boardman, who really asked why the Government did not fix price levels, or at any rate establish the parameters within which they may move, in the best interests of industry as a whole. In fact, he made the entire case when he pointed out the complete irrationality of the situation in view of the considerable energy resources we have in stark distinction to many other countries in Europe, whose energy prices, mysteriously, are much lower.

I do not think I misrepresent the noble Lord, Lord Boardman—I am not trying to inveigle him into being responsible for views he did not articulate—when I say that he put forward the irrationality of having no policy for energy prices that would be of assistance to industry. He might reflect a little more ruefully that such a state of mind does not apply when it comes to agriculture, where everything must be planned; no farm income can be lower than a certain point and everything is fixed in complete contradiction to market forces.

I will not—I cannot—anticipate what the Minister will say in reply, but he will have to address himself sooner or later to the essential question whether the Government will give some practical and rational assistance to industry by fixing the parameters within which energy costs may move, thereby giving a certain flexibility to the producers of energy, in such a way that at least our main industries can be put on the same footing of those in Italy, France, Germany and elsewhere, rather than languish at the top with grave consequences to industry and unemployment in this country, due almost entirely to a dogma that was established three years ago in arbitrarily setting out policies which bear no relevance to the real industrial requirements of the time, a dogma that has since been entirely discredited by events and has been wholly discredited by the contributions made to this debate.

8.46 p.m.

The Earl of Avon

My Lords, as noble Lords have stressed, the question of industrial energy costs is a matter of very great importance, not only for industry but for the nation as a whole. I wish, therefore, to add my gratitude to my noble friend Lord Mottistone for giving the House the opportunity of discussing this vital subject.

Before going into the matter in detail, I wish to thank all noble Lords who have been kind enough to welcome me at the Dispatch Box in this capacity, even if they went on to tell me that my department was not very good. Added to that, I thought the noble Lord, Lord Bruce, almost abolished my department before I had even got into it; and I thought he might have waited a little while. Having been in the department for nine days, I have enjoyed it immensely and have found the people there keen and extremely active, both in ideas and in projects.

Industrialists quite rightly attach considerable and particular importance to the cost of their energy. This is for two main reasons. First, the world price of crude oil has risen by 14 times in real terms since 1972, and in every country all other fuel prices have risen dramatically in its wake. Secondly, there continues to be considerable uncertainty over the future of the world energy market; it is not possible to predict with confidence what future prices will be, and to a great extent future market developments are outside our full control.

I thought the noble Lord, Lord Tanlaw, was very brave to reach the year 2,000 in his synopsis, but I realise that he was quoting other figures. The noble Lord asked specifically who industry could turn to for advice on electricity prices. No one can predict energy prices; events in the world energy market over the past 10 years must teach us that. The electricity supply industry will advise potential customers to the best of their ability, but it can be to no one's advantage to pretend that there is certainty where there is none. Our objective is to generate electricity as cheaply as possible.

The recession which has hit the world economy has very largely been caused by the rising cost of world energy supplies. The recession has led to smaller markets, both at home and abroad, and has meant that, even as energy prices have continued to rise, our industry has had to work especially hard at maintaining and improving its competitive position. However, for United Kingdom industries energy is, of course, only one of a whole number of operating costs which every industrial and commercial firm has to meet and which must be kept as low as possible if maximum competitiveness is to be achieved. Indeed, for the average manufacturing firm in the United Kingdom energy accounts for only some 4 per cent. of total operating costs, although in the case of some energy intensive sectors this proportion can rise to 20 per cent. or even higher, as my noble friend Lord Boardman stressed.

The Government have been much aware of industry's concerns over energy costs and have taken a number of direct measures to give real and positive help. In his Budget in 1981 my right honourable and learned friend the Chancellor of the Exchequer announced measures worth some £118 million to help industry with gas and electricity prices. Further assistance, worth over £150 million, was announced in last year's Budget. This included, first, the freeze, until the end of 1982, on the price of industrial contracted gas supplies; secondly, new consumer contracted load management arrangements, which should bring price reductions of up to 16 per cent. for the largest electricity users; and thirdly, continued assistance to the National Coal Board to enable them to keep down foundry coke prices.

