HL Deb 12 February 1990 vol 515 cc1121-32

4.30 p.m.

Viscount Ullswater

My Lords, with the leave of the House, I shall repeat a Statement made in another place by my right honourable friend the Secretary of State for Energy. The Statement is as follows:

"With permission, Mr. Speaker, I should like to make a statement about electricity privatisation, the publication of the draft regulatory licences for the industry and the non-fossil fuel obligation.

"Good progress continues to be made in preparing the electricity supply industry for vesting on 31st March. The House will be aware that the Second Commencement Order under the Electricity Act 1989 was made at the end of January.

"Today I am taking another important step towards completing the restructuring of the industry. I have today made available to the House copies of revised drafts of the licences to be issued to the successors of the CEGB and area electricity boards, which were initially published on 10th January 1989. The revised drafts take account of commitments made during the passage of the Electricity Act and consultations since the original drafts were published.

"Other licensees will receive licences based on these drafts but tailored to their particular circumstances. Regulations are being laid today setting out how to apply for a licence and the details of the application procedure. The exemption order identifying those who will not require a licence is also being tabled today.

"The principal changes in the draft licences published today are in the conditions dealing with price control, security of supply and the transition to a competitive market. The revised conditions are explained in detail in the explanatory notes that accompany the licences.

"The average price for all customers supplied by the public electricity supply companies will be controlled by an RPI-x+y formula, where y represents the actual costs to the companies of purchasing the electricity supplied. Customers taking more than 1 megawatt will benefit from the competition in supply that will be introduced by privatisation. I expect many of them to enjoy price reductions. It may take some time for customers to gain experience of the market and negotiate terms. I have therefore sought an undertaking from the industry that it will use its best endeavours to offer a one-year real price freeze to customers taking more than 1 megawatt.

"Customers taking less than 1 megawatt will benefit from an addition to the price control. Although the industry has yet to propose a final figure, I see no reason why the average price to these customers should rise by much more than the current rate of inflation this year. The price control should prevent any further real increase before the end of March 1993. Indeed the public electricity supply companies could well be able to offer some real price reductions to these customers in this period.

"I believe that the combination of these controls will be more effective than the yardstick price control proposed in the original draft licences. Altogether I do not expect the average price for all customers to rise in real terms this year.

"All of these expectations on prices allow for the effect of the fossil fuel levy, which I intend to set for 1990–91 at a rate of 10.6 per cent. on the value of final sales. I expect the rate of levy to decline significantly over the next eight years. I shall shortly be laying the regulations under which the levy will be established and collected.

"I also intend to lay at the same time an order setting the initial non-fossil fuel obligation for the public electricity supply companies. The intention of the obligation is not only to ensure that existing and committed nuclear plant in England and Wales is contracted for; it is also to encourage the development of commercial renewable energy sources. Around 300 projects have been put forward to the area boards in response to this policy. The Government have been extremely encouraged by this response and wish to ensure a full contribution from renewables to the NFFO. Given the size of the response, it has not been possible to assess all these projects fully by the time the initial order needs to be made.

"Accordingly, the initial order will cover nuclear capacity only. I intend to allow a further two months for the area boards to complete their negotiations with renewable operators and I shall then lay a second order relating specifically to renewables. This will ensure that renewables projects can be assessed fairly and a proper contribution obtained.

"The initial order will, therefore, amount to some 8,000 megawatts or so in total for the period 1990–91 to 1997–98. As I told the House on 9th November, the Government will review the prospects for nuclear power in 1994. Decisions about the level of the obligation beyond 1998 will be taken then.

"Returning to the licences, the conditions on security of supply have been amended to ensure that all suppliers meet the current standards of security except where their customers choose otherwise. Suppliers may meet this condition by becoming members of the new electricity trading pool that is being established, since the price of electricity in the pool will include a capacity charge that reflects the value of secure supply to customers. Suppliers will have economic incentives to ensure that sufficient generating plant is available. I believe that this approach will provide secure supplies more effectively than central planning by a monopoly supplier.

"As for competition in supply, the licences now incorporate provisions to implement the decisions announced on 29th September 1989. These provided for an orderly and stable transition to a fully competitive market by allowing other suppliers to compete with the area supply companies for customers taking more than 1 megawatt at the outset, for customers taking more than 100 kilowatts after four years and for all customers after eight years.

