§ 3.14 p.m.
§ Lord Tombs
rose to call attention to the problems in the electricity supply industry created by the absence of a strategic decision mechanism; and to move for Papers.
The noble Lord said: My Lords, it is clear that the electricity supply industry is experiencing some severe problems at present. Some well-publicised examples are the financial problems of British Energy and other generators such as TXU, AES and PowerGen. At the other end of the spectrum lie the delays in restoring electricity supplies disrupted by bad weather.
But these problems, serious as they are to those involved, are only symptomatic of the deeper problem which I want to examine today: a problem which threatens the long-term reliability of electricity supply in this country and hence our prosperity and standard of living.
Let me explain my reasons for doing so. I have spent much of my life in the electricity supply industry, joining the City of Birmingham Electricity Supply Department in 1946 as a graduate trainee. The industry was nationalised in the following year, the better to meet the huge construction programme required to remedy the non-investment of the war years and to provide the basis for post-war industrial recovery.
The British Electricity Authority was formed in 1947 to take over the activities of more than 600 separate electricity undertakings, municipal and private. In 1956, almost 10 years later, the Herbert committee, set up by the government to review the organisation, concluded that it was over-centralised and recommended the separation of distribution activities into 12 statutory area boards, but retention of centralised generation in the Central Electricity Generating Board. A recommendation to establish a central authority with responsibilities for the industry as a whole was not accepted. Instead, the Electricity Council was created with a rather Utopian view that within it,the generation and distribution sides of the industry can resolve their problems under independent guidance".1022 This was to be the first of a number of occasions on which the government of the day rejected expert advice on the management of the industry with unfortunate, though predictable, results.
Fortunately, and largely for political reasons, the organisation in Scotland took the form of two boards: the South of Scotland Electricity Board and the North of Scotland Electricity Board, each of which combined generation and distribution operations and were not part of the Electricity Council for England and 'Wales, reporting to the Secretary of State for Scotland instead of the Secretary of State for Energy. Henceforth, the industry in Scotland was to be more coherently managed, with great benefits to staff, consumers and plant manufacturers.
In 1976, the Plowden committee was set up to examine the industry organisation in England and Wales and recommended integration of generation and distribution activities in a new Electricity Corporation. This was accepted by the government of the day, a draft Bill was published in the form of a White Paper, and the measure appeared in two Addresses from the Throne, but the Bill was not presented to Parliament for a variety of political reasons.
At this point, I should return to my own career in the industry. After working in grid control in the power stations, I was asked to start a commissioning and trouble-shooting department for GEC power plant division, where I later became divisional manager. I then joined the South of Scotland Electricity Board in 1968 as director of engineering and became chairman in 1974. In 1977 I was asked to become chairman of the Electricity Council for England and Wales and chairman-designate c f the proposed Electricity Corporation. Three years later, in 1980, I resigned in protest at the failure to bring about changes which I considered essential to the health of the industry.
Things continued in that way until 1989 when the industry was privatised. This was done on the basis that the distribution boards, which had been formed on the basis of management delegation, were capable of becoming viable private companies. During the intervening years they have all become subsidiaries of foreign electricity companies, in one case a nationalised one, and ownership of them has changed hands on a number of occasions.
But the attempt to create competition in the generating side of the industry ran into even more trouble. For some years, generators were not allowed to acquire distributors. Recently this has changed so that there is now a motley collection of pure generators, pure distributors and hybrid combinations of the two, all of them served by a single trading system—and this for a product which, by its nature, cannot be stored, so that theoretically instantaneous pricing must be attempted at the margin.
The latest attempt to produce such a mechanism— the new electricity trading system (NETA)—has produced the present chaos, in which the wholesale price of a kilowatt hour has fallen by almost 40 per cent 1023 over two years while the retail domestic price has remained substantially constant. The beneficiaries have been some large industrial consumers, opportunist retailers as diverse as British Gas and the Royal Society for the Protection of Birds, and some others notorious for pressure selling techniques, and, importantly, those vertically integrated companies fortunate enough to be well balanced.
Regulation since privatisation has concerned itself with short-term issues and not with the long-term health of the industry. Generating companies are in serious difficulty and are mothballing plant, and nowhere is the future shape of the industry being seriously addressed. Government is quite low on the learning curve of dealing with an essential long-term industry subject to short-term market forces.
