Electricity Privatisation Proposals

HL Deb 20 May 1988 vol 497 cc586-632

11.28 a.m.

Viscount Davidson rose to move, That this House takes note of the White Paper on privatising electricity—the Government's proposals for the privatisation of the electricity supply industry in England and Wales (Cmnd. 322).

The noble Viscount said: My Lords, I beg to move the Motion standing in my name on the Order Paper. Your Lordships will remember that when I repeated the Statement on the White Paper on 25th February I said that I would try to arrange a debate through the usual channels. I am happy to say that the usual channels were most co-operative, although unfortunately the only day available, for reasons which will be well understood by your Lordships, was a Friday. Nevertheless, I am sure that noble Lords will agree that a Friday is better than no day and I hope that the House will welcome this opportunity to debate the Government's proposals.

The privatisation of the electricity supply industry in England and Wales is an issue of great national importance. The United Kingdom energy market has been dominated by nationalised energy utilities since the Second World War—namely, coal, gas and electricity. The successful privatisation of British Gas proved that there is no reason at all why a successful energy utility, even with significant monopolistic parts of its business, should be run within the public rather than the private sector.

Our privatisation proposals will free the electricity supply industry to act as every industry should—commercially and without state interference. We have taken our decisions on the future structure of the industry. These were published at the end of February. But there remains a lot of detailed work to do in conjunction with the industry and other interested parties before legislation can be introduced. The legislation will build on the industry's strengths.

In bringing forward our proposals, we have already consulted widely, not only with the industry but with other interested parties. We have listened to many people and many views. We will continue to do so to ensure that we get the best possible deal for the industry's customers, employees and shareholders.

Our proposals have been designed to encourage the industry to grow. We are not in the business of transforming the electricity industry overnight. That would be neither possible nor desirable. We believe the new structure will preserve and enhance what is best about the industry. It will create a framework in which a modern competitive industry will develop. The 12 distribution companies will be free to find the cheapest sources of power for their customers. A new industry, moulded by and developing to meet the needs of its customers, will evolve.

Our proposals will introduce competition in the generation of electricity. They will give new rights to the customer. They will regulate the monopolies that remain. They will open up new opportunities for employees and allow the management to use its initiative.

At present the CEGB has a statutory obligation to supply and has an effective monopoly of power generation, and through its ownership of the national grid it controls access to the market for bulk supplies of electricity. At the time of nationalisation this provision was intended to secure a measure of security of supply by placing a final responsibility to provide supplies on the statutory monopoly generating corporation.

But it has meant that because of its need to be sure of generating enough electricity to meet demand, the CEGB has had the final say on the number and type of power stations needed; it has had to own and control the grid; and because of the nature of its obligation it has had to have the ability to recover the costs of meeting its obligation in full. Our proposals will introduce real competition into generation and allow all generators equitable access to the grid. This will put downward pressure on costs which will of course be to the consumer's good.

It is imperative that we introduce competition in the power stations in order to keep generating costs down. Parliament agreed to that in passing the Energy Act in 1983. That was meant to encourage competition in generation.

We can see that that has not been as effective as we intended because the Act left the CEGB in control as the dominant monopoly supplier and an owner of the bulk supply system. Our new proposals will work because, as I have said, that distorting monopoly will no longer exist. Of course companies can compete to build power stations more efficiently and of course they can also compete to operate them more efficiently.

The distribution companies will have a key role to play. They will be among the largest private sector companies in their regions. With about one to three million customers each, they will each have a strong and immediate local identity. And they will have a real incentive to get the best deal for their customers.

They will have the freedom to use their initiative. They will become a force for development in their local economies. They will become real independent companies nurturing local interests, not just the distributing branches for the CEGB's electricity.

In ending the CEGB's monopoly and removing its obligation to supply, the distribution companies will no longer be obliged to take all their electricity from one supplier. The distribution companies will own the grid and they will be able to bring new suppliers. on to the system. They will be able to shop around for the cheapest electricity. And they will certainly have plenty of choice.

The customer may not be able to have more than one switch; but the distribution companies can, and will, have more than one supplier. They will be able to contract for local sources of power supply into their own distribution networks. They will be able to contract for power from Scotland or France, from the two largest generating companies, or from new private generators. A framework will have been created in which a modern competitive industry can develop, supplied by diverse energy sources—coal, oil, nuclear, gas and renewables.

At present, independent generation accounts for some 6 per cent. of electricity produced in Britain. We hope to see a major expansion in this sector. Already a number of private sector consortia are developing major new generation proposals.

As I said in reply to a Question earlier today Thames Power has just been created to build a 1,000 MW gas fired station at Barking and Leicester Energy Ltd are pressing ahead with their 290 MW CHP plant. Both projects have been given consent by the Secretary of State for Energy to burn gas.

Security of supply is vital as there are no alternatives to electricity in many of its uses. We need diversity if we are to have secure supplies. Our commitment to nuclear is part of our strategy to maintain this all-important diversity, and hence the security of our nation's power supplies.

The obligation that will he placed on the distribution companies to contract for a specified minimum proportion of non-fossil fuelled generating capacity is not to ensure that the nuclear portion grows; that will be up to the market. It is simply to ensure that nuclear, along with other non-fossil fuels, continue to form part of a balanced portfolio. That proportion will be roughly equal to present levels.

I have heard the criticism that competition will be stifled by oppressive regulation. Our aim is quite the opposite. The regulatory regime is being designed to promote competition. There will be competition in the generation of electricity. Regulation will ensure that the benefits of that competition are passed on to the customer via his electricity bill.

There will be a clear and effective regulatory system and our White Paper sets out the principles on which it will be based. The emphasis will be on regulating the prices charged by the distribution companies. This will prevent monopoly profits being syphoned off by any part of the industry. The initial contracts put in place for supply from existing power stations will also have to be regulated. But the Government's guiding principle will be to promote competition, not strangle it.

The regulatory system will reinforce the distribution companies' incentives to seek the cheapest supplies. But in addition to this we will put competitive pressures on the distribution companies themselves. Large customers will be free to buy electricity direct from generators.

The regulatory system will ensure that they can use the grid and distribution systems to do this and will improve on the existing provisions in the 1983 Energy Act on common carriage. The distribution companies will not be allowed to develop local monopolies in generating electricity themselves. And, of course, the regulatory system will prevent them cross-subsidising their high street retail shops with income from the sale of electricity.

Real competition in generating electricity in power stations will be the best protection for the consumer because it will put downward pressure on three-quarters of the costs of electricity. Price regulation of the 12 distribution companies will put pressure on the remainder.

But customers will not just benefit from competition and regulation: they will have new rights as well. To this end we are developing a new concept in standards of service. Guaranteed levels of service will be set by the regulator, in consultation with the industry, which will ensure that in the areas of business where a monopoly is held, the customer can be sure of the quality of service which is his right. For example, the distribution companies could be required to meet all agreed appointments to carry out work on the customer's premises, for example to replace or move meters, to provide new supplies within a particular period, and so on. Where they fail to meet these levels of service, the customer will get compensation.

The system will have real teeth to snap down on poor service so that where the industry has a monopoly, the consumer will have an obvious right of redress.

We are therefore determined to ensure that the customer benefits from privatisation, not just in prices, but in quality of service. And I believe this scheme will be welcomed by the industry. It will not only help customers. It will give management valuable information on failures of service and an incentive to make improvements. It will be effective and it will work.

Arrangements will also be made to represent consumer interests in the new structure of the industry. The advantages of the existing consumer and consultative councils will be preserved. A code of practice on disconnections, approved by the regulator, will mean that customers are protected. Our aim is always to ensure that the customer benefits.

Employees too will be able to benefit from privatisation. They will have the right to acquire a direct stake in their industry. As with previous privatisations there will be attractive provisions to help them acquire shares. The negotiating and consultation machinery and pension rights of employees will be safeguarded.

The new structure of the industry will also provide wider career opportunities. More companies will enter the market; they will be looking for people with experience. And there will be fair competition for the highest positions in the industry. Boards will no longer be chosen by Ministers and filled with non-executives representing particular interests. They will be filled by those who demonstrate ability in the industry and elsewhere. Above all, the changes proposed will enable the industry's employees to provide a better service.

The majority of those employees work for the area boards and they are enthusiastic about the new structure. They are confident it will provide real benefits for their customers. The chairman of the Electricity Council, the head of the industry, supports our proposals. So too does the Electricity Consumers' Council.

Change is rarely welcomed and proposals for change are often taken as criticism. But that is not the case here. The Government have the highest regard for the industry and its employees. We are confident they will make a success of the new structure. It builds on their undoubted strengths.

The structure will preserve the integrity of the grid and the operation of power stations in merit order. The CEGB's nuclear resources will be preserved intact, ensuring continuity and high standards in managing the nuclear programme. As competition develops, there will be a developing market for those skilled in electricity generation.

I can assure your Lordships that the privatised industry will not cut corners on safety and environmental considerations. Whether the industry is in the public or private sector, it will still have to meet the same safety and environmental standards. In no way will private ownership reduce the high standards that the industry has to meet.

The United Kingdom has a wealth of energy resources and we are developing modern, efficient industries to utilise these valuable assets safely and responsibly. Privatisation of the electricity supply industry in England and Wales is another step towards achieving this goal. Our proposals will bring competition and choice, wider share ownership and new opportunities for employees and new rights for consumers.

Above all there will be commercial initiative where previously there was nothing but state controlled monopoly. There will be a better deal for both the industry and its customers, and for the UK. I commend the White Paper to the House.

Moved, That this House takes note of the White Paper on Privatising Electricity—The Government's proposals for the privatisation of the electricity supply industry in England and Wales (Cm. 322).—(Viscount Davidson.)

11.42 a.m.

Lord Cledwyn of Penrhos

My Lords, we are grateful to the noble Viscount for his introduction to this important debate. His objective is to persuade us that the Government are right in their intention to transfer the electricity industry from public to private ownership and that the consequences of such a transfer—a highly complicated operation, as the Secretary of State for Energy said in another place—will be wholly beneficial to the people of this country.

That is done in pursuance of the Government's so-called privatisation policy. We should be clear about one thing, not only in this House but as a nation. The Prime Minister and most of her colleagues are determined to abolish the mixed economy which has served this country well under successive governments since the end of the war. I fear that we are steadily and surely returning to the pre-war days of uncertainty and insecurity. In that confused economic climate, it is the less well-off in the community who always suffer.

We are assured by Ministers that privatisation means handing the industries back to the people. That is the broad justification which is advanced by them. However, I think that that is the most farcical argument of all. Does anyone really believe that a modest shareholding in the hands of a small percentage of the population gives the public a firm grasp on the destiny of the industry in question? I have no objection to holding shares. I believe in the mixed economy. But it is not the producer of the nation's wealth who makes money when great transfers take place. It is the financial manipulators and the Government in pursuance of policies which are dubious at times.

When we deal with great public services like electricity which affect every home, business and industry in the country, governments must be sure beyond doubt that their actions are beneficial to all the people of the country and not just to a sectional interest. I realise that Mr. Edward Heath is not popular with everyone in the Conservative Party at the moment. However, it would do well to heed the warnings contained in his address last Saturday when he said that the privatisation of natural resources was divisive and unpopular. He was not merely stating his own opinion; he was reflecting a view which is widely held throughout the country.

The central question in our debate is whether the people of this country will be better off as a result of privatising electricity. Will the industry be more efficient? Will it give a better service to the community and the consumer? And will the cost of electricity to the householder and to industry be at least as fair as it is at present?

I do not believe in legislating on issues such as this unless it is absolutely essential to do so. We have enough legislative problems on our hands without embarking on new and unnecessary Bills. The fact is that whatever the Government may say about their mandate in the election—and that was vague enough—there was, and is, no public demand for privatisation of electricity. Since the industry was taken into public ownership, it has been an acknowledged success. The Government have admitted that in the White Paper. Paragraph 5 of the introduction states: The electricity industry has a record of technical and professional excellence, acknowledged throughout the world. Its greatest assets are the people who work in it". That is a high tribute. However, to justify their position the Government say: What hampers the industry is its structure and its position in the public sector". There is no clear evidence in the White Paper and no clear evidence has been given in ministerial speeches that the industry is being significantly hampered by its structure and position. Those are generalisations without substance. We cannot build up a record of technical and professional excellence which the world admires if there is a serious deficiency in the structure.

The White Paper speaks in a vague way of accountability to shareholders and new customer rights. I am concerned about the customer; there is no doubt in my mind that so far as accountability is concerned, the consumer will be far worse off than he is now. It has been my experience that after privatisation, the customer, the local authorities and indeed Members of Parliament have found it far more difficult to make contact with management than was the case under public ownership. I should like to hear the comments of the noble Viscount on that point.

If the lines of communication between the consumer and the management of the industry are being weakened by privatisation, that is yet another reason for the Government not to proceed. Some may argue that that is a good thing, that the link should be broken, and that interference from Parliament and local authorities is an unnecessary nuisance. They may argue that the industries and the boards of directors should be allowed to get on with the job without Members of Parliament ringing them up and writing them letters.