"The licences, therefore, contain corresponding transitional constraints on the premises which such competitors can supply. If they apply for licences to supply customers falling within these restrictions, I will look to the Director General of Electricity Supply to advise me on whether such licences should be issued.

"While I shall be disposed to act in accordance with the restrictions announced on 29th September, I accept that I shall need to exercise discretion to deal with particular circumstances that already exist or may arise. These cases will be considered on their merits. The licences also contain transitional limits on the extent to which National Power and PowerGen can engage in direct sales to enable competition in supply and new supply arrangements to develop.

"The arrangements that I have set out today mark the successful achievement of another stage in this privatisation. When the new companies are vested on 31st March, this country will have the most competitive electricity industry in the world. I know that those in the industry are keen to be privatised to respond to the new challenges and to rid themselves of the dead hand of the public sector. I am also sure that the public will welcome the benefits of competition and will seize the opportunity to invest in those companies."

That concludes the Statement.

4.37 p.m.

Lord Williams of Elvel

My Lords, the House will be grateful to the noble Viscount for repeating a Statement made in another place which was indeed widely advertised in the weekend press. Like many statements on electricity privatisation emerging from the Department of Energy, this Statement raises a further host of questions and does not take us a great deal further. I shall try to marshal my questions for the benefit of your Lordships because there are many, under several headings. I start first with the price increases that the Secretary of State envisages.

By indicating that the Secretary of State is prepared to accept price increases around the rate of inflation, above the rate of inflation or slightly above the rate of inflation, or price increases which are not real price increases —in other words, spot on the rate of inflation —is he not encouraging inflation psychology? After all, the CEGB has had the advantage of a coal price agreement with British Coal and its costs will be held down. Why then does it need those price increases at all? Why is the Secretary of State encouraging inflation merely in order, as we believe, to provide a return so that he can float off this industry to the public?

Secondly, on the price control formula, it appears from what the noble Viscount has said that it has now changed. He was not on the Government Front Bench when we discussed that point at considerable length when the Electricity Bill was before the House. We from this side tried to put the price formula that was then advertised by the Government into a schedule of the Bill. We were refused that. I now understand perfectly well why we were refused —because the Government continued to make up the whole thing as they went along.

We now have a new version. We have something called y, which is the cost of electricity to the public electricity suppliers. What will the contracts between the successors to the area boards and the generators be about? What term will they have? How will the pooling work? How will the spot market work? How will the settlements work? Finally, how on earth will the electricity consumer be able to determine whether his price is a fair one? He will have no idea, any more than any of us will, as to how that price is calculated.

Thirdly, on the security of supply, the Act is quite clear on the subject: the area boards or their successors have a responsibility to supply any reasonable request for electricity supply in their authorised areas. In the Statement it now appears that they "may" enter into arrangements for pooling in order to ensure continuity of supply in their authorised areas. What happens if they do not choose to enter into such arrangements? Who do we sue when the lights go out? Will it be the successors to the area boards? Who will it be?

As regards the nuclear levy, or the non-fossil-fuel obligation, we understand that this will be about 10.6 per cent., and declining. Does that tell us that the cost of nuclear energy is approximately 40 per cent. higher than the cost of fossil-fuel-generated electricity? Is it not the case that the levy is only set as high as that in order that nuclear-generated electricity should be the baseload of the system rather than competing with other sources? Does the nuclear levy apply to the French interconnector or the Scottish interconnector?

Why are we no further on the question of renewables? We had assurances in this House about the share of renewables in the non-fossil-fuel obligation. The noble Viscount said there is no share at the moment. We do not know what that can possibly be. Where are we on renewables?

Turning to the licences, why is there nothing in the licences and nothing in the Statement about the encouragement of energy efficiency? That was one of the great debates that we had throughout the passage of the Bill in your Lordships' House. We thought the Government had conceded in principle that there would be things in the licences which would not only just promote energy efficiency but would actively promote it and make sure that public electricity suppliers ensured that energy in their authorised areas was used as efficiently as possible. There is nothing here to give us any encouragement.

