Energy Review

HL Deb 25 June 1998 vol 591 cc379-90

5.15 p.m.

The Minister of State, Department of Trade and Industry (Lord Clinton-Davis)

My Lords, with the leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the President of the Board of Trade on the energy review. The Statement is as follows:

"With permission, Madam Speaker, I wish to make a Statement about the Government's Review of Energy Sources for Power Generation and the preliminary conclusions upon which I am now consulting.

"The review was set up following the crisis in the coal industry last autumn, amid claims that the electricity market was rigged against coal. In response, the Government set up a wide-ranging review of electricity generation.

"The review has looked widely at the issues, with the assistance of independent consultants, about 150 outside representations and meetings with some 40 parties. It has confirmed that there are indeed serious distortions in the electricity market. As a result, prices have been higher than they should have been. New gas stations have entered the market, benefiting from these high prices, displaced coal and failed to bring prices down for the consumer.

"Without action to address these distortions, prices for consumers will continue to be higher than necessary and diversity and security of supply will suffer.

"Some have pressed the Government to go further and actually guarantee a specific share of the electricity market for UK deep-mined coal. The Government have given careful consideration to these and all other proposals. We do not, however, believe that to identify a defined share of the market regardless of other considerations would be the right course to take. Our aim is to put all fuels on a level playing field, and not to give priority to any one. We do not propose to subsidise any part of the UK coal industry. Coal producers themselves have asked for fairness, not favours.

"I must therefore make it clear, against a background of speculation in the press, that there is no deal with the generators by which the Government have offered to introduce new policies in return for the generators buying British coal. Neither are the Government's policy conclusions in any way conditional on them doing so. This, and the fact that coal purchase decisions are a matter for them, has been made clear to the generators.

"I have asked the advice of the Director General of Electricity Supply and his views are set out in our consultation document. He has identified significant problems both in the electricity pool and in the market structure. These, and the high prices arising in the market, have been among the factors encouraging the growth of gas in electricity generation at the expense of coal. He has advised me that action is needed to reform the trading arrangements, so that all plant plays a full role in competition, and to address the market power of the major generators. He also sees new entry as important. We agree with him that reform of the market is needed.

"The review has confirmed that the main objective of our energy policy should be secure, diverse and sustainable supplies of energy at competitive prices. This includes our concern to achieve environmental improvements.

"Taking account of the advice we have received from the DGES, we intend to achieve this objective by creating a competitive electricity market, founded on diverse fuel sources, providing secure supplies and, into the bargain, delivering significantly lower electricity prices to customers.

"The Government are therefore making the following proposals to remedy the market distortions. We will promote competition by reform of the wholesale electricity trading arrangements and by pressing forward with competition in electricity supply. We will seek practical opportunities for divestment of coal-fired plant by the major generators. We will establish separate licensing of distribution and supply and ensure fair trade in electricity with our European partners. We will ensure that all generators are fairly remunerated for the services they provide to the grid. Taken together, these measures should remove the current distortions which work against coal.

"Market distortions disadvantage consumers, but they also have an impact on fuel use. This could put our energy policy at risk both from high prices and from the loss of diversity and security which the squeezing out of coal and the consequent loss of coal-fired power stations would produce. Projections by our independent consultants, based on the current operation of the market, suggest that gas-fired generation could rise sharply, accounting for over 75 per cent. of our electricity within 20 years. In our view, a properly functioning market could well produce a different result.

"There are also technical issues arising from the growing use of gas on the grid. Our independent electrical engineering consultants report that the present arrangements have failed to resolve them. The DGES has said that better arrangements are needed. We propose to take this forward.

"There is a wide reform agenda to pursue. This will take time; our aim is that once it is achieved the market will operate in a fully competitive way. But the risk is that before market reform is complete, fuel choices will be distorted and diversity and security of supply will suffer. Therefore, during this period, we propose to apply a stricter energy policy to power station consents. In fact, significant market entry is still likely. Additional gas-fired power stations in various stages of development, equal to about 10 per cent. of system capacity and owned by competitors of the major generators, need no further authorisation.