However, electricity, gas, water and telecommunications are great and essential public services. It will be a bad day for Britain if they fall into the hands of remote and inaccessible managers whose eyes are mainly fixed on making a profit. I talked recently to a telephone engineer in North Wales. I asked him how things were going under the new dispensation. His reply was that under the previous system, managers had concentrated on the service; now they keep their eye on the profits. That was his immediate response.

I wish to return for a moment to the Government's criticism of the structure of the industry and their contention that if the structure is unwieldy or faulty in some way it should be reorganised. That could be done without privatisation. However, as I read the White Paper, the Government are not interfering drastically with structure. That is to be seen on pages 5, 6 and 7 of the White Paper. The 12 area boards and the national grid are being retained. However, the boards will he privatised.

We in Wales are deeply concerned about the management of the privatised boards. Who will own them? Who will be in charge? And what rights will be left to the people of Wales? Perhaps we shall have Sir Jeffrey Stirling, Mr. James Sherwood or some of the entrepreneurs of the noble Lord, Lord Joseph, coming to Wales to put things right. What a prospect, my Lords! We can see the sun rising in Wales every day under the aegis of Sir Jeffrey Stirling!

The Government make much of ending monopoly. We shall still have monopoly—private monopoly. Like most people I prefer public monopoly to private monopoly. It is far easier to investigate and scrutinise the affairs of a public monopoly than a private monopoly and therefore very much more in the public interest.

The White Paper is not clear about the possible functions—I mean the final functions—of the new regional companies. They could develop into monopolies of generation and distribution. They could launch into other enterprises distantly related or even unrelated to their primary function. They might, for example, decide to compete with the Orient Express!

We do not yet know enough about the so-called regulatory system to be able to place our confidence in it. The Electricity Consumers Council has said in its report that there will be no role for it after privatisation. The regulator will be all-powerful. There is not enough in the White Paper to fill one with confidence. The two major roles mentioned in paragraph 50, namely, to promote competition and safeguard the consumer are not necessarily compatible.

Furthermore, the abolition of the CEGB could well be a calamity. The board has been one of the chief reasons for the acclaimed success of the electricity industry. I am not personally an advocate of the centralisation of all power. But there is a strong argument, in view of the comparatively small size of this country and the need for stability of supply, for a central board. The CEGB has done its work competently and with its chairman deserves to be congratulated most warmly. For those reasons the dismantling of the CEGB in the manner proposed in the White Paper fills me with foreboding.

I should like to turn to the performance of the CEGB, the present system and the public view of it. My own opinion—for what it is worth—is that the system works well, as paragraph 5 confirms, and that the public are content with it. I noted that during his speech in another place on 10th March the right honourable gentleman the Secretary of State for Energy said: We have to introduce competition into the power stations to keep the costs down".—[Official Report, Commons, 10/3/88; col. 50.] The Minister is implying that the CEGB is inefficient in its operations. I should like the noble Viscount to comment on that, if he will, when he winds up the debate. Is that what the Government mean? If so, what inefficiencies can they point to? Is it inefficiency in manpower, in plant, or in machinery?

The truth is that people generally believe that they have enjoyed a secure and economic service under the present system. Lest there be any doubt about that, perhaps I may be allowed to quote some figures to demonstrate the efficiency and achievement of the CEGB. They will be the only figures that I quote in my speech. First, it is one of Britain's biggest industries—bigger than BP, bigger than British Gas—with net assets of £27 million. In 1986–87 its turnover was £8,094 million and its profits £772 million before interest. Secondly, the average price per unit in electricity fell in real terms for the fourth year running. It is now 3 per cent. lower than in 1958–59 despite a 34 per cent. increase in fossil fuel prices.

Since April 1983, the CEGB has saved £950 million in an attack on costs. Again in 1986–87 the thermal efficiency of CEGB power stations achieved a new high level of 35.08 per cent. compared with 27 per cent. 30 years ago. The productivity of the labour force has also trebled over the same period. It is by any standards a remarkable record as the Government admit in the White Paper. The typical consumer paid less per kilowatt hour for electricity than consumers in Japan, West Germany, Italy and most of the USA.

That is the organisation the Government are now proposing to tamper with, not in the public interest, not for greater efficiency, not to secure price stability but purely on grounds of ideology. It is a deplorable and indefensible policy. We have, therefore, a right to be concerned about the dangers of cost trimming under private ownership. If it happened it could have disastrous results as everyone here must agree. Any change which takes place must involve no reduction in safety or security of supply.

What is the test of efficiency in an industry? That is one of the questions we should ask in this debate. It is the ability of that industry to cope with a critical situation. How does the electricity industry stand up to that test? Has it ever let us down in a crisis since it was taken into public ownership in 1949?

A grim test did occur on 16th October last year when the worst storm on record took place. Many noble Lords in this House were affected by that great hurricane. It left a trail of havoc in southern and South-East England. Millions of people lost their electricity supply. Several national grid circuits were put out of action, including the two main circuits around London. Six power stations in the South-East including four supplying power at the time had to shut down. As the storm gathered momentum the CEGB engineers realised that they had a crisis on their hands which threatened the whole electricity system in England and Wales through a progressive collapse of the national grid. How did the CEGB cope?

In the event it controlled the situation brilliantly and succeeded in arresting the collapse of the system. It was a remarkable achievement. I understand that the operation, which was crucial in the national interest, was controlled and co-ordinated by the CEGB from the control centre not far from this House in Southwark. As I read the White Paper I wondered, and I had the right to wonder, what the consequences would have been if the CEGB had been broken up in the way the Government propose.

We are living in a world of unpredicted and unpredictable storms. Electricity is not just another commodity to play about with like baked beans or ice cream. The life of our community and its people, and our economy, depend on its efficient functioning. The Government have no right to play "ducks and drakes" with it.

There are several other aspects of the proposal which I should like to examine, but I know that my noble friends who are to speak have important points to make. My noble friend Lord Peston will deal specifically with competition when he winds up for the Opposition.

We are very concerned about the future of power stations generally, especially when we read almost daily about the planning of new private power stations. We shall need to know a good deal more about that. These are, in the public mind, probably the most sensitive of all planning proposals and it is essential that they should remain subject to the most stringent planning procedures. I would prefer nuclear power stations to be in the public sector and not the private sector.

I hope that the noble Viscount will give me an assurance when he replies that there is to be no change and certainly no relaxation in the relevant planning processes, and a further assurance that there is no intention to set aside environmental considerations. He will be aware that we in North Wales are deeply concerned about current and future plans for the Trawsfynydd and Wylfa nuclear power stations.

In conclusion, I wish to draw attention to one omission in the White Paper. The introduction deals with the history of the electricity supply industry since the late 19th century but no mention is made of the historic advance after the industry passed into public hands in 1949. Those were the years which revolutionised electricity generation and supply and which laid the foundation of the excellence referred to in paragraph 5 of the White Paper. It is a pity that Ministers have not chosen to pay a tribute to that achievement.

I remember the years before the war. In rural Wales there was no electricity to speak of; and after the war, when I was a parliamentary candidate and a county councillor, the villages of Anglesey and North Wales still lacked electricity. Indeed, they lacked piped water as well. When electricity came, I was invited to switch it on in many of the villages of Anglesey. I witnessed in the cottages the great transition from the oil lamp and candle to the electric bulb. They were thrilling days which would not have come when they did had it not been for the vision and determination of those who wished every community and every section of society to share the services that only a few had enjoyed before. It would not have happened without public ownership—which, under these proposals, is to disappear.

It is against that background and in that spirit that we view the White Paper with apprehension and doubt.

12 noon

Lord Mayhew

My Lords, in November last in this House during his masterly survey of the privatisation proposals of the Government, my noble friend Lord Ezra made a prediction. He foretold that when the Government's proposals for the electricity supply industry were published, in practice they would not provide effectively for competition. Had my noble friend not been unavoidably absent today—an absence which is keenly regretted—he might claim to have been a true prophet. I and my noble friend support most warmly the principles of breaking up monopolies, increasing competition and redressing the balance of power in favour of consumers, but we are not convinced that those principles will be put into effect by the proposals put forward by the Government.

The White Paper gives the strong impression that the Government did not begin by asking the questions: What are the actual problems? Where exactly are things going wrong? What are the simplest and most practical remedies? Instead the Government seem to have started by asking: How can we apply to the electricity supply industry the philosophy of the British Conservative Party? That is the impression that their approach to the problem has given to the country and both Houses of Parliament.

The noble Lord, Lord Cledwyn, effectively quoted the words of Mr. Heath, who said that privatisation is divisive and is rejected by the community. A little research would probably uncover Mr. Heath also saying that nationalisation is divisive and rejected by the community.

I must confess that once I believed that the problems of British industry could be solved by the common ownership of the means of production, distribution and exchange. But I was only a lad at the time. It surprises me to find that same doctrinaire approach to the problems of industry from persons of mature years. That happens both on the Right and on the Left of politics and I and my noble friends reject such an approach.

Exactly why can one expect these proposals to produce competition, a better service and lower prices for the consumer? The noble Viscount said that they would produce competition between generators and if that were so they would of course be warmly welcomed. If electricity generation were to be opened up to a number of firms that operate on equal terms, which is the recommendation of the Consumer Council, it might well produce competition and it would be very welcome even though in the circumstances, owing to the nature of industry, competition would be very difficult to achieve.

I should like to quote some words from the report of the Consumer Council: Even where there is the maximum potential for getting different generating companies to compete to supply the market, that market will have to be regulated at least in a major part by some form of explicit economic regulation. Competition on its own will not be sufficient". According to the Consumer Council, even if there were a proper opening-up of generation, competition would not by any means be enough.

It may not be going too far to describe the Government's proposals as replacing a public monopoly with a privately owned duopoly. We are not far from that. Of course there will be private companies offering the service of electricity generation but the two big brothers that the Government propose to set up will dominate the whole of the supply. They will need long-term contracts in order to plan for the future. In practice they will monopolise nuclear power generation. What will be left for the smaller companies to which the Government make such copious reference? Faced with the big two who will carry the bulk of the basic load and the greater part of nuclear generation, they will not have much of a look-in. Maybe if supplies run short they will have the chance to make up the shortfall, but as the White Paper and the statements of Ministers have indicated, the prospects are that there will not be genuine competition even on the generating side.

Even though there were to be competition on the generating side, owing to the special circumstances of the industry it would not necessarily mean that this would reduce the costs. There is bound to be an extra excess capacity if there is competition. I was very struck by the comment that came from the Electrical Power Engineers Association: For there to be real competition there will have to be significant excess capacity. This will have to be rather greater than the 22 per cent. spare capacity now built into the system … There will be a straightforward cost burden to the system which the consumer will have to bear". I should like the noble Viscount, or whichever Minister replies to this debate, to address himself to that very important point which has not received very much attention so far as I can see.

One cannot look for competition among the distributors either. The noble Viscount mentioned the solid point that there may indeed be competition at the boundaries and that would be very helpful and welcome. However, the Government also have repeatedly acknowledged that, apart from such competition at the boundaries, distribution is bound to be a natural monopoly. Therefore the interests of the consumer will be looked after by the regulator. We have not been given any details about how that will be done. We have simply been told dogmatically that there will be a regulator to protect the consumer, to avoid the imposition of monopoly prices and so on. We should like to know a great deal more about that matter because it is a very complicated and difficult question. In fact there is a lack of information on very important matters over the whole range of the proposals.

Let us consider the evidence given to the Energy Committee and the supplementary information volunteered to that committee by the Department of Energy. The following are one or two of the questions put to the Department of Energy and the Government's answers: 'By what criteria will the Director General of Electricity Supply judge whether or not the companies are promoting the improved efficiency of electricity energy use with sufficient vigour?'—'The scope for possible roles for the Regulator and the Distribution Companies in this area has yet to be decided'. 'Which parts of the market would you consider it appropriate to exclude from price control?'—'This is still under consideration'. 'Why might it not be feasible to have the same regulatory formula for all 12 distribution companies?'—`This is still under consideration'. 'Do you plan to hand over to the two generation companies … the sites owned … by the CEGBT—'This is a matter for discussion with the industry'. 'What is the current state of thinking about the future of (a) research and development and (b) matters like advertising and industrial relations?'—'We are discussing these important questions with the industry'". On environment, I noticed that the noble Viscount in a single give-away, throw-away sentence brought in the word "environmental". He said that the Government would take steps to see that environmental issues were properly handled—or reassuring words to that effect. However, in the whole of the White Paper there is no mention of the environment. How will the environment benefit from these proposals? Who is responsible? Are the Government or is industry responsible? I am told that the electricity supply industry produces more than one half of the acid emissions for the whole of the United Kingdom and most of the nuclear waste. Who is responsible for this vast problem? Who will pay for desulphurisation equipment? It will be these new generating companies, we are told. Will they be required to fit denuclearisation controls? Surely we should at least be told about this. The Government seem not to have considered it.