There are many more questions which come out of this Statement. We are only a quarter of the way towards being able to write a prospectus for the public electricity suppliers. The Department of Energy really must do much, much better than this if it is to get a flotation of public electricity suppliers away in November. The hollow laugh that one could say greets the expression that the arrangements mark the successful achievement of another stage in this privatisation is just an echo of the other hollow laughs that there have been when whoever it may be comes forward to the Government Dispatch Box and says, "We've got another marvellous wheeze." They are making the whole thing up as they go along. The aeroplane is not even on the end of the runway yet and if it belly-flops, as it will, the Government have only themselves to blame.

4.45 p.m.

Baroness Seear

My Lords, from these Benches I should like to thank the noble Viscount for repeating the Statement. I must say that a Statement which is 13 pages long and which reached us less than half an hour before we had to comment on it makes considerably difficult the proper operation of the task of this House in commenting on Statements of this kind. The length and complexity of the Statement inevitably means that we almost launch into a debate on it, which I understood from comments made earlier today is exactly what we are not supposed to do in regard to Statements. So the whole approach taken in regard to this Statement is very much open to question, considering the method we now adopt.

In order not to prolong the debate, I would echo many of the points that have already been made by the noble Lord, Lord Williams of Elvel, and I shall only add a few additional or reinforcing questions. I see that on the new pricing arrangements we have a formula of RPI minus x plus y. The noble Lord, Lord Williams, has asked what y is.y I will complement that question by asking what x is. It would be very nice if we could know what the whole of the formula really means, and not be blinded by algebra.

On pricing, I should like to make the comment that later on the same page, when talking about what customers can expect, the Statement says: I [the Secretary of State] expect many of them to enjoy price reductions. I ask: how many? Will it be 55 per cent. or some other percentage? On what is that cheerful expectation based? Could the noble Viscount tell us why many of them should expect to enjoy reductions?

I should also like to ask him a question about renewables. There is a deep bow made here to renewables and reference is made to how delighted the Secretary of State has been at the very large number of proposals that have been put forward. Can we take it, as a result of this energy in the field of renewables, that the Government will give very serious consideration to increasing the amount of resources allowed for the development of renewables? I am sure the whole House would agree that if we could get really good renewables, about which there has been very considerable scepticism —a scepticism which I have shared on many occasions —the whole position regarding energy in the country would be greatly changed. What are the Government, in concrete terms, proposing to do to encourage the enthusiasm for renewables which is reported in this Statement?

I should like to ask also about security of supply, of which a great deal is made. Are we right in understanding, although it is not really in the Statement, that there is an arrangement with Scottish producers and also with French producers for ensuring certainty of supply? What are these arrangements? To what extent are they reliable and are we taking any line regarding the fact that the great mass of electricity we shall draw from France, if we do draw from France, will be nuclear generated?

Also, we understood that large producers would be able to get a substantial reduction. It seems from the Statement that there is to be a pause in the case of large production going direct to the generators. Am I right in interpreting that as meaning that there is to be a pause of a year before it will be possible to go direct to the generators? Obviously it would save them a considerable amount if they could do it because it would cut out one profit level and it would also mean that they would not have to bear their share of the nuclear contribution. There are many other points one could raise, but that would turn this into a debate.

My final question is, I suppose, a rhetorical one. In view of the high cost of nuclear power which this Statement supports, do the Government really think it is sensible to go on with Sizewell B?

Viscount Ullswater

My Lords, I should like to thank the noble Lord, Lord Williams, and the noble Baroness, Lady Seear, for their guarded welcome to this Statement. I would say that the progress of privatisation is running on speed, and everything that is being done according to plan.

The noble Lord, Lord Williams asked me some questions and I shall do my best, in a limited time, to answer them. He suggested that the prices, now that the coal contracts have been secured, should not be allowed to rise at all. Certainly the Statement says that prices will only rise at the rate of, or just about the rate of, inflation. I should like to remind the noble Lord that prices are lower in real terms that they were five years ago. It is natural that prices should have risen over the last two years as the surplus of capacity in the system has declined. The industry should be able to finance new investment at current price levels, and the returns are not excessive.