"Although the DGES has reservations about restrictions on consents, he recognises the Government's responsibility for energy policy, including diversity issues. In my view, it is of primary importance to avoid the pre-emptive destruction of our scope for diversity and security while reforms are yet to feed through.

"The new consents policy will be in place only while our reform agenda is being addressed. I have asked the DGES to keep me informed of progress in addressing the competition issues. I would expect the new consents policy to be relaxed when, on the basis of his advice, we conclude that our reforms have been undertaken and the distortions removed.

"I turn now to the details of the proposed policy. We propose to approach new and pending applications for consent under Section 36 of the Electricity Act 1989 on the basis that new natural gas-fired generation would normally be inconsistent with our energy policy concerns relating to diversity and security.

"However, combined heat and power projects have environmental and other benefits which may outweigh those concerns. They would normally do so where the project is properly sized to meet on-site or nearby heat and electricity requirements and to deliver high efficiency, though each case will be examined on its merits. It will be especially important that the relevant heat and electricity uses are clearly identified.

"Other applications likely to support our environmental objectives without compromising energy security or diversity would normally be consistent with the Government's energy policy aims. They would be likely to include renewable energy projects, including energy from waste, in support of the Government's intention to launch a strong drive on renewables; proposals using clean coal technology; and fitting flue gas desulphurisation equipment.

"We would take the same energy policy approach when considering existing and new notifications under Section 14(1) of the Energy Act 1976 relating to the construction of gas-fired power stations. This would apply whether or not consent had been given under the Electricity Act.

"The consultation document gives further details of our proposals, including on notifications under Section 14(2) of the Energy Act 1976, dual firing power stations and black start units.

"Decisions on individual applications for consents under Section 36 of the Electricity Act and notifications under Section 14 of the Energy Act will take into account all the circumstances of the particular case. In particular, in applying the new policy to cases which are already before me, I would take care to weigh carefully the impact on the interests of the promoters against the wider public interest.

"The policy I am proposing today should lead to substantially lower electricity prices by promoting genuine competition and efficiency. It would also safeguard diversity and security while we, with the regulator, press on with making the market work. There have been suggestions that in the absence of restrictions, real falls in wholesale electricity prices of at least 10 per cent. should be possible in the medium term. My hope and expectation is that prices will in fact fall under our proposed policy by even more than this. While the new consents policy is in place, I have asked the DGES to continue to monitor electricity prices and alert me to any further concerns he may have.

"Coal purchase decisions are, as I have said, a matter for the generators. But if UK coal, including Scottish and Welsh coal, can be competitive on price and other terms of supply, I see no reason why it cannot have a very positive future in the electricity generation market. Achieving that success is a matter for the management and workforce of coal producers.

"Decisions on any pit closures would also be a matter for coal producers. However, in the event of any closures taking place, this Government are firmly committed to taking early action to put effective regeneration programmes in place. Consideration will be given to establishing a regeneration fund to help affected communities.

"My right honourable friends are reviewing separately the planning policies for opencast coal developments in England, Scotland and Wales in the light of the pre-election 10-point plan, environmental and local concerns and relevant conclusions of this review. They expect to announce proposals following the final outcome of this review.

"Safeguarding the environment is a priority for the Government. Sulphur dioxide emissions from the major electricity generators in England and Wales are already programmed to fall to 365 kilotonnes in 2005. This target, and significant interim reductions, must be achieved.

"We believe that coal-fired generators should take all reasonable steps to run their plant with flue gas desulphurisation more than their plant without it. And major coal-fired generators should be encouraged to have at least one FGD-equipped plant.

"Against this background, the Environment Agency will be discussing with generators its proposals for revision of emission limits. We expect these discussions to encompass the implications of this announcement, such as for the likely lifetime and usage of coal-fired power stations and policy on flue gas desulphurisation.

"On climate change, the Government remain committed to achieving their targets. Our policy remains consistent with a decline in carbon emissions from the electricity generating industry. We shall be consulting this summer on meeting our legally binding Kyoto target of a 12.5 per cent. cut in greenhouse gas emissions and on how we can move beyond that towards our own aim of reducing carbon dioxide emissions by 20 per cent. by 2010.