In conclusion all this confirms what I was saying at the beginning. The overall impression we have of these proposals is that the decision to privatise the electricity supply industry was taken because the Conservative Party believes in the principle of privatisation, and analyses of the problems, the needs of the industry and the interests of the consumer and the environment have come afterwards. In some cases the analyses have not been completed; in some cases they have not even begun.

12.12 p.m.

Viscount Hanworth

My Lords, I do not wish to spend long discussing the Government's overall policy on privatisation but rather to point out where it is likely to fail. However I must again repeat that the six principles in the White Paper are nothing more than a political statement and a pious hope without any foundation for their realistion.

It is quite clear and confirmed by what the Minister said in another place that the Government have moved ahead without considering the side effects of their action or how greater efficiency and lower costs for electricity can arise. They seem to think that competition is bound to give this result. The major flaw in this argument is that only very limited competition is possible in this industry.

I suggest that the Government's chief reasons for privatisation have not been declared and that they are these: the money which the sale of the assets will provide and the favourable effect on the PSBR if new power stations can be financed from the private sector; that it will relieve the Government of the political difficulty of giving free choice to the power stations to buy coal from overseas; and, that they hope it may improve the security of supply by decreasing the power of the unions. But they now have moderate sensible unions in the industry, and the change may well make the situation less stable.

Before criticising the Government's proposals in detail, I should like to make it clear that I see nothing in principle against new privately owned generating stations. Most certainly, smaller generating stations could be economic, in particular if they could also develop combined heat and power (CHP) schemes in some urban areas. I am, however, very doubtful about the private financing of large power stations.

Before the City will invest, there must be a guarantee that nearly all the power generated will he taken by the grid for the lifetime of the station—nearly half a century—and it could well be that such a guarantee would not provide the most economic electricity. There is a practical limit to how far power can be sent through the grid because of the destabilising effect due to the inductance of the line producing a low power factor. The inductive loss in sending all the power from a 2,000 megawatt station 200 miles could be 10 per cent. or more of the station's output, even in a dedicated six-times-four quad line, which is the absolute maximum for existing pylons. Even then expensive special equipment is required to prevent an incident such as, for example, the recent power failure in Tokyo. Such inductive losses completely swamp the marginal cost advantages between power stations and the choice between power stations therefore depends more upon the capacity compensation of the grid than upon the performance of the power station. All this is in addition to the well known (and more easily understood) resistive loss, which might be 4 per cent. or more in this case. Moreover, the siting of large power stations is governed by environmental and other technical considerations. I conclude that real competition is a chimera.

Turning to the area boards, I cannot see how there can be any real element of competition between them after privatisation. In this case the market is a captive one, because electricity is essential to all of us. To prevent excessively high tariffs, the regulatory authority will have to intervene and make a Solomon's judgment taking into account many extraneous factors and whether money is being saved at the expense of long-term commitments. Inevitably tariffs will vary greatly over the country and will penalise many consumers. With the necessary degree of regulation, the situation becomes equivalent to that of a Marxist economy.

I understand that some boards are delighted to be free of Big Brother, the CEGB, and intend to diversify into all sorts of irrelevant activities. Is this appropriate? I thought that we now took a more balanced view on the merits of diversification.

The Government propose to make each area board responsible for the security of its supplies, but with the generating capacity owned and operated by someone else. But how can the generating companies obtain planning permission for a new generating station if required? Surely a large economical station must be planned and sited on a national basis, not an area basis, if it is to be as useful and economic as possible.

I find it hard to imagine how the board could be responsible for running the grid. Each board will have its own axe to grind and any debatable decision would at the very best be the lowest common denominator in order to reach agreement. In my view the grid must be controlled by an independent, non profit-making company, perhaps jointly owned by the generating companies, the distribution companies, with a controlling interest held by the Government, who could appoint the chairman. If not, it is likely that considerations will prevail which are unconnected with bringing stations in in order of their merit efficiency, and thus of cost to the consumer.

I am gravely concerned about what will happen to our research facilities and their staff. Most certainly private enterprise will not be sufficiently concerned with the necessary long-term research, for example on fast reactors. Compulsory redundancy may be an unfortunate necessity in unprofitable industries; it should not be accepted in these quite different circumstances. Can the Government give an assurance on this matter and give protection to the existing terms and conditions of service, including pensions, for current employees? I am particularly concerned with the generating and construction division of the CEGB at Barnwood, Gloucestershire, as it cannot just be reproduced in industry. We can well remember what happened to the three consortia in the Dungeness power stations. One cannot suddenly move a lot of people from where they are as a joint team into industry.

If we are concerned, as we ought to be because of acid rain and the possibly devastating greenhouse effect, we must move towards non-polluting energy generating and energy saving. Three obvious solutions are tidal power, combined heat and power for use in large conurbations, and insulation and solar gain from well-built houses. None of these will get off the ground without government help. Surely the Government ought to be willing to use some of the capital gained from privatising the electricity supply industry for this purpose. It must be emphasised that none of the other renewable sources, with possible exception of wind turbines (if they are environmentally acceptable) can supply more than a very small fraction of our energy needs.

Finally and regretfully, I must end by saying that this is an example (the poll tax is another) of a government who gained at the election just 40 per cent. of the electorate and are now pushing forward regardless on their manifesto. This manifesto was problably disagreed in detail by many of their supporters. It is not a mandate, meaning a demand, and it is political rubbish to say so. Having been a Conservative supporter years ago, I liked to think that these dogmatic policies were confined to the extreme elements in the Labour Party. I have recently been very badly disillusioned. Although there may be areas where improved efficiency might be possible overall, any benefit to consumers as a whole is at the very best a gamble and can probably never justify the trauma and the disruption of a reasonably efficient industry. Let us not forget that electricity prices have already been raised by 9 per cent. with another 6 per cent. expected; largely, even if not entirely, to make possible selling off the national assets.

I do not believe in overstating a case, but as a parting and unkind shot let me say that were it not for the suggested motivation of the Government which I gave at the start of my speech, they could be condemned as dogmatic fools, but I think that on balance knaves might be a more appropriate epithet.

12.24 p.m.

Viscount Hood

My Lords, may I start with an apology? I have a long standing engagement in the West Country and I may not therefore be able to stay to the end of the debate.

I am a supporter of privatisation, obviously in the best possible manner. I am a strong supporter of the nuclear policy. I agree with the noble Viscount, Lord Hanworth, about the likely contribution from renewable sources to the coming generation of power stations, which in my judgment is negligible. It would be folly to place total reliance on fossil fuels, notably coal. I wholly support the new generating programme developed by the CEGB and adopted in the White Paper. The problem there is not so much privatisation or no privatisation; it is the ability to get planning permission which seems to be increasingly difficult in the case of nuclear power and equally coal.

I have two points and a comment to make. In the first place, from the standpoint of the consumer the assurance of the availability of power is the most important thing. This is the responsibility presently held by the CEGB. I believe all would agree that it has carried out its duty with considerable success. In England and Wales there is no notable or excessive surplus of generating capacity. Yet that excess, with flexibility, dealt with the evident crisis of the coal strike without the lights going out.

As I understand it, the proposal is that this responsibility shall be transferred to the 12 area companies jointly and severally. Jointly and severally is a difficult concept in itself. It is in fact the case for the Channel Tunnel contractors; and I am told they are not entirely comfortable in that respect. However, that is a five-year building job while responsibility for the availability of power is indefinite. How it should be enforced I do not know, and I certainly wonder whether a responsibility held by an entity owning the generating capacity which meets the commitment is as well held by 12 separate entities, none at the outset having any generating capacity itself. The companies will have to contract it and ensure that somebody else will produce it, be it a private entity or one of the two generating companies proposed in the White Paper.

There is a further problem. The cash flow, which is very substantial, from the CEGB once the privatisation has been completed—and that may be some years forward—will not be tied to the building of the power stations which this country will require. Indeed if the two generating companies as proposed in the White Paper are totally private companies, their managements may consider that the cash flow should be put into totally different kinds of businesses. It would be interesting to hear the Minister's comment on that. The problem is very large. The cash flow generated from the existing stations would be helpful to produce new stations, as has been the case in the past. I feel therefore that the security of power, which I look upon as essential, will not be as secure under the new arrangements as it is at present. I shall be interested to hear the Minster's comments.

My second point relates to finance. My right honourable friend the Secretary of State quoted a figure of £45 billion in the debate in another place. This presumably includes a reasonable going concern value for the existing assets to which must be added an estimation of the cost of the new programme. That is a very large amount of money. We read of investors' interest, and no doubt there is interest. When I was in that line of business I realised that any hanker or investor was interested in a new piece of business; and this is a very large piece of business.

When it comes to analysing in detail the problems of the investment, that can be another matter. This is a new investment in the United Kingdom and it is difficult to find an adequate comparison. To the extent that the United States is a valid comparison and there are similarities, it is not particularly encouraging. The major utilities, which are well-established and substantial companies, sell in the stock market to give a dividend yield of 6 per cent. to 10 per cent. They sell on a price-earnings ratio of about six to 10 times. It follows that new financing in the United States is difficult and sometimes impossible.

I conclude that, given the size and difficulty of the financial operation, it must take time and be done in stages. Privatisation will be piece-meal—I believe that it must be—leading either to some entities being privatised and, over a long period of time, others not being; or to their being partly privatised and partly held by government. In my judgment neither situation is a particularly happy one.

I regret that the structure which has been adopted by the Government is not that which they have adopted in Scotland. There, the distributing companies, of which there are two, will own the generating capacity. They do so now and that is being perpetuated. The nuclear stations will be jointly owned by the two companies. I believe that if the 12 distributors were to own the CEGB as a whole, some of the problems which I see—and which some other noble Lords see—would be reduced. They would be independent companies. There would be rivalry—it is not really competition—leading, one hopes, to reduced prices. Each of them would own a share in the CEGB which would remain unbroken. That would go some way towards solving the problems of research and development. It would overcome the problem of certainty and assurance of power and it might simplify the financial operation. If that were to be done, it would then be possible to privatise in the manner that was used to privatise the steel industry in the 1950s and early 1960s. It was one company after another, using the experience of the first to assist in the second and so on.

I conclude on those comments. I have no doubt there are good reasons, which I do not see, why some such structure cannot be adopted. It will be interesting to hear the views of the Minister.

12.34 p.m.

Lord Mulley

My Lords, I fully endorse the objections to the proposal to privatise electricity as they were put forward by my noble friend Lord Cledwyn of Penrhos, with his usual eloquence and clarity. I shall not therefore labour the point by trying to say the same thing less well.

We are reminded of a particular objection through the contribution of the noble Viscount, Lord Hood. In it he stressed the nuclear element with which we must deal. The importance of the nuclear industry is an additional reason why I am not happy for electricity to go out of public control and into the private sector.

I have no doctrinaire views about public and private ownership. It is now broadly agreed that the old fashioned Morrisonian-type of nationalised industries have not been an unqualified success. I certainly support the pursuit of different forms of public accountability and worker participation. Having had earlier contact with the National Freight Corporation, I now believe that to be an outstanding success of workers having responsibility in the shareholding of their workplace.

Equally I must condemn the doctrinaire view of the present Government in that they must privatise everything in sight. In the same way, I understand that the bureaucrats in Brussels believe that they must harmonise everything in sight. The noble Lord, Lord Mayhew, confessed to some youthful errors of judgment. I remember making speeches years ago saying that the one thing I was certain would never be privatised was the sewers. They are currently on the agenda. Having regard to the enormous increases in water charges one can well see that it could be a profitable operation.

I believe the following to be an important principle. Having regard to the nature of public utilities, and for reasons of efficiency, surely no one will suggest that there should be two lots of electricity wires or two lots of gas pipes all over the country. Therefore public utilities should be public and not private monopolies. That is all that has happened in the case of British Telecom. It is doing its best to keep out the substantial competition which I hope will come from Mercury. The only difference one sees is the much higher salaries paid to top managers and directors in British Telecom, British Gas and the other industries that have already been privatised. I understand that the large industrial consumers of gas are already concerned about the high prices they are having to pay. I do not believe that the complex machinery that is devised to protect the consumer is in any sense a substitute for accountability, through Ministers, to Parliament. When the legislation comes before the House we shall need to scrutinise with great care the proposals that are put forward to safeguard the electricity interests.

There is a thread which runs through the privatisation document, and to some extent the speech made this morning by the noble Viscount. It is that somehow the interest of consumers and shareholders is the same. It is only the same in the limited sense that presumably most shareholders will also be consumers of electricity. However, basically their interests are opposed. The higher the profit margins the higher the cost to consumers and the greater the dividends to shareholders. The suggestion that this is a way to safeguard the interests of the consumers is totally false.

One section of the privatisation proposals caused me particular concern and interest. It is paragraph 19 which deals with government intervention. It does not make clear the fact that there is no need for the Government to be unhelpful to the industry. That is purely the choice of the Government. There is no reference in the document to the enormous precept or levy made on the industry each year by the Treasury. I understand that the estimated figure for the current year is £1,046 million. That is over £1 billion from electricity consumers to the Treasury. In the next year, 1989–90, I understand that figure could be as much as £1,131 million. All this is at a time when the Treasury is so full of cash that it is rumoured that it is fitting draught-proof doors to make sure that none of it is blown away.

