HL Deb 21 June 2000 vol 614 cc381-7

(" . In making an order and other arrangements under sections 32, 32A, 32B and 32C of the 1989 Act the Secretary of State may also make provision for—

  1. (a) electricity generated by any form of combined heat and power stations;
  2. (b) heat or chilled water produced in association with electricity.").

The noble Lord said: This amendment seeks to include combined heat and power in the obligation. The reason is that, first, the Government are fully committed to the concept of combined heat and power. I need only quote from the debate which took place yesterday in the other place to indicate what has already been contributed so far to the way in which energy has been saved and the environment improved by the combined use of heat and power. The Minister, Mr Chris Mullin, said: The…combined heat and power capacity has already doubled in the past 10 years. It is now reducing energy costs by more than £500 million annually and cutting CO2 by approximately 5 million tonnes of carbon a year".

In the course of his remarks he dealt with the question of how the Government will stimulate the further use of CHP under the Utilities Bill. He said: I can confirm that the Government are taking powers under the Utilities Bill to set energy efficiency standards of performance obligations on energy suppliers to encourage and assist consumers to use less energy. For the avoidance of doubt, let me say that CHP is defined as a form of energy efficiency". So it comes into that part of the Bill. He went on to say, The Government can also set specific CHP obligations, if they wish to do so. At present, we do not envisage that being necessary."—[Official Report, Commons, 20/6/00; cols. 317–19.] because of the other measures.

The purpose of my amendment is to make absolutely sure that the Government have the power to include CHP in the obligation. According to Mr Mullin, that is the case. Perhaps that could be confirmed. I do not press for that to be done immediately but this is a reserve power to be used if the Government's targets for increasing the use of CHP up to the year 2010 are not achieved. It is against that background that I beg to move.

Lord McIntosh of Haringey

Joined-up government requires that I should tell the Committee that what Chris Mullin, as a Minister in the Department of the Environment, Transport and the Regions, said yesterday in another place is endorsed by my remarks this evening on behalf of the Department of Trade and Industry. However, because I have not in fact read Chris Mullin's speech, I should prefer to be a little cautious here. I am sure that I will be able to confirm it, but it would be better if I gave that confirmation to the noble Lord, Lord Ezra, in writing rather than did so immediately.

The amendment would provide that the renewables powers under Clause 61 could be used to support combined heat and power as well as renewable generation. The Government fully understand the importance of the contribution that CHP can make—here I may well repeat what was said by Chris Mullin—to our environmental and energy efficiency objectives. We have made provision for it.

However, different approaches are required for CHP and renewables, reflecting their different market positions. CHP is not itself necessarily renewable. It is rather an established technology where what we need to ensure is that there is a level playing field in which it can compete. In the case of renewables, on the other hand, we are looking for the development of new technologies to deliver in the long term electricity which can be produced without damaging emissions of greenhouse gases. It is quite simply a matter of encouraging the new technologies which will protect the planet for our children. This is reflected in the structure for renewables provided for in Clauses 61 to 66.

As I have already described when speaking to Amendments Nos. 192 and 193, other parts of the Bill provide the right framework for CHP by removing barriers to embedded generation. There are additional measures in the Bill which will assist CHP. Fossil-derived CHP can by no stretch of the imagination be considered renewable but CHP which does use renewable sources may count towards the renewables obligation. Thus renewables in general may count towards our new energy efficiency targets under Clauses 69 and 98.

All this amounts to a major programme of focused measures to assist CHP. But I do not think that it would be helpful to regard CHP and renewables as somehow interchangeable and deserving of identical treatment. Both are important. However, as I have said, our objectives in the two areas, though related, are distinct. That is why I ask the noble Lord, Lord Ezra, not to press this amendment.

Lord Ezra

On the assumption that once the Minister has read the remarks made by his colleague yesterday in another place he will confirm that he agrees with what was said, I am willing to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 66 [Supplementary]:

Lord McIntosh of Haringey moved Amendments Nos. 251 to 256: Page 65, line 28, at end insert— ("(za) providing for section 32 of the 1989 Act to have effect, before its substitution by section 61 of this Act, with modifications specified in the order (but if this power is exercised the modifications must include the omission of subsections (3) and (4) of section 32):"). Page 65, line 29, leave out ("as that section had effect immediately") and insert ("made"). Page 65, line 39, at end insert—— ("( ) The power in subsection (1)(b) may be exercised both before the coming into force of section 61 and afterwards."). Page 66, line 19, at end insert— ("but while subsections (3) and (4) of section 32 of the 1989 Act remain in force an order may not provide for anything which would be an offence under section 32(3) to be treated as a relevant requirement"). Page 66, line 25, leave out ("as saved by an order under this section") and insert ("made before the coming into force of section 61 of this Act"). Page 66, line 30, at end insert— ("( ) An order under this section may make different provision for different areas.").