The latest lesson comes with British Energy, which is receiving short-term state aid and a change of management. Investors there have seen their assets vanish, and the prospect of renewed investment in companies subject to capricious government actions must be remote. For, in addition to the adverse effects of NETA, British Energy output is subject to the same climate change levy as that of fossil fuel generators, despite the fact that nuclear power does not produce carbon dioxide and so does not contribute to climate change. The adverse effect of this particular aberration on British Energy is some £80 million per year.
Additionally, the rating burden on nuclear power stations is 50 per cent higher than that on fossil fuel stations and 200 per cent higher than that for wind power. Even further, British Energy has been constrained to maintain expensive reprocessing of used fuel as part of a plan to privatise BNFL. The only common factor in these various decisions is damage to the long-term future of the industry.
Future planning for the electricity supply industry is complicated because of the long time-scales involved and the complexity of many of the technical issues. For example, the price and security of supply of competing fuels in the future are major uncertainties. It is estimated that in 2020 some 80 per cent of our electricity requirements may be met by gas imported thousands of miles from areas such as Russia and North Africa. Optimists will tell us that governments in those areas are stable and have good commercial reputations. But 20 years is a long time in politics and in international trade, and the vulnerability of the UK to political pressures, price instability and terrorist action would be very great.
Problems of secure fuel supply have featured prominently in the past in the planning of the electricity industry, which had to deal with miners' strikes and the Yom Kippur war. In both cases, disruption resulted but was manageable. I emphasise that that planning originated within the industry. There is no possibility of a similar strategy emerging from the present fragmented and fragile industry. Instead, as nature abhors a vacuum, we have seen the emergence of countless government policy reviews and procrastination as a wholly unsatisfactory substitute.
1024 Such reviews are unlikely to contribute to the long-term problems of developing an industry to face the changing challenges of fuel supply and environmental pollution, partly because they are usually conducted without an appreciation of the technical challenges involved but also because political issues pre-empt the objective examination which is necessary.
In my experience, the classical political answer to difficult problems is to avoid decision for as long as possible and, in the meantime, to do a number of limited things to mollify vocal groups. A current example is the present reliance on wind power, heavily subsidised, to make a contribution to the national electricity demand, which is likely to be substantial but will be of little value to the industry's major problems.
The essential problem is to reconcile the short-term demands of the market with the long-term investment and planning needs of the industry. Future plans have to cope with many uncertainties—for example, technical problems, construction delays. planning delays—any of which can imperil or delay the financial return on the project. Such a project, in isolation, is unlikely to appeal to investors but can be undertaken by an established industry within which the project uncertainties can be accommodated. Examples of this, of which I have first-hand knowledge, are electricity supply itself (properly organised), oil exploration and aero engines.
The last of these provides an interesting example. Following receivership in 1971, Rolls-Royce became a small player in the world market for aero engines because it could not support from its own performance the investment needed to keep pace with international competition. Of course, the Treasury was unable to contemplate investment on the scale needed. The solution lay in privatisation after 17 largely wasted years in government ownership. Extensive new investment took place—largely funded by releasing working capital—and within six years Rolls-Royce was again a major player on the world scene, a position which has since been consolidated and extended.
So it is evident that privatisation of a long-term capital-intensive business is not impossible if the management structure and determination exist. The essential problem lies in establishing a relationship between the industry and the public interest as represented by government and its regulatory mechanisms. This is the key problem in the electricity industry today.
Here, history can offer some pointers, although it is necessary to go back some 60 to 80 years to find them. After the First World War, the emerging electricity supply industry was very fragmented, with municipal and private companies operating in a generally isolated way. The solution proposed by the Williamson committee of 1918 was to establish electricity commissioners to oversee the operation and development of the industry. It had powers to approve reorganisations and give consent for building new power stations. It was described by the Weir committee of 1926—which led to the establishment of the National Grid—as,an expert committee carrying out a continuous investigation".1025 That committee commanded the respect of the multifarious companies then operating.
It is interesting to note that at the time of nationalisation, as I said earlier, there were more than 600 undertakings in existence under the general control of the electricity commissioners, with the National Grid, set up in 1926, operating the interconnections and trading arrangements. Unless some such system to organise and direct the present fragmented industry can be established, I fear that the present short-term approach will inevitably lead to power failures on a large scale, imperilling our national prosperity and standard of life. Present efforts to deal with this problem are too short term and diffuse to offer a satisfactory solution.