The electricity industry has suffered from interference by governments particularly in that it has been obliged or encouraged, unlike any other industry, to recoup its total capital expenditure out of revenue and the charges levied on the consumers of electricity. The consequence is that the industry is virtually debt free. On inquiry I understand that the present debts of the industry are £1,597 million as at March of this year and that it is proposed that it will be totally debt free by the end of the next financial year—1989–90, one year before the proposed privatisation is due to take place.

Therefore, the enormous assets of both generation and distribution, which really belong to the consumers who have been paying for them over the years, will be sold off at an enormous profit for the benefit of the Treasury. We should also ponder the consequences of this enormous levy which is placed on the industry and, in addition, the writing-off of capital. For example, I understand that in 1983–84, £550 million of debts were paid off, in 1985–86, £492 million, in 1986–87, £1,334 million and in the last year, £1,277 million. Therefore it will be totally free of debt.

The consequences are reflected in the higher prices, to which the noble Viscount, Lord Hanworth, referred, which hit the poorer sections of the community particularly hard, and that is reinforced in some cases by the very harsh practices in cutting off supplies. In addition, it imposes a very large charge on industry which cripples its competitive capability both at home and abroad. It is certainly an inflationary factor. It surprises me, because I accept the very sincere and genuine belief of the Prime Minister in trying to prevent inflation, that she sits by and allows over £1 billion to be taken away from electricity consumers both in terms of the individual and industry, and that can only have a very bad inflationary effect. That probably does as much to damage our industry as the increased value of the pound. I hope that that could be looked at again.

Of course my preference would be for the industry to be left as it is. On the other hand, if the doctrinaire rules so determine that it has to be privatised I should have preferred it to be, like the gas industry, privatised as one entity and greater powers given to the Electricity Council comparable to those exercised by the Gas Board. However, as I have been very critical of the Government, if it has to be privatised I commend the right honourable Cecil Parkinson, the Secretary of State, for resisting blandishments and heavy lobbying by the CEGB. As we have seen from the document, he has given priority to the interests of consumers rather than those in the generating industry while retaining distribution intact and breaking the generation monopoly. In that respect I realise that I differ—and that is a rare occurrence—from my noble friend Lord Cledwyn, but I fully endorse his appeal that even at this late stage the Government should think again about these proposals.

12.45 p.m.

Viscount Weir

My Lords, I must first declare my interest in the subject of this debate as chairman of one company which supplies power equipment and as director of another. I also have a strong sentimental interest since my grandfather was the chairman of the committee that was originally responsible for introducing the grid. Of course that was long ago in the days when governments which were confronted with complex industrial problems like this still used to seek and take the advice of leading industrialists and engineers.

My first reaction to the White Paper was that it was the wrong colour. It might possibly have served as a Green Paper from which, through consultation, sensible and considered proposals could have emerged. However, as a White Paper presumably intended to set out clearly the Government's legislative intentions for an industry of absolute importance to everyone in the country and one where very complex issues are involved, it is thin and inadequate.

I do not agree that these proposals have taken the many good features of the existing electricity industry and then built sensibly and objectively on them to give us a better, more cost-efficient and privately owned industry with a structure in whose future effectiveness we could have had a strong level of certainty and confidence. Instead, the starting point looks to me more like a simplistic and almost ideological commitment to competition.

I strongly believe in competition even to the point that I look at my own industrial competitors, who are mainly foreign, as enemies in a war, for they are to be defeated. However, there are industries where simple concepts of competition are not necessarily either natural or essential and are certainly most difficult to apply. Indeed, it is possible, and it looks as if the White Paper has managed to achieve this by an insistence on artificial competition, to cause defects and confusion which outweigh the natural benefits of competition.

Therefore, the result here has been, in structural engineering terms, much intellectual stress and strain to fit a distorted brand of competition into a rickety structure and has ended up full of omissions and contradictions. However, on a Friday, where I feel that brevity should rightly command some premium, I shall not weary your Lordships with any blow-by-blow analysis of the White Paper but try to highlight a few of these deficiencies.

Let us begin with the operation of the grid. I find it very difficult to understand the apparent contradiction between Section 26, which seems to imply that the grid will be run on a day-to-day basis along the lines of today's system of call-up on merit order, and Section 41, which implies long-term contractual arrangements. It is unclear and should not be so because it is a very fundamental issue.

Let us next take security of supply now that the obligation to supply is to be removed from the generator. I cannot find anything about how the availability of stand-by capacity which at present is simply arranged centrally is to be handled in future. This is also important and I do not believe it is good enough just to leave it out.

Let us take coal. Although the performance of that industry has been fairly awful for a long time, it now seems that from a combination of investment, better management and a more realistic approach from the workforce we could be looking at pretty competitive UK coal prices in a few years. However, if we now allow a rapid free-for-all in importing coal—and my right honourable friend the Secretary of State has specifically said he will not protect domestic coal—I worry that our domestic mining industry will not have the time to get its act together before losing a good part of its market to imports. In that case, good new mining developments might not take place and we could be stuck nationally with a heavy drain on our balance of payments. Yet again, nowhere in the White Paper are the balance of payments implications mentioned.

I am also worried about both the permanence and the reality of the supposed cheap supply of foreign coal for power plants. Of course the price is low today in terms of sterling, but our currency is strong, freight rates are low and the British electricity industry is not in the market as a massive purchaser. Indeed, I am told that even today there is some uncertainty in the Far East among utilities which had thought that they had long-term firm commitments at very low prices for Australian coal. The fact is that the coal and electricity industries are surely so closely tied together that any policy statement on the one which omits to cover the other is of necessity seriously deficient.

Turning to another subject, the CEGB currently spends a great deal on research and development. In the equipment industry we benefit from that and we can, for example, carry out development work otherwise quite beyond our own resources. It is not a one-way street. In return the CEGB enjoys better equipment. In any case, in national terms its funding is repaid many times over by export sales. The White Paper says nothing about future arrangements, and that omission is wrong.

As regards nuclear power, I greatly welcome the commitment on strategic energy grounds that a given percentage of power will in future come from that source. However, I find much greater difficulty in the implication, if I have understood correctly, that power imported from France will count as part of such nuclear supply. I greatly dislike the balance of payments consequences of that.

In discussing nuclear power, there should be a clear policy also set out for the future of the United Kingdom Atomic Energy Authority, British Nuclear Fuels and even the National Nuclear Corporation. Just to take British Nuclear Fuels, here we have a major organisation which not long ago stated that its investment plans were to spend an average of over £1 million per day over the next 10 years. I recently visited Sellafield, and I commend all noble Lords who have not yet visited it to do so and to see for themselves just what this immense commitment involves. It is astonishing that the White Paper does not properly cover that part of the industry either.

I will say nothing much about gas as we have had a Question about it already today. However, I too deprecate the burning of a premium fuel which is a finite resource on a large scale for power generation. Such a policy is prodigal.

There is not much detail given on the actual mechanics of privatisation of the generating companies. I simply ask: if we are to sell them off cheaply so that the public can have their now accustomed nice little profit on the shares, has it been considered how that might affect the newcomer into the generating industry who would presumably have to compete with an undervalued and established competition in a capital intensive industry? I would not dare to suggest of course that the recent rather arbitrary increase in electricity prices may happily have diminshed this apparent difficulty.

As for Scotland, as a Scot I much regret that we are not today also discussing the proposals for its electricity industry. I only remark that they look somewhat worse than those for England and Wales. They are likely to produce a solution which is more costly than the present arrangements for the North and one that is thoroughly artificial. Like the noble Lord, Lord Mayhew, I also regret that an excellent opportunity is missed in the White Paper of setting down tough and effective conditions on air pollution control in the future, particularly for new entrants into the generating industry.

I leave to the end my greatest concern about the White Paper; that is, the confusion and uncertainty that it may cause for the power station construction programme. The least the industry deserves, both the generating side and the equipment suppliers, is an unequivocal statement that there will not be delays. The White Paper does not give these assurances but I very much hope that we can hear them today.

12.56 p.m.

Lord Kirkhill

My Lords, I take part in the debate this morning, albeit briefly, to discuss not the White Paper on the electricity supply industry of England and Wales, but to make some mention of the situation which is beginning to develop in Scotland. I make no apology for doing so because I think that the noble Viscount, Lord Davidson, will agree, if I remind him, that we had an informal discussion on an earlier energy debate in the House when it was thought that there might be a possibility to discuss the Scottish situation. However, events of a somewhat more serious nature have developed in the House over the past few weeks; therefore, I take a measure of licence this morning and I hope I do not weary the House if, in being reasonably brief, I speak about the Scottish scene.

Of course, I am opposed to the privatisation proposals because I consider them a bizarre example of extreme political partisanship which is hardly justified by the economic events which have occurred in the electricity supply industry over the past two generations. Indeed, one could reasonably claim that unit costs in the electricity supply industry throughout Great Britain stand up to the closest comparison with other forms of energy. Having said that, I am also a political realist and I recognise that the Government have a measure of authority to introduce their proposals. To that extent, the proposal by the Secretary of State for Scotland that the South of Scotland Electricity Board and the North of Scotland Hydro-Electricity Board are to be privatised as separate entities is one that I tend to welcome. Judging from what the noble Viscount, Lord Weir, said a moment ago, he would perhaps not be with me on that; but I tend to feel that that is the correct decision. It certainly mirrors an earlier decision by the then Secretary of State for Scotland who rejected the McKenzie proposals in 1961 for very much the same reasons as the present Secretary of State has indicted as being his reasons for rejecting a merged board; that is, that the social clause under which the hydro-board has continued to operate since its inception is a very important factor in the life of the economy of North Scotland. The hydro-board covers about 25 per cent. of Britain's land mass and it caters for approximately 2 per cent. of Britain's consumers. However, its social clause demands that it takes cable—which it can now do, of course—to the islands and that it burns expensive diesel in the islands. Incidentally, there are 50 inhabited islands which the hydro-board serves. It has taken electricity to 99.99 per cent. of all of the possible consumers who could have been linked up. However, it has been an expensive business and it has only been made possible of achievement because of the common tariff which exists. In other words, the consumers in the mainland areas of the hydro-board area have subsidised the electricity costs in the more remote areas.

As the noble Lord, Lord Cledwyn of Penrhos, said earlier in his quite outstanding speech, the bringing of electricity to these remote communities has enabled community life to be sustained and to be improved. As regards the hydro-board area, it has clearly helped the generation of such new industry as can be reasonably developed in these more remote areas.

Regarding the South of Scotland Electricity Board, it is a huge enterprise with a huge base of nuclear power. It is going into the private sector in a very competitive position because of write-offs. Torness will be on stream, and the board will sell much of its electricity south of the Border at very competitive prices. In those circumstances, I do not worry very much about it in the longer term; but I have to express some consideration for the future well-being of the hydro-board. At present the board has almost all of the hydro-generation plant within its area. The South of Scotland Electricity Board has one or two very small plants.

The Secretary of State for Scotland said that some modest rearrangement of generation plant may be necessary so that the boards may have a robust and commercial instinct. I give at the very least this warning and I hope that the noble Viscount will let those concerned know that some of us are also worried. They hydro-board must be allowed to retain its hydro-plant. If it cannot do that, it cannot produce the low-cost electricity which it needs so that the more remote communities and the island communities may continue to enjoy the benefit of a common tariff.

A private company entering this field will be very tempted to raise tariffs at the expensive end, and there is very little doubt about that. That is something which, in my view, must be very seriously guarded against. That is the main point I wish to make. I should have declared an interest earlier in that at one time, and for a period of years, I was chairman of the hydro-board. I think my remarks should be placed in the public domain because I have a real concern for the longer term.

1.4 p.m.

The Earl of Lauderdale

My Lords, after the devastating speech by my noble friend Lord Weir, I wonder whether there is very much else to be said. Nonetheless, I shall do what I can. I begin by congratulating the Government on the wonderful ingenuity with which they have navigated between the Scylla of natural monopoly and the Charybdis of limitless fragmentation. This is a very white White Paper—indeed it has too many blanks. If I were to liken it to anything else it would be to the curate's egg, which was "good in parts".

The good parts can be spotted fairly easily. Big industrial consumers should have a better chance of good, bulk contracts; small local private enterprise generators are likely to have better access to the market. This should all work out better for on-shore gas and oil and eventually even for coal producers. It should certainly be better for small, combined heat and power schemes and possibly for the development of biomass and wind as supply sources.

To me the first worrisome part is that the upset can only delay achievement of the admitted need for 13 new gigawatts of capacity by the end of the century. It is quite true that a sentence of death concentrates the mind and it has obviously concentrated the mind of the CEGB to the extent that it is hurrying up with an extra gigawatt in Anglesey, and a third extra gigawatt at Sizewell and we have learned of a private enterprise consortium which is preparing to take over and develop a power station at Barking as well as attracting Eléctricite de France to propose a further cross-Channel link at their own cost. All this is mainly to serve the overpopulated, but under-supplied South-East.