Regarding security of supply, about which the noble Lord and the noble Baroness asked, it is very much the pool price that will contain a capacity charge that will ensure that sufficient power stations are built to ensure security to current standards. Competition will help to ensure that they are built at the lowest cost. Licence conditions on all suppliers will enshrine the current standards of security. They will also ensure that suppliers provide sufficient information to the director general to enable him to take a view on the level of security provided. If he believes that levels of security must be increased, he can seek modifications to the licence conditions by agreement or by reference to the MMC.

The noble Lord also asked me about pooling and the operation of a pool. Generating companies will sell all the energy output of their stations into the pool, from where supply companies will buy the required amounts of energy to satisfy their customers' demand. Every day each generating company will bid its price for each of its generating sets for the following day. On the basis of these offer prices the National Grid Company will schedule and dispatch all generating sets so as to meet demand at least cost.

The noble Lord also asked me about the levy and the non-fossil fuel obligation. He also inquired about why the renewables had not been included so far. As the Statement said, there are a number of projects, 300 in all, which have not had time to be assessed in order to be included in today's Statement. The non-fossil fuel obligation will include the building of Sizewell B but no further nuclear stations. As has been reported, the nuclear option will be reviewed in 1994. The French connector will not be subject to the non-fossil fuel obligation; nor will it be subject to the levy.

The levy is not additional money required to run the nuclear stations. The cost of electricity at the moment includes the cost of electricity generated by nuclear power. The levy makes it much more transparent.

The noble Baroness, Lady Seear, asked me what the x factor was in the price formula that I read out. The x factors in the licence control various parts of the final price. One will limit increases in the grid companies' transmission charges; others will limit increases in the area boards' distribution charges and supply margins. It is a fairly technical and complicated subject. I could go into it in more detail but perhaps it would not be right at the moment.

4.52 p.m.

Baroness Seear

Perhaps I may suggest that the noble Lord and I would not be much the wiser!

Viscount Ullswater

My Lords, the noble Baroness also asked me whether the generators could supply direct during the current phase, during the first year. The answer is yes. They are allowed to supply direct to a certain percentage of the market which will not be more than 15 per cent. in any one individual supply area. I hope that I have dealt with all the points.

Lord Peyton of Yeovil

My Lords, is my noble friend pleasantly aware that no one will envy him the task of explaining the Government's plan to your Lordships' House? He enjoys a measure of protection both from the rules which were referred to earlier this afternoon which forbid debate now and by virtue of the complexity of the plan which is quite impossible to digest simply by hearing it once. However, I should like to ask him two questions. First, he claims that everything that has been done is being done according to plan. Would he please seek an early opportunity to inform the House what that plan is, with a reasonable statement as to the time element in it? Secondly, how do the Government justify the retention of the fossil fuel levy —it was an idea originally introduced in order to protect those private owners of nuclear power stations—without doing anything so far as one knows in the field of energy saving? Although my noble friend did not have the conduct of the Bill, does he not recall that a very large element in the debate on the Bill expressed disappointment at the fact that the Government did not give adequate emphasis to this extremely important factor?

Viscount Ullswater

My Lords, perhaps I may say to my noble friend that he should not confuse a radical change for the electricity industry with the muddle as he sees it. The electricity industry is going through a radical change. It is certainly not as he describes it.

I have suggested in the Statement that we are on target for vesting on 31st March. That will continue and that date will be met. As my noble friend knows, it is intended that the sale of the public electricity industry's suppliers will be later on in the autumn of this year and the generators in the first half of next year.

On the fossil fuel levy and why we need to continue with it, it has always been accepted that nuclear costs are higher than fossil fuel costs. The fossil fuel levy evens out the amount of money between the two generating systems. Also the nuclear industry is required so that we have a diversity and security of supply. Also I do not think that we should neglect the environmental benefits that we have from the nuclear industry.

Lord John-Mackie

My Lords, the words "competition", "competitive" and so on are mentioned several times in the Statement. I have a mile of line to my farm supplied by the present electricity board. I presume that it will be taken over. That will be the line from which I obtain my supply. If I quarrel with the company, does the noble Viscount suggest that there is someone competitive enough to build another mile of line to supply me with electricity? People in many outlying areas are worred about the competition. Can the Minister give us some idea what will happen if we demand another supply?

Viscount Ullswater

My Lords, as I understand it, the transmission lines remain as a natural monopoly.