The industry has been well served by periodic reviews of its structure and problems. The Williamson committee of 1918, the Weir committee of 1926, the Herbert committee of 1956 and the Plowden committee of 1976 are all constructive examples which identified structural problems and went on to propose solutions.
It is interesting to note that, in general, while the proposals of committees before the Second World War were generally accepted and implemented, those after the war were generally not. In my view, today's problems largely stem from that post-war desire to interfere on a political basis with solutions proposed as a result of careful and expert analysis. This tendency can be seen in other activities and perhaps reflects an over-valuation of the possible contribution of politics to complex industrial problems.
The history of the electricity supply industry since nationalisation in 1947 has been marred by intervention for political reasons. I hope that a similar tendency will not mar today's discussions. That would be highly undesirable in discussing an issue of great national significance which should transcend party political interests. In my view, all three parties share responsibility for the present chaotic state of the industry and all parties should be prepared to recognise the problem and contribute to a solution.
I suggest that the way forward is for the Government to set up an independent expert committee to report to them on the problems facing the industry and to recommend remedial steps. The matter is one of considerable urgency and I hope—although I can give no assurance—that there remains time for order to be restored and a reliable electricity supply system to be established. The present situation—ad hoc responses to successive crises—will simply not do. It damages confidence and morale both within and without the industry, and sows the seed for further difficulties.
I raise this issue because of its importance, and because I believe that I am able, by virtue of independence and experience, to identify and describe the problems. My Lords, I beg to move for Papers.
§ 3.30 p.m.
§ Lord Jenkin of Roding
My Lords, we have heard an extremely powerful and experienced speech from the 1026 noble Lord, Lord Tombs. He has been kind enough to remind us—and some of us may have needed reminding—of his long experience in the industry. He speaks with enormous authority. I had the pleasure of his chairmanship when I sat on the Select Committee on nuclear waste—whose report remains one of the major guidelines for government in dealing with a current problem facing the industry.
In the light of the noble Lord's recounting of the history—which will make interesting reading in Hansard—I can understand his wish to see some "strategic decision mechanism", as spelt out in his Motion. He indicated that he preferred a committee to review the position rather than a straight move to a strategic decision mechanism. For my part, I approach the suggestion of a strategic decision mechanism with some caution. Had the Motion called for "a coherent policy framework" to be provided by government, I should have been much happier. However, I understand that it is not the custom in such debates as this to table amendments to Motions. I should certainly have hesitated to table one to a Motion from so knowledgeable a noble Lord.
It is the word "decision" that worries me. Since the electricity industry was privatised, I have found that there has been a great deal of support for the concept of a competitive market for electricity. Yes, it must be properly regulated, of course; and I shall have something to say about that shortly. But the major decisions—to invest, to enter into contracts, to merge or de-merge, to buy and sell commercially—are all decisions to be made by the players, not by the Government or by some government appointed mechanism.
I should find it possible to support such a market-based system were it allowed to operate properly. But the present system is not being allowed to work properly, for reasons which become clear to anyone who has taken the trouble to read the DTI document headed: Energy White Paper: Responses to Stakeholder Consultation on Key Energy Policy Issues. It is no more than 37 pages: a closely typed, summarised account of some 2½ thousand responses to the Government's consultation document published in May last year.
Of course, there are areas where a government decision is crucial—for instance, in getting on with the business of dealing with nuclear waste. The noble Lord's Select Committee report appeared nearly four years ago, and so far we have heard nothing, other than about further consultation on how to consult—which is in effect all that DEFRA has done. I heard Mr Michael Meacher declare to a meeting that I chaired that he wants to go down in history as the Minister who solved the problem of nuclear waste. I do not know how much longer he thinks he will remain a Minister, but at the present rate, it will have to be a very long time. Here is an issue where government do have to take the lead and make absolutely clear where they stand.
Returning to the document to which I referred, most respondents recognised that we are in an electricity market which is not just in the UK but which is 1027 becoming EU-wide. This support for the market resonated in last year's report from the Trade and Industry Select Committee in another place. Perhaps I may quote one paragraph from the committee's report, Security of Energy Supply (HC 364-I), to illustrate what I mean. Paragraph (j), on page 60, states:We agree with the view that it should not be the role of Government to dictate the appropriate mix of fuels for electricity generation, although that need not prevent intervention by the Government and the Regulator to ensure that long-term security of supply is maintained".The report contains many other paragraphs—with, of course, a Labour majority—making the same point. It is for the industry and not for the Government to make these decisions.