On Question, amendments agreed to.

Clause 66, as amended, agreed to.

Clause 67 [Modification of licences: electricity trading arrangements]:

Lord McIntosh of Haringey moved Amendment No. 257: Page 66, line 35, leave out ("1989 Act") and insert ("Electricity Act 1989").

The noble Lord said: In moving Amendment No. 257, I shall speak at the same time to Amendments Nos. 259 and 351. Once it has been spoken to, I shall respond also to Amendment No. 258 which is grouped with these amendments.

The government amendments are technical amendments necessary to provide that Clause 67 commences at Royal Assent. Clause 67 gives the Secretary of State powers to change electricity licences in order to implement the new electricity trading arrangements in England and Wales. Commencement at Royal Assent is essential so that the powers can he used in time to bring the new trading arrangements into effect in the autumn. The planned start date for the new arrangements is 21st November. I beg to move.

Lord Kingsland

I shall speak to Amendment No. 258, which has a simple text. It replaces the expression, where he considers it necessary or expedient", with the expression, to the extent that it is necessary". Clause 67 is a very important clause. It gives the Secretary of State wide powers to modify licences. The circumstances in which he can do so are said to be, where he considers it necessary or expedient". What exactly is meant by "expedient"? I can understand when the Secretary of State might think it necessary to make modifications. But, strictly speaking, we ought to read into the expression "necessary or expedient", "necessary or unnecessary but expedient". So we are told that there are circumstances where it is unnecessary to make modifications, but nevertheless it is expedient.

As a good Conservative, I have always been brought up to believe that if it is not necessary to do something, it is necessary not to do it. So I do not recognise circumstances in which it is unnecessary to do something but nevertheless expedient. Would the Minister kindly like to speculate on what "expedient" might mean in the context of this important clause?

Lord McIntosh of Haringey

My starting-point for responding to this amendment is, I hope, the common ground that we are both in favour of the new electricity trading arrangements. The noble Lord nods. That is very helpful. I am grateful for the way in which the noble Lord has spoken to his amendment.

However, I do not see how the amendment is consistent with support for the reforms. Its aim is to narrow the scope of the powers under Clause 67. But the provision has been carefully drafted precisely to ensure that we have the scope to introduce the new arrangements without giving the Secretary of State overweening powers in other areas.

What the amendment would do is put at risk the timely interpretation of the new arrangements by opening the possibility of new lines of legal attack on the use of the powers.

Exercise of the powers is bound to be a matter of judgment, and the judgment has to be that of the Secretary of State. The clause as drafted makes that entirely clear. By removing the reference to the Secretary of State, the amendment would remove that clarity. By substituting "necessary" for "necessary or expedient", the amendment invites challenge as to what lies on which side of the boundary between the two adjectives.

I shall not take up the challenge of the noble Lord, Lord Kingsland, to define "expedient or necessary". The whole point about the provision as drafted is that it is for the Secretary of State to decide what is expedient and necessary, and he is subject in the end to the provisions of administrative law.

I hope that the amendment does not reflect a fear that somehow the Government will decide to use the powers for some purpose other than introducing the new trading arrangements. That would be completely unfounded. In the cause of avoiding the possibility of legal challenge to the new trading arrangements, I hope that the noble Lord will not press his amendment.

Lord Kingsland

Before the noble Lord sits down, I entirely accept that it is necessary to include a clause of this kind in the Bill for the purposes which the Minister has clearly outlined. However, that is not the issue. The issue is: to what extent should the Secretary of State's power be constrained on the face of the Bill?

If one holds a licence, one is likely to have acquired it by spending a sum of money; and to have spent a great deal more to comply with its terms. If the Secretary of State suddenly says, "Even though you have acquired this licence, I now have to change the terms on which it was acquired", one is entitled to know as clearly as possible how widely he can cast his changes.

My worry about "expedient" is that it is an expression that is almost not susceptible of judicial review. A licence is economically, if not in law, tantamount to an item of property, albeit constrained by a term of years.

10.45 p.m.

Lord McIntosh of Haringey

I do not think that that is the case. I oppose the amendment on the primary ground that it would remove the phrase, where [the Secretary of State] considers it necessary". But I will think about the "necessary or expedient" issue, without any commitment, between now and Report.