Lord Stoddart of Swindon

My Lords, the noble Viscount said that the arrangements that he set out today mark the successful achievement of another stage in the privatisation. If he will forgive some of us, we do not quite see it that way. So far the privatisation has been fraught with danger, to the extent that part of the electricity supply industry has had to be taken out of the privatisation programme. Will he tell the House, and certainly tell me, who in the industry, other than senior officials of the area boards, is keen to be privatised and to respond to these new challenges to which he refers? So far as I know, the people working in the electricity supply industry simply do not want to be privatised. They have not yet become convinced of the benefits of the industry being privatised, and nor have the consumers.

The noble Viscount referred to the dead hand of the public sector being removed from the electricity industry. Does he not appreciate and agree that a large part of the industry is being retained in the public sector —that is the nuclear part —simply and soley because the private sector is unable to make a profit out of it? Is it the case that the public sector must incur all the losses and the private sector can enjoy all the profits?

Since the nuclear industry is to remain in the public sector, can the Minister say what on earth is the benefit gained from retaining the fossil fuel levy? It does not appear to be reasonable or competent to impose such a levy, bearing in mind that the nuclear industry is to be kept in public hands.

Can the noble Viscount also answer some of the questions which have been asked? For example, can he reply to my noble friend who asked who can be sued if the lights go out? The public are entitled to know the answer. Will he also say exactly who are the consumers who will enjoy reductions in the price of electricity? That question was put by the noble Baroness, Lady Seear. Finally, what encouragement will be given to the electricity supply industry to institute the least-cost option?

The noble Baroness asked the Minister about Sizewell. There is no question that it is possible for the new electricity area boards to save the public a good deal in capital cost and in the cost of elecricity by bringing forward ideas and projects which do not involve the building of new power stations but, instead, the considerable saving of electricity to the benefit of us all and the greenhouse effect.

5 p.m.

Viscount Ullswater

My Lords, the noble Lord, Lord Stoddart, asked a number of questions, including the question: why should the nuclear industry be removed? That was dealt with on a previous occasion. As I have already explained, it was the view of the proposed purchasers of the industry, who required a high rate of return in order to undertake all the unknown decommissioning costs which also had to be sold. Nuclear electricity will provide a return on its investments appropriate to the public sector. In order to do so the cost of generating nuclear electricity is higher than that from fossil fuels. Part of the reason is because the damage to the environment caused by fossil fuel generation is not costed in the price of electricity. The emissions of CO2, the global warming, is not costed. Electricity is not recovering the cost of that in order to safeguard our atmosphere. If that were to be done, no doubt it would be even more expensive than nuclear electricity —

Lord Tordoff

My Lords, if that is the case for nuclear, is not the opposite true for renewables? Is it costed when calculating the cost of renewables?

Viscount Ullswater

My Lords, the renewables will form an important part of the supply of electricity. This is being greatly encouraged by the Government, as I have stressed. The difficulty is that there are not enough renewable sources to make an impact on the requirement of electricity for the industry of this country. Our supplies cannot be guaranteed from renewables.

The noble Lord, Lord Stoddart, asked: who in the industry wants privatisation? I daresay that there are a great number of such people in the industry. I have only to cast my mind back to those who were working for the road transport company and who, when it was privatised, became shareholders. Not only did the industry do well but those people became extremely rich as a result of the shares they had purchased.

The noble Lord also asked: who would have the obligation to supply? That rests with the supply companies and it is part of the licence which they will be granted and which transfers to them the obligation to supply. I also agree that the least-cost option should be fully investigated. However, a difficulty exists because at the moment we need a certain amount of generation which is being undertaken by either fossil fuel or nuclear. Until that is privatised and there is competition we are not in a position to do a great deal about those cost options. Nevertheless, they are options for the future and are most sensible.

I have been on my feet for long enough but, in order to answer the noble Baroness, Lady Seear, I wish to point out the importance of completing and Commissioning Sizewell B in order to keep open our PWR option.

Lord Peston

My Lords, there apears to be a frightful mess. Does the Minister agree that Statements made to your Lordships' House should contain material which your average Lordship can understand rather than say that it is all very difficult —although it is all very difficult? In particular, I refer to the formula set out on page 4, which I am bound to say makes no sense to me whatever. I should like to ask the Minister questions about that. However, if he cannot answer them today perhaps he will ask his right honourable friend the Secretary of State to issue a further Statement so that we can understand the situation.