Elsewhere, low-cost nuclear power must, in my view, still pre-empt the base-load supply and therefore devalue those small fossil-fuel stations which are most likely to be attractive to private enterprise because of the shorter pay-back. One wonders whether there is really much chance of private enterprise funding the far-off pay-back schemes—whether nuclear or tidal—without the support of the CEGB or something similar. Incidentally, unless the so-called big "G"—one of the two successors to CEGB—takes it on, does this not mean "goodbye" to the Severn Barrage which may have a potential of up to seven gigawatts—certainly more than one and nearer two—albeit at three times the capital cost of the Channel Tunnel?

The Energy Economist published by the Financial Times made the point in March that, Electricity is perhaps the single most important asset of a modern industrial economy. If it goes wrong, chaos can follow. Therefore, the most critical issue is security of supply and after that cheapness of supply. The crux of this scheme is the divorce of generation from distribution and that is the end which is supposed to justify the means. Such vertical disintegration has been rejected in the United States and has never been attempted anywhere else. It represents a large gamble the physical success of which turns on load management when electricity is something that cannot be stored.

Since real costs vary from minute to minute, and since consumers cannot be kept waiting, there has been developed a highly sophisticated merit order system based on ascending marginal operating costs as measured by central ownership and conducted by the grid. The alternative now offered is really a spot market amid a network of contracts for capacity and supply which is supposed to reflect the lowest net effective cost.

Just picture the kind of contract which is to replace central ownership. "We," that is the grid—or the owners of the grid—"agree to take the output from your power station for the next 30 years, unless the grid controller decides that something else would be cheaper". Obviously, such contracts will not be acceptable. As a layman, I believe that either there will be a costly surplus of capacity, or a pooling among generators which must be the very opposite of competition and amount to collusion.

I notice an element of sheer ideology—nothing better—in the Secretary of State's reply to what I thought was a most powerful submission made to him by the Electrical Power Engineers Association. I personally believe that effective load management is only possible where both the power source and distribution are under single control.

So what about the grid? We are told that it will be run by the same people as before. But who will take the decisions? It is to be owned by the 12 area boards which are now the distributing authorities. How will their different regional interests be reconciled? For example, the East Midlands and the South-East have quite different load problems from those of the South-West.

Who is the primus? Is the primus merely primus inter pares? Or, will the managing board vote in terms of a shareholding that reflects each area's needs and the scale of such needs? How will the grid be accountable to the nation at large for security of supply, let alone for cheapness? I quote again from the Energy Economist: With electricity—as those trapped in New York office lifts in the black out can testify—a shortage of reserve capacity can be a nightmare timed by the minute, not by the week. To place in the hands of the market all notions of statutory reserve capacity and to give distributors all the obligations, is to run the risk either of extreme conservatism and wide uneconomic reserve margins, or extreme recklessness and black outs". The Santa Claus in the whole situation is the regulator. His job is to square the circle. He must obtain low prices for the consumer; but he must also encourage investment. He must obtain more nuclear provision, with its slow pay-back on investment; he must get it without the counter-competitive collusion of cross-subsidisation by smaller gas or oil stations offering a faster pay-back. He must ensure security of supply without non-competitive collusion. He will need the patience of Job, the wisdom of Solomon and the skills of Houdini.

Where will fundamental research and development wind up? Who will look after ETSU, the Energy Technology Support Unit, at Harwell? Further, who will ensure (or even restore) ETSU's objective, instead of being the mere plaything (as many suppose) of the Atomic Energy Authority?

There are critically important research questions for electricity supply in the years ahead as regards tidal power; wave-power reseach; biomass; energy crop farming for set-aside agricultural land, as the common agricultural policy contracts. All this, to say nothing of the fast reactor and of fusion—although, to some extent, those are an international undertaking at present, must be underwritten somewhere somehow.

In my view, the White Paper recalls a child's description of a tennis net: a lot of holes tied together. That is because the document was rushed out after weeks of agonising with the main object of defeating Lord Marshall's campaign for the CEGB. That is why there are so many gaps in this document.

Therefore, I say, spare a sigh and shed a quiet tear for the luckless Front Bencher on this side of the House who draws the bad lot of having to pilot the Bill through this Chamber without at least being a full member of the Department of Energy's ministerial team, however much we love him personally.

1.18 p.m.

Lord Nelson of Stafford

My Lords, I put my name down to speak in the debate for one purpose only and that was to draw attention to the lack of any mention in the White Paper of the protection of research and development. However, I am delighted to note that the issue has already been touched upon by many previous speakers, including my noble friend Lord Lauderdale in his excellent speech.

The noble Lord, Lord Cledwyn of Penrhos, in his opening reply referred to paragraph 5 of the White Paper which pays tribute to the industry's greatest asset; namely, the people who work in it. A large proportion of the most highly qualified people in that group are in fact working on research and development. To my mind it is most important to ensure that the future of their work is known and assured.

The industry is a high-tech industry and considerable resources are therefore necessary and essential to maintain an adequate research and development programme to protect the public interest—the public interest in maintaining a secure and competitive supply. Previous speakers have emphasised the importance of competitive power to the industries of our country.

We have large, important, experienced and dedicated teams of qualified personnel working in the research and development field in laboratories around the country. The CEGB has three such laboratories; the AEA has seven. Indeed, my noble friend Lord Weir referred to the work taking place in one of them. Moreover, there are other laboratories in the country devoted to the support of the industry, including those of the manufacturing industry itself.

The work of such teams covers important spheres of safety, reliability and protection of the environment which are all of great importance to the general public. They also cover those areas necessary for the adequate preparation and introduction of new techologies into a fast-moving industry. They ensure that equipment is prepared in adequate time to be introduced into the system to provide a secure service and efficient supply. Such functions are especially important in the nuclear field. I am glad that a nuclear programme is part of the Government's plans for the industry. My noble friend Lord Davidson referred to the continuation of the nuclear programme and the resources behind it. However, many of those resources are in fact research and development resources and it is not at all clear how they will be protected or how they will be paid for.

This matter is also important to the manufacturing industries of this country which have a very important export market in the supply of power equipment to the world. They will not be able to compete in the world market unless there is an adequate research and development programme for plant, and that will come only if there is a progressive approach to the matter by the supply industry itself. Your Lordships will appreciate that one cannot sell power equipment to the world markets unless one can demonstrate that it is working and is proven on one's home system. Therefore this area is extremely important to our manufacturing industries and to our export trade.

We all listened a week or so ago to my noble friend the Secretary of State for Trade and Industry when he emphasised the importance of 1992 to our position in Europe. We were all impressed with that and we wish him well in his campaign around the country to make everybody else aware of it. However, we must have an adequate research and development programme in the industry after privatisation to ensure that our equipment is competitive with that which will be available in the rest of Europe in 1992. This is a matter of vital importance to us.

One cannot turn research and development on, off and then on again. One has to maintain continuity. I fear that there will be a hiccup during the time we debate this new set-up and while we are waiting to know who will be in charge of what in our research and development programme. I draw your Lordships' attention, and in particular the attention of my noble friend Lord Davidson, to the fact that there is considerable uncertainty among the people working in the laboratories to which I have referred. They do not know what the future of their work will be. They do not know for whom they will be working. Nor do they know how or even if their programmes are to be funded in the future. This could lead to disastrous circumstances. These are good people. They can go elsewhere and can be attracted into other jobs. Once these teams are broken up they cannot be put together in a short time.

Someone has to make it clear to these people who will decide their programme what is required and what is not required and who will pay for it. Obviously the programmes that come within the ambit of normal commercial considerations—programmes on which one can see a return in five years or so—should be paid for by the privatised companies. However, this industry does not work on a short-term basis; it works on a long-term basis. There are 10-year programmes to introduce major new equipment. There are programmes for 20 or 25 years for a new nuclear power system. How will these programmes be decided? Who will pay for them?

There is considerable concern that at the moment the movement is in the wrong direction. The organisations are already looking to privatisation, are already seeing how they can put their finances in the best possible shape to attract the best possible market for their shares. That means cutting down on costs, and so long-term problems of research and development are being put on one side. However, one cannot pick them up again later. This is already happening. It is a little stream at the moment. One can see it: "We are not going to do this; we are not going to do that", and so on. This will become a flood unless somebody says, "Yes you are, it is going to be done this way". I draw special attention to the seriousness of this matter.

In conclusion, I urge the Government to give early attention to this problem. It is too important to leave until all the other matters and details are sorted out. They must allay these fears quickly and at an early date because they are there and they are serious. I hope that my noble friend Lord Davidson will be able to indicate to the House today that something will be done in this field. I hope he will say, first, that the Government are aware of the problem, and, secondly, that he will give us some idea as to how they see the problems being resolved at an early date to prevent a serious deterioration arising in this vital area for the long-term future progress of this industry.

1.25 p.m.

Lord Winterbottom

My Lords, I must declare an interest in this subject, although it is not quite the obvious one. In the month of March I was approached by a group of individuals from the Far East who had substantial funds which they wished to invest in this country. Fortunately, I did not have to use my brain for very long because the Under-Secretary of State at the Department of Energy, Mr. Michael Spicer, made the first indication of the Government's immediate intention to privatise the electricity industry. This preceded the White Paper, or the semi Green Paper, by a week or two. This prompted me to suggest to the gentlemen who came to see me that they should study the possibility of investing some of their funds in the privatisation of the electricity industry.

I was encouraged to do this by two of the key points in Mr. Spicer's speech. He made a firm statement that foreign funds would be welcomed in the expansion of the British electricity industry. He extended a special invitation to the United States—the speech was made in Florida—to come and help us to extend our industry. He also stressed that other interests would not be excluded. This I brought to the notice of the gentlemen who consulted me.

Another point in his statement pleased me. He stressed the importance of renewable resources, including the Severn barrage, which one noble Lord has already mentioned. At that point he made a mistake when he seemed to assume that the larger generating plant should be mainly nuclear. I may be wrong because I have no direct experience, but he seemed to assume that it would be easy to produce a number of stations. He seemed to think that they would spring out of the ground. One remembers that the Sizewell B inquiry took six years, and the Minister has promised that the usual public inquiries will take place for every nuclear power station.

An important consideration is the timing of this operation. Mr. Spicer stressed that it would not be difficult to place the shares of the 14 new companies on the world market. He said that the problem was 20 times larger than the flotation of British Airways. This strikes me as a very heavy programme indeed. We are certainly promised one year's legislation starting in November and continuing until late summer next year. So the single question I should like to put to the Minister is: how does he foresee the machinery of flotation? It will be vaster, 20 times as large as the flotation of British Airways and will put strains surely on some parts of the economic machinery.

I shall not touch on any politics in this matter because we shall have all next year to do that. But the points about the general timetable for carrying this into effect would, I believe, be of interest.

1.30 p.m.

The Earl of Bessborough

My Lords, I am glad that my noble friend Lord Davidson has initiated this extremely interesting debate. I have been considering energy questions for some 25 years, ever since I became Parliamentary Secretary for Science in 1963. Then I was mostly concerned with nuclear power, the Atomic Energy Authority, government research establishments and the co-operative industrial research associations, some of which were much concerned with various kinds of energy research.

Then from 1964 to 1970, during the government of the noble Lord, Lord Wilson of Rievaulx, and when Mr. Anthony Wedgwood Benn was the Minister for Technology, and his department then included energy, I was a shadow energy spokesman on the Benches opposite. I continued to be concerned, as Minister of State in 1970, as chairman of the committee of inquiry into research associations and for six years as Conservative energy spokesman in the European Parliament, followed by another six years on the energy sub-committee of the European Communities Committee.

I have gone down coal-mines, flown out to oil and gas rigs in the North Sea and visited many power stations. At the request of Lady Bessborough—I hope that noble Lords will not think this is irrelevant, but my noble friend Lord Davidson has allowed me to mention this in parenthesis— in co-operation with the admirable firm of Tarmac Properties, Lady Bessborough and I are both active supporters of the restoration of the house in Craven Street where Benjamin Franklin conducted his first experiments in harnessing electricity. That was a most notable and interesting early example of private enterprise in the generation of electricity. My noble friend Lord Hood knows all about this. He made a most interesting speech which no doubt my noble friend Lord Davidson will be answering.

At all events, throughout the last quarter of a century I have often reflected on how and to what extent electricity might be privatised. I should like to say at the outset that having read the White Paper I feel that the Government's proposals are just about right. I can tell my noble friend Lord Davidson that unlike some of my noble friends I support him just about 100 per cent.

I find it interesting to note that in the United States and Japan ownership is mainly private. In Belgium generation is almost entirely private and distribution mainly private. In Germany it is mixed public and private and in Spain it is mostly private. I have not heard many complaints from consumers in those countries, apart from very rare power cuts such as the one in New York State mentioned by my noble friend Lord Lauderdale in his delightful remarks. After all, we had our power cuts after the hurricane.