So what we are discussing today is a market where most of the decisions, strategic as well as operational, are rightly taken by the market. Why is it not working? I entirely agree with the noble Lord, Lord Tombs, that there is a great deal wrong with the present system—it is not working. The phrase that I used as an alternative to a "decision-making" institution was "a coherent framework". I am afraid that I detect very little evidence that we have such a framework for the electricity industry.
What I do see—and here I entirely agree with the noble Lord—is a whole raft of constantly changing interventions, more and more mechanisms to interfere with the market, more and more targets announced, many of them only to be abandoned, sending out conflicting signals and conflicting policies, all of which serve to confuse and de-stabilise what could be a proper working market.
There are many examples, but time allows me to mention only a few. Everyone recognises that the policy framework has to reconcile at least three conflicting objectives: security and diversity of supply—with security being exceedingly important; the need to reduce the environmental impacts of electricity production, particularly with regard to global warming but also with regard to sulphur dioxides and nitrogen oxides; and, thirdly, addressing the problem of fuel poverty. It is difficult but by no means impossible, with the right policy framework, to work towards the achievement of all three objectives.
My first example refers to the regulatory system. When this House debated the Utilities Act 2000, many concerns were voiced that undue weight was being placed on the third of those objectives, the question of fuel poverty, and the overriding need to keep down the price of electricity to the consumer, even at the expense of the other two. The new electricity trading arrangements set up under the Act, policed by the new regulator—which eventually adopted the name of the old one, Ofgem—have demonstrated that the fears voiced in this House at the time were justified.
At the last moment this House accepted two amendments which I proposed, aimed at broadening Ofgem's objectives to add a further objective:to secure a diverse and viable long-term energy supply".1028 It had to apply to both electricity and gas, therefore it appeared twice: in Sections 9 and 13 of the Act. That was fiercely opposed by the Government, but, with the help of parties in all parts of the House, it was carried against them by three votes. I subsequently had a letter from the noble Lord, Lord McIntosh of Haringey, to say that the Government were not going to reverse the amendments in another place.
But what has happened? Last year I attended a seminar at the Institute of Economic Affairs addressed by Mr Callum McCarthy, the director general of Ofgem, the regulator. I asked him how he was giving effect to the clauses written into the Bill by Parliament to form part of the Act. His reply startled me and others present. We were given the firm impression that he had been given guidance that the Government did not want the clauses and that he should not pay too much attention to them.
I subsequently drew attention to that remarkable state of affairs in a letter published in The Times last year. I was mildly surprised that nobody sought to challenge my statement. So, I was even more surprised to read in the responses to the consultation document, which I referred to a few moments ago, that the regulator regarded "diversity and security" as being at the heart of his obligations. He could have said that in response to my letter to The Times. At some stage somebody decided not to do that. The statement is extremely difficult to accept, when one looks at what is happening on the ground.
As a result of Ofgem's price regulation regime, wholesale electricity prices have fallen by 40 per cent in the past three years, as the noble Lord, Lord Tombs, said. I do not believe that I am alone in not having noticed any such change in my domestic electricity bills. But what has been the impact of the 40 per cent cut in wholesale prices on the generators?
The noble Lord mentioned British Energy. I shall add only that the effect of the price cuts has been to price nuclear energy out of the market. That required, therefore, short-term financial support from the Government, because British Energy faced serious problems. The most extraordinary of the Government's policies on nuclear energy is what I can only describe as their pig-headed refusal to recognise that, if ever an industry should be exempted from the climate-change levy, it is the nuclear industry. It generates no carbon; it contributes nothing to global warming and climate change. Yet, because some Ministers are deeply hostile to the nuclear industry, that has not been done. I give that as a clear example of the conflicting policies to which I referred.
Let me give another example. Last month I had an agonising cri de Coeur from the Combined Heat and Power Association. No doubt, the noble Lord, Lord Ezra, will have something to say about it, too. I shall be very brief. The association pointed out that at the last election, the Labour manifesto said:Labour is committed to a secure, diverse and sustainable supply of energy at competitive prices … a doubling of combined heat and power by 2010.1029 The paper from the association continued:But what has happened? According to the Government's annual digest of UK energy statistics in 2001:Additions of new CHP capacity have fallen by 95% in a year;The output of existing CHP schemes has fallen by at least 17%The capacity of operating CHP plant has effectively fallen by 800 MWe since 2001.This means that:£1 bn of investment in consented CHP schemes is now currently stalled.Not surprisingly, UK emissions of carbon dioxide from the power sector have risen by 13%".The industry has been priced out of the market. It is unable to contribute to the reduction of global warming. We now read that it is almost certain that the target of doubling the output by 2010 is yet another one that will have to be abandoned.