Lord Kingsland

I am much obliged to the Minister.

On Question, amendment agreed to.

[Amendment No. 258 not moved.]

Lord McIntosh of Haringey moved Amendment No. 259: Page 67, line 25, leave out ("commencement of this section"") and insert ("passing of the Utilities Act 2000. (2) This section shall come into force on the passing of this Act."). On Question, amendment agreed to.

On Question, Whether Clause 67, as amended, shall stand part of the Bill?

Lord Ezra

The clause gives the Secretary of State powers to make licence modifications relating to the new electricity trading arrangements. The reason why my noble friend Lady Sharp of Guildford and I have indicated our intention to oppose the Question that Clause 67 stand part of the Bill is to draw attention to the serious problems which the smaller generators are likely to face, particularly involving renewables and combined heat and power, as a result of the proposed balancing and settlement code, which forms a crucial part of the new electricity trading arrangements.

The present arrangements under the electricity pool provide a relatively benign environment for smaller companies. They place few demands on participants in terms of fulfilment of the existing levels of activity. For example, a wind generator expecting to produce a level of output that in the event it could not provide would not be penalised in the pool for non-delivery.

However, NETA introduces an entirely different trading philosophy. In future participants would be expected to enter into prior contracts for the physical delivery of electricity, and they would be penalised to the extent that they could not produce all the electricity committed under their contract, or if they produced an excess amount. The operator would receive a low price for excesses—this is called the system sell price—and pay a high price to buy back shortfalls, known as the system buy price.

Given that it is virtually impossible for, say, a wind farm to predict its output, it cannot safely contract in advance to sell it. It is therefore seriously exposed to the penalties under NETA. Larger companies, with their much larger scale of operations, can reduce these risks very substantially.

The question is how, if at all, NETA's objective can be preserved for the bulk of operators, particularly the large ones, with some mitigation for the smaller ones, particularly those producing renewables and operating CHP, which cannot, by the very nature of their business, forecast accurately their production.

I have written to the Minister about this, and have made a suggestion, which is that for specified generators, which would include those based on renewables and CHP, there would be a third price, to be known as the system average price—the average of the buy and the sell prices. It would not remove all the difficulties which smaller operators would face but it would reduce them substantially. I have indicated to the noble Lord how it might be done. The proposal would not involve an amendment to the Bill but would be part of the settlements code. I have provided the Minister with some wording and indicated where it might be inserted into the code. I should be glad to know whether the noble Lord is prepared to consider that proposition.

Lord McIntosh of Haringey

I am most grateful to the noble Lord for writing to me with his proposal to amend the balancing and settlements code. I do not know whether Members of the Committee have seen that code; it is a terrifying document of incredible complexity about six or seven centimetres thick. The noble Lord has concerns about the effect of imbalance pricing on renewable and combined heat and power generators; in particular, those with an unpredictable output. The Government are consulting on the code and will consider the noble Lord's proposal carefully in that context along with other responses.

The consultation closes on 14th July and I am not in a position to give more than a preliminary reaction to the proposal. We are conscious of the concerns that have been raised, particularly in relation to unpredictable output. For that reason we have developed mechanisms for aggregation which will allow a licence-exempt generator to share the risk of imbalance with other generators, thereby reducing the overall risk to itself. We are confident that the mechanism is a practical one and that smaller generators will find it of significant benefit in minimising imbalance charges. We have consulted on raising the licence exemption threshold from 50 to 100 megawatts which will increase the number of generators for which the aggregation option is available.

The Government will make an announcement on the results of the consultation. We are determined that the new trading arrangements should correct the distortions in the current market arrangements identified in the 1998 White Paper. A significant distortion is the failure of the market properly to reward flexible plant. The new arrangements will ensure that it is properly rewarded. I should note that that includes renewable and combined heat and power plant. But it must follow that plant that lacks flexibility or predictability will be less well rewarded. The mechanism for achieving that is precisely the imbalance arrangements targeted by the noble Lord's proposal. Therefore, there are difficulties about the noble Lord's proposal to which this is only a first reaction. The noble Lord's proposal will be considered, together with others, very carefully. If we have more to discuss with the noble Lord we shall certainly seek an opportunity to do so.

Lord Ezra

I thank the noble Lord for his helpful response.

Clause 67, as amended, agreed to.

Lord Borrie moved Amendment No. 260:

After Clause 67, insert the following new clause—