"The proposals I have made today are open for consultation until Monday 20th July, and we intend to announce our conclusions shortly thereafter. Until then, I propose to defer decisions on power station consents and notifications; where decisions are necessary and should not be deferred, I propose to apply the proposals announced today, subject to the circumstances of each particular case.

"A consultation document, with full details of our proposals, is published today. Copies have been placed in the Vote Office."

My Lords, that concludes the Statement.

5.28 p.m.

Earl Attlee

My Lords, I am grateful to the Minister for repeating the Statement made in another place by his right honourable friend the President of the Board of Trade. We on these Benches are not surprised by the content of the Statement as it is largely a reiteration of the difficulty in which the Government find themselves. That stems from a romantic attachment to the coal industry.

According to the report of the Select Committee in another place, it took the Government six months to realise that they did not have an energy policy. It has taken them a further six months to make this Statement, which is entirely "stopgap". The only decision made appears to be to continue the Section 36 moratorium, except for CHP projects. Does the Minister agree that, yet again, there is this short-term decision which does not allow industry to undertake long-term planning? When will the Government make a substantive decision?

The electricity pool trading arrangement has already delivered a 21 per cent. reduction in the cost of electricity but, at the same time, emissions have also been severely reduced. However, the pool can clearly benefit from further improvements in the light of experience. There is no indication as to how that may be achieved although it is the key policy initiative that is required.

Unfortunately, the Government do not appear to have grasped or understood the basic laws of physics and chemistry. Gas turbines are "internal combustion engines" which are thermo-dynamically more efficient than steam driven coal-fired equipment. Indeed, some gas turbine plants can be 60 per cent. efficient. The ratio of hydrogen to carbon is much more advantageous with natural gas than with coal. As a result, more water and less harmful CO² is produced when burning natural gas. In addition, coal contains sulphur which produces harmful SO² emissions, although they have fallen overall by 25 per cent. at least with the dash for gas.

I am sure that the Minister will accept those facts. But does he agree that, as the policy increases coal burn, it will also increase SO² and CO² emissions? The SO² emissions can be cleaned with expensive FGDS equipment, but also there is nothing that the Minister can do about CO² emissions. In that context, does the Minister agree that paragraph 27 of the Statement is extremely weak? It states: We believe that coal-fired generators should take all reasonable steps to run their plant with flue gas desulphurisation more than their plant without it". Will the Minister assure the House that the Environment Agency will not be allowed to relax emission limits?

The Section 36 moratorium is not to be lifted but instead, the Government will generally find that, new natural gas-fired generation would normally be inconsistent with our energy policy concerns relating to diversity and security". Does the Minister agree that that flies in the face of the considered view of the Labour-dominated Select Committee in another place? Its recent report states quite clearly that diversity and security of supply is not a problem. Indeed, if anything, matters have improved over recent years. Does the Minister agree also that that will result in a field day for lawyers attempting to secure Section 36 approvals? I have already heard from one generating company which is considering legal advice and action.

The Government will claim that they have increased the market for coal, but what is to stop the generators from importing more economical, low-sulphur fuel from abroad? In any event, they may have to import some coal to mix with high sulphur UK deep-mined coal in order to meet the SO² emissions limits per unit of electricity. That will increase CO² emissions still further.

Why should the generators decide to act like turkeys voting for Christmas and agree to sell their moth-balled power stations to others, desirable though it may be for competition? To be quite blunt, what will be in it for them?

In the Statement, it is claimed that wholesale electricity prices will fall by at least 10 per cent. in the medium term. That is the spin which will be given to the Statement. But how is the "medium term" defined and what do the Government understand to be the current wholesale price?

The Government do not appear to understand the damage that they are inflicting on British industry, including the coal industry, with their policy, or lack of one. A highly polluting sunset industry is being supported at the expense of a clean, new, high technology industry. Does the Minister not understand that more employment and inward investment is being put in jeopardy than can be saved in the coal industry?

