HL Deb 18 July 1997 vol 581 cc1141-8

12.16 p.m.

Lord Haskel

My Lords, I beg to move that this Bill he now read a second time.

In contrast with the Plant Varieties Bill, I am pleased to say that this Bill has only two clauses. It is concerned with the fossil fuel levy, which has an influence on electricity prices to consumers, a matter on which we on this side of the House are very concerned. The Bill is also important because the fossil fuel levy is the main means of raising money to support renewable technology for the generation of electricity.

The arrangements for supporting renewables in Northern Ireland are different from those in the rest of the United Kingdom and the Bill will not extend there.

The stimulation of generation from renewables is an important part of the Government's policy to achieve diverse, secure and sustainable supplies of electricity. Renewables generation also has an important part to play in securing the Government's target to reduce emissions of carbon dioxide by 20 per cent. by the year 2010.

However, the provision of support for renewable generation has not always been the main purpose of the fossil fuel levy. In the past, the greater part of the levy in England and Wales has been used to provide support for the nuclear electricity generating industry. That is no longer the case. The fact is that the nuclear generation industry received over £7 billion of support from the fossil fuel levy before the newer parts of it were privatised. It is now able to compete in the market with other generators. So apart from some money still collected for British Nuclear Fuels, and for Magnox Plc to repay them for under-collections in previous years, proceeds of the levy are now used to support renewables. From next year, all the levy income will be used for that purpose. In the current year, the fossil fuel levy is expected to raise approximately £266 million. Around 60 per cent. of that will be paid in support of renewable technologies.

Under the present arrangements, two types of electricity supplied by electricity suppliers licensed under the Electricity Act are subject to the fossil fuel levy: first, electricity from fossil fuel sources and, secondly, electricity produced under the terms of non-fossil fuel orders which are made under Section 32 of the Electricity Act 1989. These are called NFFOs. In Scotland, the arrangements are made under SROs (Scottish Renewables Orders) but in fact all the output of nuclear generating stations in England and Wales is contracted under the primary nuclear contracts, which itself is a NFFO arrangement. Consequently, this nuclear electricity is subject to the fossil fuel levy. However, the primary nuclear contract is due to expire on 31st March 1998 and if no action is taken the nuclear electricity currently generated under that contract will no longer be subject to the levy. Surprisingly, that will result in a slight upward pressure on the price of electricity in England and Wales and it is that small upward movement in electricity prices that the Bill seeks to avoid.

To prevent a distortion in favour of nuclear generators, the Fossil Fuel Levy Bill amends Section 33 of the Electricity Act, so that all electricity from nuclear sources supplied by licensed electricity suppliers will be subject to the fossil fuel levy. That will result in nuclear generators competing on equal terms with fossil fuel generators.

In Scotland, the position of nuclear generated electricity is different from that in England and Wales. Nuclear sourced electricity in Scotland is not subject to SRO or NFFO arrangements and so currently is not subject to the levy. Instead, Scottish Nuclear has a contract, the Nuclear Energy Agreement, with ScottishPower and Scottish Hydro-Electric, under which it is required to provide all the electricity it generates to ScottishPower and Scottish Hydro-Electric. The contract expires in 2005.

We are committed to the support for renewables. The Prime Minister, speaking at the Earth Summit in New York, underlined the Government's determination to put environmental concerns at the heart of the Government's decision-making process. We have set ourselves challenging targets to cut carbon dioxide emissions. I know that the noble Lord, Lord Ezra, is interested in this matter and I can inform him that last year renewable generators supplied about 2 per cent. of the UK's total demand for electricity. The majority of renewable electricity is supplied by hydro-generation, mostly based in Scotland. Generation from renewable sources, other than large-scale hydro, increased by over 7 per cent. in 1996 compared with 1995. In England, Wales and Scotland there are currently 195 renewables generation projects generating electricity under NFFO and SRO contracts, with a total capacity of 456 megawatts. Further projects are planned and under contract. We intend to ensure that there is continued growth in generation from renewables.