In total, in the past two years the Government have introduced measures worth over £¼ billion to help industry with its energy costs. And a good deal of this assistance has been aimed principally at the very intensive energy users, who have found rising energy prices to be a particular problem. I take the point of my noble friend Lord Boardman about the next Budget, but I am sure he woud not expect me to comment on that.

In addition to measures of financial assistance, the Government have also taken other steps to help. In July 1980 we asked the electricity supply industry to conduct a review of its bulk supply tariff, and we subsequently sought comments upon it from industrial consumers and engaged consultants to help us look at this very complex subject. If I may say so, I am pleased that my noble friend suggested electricity as his major point, as part of my remit in my department is electricity and also energy conservation as well as the renewables. Following this review, the Government agreed with the industry that there would be no increase in the average level of electricity prices in 1983. This was announced by my right honourable friend the Secretary of State for Energy in another place on 12th November. Details of the actual tariffs which will apply from 1st April will be announced by the industry in due course. Some consumers may see small increases and others receive small reductions, but, on average, prices will remain unchanged: this means an overall reduction in electricity prices in real terms.

My noble friend Lord Swinfen referred to reports that heavy industrial users face tariff increases of 3 per cent. this year and further increases as from next January. I think I should make it clear to my noble friend that the detailed level of tariffs is a matter for the area boards and they have not yet finalised their tariffs which will apply from next April. However, I have no reason to believe that the tariffs will result in an increase as high as 3 per cent. for industrial users. Furthermore, the price standstill which he mentioned is to April 1984 and not to January. There was more good news last November about energy costs for industrial users.

On 1st November the National Coal Board increased industrial coal list prices by a modest 7.9 per cent. and expressed the hope that there would be no further increases for 12 months. Almost all coal sold to industry is supplied under contract at a discount below the list price. And since coal now accounts for over 80 per cent. of fuel used in power stations, this is welcome news for all electricity consumers, too. Also on 8th November the British Gas Corporation announced a 9-month continuation, until 1st October 1983, of their freeze on the price of contracted gas supplies.

The recent announcements about fuel prices for the coming year, together with the measures of help which the Government have given, are, and will be, of significant help to British industry and commerce, who have warmly welcomed them. Nevertheless, as noble Lords have said, some large users of electricity have claimed that the electricity price structure in this country puts intensive users of electricity at a disadvantage by requiring them to pay substantially more than their European competitors. The facts, however, as I understand them, are these.

A special task force (which was mentioned by the noble Lord, Lord Kirkhill, in a most erudite speech) was set up in 1981 under the auspices of the National Economic Development Council to establish the position on comparative energy prices. It found that, for the great majority of industrial electricity consumers, prices were broadly in line with those elsewhere in Europe. The Electricity Council has been updating these figures, and the general picture, we believe, has not changed. Electricity prices in France remain substantially lower than elsewhere in Europe. They have the advantage of generating over 50 per cent. of their electricity from relatively low-cost nuclear and hydroelectric power. But our prices compare well against other countries such as Germany, Italy and the Netherlands.

It is true that our prices are towards the top end of the range of European prices for those few consumers whose electricity demand is virtually constant over the year and who thus have a load factor of 80 per cent. or more. But it would be wrong to put excessive weight on this. Only a small minority of consumers, as we have heard, come into this category. These figures are not relevant to the large majority of intensive users of electricity, such as those in the steel industry, who necessarily operate at much lower load factors.

The Government are indeed concerned that the electricity tariff structure should give proper recognition to those users whose pattern of demand makes them cheaper to supply. Under existing tariffs, intensive users already pay up to 40 per cent. less per unit than the average consumer. We have examined carefully the claims made by some consumers that the tariff structure is biased against intensive users of electricity, but our studies have not substantiated them.

Today energy everywhere is an expensive commodity. But as the NEDC task force reports made clear, for the vast majority of industrial users, energy prices in the United Kingdom are no higher than on the Continent. Differences between energy prices in different countries can occur, either for short-term reasons or because markets have different structures. In the shorter term, as exchange rates fluctuate, so relative energy prices, like the prices of all other goods, will change. For much of last year sterling had a relatively high value, so that overseas prices were lower when expressed in sterling terms. Since the autumn, however, European currencies have risen by around 13 per cent. against Sterling. Consequently United Kingdom energy prices have fallen significantly in relation to those of our competitors. I noted that my noble friend Lord Boardman forbade me to mention this topic, but I hope he will forgive me for stating just that.