I agree in particular that privatisation involves truer public ownership and that in general privatisation as so far introduced in this country in other sectors, with well over one-third of the former state sector having been already privatised, is now recognised worldwide as one of the hallmarks of this Government. It is being emulated in other countries.

I agree with the six key principles enunciated by my right honourable friend the Secretary of State for Energy in February and also with what he said in March, that competition in generation would provide the best protection for the consumer. It would put pressure on that part of the industry responsible for three-quarters of the cost of electricity. At present, as we know, the CEGB supplies some 95 per cent. of electricity transmitted by it, the other 5 per cent. coming from Scotland, from France across the Channel and from a few generators which provide electricity as a by-product of their main business, such as the Atomic Energy Authority and British Nuclear Fuels.

I recognise very well the weakness of the present system, with the CEGB controlling the national grid, as well as being virtually its monopoly supplier. I have never thought that this could be right. There has been very little scope for other generating concerns to break into the market.

I agree also that although the grid will continue to be owned and run by a separate company which itself will be owned jointly by the area distribution companies, it will operate on a contractual basis with both generating and distributing companies. Clearly, as long as electricity's marketplace is controlled by a company with a strong, let alone the strongest, generating interest, it is inevitable that free and fair competition will be hampered. I agree that after privatisation the 12 distribution companies will be the grid's major customers and that they will have a strong interest in ensuring that as much competition in generation as possible is allowed to develop.

I agree too with the government proposal to split up the CEGB into two competing generating companies and that both should be sold to the public. I think that it is reasonable to predict that the new system will also encourage new private generators, the Benjamin Franklins of our day in research. I well remember the days when we had our own private generators in the country and they worked quite adequately. I agree also that if alternative power schemes such as the Severn barrage and hot rocks become viable, private sector interests which have developed these sources will find it easier to introduce them into the market under the new system.

I am interested to see and to hear from my noble friend that the 12 distribution companies will be among the largest private sector companies in their region and that they will thus—and I think this is very important—have a strong local identity and a real incentive to strike the best deal for their customers. I am also glad to read the proposals on share ownership and that the employees in the industry will be offered incentives to acquire a genuine stake in its future. I agree that there is every reason to assume that electricity workers will be just as enthusiastic as their counterparts in British Telecom and British Gas. Over 99 per cent. of British Gas employees took up shares in the privatised company and 96 per cent. in British Telecom. This was despite considerable opposition from the trade unions.

I am happy that the new structure will provide more diverse career opportunities. I am also convinced that nuclear safety will not be affected in that the Nuclear Installations Inspectorate will remain independent and continue to monitor safety. It is gratifying too to know that all the area board chairmen and the Electricity Council have welcomed the Government's plans and that there is support also from consumer organisations. For all these reasons I fully support the Government's proposals and have not been convinced by those who oppose them. I am very glad that my noble friend Lord Davidson has given me this opportunity of supporting him warmly.

1.39 p.m.

Lord Stoddart of Swindon

My Lords, at this stage of a debate it is very difficult to say anything which has not already been said before. However, I shall certainly try. I have been impressed so far by the speeches that I have heard, certainly with the very eloquent speech of my noble friend Lord Cledwyn of Penrhos. He put the whole matter in perspective and told the House that the Government were operating not on the basis of making the industry more efficient but simply because the Conservative Party was very doctrinaire and needed to do this; it needed to privatise to get money to bribe the electorate at the next general election.

But of course the noble Lord, Lord Mayhew, by quoting the replies given to the Select Committee on Energy in another place also showed quite clearly that the Government were making things up as they went along and that they had no clear view of what the industry was going to be like. Later there followed the demolition job, if I can put it that way, by the noble Viscount, Lord Weir. That was followed again by a devastating critique by the noble Earl, Lord Lauderdale, it seemed, and still seems, to me that the Government have very few friends. Indeed, the noble Viscount, Lord Davidson, must have been very relieved when the noble Earl, Lord Bessborough, got to his feet to give the only indication of unqualified support yet to the White Paper.

However, before I go any further perhaps I should declare that I have an interest. I enjoy a very small pension from the CEGB as I worked at one time for that organisation. But I must emphasise that the pension is very small. Nevertheless that leads me into my first point, which is that I noticed that the Secretary of State told the House of Commons that he had written to all the 131,000 employees of the industry. I do not object to that of course, but I remind the Government and the noble Viscount that there are many thousands of people who are retired who helped to build up the industry to the successful enterprise that it is at the present time.

As a pensioner of the electricity supply industry I take grave exception to the fact that the Government have not seen fit to write to me and to my fellow pensioners telling us what privatisation means to us and whether our pensions and our pension rights will be safeguarded. I sincerely hope that the noble Viscount, Lord Davidson, who has just returned to his place, will tell his right honourable friend the Secretary of State that the pensioners in the industry are entitled to consideration as well and that we look forward to hearing from the Secretary of State in the same way as he has got in touch with the existing staff of the industry.

In his opening remarks the noble Viscount, Lord Davidson, said that one of the reasons for privatisation was to enable the electricity supply industry to act commercially and without state interference. We all say amen to that, but the electricity supply industry has had more interference from the present Government—from a Tory Government—since 1979 than it ever had before. As my noble friend Lord Mulley pointed out, the Government have milked the industry by about £4,000 million and they have forced it to push up prices to a level at which they need not be.

But it is not necessary to privatise an industry in order to allow it to act commercially and without interference. All that has to happen is for the Government to stop interfering. There is a model in the case of Scandinavia, which runs its nationalised Industries in just such a way without any interference From the Government but nevertheless ensuring that the public retain control of strategic industries. If there is a strategic industry above all other strategic industries, it is the electricity supply industry. Therefore it should remain in the public sector and under public control.

As my noble friend Lord Cledwyn of Penrhos and others have pointed out, the electricity supply industry has been a very successful organisation over a very long period of time. To take us back to the period before it was nationalised in 1949 is not a backward step; it is a backward leap. If the noble Viscount will merely read the history of the industry before it was nationalised he will see that a fragmented industry failed to meet the needs of the country over a long period of time. It is only since the industry has been nationalised that there has been universal pricing and indeed the ability of all people in this country to enjoy an electricity supply at all.

We must know whether uniform pricing is to be maintained. I do not see how under private ownership it can be, but it is a necessary component and a necessary assurance that we need, and we need that today. I hope that the noble Viscount will be able to give that assurance.

We also need to know just exactly how security of supply is to be maintained. That point has been made by a number of noble Lords and it is vital. Over the past decades the electricity supply industry, because it is an integrated industry, has been able to build and operate power stations on an integrated basis, seeing to it that their maintenance programmes are scheduled correctly so that winter peaks can be met. It is essential that we know how this fragmented privately owned industry is to meet that security of supply; that the housewife, when she presses a switch, can be assured that the light will come on and that the cooker will work; and that when the industrial worker presses his switch he will be assured that his machine will turn in order to produce. We need that assurance because it is vital to this country and to the interests of the country.

We have been told that privatisation will lead through competition to lower prices. However, as has already been pointed out, the Government are forcing prices up by 15 per cent. in order that the industry can be made more attractive to private speculators who, when they own the industry, will demand greater profits than the 12 per cent. that has been made on an historic cost basis. They will therefore attempt to force prices up even further. We need better assurances as to how prices will be controlled, not only those charged to domestic consumers but also industrial consumers who are getting a very bad deal at the present time from the gas industry.

I should like to make one final comment. Throughout the electricity supply industry over the last 35 years negotiating and advisory machinery has been built-up which is second to none. All employees, both in the generation and the distribution sides of the industry, have been able to negotiate terms and conditions of service. And they have also been able, together with management, to have a say in how the industry is run as a whole. As I read it, we are assured in the White Paper that the present arrangements will not be interfered with. I do not see how, in a fragmented and privatised industry, we can continue to have the national negotiating and advisory machinery which has served the industry so well over a long period of time. I hope that the noble Viscount will either be able to give me the assurances I need on that point when he winds up or that he will write to me at a later date.

In conclusion, the White Paper is unnecessary. It is ill-thought-out. It will not serve the nation well. There is still time for second thoughts, especially bearing in mind what has been said today. The Government should understand that the electricity industry is a great strategic industry. From their own and the consumers' point of view, they ought to keep it under public control.

1.52 p.m.

Lord Reay

My Lords, I should like to congratulate the Government on having arrived at a position where they are able to start the process of privatisation of electricity, the largest act of privatisation ever undertaken so far as I am aware. It could be said to mark the apogee, to date at least, in the retreat from that now discredited ideology, nationalisation. The dogma of nationalisation had already been abandoned in practice if not in principle by the last two Labour Governments. The present Conservative Government put the policy from neutral into reverse and they have presided over the return of ever greater swathes of industry to the private sector. In doing so, they have both caught the spirit of the age and, in turn, given the world inspiration.

I do not know where the Labour Party stands today on nationalisation. I assume that it is hard pushed to find its feet, caught up in the rush of the mighty movement. In fact, I think that for any noble Lord on this side of the House to ask any noble Lord on the opposite side if he believed in nationalisation would be considered as tasteless and inappropriate as it was for the noble Lord, Lord Sefton of Garston, to ask the right reverend Prelate the Bishop of London during the Committee stage of the Education Reform Bill whether he believed in the Virgin birth.

It is ironic that members of the party opposite, such doughty if erstwhile champions of state monopolies, should criticise the Government for failing to introduce 100 per cent. competition into the industry and leaving elements of monopoly within it. The Government have recognised that regional electricity distribution is a natural monopoly and they propose to introduce competition only into generation. Since nearly 80 per cent. of the cost of electricity production is accounted for by generation, plainly the scope for reduction in final cost to be brought about through competition in generation is considerable.

The point surely is that there is simply no way of telling whether costs are as low as they could be while electricity generation remains a monopoly. After eight years of drawing down surplus capacity and with much obsolete and obsolescent plant, the electricity industry stands on the edge of an exciting and expansive future. The Government estimate that an investment of some £45 billion will be required in the next 12 years. That is surely a wonderful prospect for the order-starved power equipment industry and will provide many jobs through the regions and in Scotland.

It will also provide a great incentive for new, entrants into the industry. One should never underestimate the extraordinary vitality of capitalism. Like an irrepressible garden plant, it needs to be given the right conditions, to be contained within the proper regulatory limits, to be spared too many visits from the gardener and his staff and to be allowed to take hold. Who knows? I should not be surprised if even some noble Lords were tempted out of Westminster's placid pools into the bracing stream which is just starting to bubble out of the ground.

I support entirely the emphasis which the Government have placed on the need to secure variety in a fuel supply in the interests both of costs and security of supply. As we all know, the British coal industry used its monopoly position in the past to hold the nation to ransom. That position was artificially strengthened by agreed prohibitions on imported coal. Even today, there are handling facilities only for 15 million tonnes of imported coal which is some 15 per cent. of national consumption.

However, the British coal industry has already emerged from its darkest night, as my noble friend Lord Weir recognised. The Government have invested no less than £6 billion since 1979 and productivity is up by 50 per cent. in the last four years. With its geographical advantage, it looks set for a thriving future. That future should not be based on the abuse of a monopoly position at the expense of the customer.

I believe that the Government are right to lay an obligation on the distributing companies to use a minimum of non-fossil fuel generated electricity. Incidentally, that obligation is for a fixed proportion and not a rising proportion. It is irresponsible to future generations to rely on non-renewable fuels for electricity generation. Since in practice we are years away from producing adequate quantities of wind- or wave-generated electricity, as was pointed out by the noble Lord, Lord Hanworth, that means nuclear power.

Some critics have sought to focus on the distinction between the guarantee given for nuclear fuel use and the absence of any guarantee for British coal. The second half of that proposition was much emphasised by my noble friend Lord Weir. However, the situation in the two industries is quite different. The British coal industry, with 75 per cent. of the electricity fuel market, is still emerging from a monopoly position. Nuclear fuel, with 18 per cent. of the market, is an industry which is struggling to establish itself and contending against great political forces. In the case of coal, the Government have made already the great capital investment which is necessary.

In the case of nuclear fuels, a great deal remains to be undertaken. The guarantee of a minimum demand has quite reasonably been considered necessary to protect future investment. Nevertheless, my noble friend Lord Weir is worried that the position of coal may be rapidly undermined by imports. Certainly we are far from that position at the present time. I am quite sure that the Government cannot intend that in view of the investments they have made. Moreover the Government have given assurances that that is not their intention. In any case there is plenty of time; it is not something that would happen hurriedly. However, I agree that it is something which we shall have to look out for over a longer period of time.

In sum, I believe that this measure is a meritorious one, despite what its critics say. The critics for the most part seemed to me to be either sceptics, those who had a feeling of being kept in ignorance about important details or who were suspicious of what they see as the ideological motivation behind the White Paper, a motivation with which they do not sympathise; that is to say, they were not outright opponents.

I believe that the measure is in the interests of employees, who will retain their existing rights but in addition acquire the right to a stake in their industry. It is of great and obvious advantage to the national exchequer, which will have funds available for public expenditure of the kind for which private expenditure is not available and for tax cuts which have as their purpose the stimulation of growth in the economy, on whose continuing prosperity all our livelihoods depend.