To meet our aims, the Minister for Science, Energy and Industry announced on 6th June that the Government propose to undertake a new and strong drive to develop renewable energy sources in line with our manifesto commitment. To determine how we will provide targeted and effective support for renewables technology in the future, he has announced a review of new and renewables energy policy. The review will include an examination of what would be necessary and practical to provide 10 per cent. of the UK's electricity from renewables by 2010. We do not intend that productive avenues of support should be rejected or that sensible reforms should be ignored. However, the Government do not intend to make decisions on such reforms until the results of that review are known.

For those reasons, the Fossil Fuel Levy Bill contains a power for the Secretary of State to make all electricity supplied by licensed electricity suppliers subject to the levy. The power would enable the scope of the levy to be extended to include renewables electricity produced outside the NFFO and SRO arrangements, such as large-scale hydro. No decision has been taken on the circumstances in which that power might be exercised and none will be taken until the review of support for renewables is complete.

When reading through the Bill, it struck me that my right honourable friend the President of the Board of Trade, as part of the review, could consider a more suitable name for the fossil fuel levy which more accurately would describe its purpose and effect.

Although this is a small Bill of only two clauses, it is important. I beg to move.

Moved, that the Bill be now read a second time.—(Lord Haskel.)

12.25 p.m.

Lord Ezra

My Lords, I thank the noble Lord, Lord Haskel, for giving the background to this short Bill. I quite understand that with the termination of the primary nuclear contract an anomaly would arise which could lead to a small increase in electricity prices when spread over the whole market and that the immediate purpose of the Bill is to avoid that. Naturally, we support that necessary correction due to the termination of the contract.

The Bill is concerned with the levy and how it is to be collected in the future. It does not deal with how the levy is to be spent. The noble Lord gave an assurance that an inquiry is being carried out into how the stimulation of non-fossil fuel sources of energy can be increased and that, when the inquiry is completed, proposals will be put forward. Will there then be legislation to amend the arrangements? I believe that the non-fossil fuel arrangement—I entirely agree with the noble Lord that we should think of some other name for it—is laid down in legislation and presumably, if there is to be any change, we can expect a further Bill. It is unfortunate that the Bill does not in any way, even in general terms, indicate the intentions of the Government in that regard, but if there is to be further legislation following the review I accept that situation.

The review, I suggest, should be accompanied by a similar study of energy efficiency measures. If the objective of cutting carbon dioxide emissions by 20 per cent. by the year 2010 is to be achieved, a very wide range of measures will have to be introduced very quickly. Therefore, I hope that the review being carried out will not be exclusively restricted to the stimulus of non-fossil fuel sources. There is a good deal that can be done by introducing measures to increase the efficiency with which energy in general is used, whether derived from fossil or non-fossil fuels.

I have in mind in particular combined heat and power, a process with which your Lordships are familiar. It can virtually double the effectiveness with which primary energy can be converted into electricity and heat. The process has been developed in centres such as Nottingham and Sheffield—I declare an interest in that I am associated with those developments—in conjunction with the local authorities concerned. I should have thought that it needs to be taken into account as one of the ways in which the general objective of reducing carbon dioxide emissions can be achieved. I hope therefore that the non-fossil fuel obligation, as it is now known in technical jargon, can not only be rechristened but widened to include the stimulus of energy efficiency measures in general. In the hope that that is the intention, I welcome the Bill.

I remind the noble Lord that there is a big area in which at the moment energy is not particularly efficiently used; namely, the domestic sector. We know that from the report issued by the Department of the Environment at the end of last year. I hope therefore that in the review the Government will consider the reinstatement of the e-factor, the energy factor at one time included in gas and electricity prices but no longer so, as a way of providing better funding of the Energy Saving Trust which is much more short of funds than originally envisaged by the then government which set it up. I hope that that too will be considered.

I am therefore looking to a range of measures not only to stimulate the development of non-fossil fuels but also to encourage the better use of energy in the various sectors of consumption which can be harnessed to the desirable objective of reducing CO2 emissions. As a small step in that direction, I welcome the Bill and hope that there will be other measures later to complement it.