This Statement is extremely disappointing because the Government have done absolutely nothing to dispel uncertainty in the industry. Does the Minister agree that in the first 12 months of office it would have been better to have arranged for the overhaul of the electricity pool and the setting of durable emission limits, and then allow market forces to provide the security, diversity and sustainable energy at the lowest cost?

5.35 p.m.

Lord Ezra

My Lords, I, too, thank the noble Lord for repeating the Statement. Before I comment on it and ask questions, I should remind the House that I have worked in the energy sector for many years and am still actively involved therein.

The Government have had to face a very difficult task in tackling the problem of reviewing energy sources for power generation. They have had to try to reconcile on the one hand their desire to improve the prospects for coal with which, in view of my past activities, I fully sympathise and to do that by removing the distortions which they have identified in the market place and to aim for diversity of supply. But, at the same time, there is a need to avoid undue interference in market competition and to safeguard the environment. Those are three very difficult issues to reconcile.

Unlike the noble Earl, I feel that on the whole the Government have made a reasonable attempt to deal with the matter but there is still a long way to go. There are a number of questions which may well be asked. First—and I am with the noble Earl on this—I have pressed on other occasions for the Government to come out with an overall energy policy. This is one part of the energy scene, albeit a major one. But it is important that there should be an overall statement of energy policy within which these various individual reviews can be considered.

Secondly, there is the question of the review of the pool. That will be a very complex issue. How long will it take? The longer it takes, the more uncertainty it will create within the electricity generation and supply industry. Therefore, that is a review which it was undoubtedly necessary to carry out but it is extremely important that the results should be applied as soon as possible.

The Statement referred to the divestment of coal-fired power stations, which the noble Earl mentioned. I should like to know on what terms these will be offered in the market place. The plants are all written down. They were written down substantially at the time of privatisation and have probably been written down a good deal more since. Will they be offered at something reflecting their written-down values or at what the generators disposing of them consider to be their market values? Obviously that will be a key issue on whether those plants can be operated effectively and competitively on coal.

Then there is the interim period during which the consents will be restricted. I was extremely pleased to note the exception made for combined heat and power plants. But that period of restriction will obviously be undesirable if projected beyond a relatively limited period. The Government accept, by the general wording of the report, that that will be an interim measure. It is linked with the other measures which have been mentioned and so it is important to have some idea of how long that interim period will last.

Finally, on the question of the environment, great emphasis is made in the Statement of the Government's continued commitment to their environmental objectives. As regards coal, its longer term prospects are closely linked with clean coal technology to which reference is made in the report. But there is no indication of the way in which the development of clean coal technology will be advanced. In my opinion what is now needed is a large-scale demonstration plant. As far as I am aware, there is no provision made for that. Is this something which the Government have in mind?

5.39 p.m.

Lord Clinton-Davis

My Lords, I am obliged to the noble Earl, Lord Attlee, and also to the noble Lord, Lord Ezra, whose contribution to the coal industry is one of great repute and well deserved. I am most grateful for the physics lesson given by the noble Earl, Lord Attlee. That takes me back. It is important that he should explain such matters. I shall attend his tutorials in due course. This subject is not my main remit in the Department of Trade and Industry but I am grateful for the thought that he has applied to his response to the Statement.

To talk in terms of a romantic attachment to the coal industry is a little misplaced. Human tragedies are associated with the dramatic run-down of the coal industry. Not so long ago there were 280,000 miners; today there are just over 12,000. That is associated with the collapse of communities, aspirations, desires and hopes. We should not dissociate ourselves from that. To talk of a romantic attachment to the coal industry is not the way that I should have thought we would want to consider these matters.

The noble Earl said that gas turbines are more efficient than coal and cleaner. We as a Government have made it clear that our proposals are not inconsistent with our targets. The noble Earl said that paragraph 27 of the Statement is weak. He asked me to assure the House that the Environment Agency would not relax the limits. The Environment Agency is an independent body. It will discuss these matters with the generators and it will set the limits. As I have said, our proposals are not inconsistent with the targets that we have already established.