Is it not the case that in an industry such as electricity, which is subject to technical advance, we would normally expect the price of the product to fall in real terms? It is a counsel of despair to suggest that its real-terms price should be constant. We undoubtedly expect the relative price of electricity to fall compared with prices in general. If that is not the case one would like to know why.

As regards the RPI minus x plus y formula, is there not an element of double counting? The RPI refers to prices in general. I had thought that x was deducted to allow generally for productivity improvements in the industry indicating that the real price will fall. That appeared to me to be the point of the RPI minus x formula. By adding again y is one not counting the inflation rate for a second time? Does not something appear to be sadly wrong with the formula? In due course will the noble Viscount tell us what the formula means?

Viscount Ullswater

My Lords, the noble Lord, Lord Peston, will be grateful to know that the price control is designed to keep prices constant during the years that I have mentioned in order that opportunities will exist for competition which could bring them down. The price formula RPI is not a constant figure but a percentage figure. Therefore y is an important element and it is the pass-through costs.

Lord Hatch of Lusby

My Lords, the answer which the noble Viscount gave to my noble friend Lord Stoddart seems to follow very peculiar logic. He appeared to be saying that although nuclear energy could not make sufficient profit in private hands to justify the City putting its money into it, in public hands it would make sufficient profit. How will that come about? Will that not come about by double taxation; that is, by the use of taxpayers' money twice? Will it not come about through the non-fossil fuel levy plus higher prices?

The noble Viscount has not answered the question put by the noble Baroness, Lady Seear. He said that we must continue with Sizewell B. Why? Would it not lower the cost of electricity if Sizewell B were closed down now and the extra costs not incurred?

When he talks about the environment, has he ever heard of what will happen to nuclear waste? Is that not an environmental matter, or does he neglect that? In the section in which he talked about non-fossil fuel obligation, he did not say what will be the proportions between nuclear energy and renewables. There is a nice bland statement at the end of that page which states that the Government wish to ensure a full contribution from renewables. What will be the contribution, and what will be the proportions within that non-fossil fuel obligation between nuclear energy and renewables?

Again, the noble Viscount has not answered the question asked originally by the noble Baroness and also by my noble friend Lord Williams. Where does energy efficiency come into this Statement? Why is that not included in the licences? Why is energy efficiency not calculated in the whole of the calculation for the production of electricity?

This is a loose Statement trying to cover up the failure of the Government in their privatisation policy. Again, they are trying to draw a veil of respectability over the nuclear section of energy, whereas it has been clearly shown that serious energy efficiency is far more cost effective and environmentally friendly than nuclear energy can ever be.

Viscount Ullswater

My Lords, this Statement is one of a progression of Statements bringing into being electricity privatisation. As I explained earlier, we are on course for that.

Trying to privatise the nuclear section ran into difficulties in the City because of the expected return which the City would wish to make on its money by selling the nuclear industry into private hands, because of the unknown, unquantifiable costs of decommissioning and also the higher rate of return required by City investors.

As has been made clear in the past, the Government fix a different rate of return for the public sector, whose appreciation and idea of the decommissioning costs may not be the same. They certainly have their ideas, which they have put into their accounts.

I cannot repeat yet again why we require Sizewell B and why we need to keep open the PWR option. I have said it on a number of occasions; namely, for diversity and security of supply, to make sure that the nuclear option remains and that the PWR station is built and Commissioned so that we can learn from that technology.

The non-fossil fuel obligation which I mentioned in the Statement, the eight gigawatts, refers basically to the nuclear part, and the Statement goes on to say that there will be another tranche of non-fossil fuel obligation announced to meet the renewables. However, the department requires another two months to assess the value of the 300 projects at which it is at present looking.

Lord Howie of Troon

My Lords—

Lord Belstead

My Lords, I am sorry to interrupt the noble Lord but only two hours ago the House agreed that 20 minutes should be the time allotted to a Statement after the two Opposition Front Bench spokesmen have been answered. I am afraid that the noble Lord has fallen foul of that agreement today.