12.30 p.m.

Lord Fraser of Carmyllie

My Lords, I say immediately to the noble Lord that on this side of your Lordships' House we support this Bill in principle. Indeed, but for that rare abberation of political judgment by the British people on 1st May, I have no doubt that I would have been introducing this self-same Bill from the other side of the Chamber. In those circumstances it is unnecessary for me in any way to rehearse the elaborate and detailed argument which the noble Lord usefully gave to the House in support of this measure.

However, I would be grateful if the noble Lord could respond on two matters. The first relates to making it clear to a wider audience what the measure encompasses. In the press release which the DTI put out in a somewhat exuberant fashion on 27th June, it was stated that this was a Bill to save electricity consumers £70 million. I agree that indirectly one reaches a position where prices do not increase, but it is a nice point whether, if prices do not increase, that is a saving. It would seem to me—perhaps the noble Lord will confirm this—that a more accurate way of describing the purpose of the Bill is to be found in the Explanatory Memorandum which indicates, The Bill will prevent nuclear electricity generators obtaining a price advantage in the market, compared to fossil-sourced electricity, after the ending on 31 March 1998 of the requirement for regional electricity companies to acquire certain amounts of nuclear electricity". That would seem to be a much more accurate way to explain the situation. It is not simply a matter of a measure being taken which will, from present levels of electricity prices, bring about any saving of the order of £70 million.

The other matter I should like to raise—I gave the noble Lord some notice of this—is that prior to the election I know that the present Minister for Science, Energy and Industry was approached with a proposal, as I was, that this levy—we will leave out fossil fuel for the moment because the nomenclature becomes rather tangled—should be utilised not only to support the generation of electricity from renewable resources such as wind, wave or solar power, but also that it should be extended to support the research and development of cleaner coal technologies.

Mr. John Battle certainly gave the impression to those making the proposal that he was sympathetic to the making of such a change. I know that because subsequently they came to see me and asked me to express exactly the same degree of sympathy for such a proposal. As it turns out, unnecessarily, I was somewhat more cautious in what was being proposed than he was.

It is important that we know exactly where the Government stand on the proposal. I heard what the noble Lord said in relation to the review of support for renewable technologies, which was announced in an Answer to a PQ on 6th June, but from what was contained in that and from what the noble Lord said, it does not seem to me that encompassed within that review is any assessment of whether the levy may be extended to give support to the research and development of cleaner coal technologies. It is important that we understand exactly where the Government stand on that.

There are always reviews and reviews; such reviews are designed solely to ensure that the ball is lost in the long grass. It is important for the coal industry in the United Kingdom to understand what the Government's intentions may be. I am not trying to make a point that the Government should announce an immediate review or decision; it is clearly a difficult issue. Given the announcements of policy that the Government made in terms of reduction of CO2 emissions and other greenhouse gases, even if the Government were to support cleaner coal technologies, that would have its own impact on the level of emissions even though they may be smaller.

The coal industry in this country will have to take some important decisions in terms of investment and coal miners' jobs. It will do no one any good if it is left in any state of uncertainty for any period. If the position of the Minister for Energy is that, notwithstanding the sympathy expressed before the election, he cannot see a way forward to offer the type of support he appeared to be offering, then that should be made clear at the earliest possible opportunity.

I should be grateful if the noble Lord will respond, particularly on the last point. I do not envisage that the Bill will encounter any difficulty as it proceeds through your Lordships' House. I want to be clear on one point of detail which may save time at a later stage. Clause 1 (2)(c) reads, is generated in pursuance of qualifying arrangements by a generating station fuelled or driven otherwise than by a fossil fuel or nuclear fuel". That may mean a resource in the future which is actually a renewable resource. If I understand the position correctly, the Government have included that simply as a reserve power and at the present time have no specific resource in mind. If the noble Lord can confirm that, it may save me tabling a probing amendment at a later date.

12.37 p.m.