The noble Earl asked why generators should buy United Kingdom coal. That is a commercial matter for the generators. Our proposals are designed—I think the noble Lord missed this—to "derig" a rigged market. We believe that the United Kingdom will be able to compete. The United Kingdom coal industry has repeatedly said that it wants fairness and not favours, as was mentioned in the Statement. The noble Earl asked about the report of the Trade and Industry Select Committee. It is not appropriate for me to give a considered answer to the points raised in that report. We shall do so in due course. That is in accordance with precedent.

The noble Earl asked many questions. I did my best to note them down but I was a little overcome. I believe he said that gas is a clean, high tech industry and our proposals would impair investment. However, new gas investment is effectively being subsidised by the consumer. That is hardly a sensible arrangement. I hardly noticed any comment from the noble Earl as regards the current unfairness and how the market is rigged against coal. The Statement mentions the evidence that the Government have relied on to come to that conclusion. It is noticeable that there was an ambivalent response to the Statement by the shadow Secretary of State in another place when he shed some crocodile tears over coal. Yet at the same time the shadow Minister here sheds no crocodile tears and hardly refers to the value of the coal industry.

I turn now to the points made by the noble Lord, Lord Ezra. He is right to say that we face a difficult task. Securing a balance here is a formidable challenge. We have made a reasonable start to that. Some complaint was made about delay. The Opposition when in government imposed this incredibly complex and unfair system upon the energy industry of this country. Some were able to take advantage of it but others were not. Others were plainly disadvantaged. We seek a fair, unrigged market. I believe that the noble Lord, Lord Ezra, would share that view. He asked me how long the review will take. The DGES will announce details of the full review next month. I cannot go beyond that for obvious reasons.

The noble Lord asked about clean coal and a demonstration plant. We are working with the industry on relevant research and development but no firm proposals have yet been put forward for a demonstration plant. The most likely option is fundamentally American. The noble Lord has put his finger on an important point. We shall certainly look further into that issue. I am most grateful for his comments.

The noble Earl asked about the sale of mothballed plant. We have made it clear that we shall seek practical opportunities for divestment of coal-fired plant by the generators. They will, of course, seek a fair price for their mothballed assets.

I believe I have dealt with most of the points that were raised. I shall certainly examine what has been said. I thank both the noble Earl and the noble Lord for the contributions they have made this afternoon.

5.47 p.m.

Lord Hardy of Wath

My Lords, I thank my noble friend for repeating the Statement. As he said, this is an exceedingly difficult area and the problems which the present administration inherited are serious ones. Will my noble friend comment on some of the wilder observations which have been made over recent weeks, many of which are not particularly well informed? Will he request the Official Opposition to be absolutely clear about their position? Do they seriously expect to see the British coal industry completely eradicated and our highly technologically advanced mining engineering industry virtually wiped out in a world where vast quantities of coal will be burnt, and perhaps not burnt cleanly if there is no base on which to improve the technology?

Does my noble friend accept that the Government's efforts to provide a future for coal, and therefore a broader base for the British energy requirement, deserve to be applauded? One hopes that they will maintain their efforts not only to ensure that the playing field is level, but also to ensure that that field is clean and green.

Lord Clinton-Davis

My Lords, I am grateful to my noble friend. I remember his clear dedication and commitment over many years when we were both in another place to the welfare of the people who served in the coal industry.

I do not know where to start in relation to the wilder observations in the media. I shall not take up the time of the House in seeking to rebut such a wide, disparate and negative component of argument, if it may be so termed, as has been displayed over recent weeks.

We have been accused, even in this House today, of delay. But when one thinks of the inheritance to which my noble friend alluded, it takes time to begin to unravel those complexities and injustices. We have not received any evidence of a determination to deal with that position from the noble Earl today. I believe that it was his party's intention to cause severe injury to the coal industry. There were an amalgam of reasons for that, most of them ideological and certainly political. What we now seek to achieve is a policy that offers fair competition for all fuels and an end to the unfair discrimination against coal that has persisted for so long. We need a range of fossil and non-fossil sources. It would be wrong to see a total dependence on gas. So it is a balanced market with different fuels competing fairly within an environmental framework that has been set by the Government. I believe that that is the way forward. I thank my noble friend for his constructive observations.

