Electricity Charges: Effect on Exports (Hansard, 30 November 1987)

§ Lord Ezra
My Lords, I beg leave to ask the Question standing in my name on the Order Paper.

§ The Secretary of State for Trade and industry (Lord Young of Graffham)
My Lords, the proposed increase will add one-sixth of 1 per cent. to industry's costs. The impact on competitiveness will depend upon a variety of factors, including the movement of labour and other costs, many of which are under industry's own control.

§ Lord Ezra
My Lords, does the noble Lord not agree that, while British industry has done extremely well in recent months in increasing its exports, it now has many obstacles in its path; that interest rates in real terms are still higher than those in most of our competitor countries; that it is faced with a currency which is increasing in value every day and therefore making competition more difficult; and that, on top of that, the Government have chosen this very moment to add to electricity costs, which in the case of many leading export industries are very serious indeed?

§ Lord Young of Graffham
No, my Lords. I do not agree with the noble Lord, Lord Ezra. Indeed, our 806 exports depend in many instances upon non-price competitiveness—matters such as design, quality, delivery and after-sales service. The electricity supply industry has a current return on current cost assets of 3.75 per cent. for 1988–89 and 4.75 per cent. for 1989–90. This compares with an average real rate of return of 10 per cent. for all United Kingdom industrial and commercial companies in 1986.

§ The Earl of Lauderdale
My Lords, are we right in taking it that when my noble friend speaks of one-sixth of 1 per cent. as the on-cost of electricity to industry, that is an average taken over industry as a whole? If that is the case, does he not agree that in cases of capital intensive industries, such as chemicals and petrochemicals, the difference is very much greater?

§ Lord Young of Graffham
My Lords, it follows that in large parts of industry it will be much less than one-sixth of 1 per cent. It is true to say that even chemicals and textiles, the most intensive cost sectors, will have increases of less than 1 per cent. in 1988. Wages have been rising at about 3 per cent. over the rate of inflation for the past five years in manufacturing industry. I believe that we should look at both in perspective.

§ Lord Tordoff
My Lords, does the Minister accept that the chemical industry, in which I declare an interest, uses something like 18 per cent. of the total electricity, and that some of the major users of electricity find themselves being made totally uncompetitive with people on the Continent? Will he also accept that, in particular, the producers of French chlorine are buying electricity at something like half the price which the chemical industry in this country is paying? This surely cannot be to the benefit of an industry which has a £2 billion export surplus.

§ Lord Young of Graffham
My Lords, it is true that in narrow areas in the realm of industrial gases the cost of electricity is very high. It may well be that some Continental users have special price arrangements, as indeed we have in the industrial consumers' scheme, which gives discounts of up to 11 per cent., with an average of 6 per cent. across industry. But on average our power costs are about half those prevailing in Japan and lower than those in many countries of Europe.

§ Baroness Gardner of Parkes
My Lords, is the Minister aware that the regional electricity boards in this country have been able to offer some small reductions to their largest industrial consumers?

§ Lord Young of Graffham
Yes, my Lords. I am very grateful to my noble friend. We have seen reductions in power costs, electricity costs, of 15 per cent. in real terms over the past five years, and the proposed increase does little more than take back some of those reductions. Industry would be much more concerned if by the year 2000 we did not have an adequate supply of electricity. Surely it must be our first charge to see that this takes place.

§ Lord Shackleton
My Lords, can the noble Lord say what is the increase for the aluminium smelting industry, which above all is sensitive to this cost?

§ Lord Young of Graffham
My Lords, if the noble Lord cares to put down a Question on specific industries I shall be only too happy to answer.

§ Lord Taylor of Blackburn
My Lords, how much attention is paid to recommendations from consumer boards, which in the North-West in particular are saying that there is no need for any increase at all?

§ Lord Young of Graffham
My Lords, I am quite aware that consumer boards may well say that, although I should be interested to have evidence of such. Nevertheless, in order to meet the demand as we approach the year 2000 we have to invest some £30 billion at 1987 prices. A rate of return of 3¾ per cent. going to 4¾ per cent. is hardly an excessive rate of return and is necessary to ensure that we can begin to finance on any basis this very considerable investment programme.

§ Lord Barnett
My Lords, while I accept the points that the Minister has made, perhaps I may ask him whether he can tell us why these price increases did not start last year.

§ Lord Young of Graffham
My Lords, we have been waiting for some years for the results of planning inquiries in order to allow this investment programme to proceed. It is only now that the investment programme is in the process of proceeding. It is only now that the commercial return will be necessary.

§ Baroness Seear
My Lords, is it not true that the percentage profit that the noble Lord has given us is based on current cost accounting, whereas it is normal to do it on historical cost? What would be the figure for the electricity industry if it were not based on current cost accounting?

§ Lord Young of Graffham
My Lords, I am happy to assure the noble Baroness that it would be a great deal lower.

Lord Bruce of Donington
My Lords, is the noble Lord aware that his use of the profit return in the electricity industry by reference to current cost accounting will deceive no one? In point of fact in terms of historic cost the percentage achieved is somewhere in the region of 14 per cent., which is quite general at this time. Will the noble Lord give the House an assurance that his department's Press Notice No. 720 of 24th November has been sent to his right honourable friend the Secretary of State for Energy? That press notice revealed that the trade deficit for manufactured goods in the United Kingdom is running at some £9 billion per annum and that the industry cannot afford to have its prices made less competitive than those which already exist at present under the disability of quite inane exchange rate policies on the part of the Government.

§ Lord Young of Graffham
My Lords, first, I must apologise to the House and to the noble Baroness, Lady Seear. On historic cost accounting the return would be higher.
I point out to the noble Lord that recent estimates have shown that the balance of payments for this year will be in the range forecast by the Chancellor. It is the non-price competitiveness which determines in many instances the success of our exports. That will not be affected by an average increase of one-sixth of 1 per cent. in electricity costs.

§ Lord Cledwyn of Penrhos
My Lords, will the noble Lord confirm that the basic reason for increasing electricity costs is the Government's plan to privatise the electricity industry?

§ Lord Young of Graffham
No, my Lords. The basic reason for increasing electricity costs is to ensure that we get an adequate and commercial return out of which we can prepare to meet an investment of £30 billion which is needed by the end of the century to maintain continuity of electricity supplies.

§ The Earl of Lauderdale
My Lords, my noble friend has twice mentioned the total cost of £30 billion for this new investment. Are we to understand that that will be underwritten by the Government or, the industry having been privatised, will it fall on the private investors?

§ Lord Young of Graffham
My Lords, some of the investment which goes ahead now will of course fall within the period of public ownership. I hope that a very large bulk of the cost will be met by the private sector.

§ Lord Molloy
My Lords, will the noble Lord say whether the increases in electricity costs will also affect the domestic area? Will the Government endeavour to see that poor old-age pensioners and other people who could be put in difficulties by the increased charges will receive some assistance from the DHSS to meet the electricity increases which the Government now intend to impose?

§ Lord Young of Graffham
My Lords, I am sure the noble Lord will understand that a Question about the competitiveness of British industry's exports in the light of the increase of electricity charges to industry is a long way away from the DHSS and old-age pensioners.

§ Lord Denham
My Lords, we are going a little bit far on this particular Question. We have spent eight or nine minutes on it. It is the general agreement of the House that the average time should be five minutes per Question. Perhaps we may pass on to the next Question.