The last example I shall give, which the noble Lord also mentioned, is the Drax coal-fired power station run by AES Drax Power Limited. This is the only large coal-fired power station to have fitted a flue gas desulphurisation plant to limit emissions of nitrogen oxide and sulphur dioxide. It cost nearly £700 million to install. The annual running cost is about £30 million. Falling wholesale electricity prices are leading buyers to switch to lower-cost non-abating coal-fired generators. As a result, more coal is being burned by the higher polluters and less by Drax, which is saddled with the cost of its flue gas desulphurisation pollution abatement plant. I could give figures, but I should bring my remarks to a close.
How can that possibly make sense? What does it say about the Government's commitment to environmental improvement? What does it say about Ofgem's professed commitment to diversity? I hope I have said enough to demonstrate that, so far from having a coherent framework within which a competitive market could work, the Government's energy policy is a shambles. They have no lack of wise advice. Much of it forms part of the response to the consultation paper. I shall quote only one more extract from it. There are pages of it, much of which is extremely sensible advice. Paragraph 7, under the heading of "Transmission, Distribution and Trading" asks:What more can be done to provide a stable framework for investing in these sectors?Paragraph 7.1 states:There was support from across the energy industry and unions for a clear economic and political framework for energy".That is what we will be looking for in the White Paper, which the Government are to publish within a month or two. And, by God, we need it.
§ 3.48 p.m.
§ Lord Ezra
My Lords, I declare an interest. Like the noble Lord, Lord Tombs, I have been involved in the energy sector for many years. I am currently chairman of Micropower, which exists for the promotion of small-scale electricity generation. I am delighted to participate in this debate, which was so ably introduced by the noble Lord, Lord Tombs. I was closely associated with him, particularly when he was 1030 chairman of the Electricity Council and I was chairman of the Coal Board. We had not only good personal relations but good trading relations. At that time, I am glad to say, the electricity industry was taking large quantities of coal, so we met in a celebratory frame of mind, unlike the present situation, where unfortunately the amount of coal, particularly British coal, being used to generate electricity is dwindling.
The noble Lord is very lucky to have won the ballot for this debate because it is extremely timely in view of the proposed White Paper, as both his speech and that of the noble Lord, Lord Jenkin of Roding, made clear. As that document seems to have been a little delayed, perhaps the Minister can tell the House when it is likely to appear. The latest date that I have heard about is March, but we originally expected it to be published at the end of last year. I should appreciate some enlightenment on the subject.
The debate is not only timely because of the White Paper that is due to appear; it is also timely because of the considerable amount of disarray in the electricity market at present, to which both noble Lords referred. It is unfortunate that a number of the leading companies involved in electricity generation should have been so adversely affected by the dramatic collapse in the wholesale price, which, as the noble Lord, Lord Jenkin, pointed out, has certainly not been passed on to the domestic sector and, therefore, has caused a great deal of harm to those who have generated as opposed to those who both generate and supply. That is an aspect of the development of which I believe the Government were not particularly in favour. They wanted to separate these various activities.
Not only have the large operators been adversely affected in the present situation. Smaller ones have also been involved. This covers both renewables and CHP, to which the noble Lord, Lord Jenkin, referred. The discrepancy between the gas price on the one hand, which has remained relatively high, and, on the other hand, the wholesale electricity price, which as become very low, has caused real problems for CHP operators. The Balancing and Settlement Code of NETA that discriminates against intermittent suppliers, which renewables and CHP inevitably are, has added to the problems. Some corrections have been introduced into that code, and it is possible that more are contemplated. Perhaps the Minister could also refer to that possibility.
There is no doubt that electricity is absolutely crucial, not only in the consideration of energy policy but also in the affairs of the nation as a whole. The drastic effects of possible power cuts, or of major variations in the price of electricity, are situations to be avoided. I hope that the White Paper will deal with the problem of electricity in all its ramifications, and propose the sort of framework to which both noble Lords have referred. In documents dealing with energy policy, it has all too often been the practice to treat primary sources of energy as being of major importance, while leaving electricity as a follower-on because it is a secondary source. However, it has now 1031 become the most important element in energy policy. I hope, therefore, that in the forthcoming White Paper there will be a comprehensive chapter devoted to electricity.