The case of electricity prices in France, to which I have already referred, is a good example of how prices are affected by the structure of a market or supply system. A country which is able to produce electricity at a lower cost will always have an advantage over high cost producers. This is something we need to achieve for the United Kingdom, for the benefit of industry and all other consumers. I can assure my noble friend Lord Mottistone that it is the Government's intention that United Kingdom energy prices should be as competitive as possible.

I believe that we have gone a long way. I must emphasise, however, that subsidisation of energy costs is no answer. I noticed here that the noble Lord, Lord Bruce, in a way called for subsidisation; whereas I did not think that the noble Lord, Lord Tanlaw, did so. Although I was not quite sure what his solution was, I believe that he called for a reorganisation of the electricity industry.

As other Administrations have found to their cost, subsidisation, sometimes euphemistically called price control, only breeds a false sense of security and inevitably leads in the longer run only to even higher prices and to the unpleasant necessity of coming to terms with reality. The primary aim of the Government in the energy sector is to set a framework which will ensure that the market operates with a minimum of distortion and that energy is produced and consumed efficiently. The fulcrum of economic efficiency in any market is, of course, the price, so it is essential that energy is priced on a realistic and economic basis.

The importance of market forces in the energy sector is not a phenomenon which has been created or developed by the Government, as it sometimes seems. As the events of the past decade have shown, it is an inescapable fact of life. Energy is largely, and increasingly, an internationally-traded product. Even if it were possible or economically sound to do so, the United Kingdom could not insulate itself from the effects of the market. We import gas and both import and export crude oil and refined petroleum products, all at world market prices. The price of coal is also determined by the prices of competing fuels, including fuel oil and coal imports. And, of course, the price of coal in turn affects the price of electricity. Subject to the need, therefore, for the energy utilities to cover their long-term costs of supply, the market mechanism should work so as to allow our energy prices to be as competitive as possible. And we believe that economic pricing which provides the right market signals will help us to reduce our dependence on oil and achieve the most economic balance of energy supply and demand. It should also ensure that large industrial consumers, whose demand results in lower unit costs of supply, should pay prices which reflect those lower costs.

Of course, with the significant exception of oil and oil products, available energy resources are largely concentrated in the hands of public sector monopolies, with the result that the influence of competition and free market forces is muted. The noble Lord, Lord Bruce, touched on this. Where possible, we have tried to open the energy sector up to greater competition. The Oil and Gas (Enterprise) Act 1982 brought to an end the virtual monopoly held by the British Gas Corporation over the purchase and sale of gas. Greater competition in the longer term in the supply of gas to large industrial users will mean a better deal for the customer.

A Bill is also currently before Parliament which would allow the private generation of electricity as a main business. This should encourage combined heat and power schemes by allowing the private sector to invest with greater confidence where economic projects exist, and open the electricity market to greater competition. In the past three years we have also commissioned independent scrutinies, by the Monopolies and Mergers Commission or by external consultants of the Central Electricity Generating Board, the British Gas Corporation and the National Coal Board and also one area electricity board.

In addition to these specific measures, we discuss energy prices with the nationalised industries on the basis that prices should be on an economic basis, reflecting market pressures where reasonably open markets exist, or supply costs in other cases. This is one of the important factors we take into account when agreeing financial targets and limits with those industries. The purpose of the approach which I have outlined is to ensure that the right conditions exist for energy prices to industry to be as competitive as possible.

I should like to say a few words about energy efficiency in industry. There is a good deal that industry can do itself to reduce energy costs. A report by the consultants Armitage Norton last year concluded that a large number of energy efficient investments were already cost effective. I hope that managers in industry will realise that those opportunities are there to be taken. Indeed, there are many firms which have made considerable progress in this area. This has been most encouraging. The report also concluded that realistic energy pricing and clear market signals were the most efficient way of securing efficient and rational energy use.