Lord Stoddart of Swindon

My Lords, I congratulate my noble friend and the Government on bringing forward this Statement on energy policy, which is presently a very complex area. It exercises many minds up and down the country. I assure my noble friend that those of us who were brought up in mining areas and whose fathers were miners have no romantic attachment to the coal industry. However, we do realise that it is still an important part of our energy source and indeed has strategic value. Wars have not gone away forever. It would be very difficult to extract North Sea gas in a period of war, although it would be possible to extract coal if we had any deep coal mines left. So we have to examine the strategic value of coal as well as its existing commercial value.

I wish to ask my noble friend one or two questions about future assistance for the coal industry. It is not unrespectable for the Government to give assistance to a particular industry which has a value, both strategic and commercial, particularly since that industry has been denied finance for research over a long period of time. Do the Government intend to assist in alternative coal technologies such as the fluidised bed system of firing power stations? Are we to go in for gasification of coal, as they do in the United States? That would completely answer the question put by the noble Earl, Lord Attlee, in relation to the overall efficiency of coal-fired gas turbines and natural gas. It is possible to gasify coal and use the gas in power stations to provide electricity. So there are some very good reasons why the coal industry should be supported and why we should bring it up to modern standards. One final important question is: how many years of natural gas supply is still available to us? That ought to figure in the thinking of the Government and the country.

Lord Clinton-Davis

My Lords, I thank my noble friend for his contribution. I am aware of his familial background in relation to the coal industry. We served together in another place over many years.

My noble friend is right in saying that the coal industry remains a very important, indeed vital, energy source for this country. As he says, it has a strategic value. However, as I said earlier, the coal industry is not looking to the Government for subsidies or support of that kind. It is not looking for favours; it is looking for fairness.

So far as concerns alternative coal technology, that is an industry where a great deal of time and money has been spent on research and development. I am sure that will continue, and it is to be encouraged.

Fluidised bed technology is mainly a US technology, and is not to be disparaged for that reason. I have indicated the sort of progress that can be made in that regard. Gasification is an area where we should welcome proposals from the industry. I certainly do not claim to be nearly as expert in this field as the noble Earl with his background and his extraordinary knowledge of physics. But of course he is much younger than I am and learnt physics rather more recently.

I cannot tell my noble friend how many years of natural gas we have available. However, I shall be happy to write to him on the matter.

Baroness Denton of Wakefield

My Lords, why does the report ignore that part of the United Kingdom where energy prices are at their highest for both the consumer and commerce, a part of the United Kingdom with the greatest need for inward investment and with the greatest number of people per capita on social benefits? I refer to Northern Ireland.

There is a proposed link from Scotland to Northern Ireland in the power field. That policy will affect the Northern Ireland generators. Yet it would seem that there has been no mention of that, and no plan has been proposed. That will make it very difficult for people to invest in energy in Northern Ireland. Can the Minister explain where the future lies in that area?

Lord Clinton-Davis

My Lords, the House is well aware of the noble Baroness's contribution to the affairs of Northern Ireland. She remains very much concerned about that part of our country. The way in which we deal with Northern Ireland in the context that we are discussing today is a matter for the Northern Ireland Office and not the Department of Trade and Industry. I am sure that that department will take into account the points made by the noble Baroness.

Lord Craig of Radley

My Lords, speaking as a member of the science and technology sub-committee examining the management of nuclear waste, is the Minister prepared to comment on the Government's policy for future nuclear generation, bearing in mind that it has an important part to play in reducing the amount of carbon dioxide and other carbons released into the atmosphere?

Lord Clinton-Davis

My Lords, I thank the noble and gallant Lord for his question. Future nuclear generation is not dealt with in this report. We have no plans to develop that particular aspect of industry. No doubt it is an issue to which we shall return in due course in the context of energy policy.