The White Paper should consider the problem in ways that subdivide themselves quite easily under the headings mentioned by both noble Lords; namely, security, diversity, and efficiency. The latter, of course, has an impact on climate change. I should like to say a few words under each of those headings.
Security of supply is absolutely vital. Hitherto, there has been a substantial surplus of capacity, but that has been eroded by a number of plant closures, two of which were announced just a few days ago, and by plant being mothballed. Even though I was told in answer to questions that I have raised on the subject that the mothballing of plants was a form of security, that is not entirely so. It takes several months for a mothballed plant to be brought back into action, which means that it cannot deal with an immediate situation. There must be at least 15 to 20 per cent surplus capacity, which, under the previous regime, the CEGB made sure was always available. The present regime does not allow for that; and, therefore, there should be a modification in the regulatory arrangements to ensure that there is an incentive to generators to maintain that degree of surplus capacity.
The other possible security risk could arise from terrorism. I have no doubt that suitable measures have been put in hand to safeguard major power stations, especially nuclear stations. But in the longer term, a further safeguard could be achieved by decentralising the way in which electricity is generated.
I turn to diversity. Since the dash for gas in the 1990s, the gas generation of electricity has built up from virtually nil to over 40 per cent. It could raise to 60 or 70 per cent on a business-as-usual basis, as defined in the PIU report, as mentioned by the noble Lord, Lord Tombs. At that stage, something like 90 per cent of the gas used in the United Kingdom would have to be imported. That strikes me as being a disturbing and very serious prospect, but it did not seem to be treated as such in the PIU report; indeed, the report seemed rather detached about it and suggested that the situation should continue to be monitored. I do not know what "monitoring" really means. What happens if, in the process of monitoring, it is found that a serious situation is arising? How, at the drop of a hat, could one deal with the problem of the massive dependence for the generation of electricity on gas and on the imports of gas? Something more positive than just monitoring must be introduced.
We need to consider other ways in which electricity could be generated. Serious consideration should be given to such alternatives. It will be no surprise to noble Lords if I start with coal, which could have a major part to play in the future generation of electricity. Clean coal technology has now been developed to the point at which it can be fully effective. Such plants are operating in the United States, and in 1032 other European countries. It can also be associated with carbon extraction, which is also another valid and proven process.
Two projects have been put forward in the United Kingdom for such plants—one at Hatfield in Yorkshire, and another at Onllwyn in South Wales. I very much hope that the Minister will be referring to those pioneering efforts and that he will indicate ways in which the Government could help them to come to fruition. After that start we could have many more such plants, and begin to see some diversification in the way in which electricity is produced in the future.
Mention has already been made of the nuclear sector. It really is time—indeed, the time has almost passed—for a decision to be reached on the future of the nuclear industry. We all know that there will have to be a progressive withdrawal over the next 10 to 15 years of most of the nuclear plant operating at present, and that the time-scale for new nuclear plant, if such should be decided, is very long for planning and capital expenditure reasons. Therefore, more than a pointer needs to be given in the White Paper about this. But, if such a pointer is to be provided, it will be necessary to take into account all the issues relating to nuclear waste in which the noble Lord, Lord Tombs, was very much involved.
I remember reading the report that appeared nearly four years ago. It seemed to me to make a very sensible suggestion as to how nuclear waste might be dealt with, and yet the problem is not yet resolved. Perhaps the White Paper will show how it is to be resolved. There is also the problem of special security for nuclear stations, as well as the question of the capital cost and the role that it is to play in climate change—a matter to which the noble Lord, Lord Jenkin, referred.
We also need to consider renewables. The Government have rightly said that they consider renewables to be of great importance; indeed, they have given the matter much support. But, at present, renewables are mainly limited to wind power, and particularly on-shore wind. There is an increasing amount of resistance on visible environmental grounds to the extension of on-shore wind. Therefore, the Government need seriously to consider ways in which the concept of renewables can be widened. I should prefer a term such as "clean energy" to replace that of "renewables", which could include such processes as methane recovery from disused coal mines, in which the noble Lord, Lord Jenkin, has been much involved, clean coal technology and combined heat and power.