So I submit that it is in the interests of the economy. Above all it is in the interests of the customer. That means all those for whom electricity costs are a matter of vital concern. It has met with wide approval. Anyone would think from some speeches in the debate that the measure was entirely friendless save perhaps for my noble friend Lord Bessborough.

It has the strong approval of the chairmen of the 12 area boards. The areas account for two-thirds of the industry. It has been welcomed by the chairman of the electricity council. It has the support of the Electricity Consumers Council. Not surprisingly, it does not have the support of the CEGB, which has lost control of the national grid. The noble Lord, Lord Mulley, at least on the other side seemed to appreciate the reason for that.

Lord Cledwyn of Penrhos

My Lords, the noble Lord is of distinguished Scottish descent. How does he think that the 50 inhabited islands off the coast of Scotland would have received electricity had it not been for public enterprise? Does he think that private enterprise would have arranged that?

Lord Reay

My Lords, I listened with great interest to the speech of the noble Lord the Leader of the Opposition this afternoon. I thought he gave a charming and persuasive picture of what happened in the pre-war period. But that is a different period of history. I do not contest his claim that at that time the public ownership of electricity may have been necessary, but times have changed and today we live in a different period.

My noble friend Lord Weir's criticisms were principally directed against the White Paper and what he saw as its omissions. I agree with him that it is sketchy. We shall need to know a lot more about the details before we can be satisfied with the Bill as a whole. We shall have plenty of opportunity to discuss that in the future and the legislation will obviously require careful scrutiny. Today I salute a daring and constructive act of government.

2.3 p.m.

Lord Peston

My Lords, energy debates in your Lordships' House are always interesting and enjoyable, and this is certainly no exception. Apart from the main principle I think that there has been a certain amount of meeting of minds. The difficulty in winding up at this stage is exactly the one mentioned by my noble friend Lord Stoddart, namely that all the good points that one has prepared have already been made. He said that he would nevertheless try to say something original. I am afraid that there is no possibility that I can say anything new. The best I can do is to undermine—underline some of the points that have already been made.

A noble Lord

A Freudian slip!

Lord Peston

My Lords, Freudian indeed. I have a couple of questions for the noble Viscount. Are we to understand that legislation will be introduced in the next Session? Is that a definite government commitment? Do we have any idea when it will be introduced? I do not ask that just for ourselves because a number of his noble friends, or their friends, can see the new honeypot and are very keen to get their paws into it. From their point of view the sooner it happens the better, although that may be to the detriment of the rest of us.

The noble Viscount mentioned consultation and we all strongly approve of that. Can he say whether the consultation process is continuing and in particular whether the consultation process in connection with the regulation of the industry is still going on? I find the statement in the White Paper about regulation rather complex to the extent that I can understand it at all. It seems to me that if one produces this kind of private monopoly, regulation has to have a central role. One would like to know a great deal more about what the Government have in mind. In particular one would like to know whether the relevant consumer interests—by which I do not mean merely the Electricity Consumer Council but also the Consumer Council generally and the Consumers' Association—have been or will be involved.

On the central issue of privatisation or not privatisation which was raised by the noble Lord, Lord Cledwyn, I do not expect a meeting of minds. However I think that I ought to say that we on this side do not think it is in any sense right to privatise this industry. I shall set ideology on one side and assure the noble Lord, Lord Reay, that I do not have any worries about ideology. I am not ashamed of nationalisation. I believe that the nationalised industries have made tremendous contributions to the economy of this country. Indeed I think that nationalisation saved our economic system at the time when the very first of the great Labour Governments nationalised those industries. They cleared up the mess of what the noble Lord, Lord Reay, called capitalism, and the extent to which they can be privatised is an indication of their success. I make no apologies for that.

Indeed, if I were in a taunting mood—which I am not this afternoon—I could say on the subject of capitalism that I notice that very few noble Lords really believe in the free market system. There would not be a ring fence aroung nuclear power if they believed in free market economics. The nuclear power industry would simply be told to take its chances in the market place. The problem is that everyone knows that it would not survive in the market place without government protection. I believe that nuclear power is of considerable importance to our country—which is where we agree—and it ought to have that protection.

The essence of that is not free market capitalism; it is the mixed economy, namely, where the national interest is important the Government must intervene. The Government are right to intervene but I am not convinced that they have intervened enough in nuclear power. Therefore, I do not think that we ought to be bandying ideologies about. I think that for all the talk the mixed economy is what we all believe in. We may disagree about which parts we like and which we do not. I believe that the mixed economy solution is the correct one. Nonetheless this industry ought to stay in the public sector and I shall be making one or two technical points on that subject in a moment.

First, I should like to point out that if we were to go along the path chosen by the Government of wishing to privatise, I fail to see why it is necessary to adopt an approach of wholesale privatisation. I do not see why they do not adopt the approach of a mixed economy. As an example, why do the Government not just privatise the area boards? That would be quite a good experiment. It seems to me that at the same time the nuclear sector—certainly that of generation—ought absolutely to remain in the public sector. I have no doubt about that whatsoever. That is not unrelated to the question of research and development, which is another point to which I shall return.

However, the key point in terms of minimising electricity costs or maximising efficiency is the merit order system—the system of optimisation and control. The system that one is trying to optimise must also be under one's control. That is the central technical point.

Several noble Lords have referred to systems in other countries which are not fully publicly owned. However, it is by no means clear that their electricity systems are as efficient as ours. Some evidence of that has already been put forward this afternoon and many people believe that this country has one of the most efficient, reliable and secure electricity systems in the world. That is largely due to the structure of our industry and in particular to the system of optimisation based on the merit order approach. In no circumstances would I care to see that disappear.

As I said, I think that a mistake was made in taking that route. It is a mistake that becomes apparent in the area of research and development, and that is a subject that was mentioned by the noble Viscount, Lord Hanworth, the noble Earl, Lord Lauderdale, and the noble Lord, Lord Nelson. Again, I do not think that we need be even remotely ashamed of our contribution in that area. This country is outstanding in the field of research and development. I have said it before, but those of us who have visited electricity supply systems in other countries notice how many of the basic manuals of our electricity industry have become those countries' working manuals. They use our stuff to a quite astonishing degree. I too am worried, as indeed are other noble Lords who have spoken today in this debate, about the future of our research groups.

The point made or implied by the noble Lord, Lord Nelson, is that one cannot break up a research team and easily put it together again without any difficulty. A research team exists almost as an organic entity and one must keep it together. When the noble Viscount, Lord Davidson, replies to this debate, I should be glad if he would say a few words about whether the Government have given any thought to that matter and to what the noble Lord, Lord Nelson, hoped that we would have to offer to our scientists and engineers in that area.

Changing tack a little, I should like to say a few words on the environment, which is a topic that was also mentioned by the noble Lord, Lord Mayhew. I mention it partly because it is of general interest but also because it is of particular interest to my noble friend Lady Nicol. It is no disrespect to my noble friend Lord Cledwyn to say that we all regret that the noble Baroness is not taking part in this debate today. We all look forward to her return to our energy debates and certainly when we come to debate the Bill I look forward very much to her leading for these Benches. The environment is a subject that concerns her very much and the White Paper is quite silent on some relevant questions. It says nothing about reducing pollution from power stations or planning controls over the new privatised industry when it takes over, which is a point that has already been mentioned by other noble Lords. Nor does it say anything about control over future developments.

So there is the question of what is to be done about control over the environment. Will it have to be more rigorous when the industry is privatised? There is the whole problem of sulphur clearing with which the CEGB is now engaged. It is a long process that the CEGB has embarked upon. I have been told that the whole process of installing sulphur clearing equipment will amount to a figure of £1 billion. That process does not benefit the consumers of electricity as such. As it happens, it is in the national interest and benefits everyone, including our colleagues overseas. However, is there any incentive for a privatised sector to undertake that kind of work? There are a great many questions of an environmental nature and some about energy conservation on which I believe noble Lords would like to have information from the noble Viscount either in his reply this afternoon or perhaps on another occasion.

Another matter of interest concerns the ownership of the industry's assets, which is a point that was raised by my noble friend Lord Mulley. It is a question that has concerned all of us when we have come to consider privatisation. One must consider who owns the assets and who has paid for them. In very large part they have been paid for by the consumers of the industry.

Lord Mulley

If my noble friend will permit me to intervene, I understand that before privatisation there will be no debt. They will be totally paid for.

Lord Peston

Exactly! Following the point of the noble Lord, Lord Reay, if the industry is sold, the proceeds of these assets will accrue to the Treasury, and then to the taxpayer if they were then used for tax cuts. But the tax cuts are not pro rata according to electricity consumption. Indeed, with the tax cuts that this Government have in mind (which are tax cuts for the very well off and benefit reductions for the very poor) they will be genuinely stealing from a large number of people in this country. The value of the assets is not being returned in any fair or proper way. The assets were not returned in a proper and fair way for gas or for British Telecom. Therefore, I believe that the question of assets that my noble friend Lord Mulley raised is an important one. When we consider the Bill in detail we shall inquire into that.

On the point raised by protagonists of privatisation, I am not that impressed with the performance of British Gas to date. I am interested to discover that this is regarded as a brilliant performance. It does not look that brilliant to me. British Telecom made a terrible mess until a public outcry brought them into line. Without such public outcries, they will not stay in line. I am rather surprised that the noble Lords opposite are that keen on the achievements of privatisation. We on this side are content to watch, wait and talk about these matters. However, the issue is by no means simple.

I wish to hurry quickly to a conclusion. I think that I am almost the only noble Lord who has taken part in virtually all the activities of this House in the past five days, and I am beginning to get rather tired. However, I should like to say one last word on competition. At the level of consumption, where competition matters most of all, there simply will not be any extended competition. The White Paper says that even after privatisation the supply activities of the distribution companies and the national grid company will remain in large part natural monopolies. I do not understand the "large part"—the weasel words. They will remain natural monopolies. The only slight area of competition is in the area of generation.

As the noble Viscount, Lord Davidson, has said, under the 1983 Act, anyone can now set up a private power station, and can compete. They have full right of access to the national grid. I believe that the noble Viscount threw the line away that that system has not achieved much, and that is why we are going on to this. But I doubt whether this approach will achieve anything on the competitive side. As the noble Viscount, Lord Hanworth, said, if some people wish to try their hands at the smaller end of CHP, and so on, why not? We have no doctrinaire views on that.

However, I do not see this system as the introduction of the principles of Adam Smith into the system because this is inevitably a monopolistic system. We judge that it is difficult to regulate. We do not doubt that. But we believe that the system would be more easily regulated and more easily optimised if it largely stays in the public sector rather than this extraordinary attempt, which has not yet been thought through, to try to regulate what in the end will simply be a private monopoly.

2.17 p.m.

Viscount Davidson

My Lords, my noble friend Lord Weir declared a strong family connection with the electricity industry. My noble friend Lord Bessborough—in his very supportive speech—mentioned Benjamin Franklin.My connection is not so strong; but perhaps I may tell your Lordships that when my maternal grandfather was chairman of the LCC in 1901 my aunt, then aged eight years old, pressed the switch which turned on the first electric lights on the Embankment along the Thames opposite the Palace of Westminster. I do not think that that has ever been recorded before.

I do not think your Lordships will expect me to answer all the questions that have been put to me. However, I should start by emphasising, in answer to the gentle wigging from the noble Lord, Lord Mayhew, that we are debating a White Paper and that the Government are in the middle of the process of drafting a Bill. In my view this debate is part of that process. I know that my right honourable friend the Secretary of State will take into account seriously what has been said today. I thought that I should make that clear at the outset.

I am grateful to all noble Lords who have contributed to today's debate. We have heard today a wide range of views both on the principles of privatising the electricity industry and on the details of the Government's proposals.

I cannot say that any of the views expressed were unexpected, in particular from the Benches opposite. I have seldom heard so many prophecies of doom and gloom. I am bound to agree with my noble friend Lord Reay in his analysis of the Opposition's attitudes.

Many reasons have been put forward today to explain why the Government have chosen to put the electricity supply industry into private hands. Some are correct and some are not. Let me just remind your Lordships of the six principles that the Government have adopted in framing their proposals for privatisation. First, decisions about the supply of electricity should be driven by the needs of the consumer. Secondly, competition is the best guarantee of the consumer's interest. Thirdly, regulation should be designed to promote competition, oversee prices and protect the customer's interests in areas where natural monopolies will remain.

Fourthly, security and safety of supply must be maintained. Fifthly, customers should be given new rights not just safeguards. Sixthly, all who work in the industry should be offered a direct stake in their future, new career opportunities and the freedom to manage their commercial affairs without interference from government.

Moved into the private sector under these principles, the Government believe that the industry will have plenty of scope to achieve more. Once released from government interference, management will be free to manage while being subject to real commercial pressures.

The industry will also be made accountable to its customers and shareholders, which we expect will include a significant number of its employees. The Government's proposals will create a modern, competitive industry, owned by the public and responsive to the needs of customers and employees. There are real benefits in prospect, not only to the industry but to the economy.