Lord Haskel

My Lords, I thank noble Lords who have taken part in the debate for their support. The noble Lord, Lord Ezra, asked how the levy is to be spent and inquired whether any legislation would be introduced. The question of legislation depends very much on the outcome of the inquiry. Once the inquiry has been completed, we shall be in a position to know which legislation is required.

The noble Lord asked about energy efficiency and was kind enough to give me prior notice of his question. The purposes for which the fossil fuel levy may be used are closely defined in the Electricity Act, which restricts their application to encouraging renewables generation through NFFO and SRO projects. Energy efficiency is encouraged by different means. The Director General of Electricity Supply set standards of performance requiring regional electricity companies to promote the efficient use of electricity. The standards back up an allowance for energy efficiency of £1 per customer for each year of the supply price control. In short the standards require the companies to undertake, before April 1998, projects designed to save over 6,000 gigawatt hours of electricity and by the beginning of this year savings of over 5,000 gigawatt hours had been achieved. That deals with the point of energy efficiency projects.

Lord Ezra

My Lords, I thank the Minister for giving way. It was because I knew that the 1989 Act contained a very limited definition of the use to which the levy can be put that I raised the question of legislation. I am aware of what happens in the electricity industry at the moment. It is positive; it does not go far enough in my opinion; and certainly nothing has been done in the gas industry. So I thought that the Government might be tempted to have a look at this whole area, as well as that of non-fossil fuels, and bring in legislation in due course.

Lord Haskel

My Lords, I am sure that the Government will consider these factors as part of the review. The noble Lord asked about combined heat and power. The same answer applies. The application of the proceeds of the levy is closely defined in the Electricity Act and it is not possible to use the levy to support generation from fossil fuel sources. However, it has been possible to provide encouragement through the levy for combined heat and power schemes where the source of their fuel is waste. Seventeen such projects with a combined capacity of 182 megawatts have been given contracts through NFFO arrangements.

So far as concerns the e-factor, which was raised by the noble Lord, Lord Ezra, I shall bring that matter to the attention of my right honourable friend the Minister. I am sure that it will be taken into account during the review.

The noble and learned Lord, Lord Fraser, asked about the savings of £70 million annually. The noble and learned Lord reads the press releases carefully and he is right. If the electricity from nuclear generators were levy-free, the DTI estimates that the generators could benefit by up to around 0.1 pence per kilowatt hour from green ticket payments. That would amount to £70 million annually. But the Bill will prevent this market distortion which could allow nuclear generators supplying the markets of England and Wales to obtain higher prices for their electricity from 1st April. By having this arrangement the levy is spread over a much wider number of companies. The DTI estimates that the levy rate in England and Wales could be about 0.5 per cent. lower than it would have been without the Bill.

The noble and learned Lord asked about Clause 1(2)(c) of the Bill. In relation to that I am happy to confirm that this will allow electricity from those renewables generated outside of NFFO and SRO arrangements to be exempt from the levy. This leaves their situation unchanged. That is the intention of this subsection of the Bill.

The noble and learned Lord asked about clean coal. Again, he was kind enough to give me notice of his question. Since 1993 there has been a programme of support for R&D into clean coal in collaboration with industry and academia, as I am sure the noble and learned Lord knows very well. More than 215 projects with a total value of over £200 million have been initiated and part funded by the DTI. The present phase of the programme is due to be completed next year. We are currently considering what further work needs to be undertaken. The review will take into account both the recommendations in the evaluation report and the views of the industry-led Foresight Taskforce, in which I know the noble and learned Lord was involved. As part of the review the Government are considering implementing a scheme in support of clean coal technology similar to that operated under NFFO for renewable energy. At this stage I canfot say what the outcome of the review will be, but I shall bring the points made by the noble and learned Lord to the attention of my right honourable friend.

The Fossil Fuel Levy Bill is a small but necessary step towards achieving a secure, diverse and sustainable supply of electricity. The levy is the main source of support for these renewables and the Bill will ensure that the levy continues to be soundly based. I commend the Bill to the House.

On Question, Bill read a second time, and committed to a Committee of the Whole House.