I said earlier that it was essential for British industry to maintain and improve its competitive position. Recent economic signs have indicated that good progress is being made: our balance of payments has been growing increasingly strong; British goods are becoming more competitive; inflation is well under control, and it is clear that the Government's policies are putting the economy back on a sound footing.

If I may take up one or two specific points which were made during the course of this short debate, my noble friend Lord Mottistone mentioned higher heavy fuel prices. As the two Neddy task force reports showed, differences between net oil product prices in the United Kingdom and those on the Continent can emerge because of the United Kingdom's distance from the Rotterdam spot market, and because price fluctuations are dampened by the predominantly contractual nature of the United Kingdom market. I take my noble friend Lord Boardman's point on this topic.

My noble friend Lord Mottistone also asked about horticultural heavy fuel oil being higher in cost here than in the Netherlands. My understanding is that the Dutch horticulturalists use mainly gas rather than fuel oil in greenhouse heating. The rest of the European Community countries, including the United Kingdom, use mainly fuel oil. The preferential gas tariff which the Dutch made available to horticulturalists will be phased out at the end of March this year. Since March 1980, the European Commission has allowed adaptation aid in other member states to help horticultural oil product users during this transition period. This aid has been paid in the United Kingdom to help British consumers. The action by the European Commission in the Dutch case was taken forward substantially at the encouragement of the United Kingdom Government.

The noble Lord, Lord Tanlaw, asked how much electricity at 90 pence per therm would be in pence per kilowatt hour. The answer is roughly 3 pence per kilowatt hour. The noble Lord asked why the CEGB had to pay average prices for NCB coal. The price that the CEGB pays is the result of direct commercial negotiations between the two boards. In general, this is no greater than the price that the CEGB could import the coal for, as I believe he suggests. He also asked about cheaper electricity in the paper industry. The British Paper and Board Industry Federation has participated fully in the comparative price works by the CBI to which my noble friend Lord Mottistone referred. We look forward now to seeing the new results of this work, which I believe will be coming out towards the end of the month. The noble Lord, Lord Tanlaw, referred to electricity prices in the Nordic countries and parts of North America. Consumers in those countries benefit from low cost electricity generated by hydropower or cheap strip mine coal. There is little, I am afraid, that we can do to compete with that.

I should say to the noble Lord, Lord Bruce, that financial targets are not instructions; they are agreed with the industries who recognise the need to operate as businesses. Just because they are in the public sector, they cannot abrogate financial responsibilities, as I am sure the noble Lord will agree. The noble Lord, Lord Tanlaw, asked about the CEGB and the statement that they provided of case and proof of evidence figures for the lifetime availability and load factor of Sizewell B. The Government agree with the CEGB view that the appropriate methods of appraising new power stations is to assess the costs against the total benefits to the system as a whole of building the station. This must take into account the new station's operating costs and the costs saved by the displacement of other more expensive plants. Because of different lifetime operating régimes, these system savings are not identical for nuclear and coal plant. Neither the CEGB nor the Government consider that analysis on the basis only of cost per unit produced is an appropriate method to assess new investment in power generation. In order not to disappoint the noble Lord too much, I understand that the type of figures that he is asking for may be coming out in the not too distant future.

My noble friend Lord Mottistone quoted from a letter from my noble friend Lord Drumalbyn calling for an accounting appraisal. I was pleased to hear the noble Lord, Lord Bruce, give a loud "hear, hear" to that suggestion. I shall of course take it on board. Before I close, I should like to say to my noble friend Lord Boardman that I much appreciated his wide-ranging and fascinating speech, which I thought went to the heart of this particular matter. I shall read it again tomorrow with great interest.

I reaffirm that the Government are determined that energy prices to British industry should be as competitive as possible, and competitive energy prices can be secured only by allowing market forces to operate freely and by improving competition and efficiency in the energy sector. The Government will do what they can to ensure that energy is produced as cheaply as possible and prices are set accordingly.

In concluding, I am happy that tonight, rather than saying that I will take this back for my Secretary of State to look at, I can say that I will take it back and look at it myself.

House adjourned at eight minutes past nine o'clock.