How the Government's proposals for privatisation will make electricity supply more competitive and efficient has been discussed at some length today, and quite rightly, as it is the key to the success of the privatised industry. I should now like to turn to some of the specific points which have been raised during the debate.

The noble Lord, Lord Cledwyn of Penrhos, made a powerful speech. He expressed doubts that the Government had a clear mandate to privatise. The Government do have a clear mandate to privatise. The 1987 manifesto was unambiguous about that. The success of previous privatisation, whatever the noble Lord, Lord Peston, says, demonstrates public support for this policy.

I agree with the noble Lord, Lord Cledwyn, that it would be wrong for privatisation to result in the management of the distribution companies becoming remote from customers. I believe that the reverse will be the case. Instead of customers having to go through Ministers, who must necessarily be remote from the day-to-day operation of the industry, we shall be creating clear accountability to customers, to shareholders and to employees. The regulator will be given the powers and the resources to ensure that the consumer receives a good service. I am also glad to give the assurance sought on controls over nuclear power stations. There will be absolutely no diminution of safety standards. Our system of safety regulation and control does not depend on ownership. Any businessman knows that especially in large organisations there is always scope for greater efficiency. We are determined both to ensure that the regulatory system encourages a continuing drive to greater efficiency and to see that the consumer benefits.

The noble Lord, Lord Cledwyn, asked about the regulator's role in any new businesses which the distribution companies decide to enter. The regulator will ensure that the core business of electricity supply will be ring-fenced for regulatory purposes for the other activities.

The noble Lord, Lord Mayhew, asked me many questions. The Secretary of State for Energy made it quite clear that the White Paper sets out the principles under which the industry is to operate. The department and the industry still have a great deal of work to do to turn this into detailed legislation. It would be foolish and irresponsible to give glib answers to important questions now and I am surprised that the noble Lord expected the Government to do so. But I explained earlier that I believe that this debate is part of the procedure of consultation and my right honourable friend will take what has been said into account.

The White Paper makes it quite clear that environmental standards will be maintained. The Government are committed to the reduction of emissions from power stations. Sulphur dioxide emissions have fallen by 40 per cent. since 1970 and 25 per cent. since 1980. In September 1986 the Government endorsed the CEGB's voluntary commitment to retrofit flue gas de-sulphurisation plant to 6,000 megawatts of existing coal-fired capacity by 1997 and to fit low inox burners to 23,000 megawatts of capacity.

The noble Viscount, Lord Hanworth, asked about the structure of the transmission of the grid. The grid will be owned by the distribution companies and they have every incentive to seek diverse sources of supply including supplies from private generators. They will wish to minimise generation costs and to run the grid efficiently and effectively. The grid's operation will be self-contained and the regulator will be able to check on unfair practices. The rules governing the grid will ensure that the use of system charges and terms of access will be transparent.

The noble Lord, Lord Cledwyn, asked about security of supplies. Every party involved in electricity supply must have an interest in maintaining supplies. We can expect them to work together, especially in emergencies and there will be penalties for those who fail to supply. There will be contractual arrangements to provide for national control to return its power to direct power stations. National control will also direct action on the distribution system in the event of emergencies.

In his speech the noble Viscount, Lord Hanworth, quoted figures on the percentage of losses from a 2,000 megawatt station sending power 200 miles. I know that the noble Viscount is well versed in the technical arguments. However, I believe that the figures he quotes represent the worst case. Under normal conditions losses associated with a power transfer over 200 miles would be of the order of 2 per cent.

My noble friend Lord Hood asked about the difference between the proposals for Scotland and those for England and Wales. The differences in the historical development of the two industries are reflected in the proposals for their privatisation. It is a question of horses for courses. In both cases the Government's proposals are radical but evolutionary. It would have been wrong to force Scotland into an English framework or vice versa.

I must also welcome my noble friend's support for a continuing nuclear programme. A healthy nuclear industry is essential to continuing diversity and security of supply. The Government' proposals to carry over the CEGB's nuclear expertise, and so guarantee a minimal level of non-fossil fuel capacity, will ensure that these benefits continue.

The noble Lord, Lord Mulley, asked about the protection of customers. I can assure him that the regulatory system will protect customers by controlling prices, by setting standards of service, by setting the right incentives and by making the industry more consumer-responsive.

As regards paying off the industry's debts, there is nothing particularly odd about that. Any business must finance its continued development and operation. If instead of the industry repaying its debts they had to be written off, the cost would fall on the taxpayer.

In answer to my noble friend Lord Weir, we believe that electricity privatisation will create many new opportunities for the industry and for the people who work in it directly and indirectly. Although we are interested in overseas firms investing in Britain, we expect that the bulk of the investment will come from UK firms. My right honourable friend the Secretary of State for Energy has made it clear that avoiding any unnecessary interruption to the power station ordering programme is essential. I hope that my noble friend Lord Lauderdale will accept that assurance from me. Therefore I can give my noble friend Lord Weir the assurance that he seeks on that matter.

Many noble Lords have asked about research and development and I shall return to the topic in a moment. However, I should like to take this opportunity to commend the excellent record of the industry's R&D effort. I am sure that the privatised industry will wish to build on this. The Government have already received a number of representations from within and outside the industry about the arrangements for R&D in the privatised electricity industry. We are consulting the industry on that matter. There are a number of options for the future structure of the electricity industry's R&D effort, but we are not yet in a position to make a decision. It is our intention that whatever option is chosen for the future arrangement of the industry's R&D the new organisation will continue to be able to undertake contractual work on a commercial basis.

The noble Lord, Lord Kirk hill, spoke about the planned proposals for Scotland. I hope that he will forgive me if I do not respond directly to the interesting points that he made about the Government's proposals for privatisation of the Scottish electricity industry. I shall of course draw them to the attention of my right honourable friend.

I must agree with my noble friend Lord Lauderdale about the advantages of the Government's proposals for large customers, for private generators, for CHP and for renewables. We are determined to avoid the problems that he foresees. In particular, there must be no interruption on the ordering and construction of the new plant needed to meet the gap in supply foreseen towards the end of this century. The distribution companies will have an obligation to supply. They will therefore be responsible for security of supply. They will have to contract for sufficient supply from a variety of sources or generate it themselves. Discussions with the industry on how these contracts and the grid will work are continuing. I believe it was my noble friend who mentioned the ETRU—the Energy Technology Research Unit. As it is largely funded by the Department of Energy, it will not be affected by the White Paper proposals.

The Earl of Lauderdale

My Lords, as I understand it ETRU operates under the Atomic Energy Authority and has a bias in that direction. One would like to know or to be assured at some stage, not necessarily now, that it will continue and become absolutely independent and objective.

Viscount Davidson

My Lords, perhaps I can write to my noble friend on that matter. I may have to write to everybody if my voice fails! The noble Lord, Lord Winterbottom, asked about the timing and form of distribution for flotation. There are likely to be three separate flotations. Because of the sums involved it is possible that the Government may decide not to sell all the shares in each company at one time. But no final decisions have been taken. The distribution companies will probably be the first to enter the market. Details of the flotation are still being sorted out but it is likely that all 12 will be floated at the same time. We may decide to offer investors the opportunity to buy a single security representing shares in all 12 companies.

Whichever route is chosen for flotation we intend that members of the public and people who work in the industry will have the opportunity to own shares in their own local company. Our aim is to start the flotation as soon as is practicable after the privatisation Bill is enacted. Flotation of the distribution companies could occur in about two years' time. It will then be followed by sales of the two generators. We aim to complete the privatisation within the life of this Parliament.

With regard to overseas investment, we shall be particularly interested in proposals from overseas firms for investment in United Kingdom technology and jobs.

The noble Lord, Lord Stoddart, asked about pension rights. The Government did not write to the industry's employees but the Secretary of State arranged for the industry to distribute copies of the White Paper to them. At paragraph 61 the White Paper states: Privatisation will not affect the benefit payable to the members and pensioners of the industry's pension schemes. The industry will continue to have an obligation to finance pension liabilities". Therefore, the position on pensions is quite clear: they will be fully safeguarded.

Lord Stoddart of Swindon

My Lords, does that mean that they will be fully safeguarded in relation to future increases?

Viscount Davidson

My Lords, I will write to the noble Lord on that point because I do not have an answer. I take safeguard to mean safeguarding with regard to future increases but I shall have to confirm that.

The White Paper makes it clear that the privatisation legislation will not make any changes to the negotiating machinery, which has served the industry well. After privatisation it will be for the new companies and unions to negotiate any changes as is the case at present.

The noble Lord, Lord Peston, asked two questions. With regard to the timing of the legislation, I cannot anticipate the Queen's Speech. But the White Paper makes clear that the Government intend to introduce the legislation at the earliest opportunity to provide powers to restructure and privatise the industry, establish a regulatory system, modernise the law on electricity supply and establish a new system for maintaining and improving the service.

As for the future of consumer councils, the White Paper makes clear that arrangements will be made to ensure that an effective voice for consumers' interests will be maintained. Electricity consumer councils have been consulted about future consumer repesentation. Their views will be taken into account when finalising proposals for consumer representation and they are being fully consulted.

The noble Viscount, Lord Hanworth, is quite correct to say that so far as distribution to the final consumer is concerned, natural monopoly will effectively remain: we cannot envisage rival companies digging up the streets to offer customers a choice of cable to take electricity into their home or factory. That is why the regulatory system will be designed to provide each distribution company in the industry with incentives to operate more efficiently and to ensure that the benefits of cost-savings are shared with customers. Prices will be regulated by means of a price control formula, and companies will not be allowed to make monopoly profits at the expense of the consumer. A regulatory system is intended to be a good deal less burdensome and intrusive than the regulatory system in the United States and a good deal more effective.

My noble friend Lord Nelson of Stafford and the noble Lord, Lord Peston, will be pleased to hear that now that decisions on the future structure of the industry have been taken we are looking in depth at the future structure of the industry's centralised services including R&D. We recognise the industry's excellent record and reputation in this field and have every intention that this should continue. While it must be ultimately for the privatised industry to take the decisions on how best to take forward and organise its R&D programme, we intend to provide the framework within which it can fully utilise its existing expertise.

The Government are currently supporting comprehensive research, development and demonstration programmes aimed at exploiting the significant renewable energy resource in the UK. Over £121 million has been invested by the Department of Energy since the inception of the programme and strong support will continue to be provided to ensure their full commercial potential is realised. It is expected that the Department of Energy will spend around £50 million in further work in this important area over the next three years.

Most of the major private sector companies with an interest in the electricity generating renewable technologies—wind, tidal and geothermal hot dry rocks—are already participating in these research programmes along with the generating boards. I expect such collaborative work will continue after privatisation. The intention is to place an obligation on the distribution companies to take a specified minimum proportion of capacity from non-fossil fuel sources. This will further encourage the contribution of renewable sources to electricity supply.

The Government believe that technical constraints on the grid will not prevent the development of competition in generation as suggested by the noble Viscount, Lord Hanworth. There are of course technical limits as to what can be done but within this exist real choices for distribution companies or large customers seeking power supplies. When assessing competing bids the customers will take account not only of the cost of developing power to the station fence but also losses in transmitting power to where it is needed.

As regards obtaining capital for new generating stations, distribution companies will place contracts for new capacity with generating companies. On the strength of these contracts the generating companies will be able to borrow funds to finance power station construction. If the distribution companies decide that large power stations will meet their needs more cheaply they will join forces and place contracts jointly and share the output from the station. National planning is not necessarily the answer.

My noble friend Lord Lauderdale expressed concern about how the grid will work. The grid company will operate under its own licence and will have its own memorandum and articles of association. The grid company, rather than the distribution companies, will be responsible for the day-to-day operation of the grid. In particular, it will ensure that the advantages of a national grid merit order for power stations are monitored. Terms of access to the grid for third party users will be regulated.

I should like to conclude by making one or two general points. As I have already indicated, the Government believe that the consumer will benefit from their privatisation proposals. The consumer is being put first. No fewer than four of the six guiding principles adopted by the Secretary of State are concerned with ensuring that the consumer gets a better deal. Competition combined with effective regulation which protects the consumer but still allows competition to flourish is our intention.

The new system of guaranteed standards will for the first time give consumers the rights which they deserve. They will also give the industry the incentive to become more efficient and more responsive to the needs of its customers, thereby providing the better service that we all want.

I should make it absolutely clear that there is nothing in our proposals which will result in the lowering of safety standards. The industry has an excellent record in this area, and one which we intend should be maintained.

In conclusion, I should like to thank all noble Lords who have contributed to such a lively debate. It has been most interesting and worth while particularly because of the breadth of expertise and knowledge that exists in energy matters in your Lordships' House. If I have not been able to answer all the points which noble Lords have raised, I shall of course be glad to respond in writing.

Work on the details of the privatisation is continuing apace. I repeat that my right honourable friend the Secretary of State will be very interested in the comments made today and I shall ensure that they are conveyed to him.

On Question, Motion agreed to.

House adjourned at twenty-one minutes before three o'clock.