This brings me to the issue of efficiency, because combined heat and power means that the output of large scale power stations that currently produce only about half the heat content of the primary energy put into them will be virtually doubled, resulting in up to 80 or 90 per cent efficiency. The trouble with large scale power stations is that the waste heat cannot be used. With smaller scale power stations it can be because you can site combined heat and power stations near consuming points and therefore make use of the waste 1033 heat. That doubles the efficiency with which energy can be produced and used and helps to deal with the problem of climate change.
The noble Lord, Lord Jenkin, drew attention to the doldrums through which combined heat and power is passing. It is important that the White Paper indicates what will be done to correct this serious situation if the Government want to achieve their climate change objectives.
I am involved, as I have indicated, with micro-CHP: combined heat and power in domestic households. It has been developed technically; products will be on the market in about a year's time and that could revolutionise the way in which the electricity distribution system works. Hitherto it has worked one way; namely, through the progressive flow of power from the main power stations to the consumer. If we have a wide spread of CHP plant and go into the household so that every household effectively becomes a power station we will need a new distribution system. I am glad that Ofgem have recognised this and have talked about the "rewiring" of Britain.
There will be a dramatic change in the electricity industry. It is necessary for this "rewiring" to take place quickly. When these products come on to the market they will be like a domestic boiler but will produce both heat and power; consumers will have all the electricity they require and they will need to sell surplus electricity into the grid. That is why changing the distribution arrangements is necessary.
It is important that there should be a carefully thought-out strategy for the electricity sector. The Government have an opportunity in the White Paper to achieve that. The issues of security, diversity and efficiency need to be clearly tackled and the new and developing technologies such as micro-CHP should be given a helping hand so as to change the electricity system in Britain for the better.
§ 4.3 p.m.
§ Lord Stoddart of Swindon
My Lords, I too thank the noble Lord, Lord Tombs, for introducing this discussion. It is timely because day after day we read in our newspapers of the problems facing the electricity industry. In today's Financial Times there is an article headlined,US group hit by wholesale electricity price falls".It reads,''NRG Energy, the struggling US electricity group, is in talks with banks",to reschedule its finances. Even today as the debate takes place we see that the electricity industry is struggling.
It is rather daunting to follow such a distinguished group of speakers: a former Secretary of State for Energy; a former chairman of the National Coal Board; and the noble Lord, Lord Tombs, himself, who was chairman of the Electricity Council. I cannot match that in any way, although I was employed in a humble capacity in the electricity supply industry at a power station. The noble Lord, Lord Tombs, and I met on the Electricity Council when I was a member of 1034 the National Joint Council for the Electricity Supply Industry trying to earn a crust for my fellow trade unionists at low levels in the industry. I do not know whether I succeeded but at least I tried; that is the best one can do.
The noble Lord, Lord Tombs, gave proper recognition to the nationalisation of the electricity supply industry. Indeed, for a time it served the nation extremely well. I like to think that public ownership might be the way by which we could bring order into a chaotic industry but I fear that towards the end nationalisation did not serve the country well. I shall explain why. The reorganisation that began in 1956 eventually led to the formation of the Central Electricity Generating Board which became too big and too powerful. The CEGB dominated the industry and fixed prices to suit itself. The regional boards had virtually no say over prices or policy which meant no say for the consumer either.
The CEGB, in other words, grew too big for its boots and failed to respond to the market. It continued to build power stations to meet an exponential annual increase in demand of 10 per cent when mass demand had fallen to 2.5 per cent or less. As a consequence we had a large surplus of capacity—over 100 per cent in Scotland and over 50 per cent in this country—with dire consequences for the consumer. That should not have happened. The board's insistence on retaining current cost accounting when inflation was falling added further to the consumer burden.
When I was in the other place I was a member of the House of Commons Select Committee on Energy. I came up against the CEGB, which was impervious to any criticism and unresponsive to any ideas to improve its performance. It was not averse to concealing the truth, especially about the true cost of nuclear energy. The Department of Energy seemed to have no influence and was mesmerised into impotence by self-serving experts on the CEGB. I was worried when full-scale denationalisation of the industry was decided on, but we could not return to such a system. It corrupted public ownership and brought it into disrepute, which I regret.
The noble Lord, Lord Tombs, is correct, as are the other speakers. Electricity is so vital to every part of everyone's life and to the soul of this nation that it cannot be allowed to slip into neglect and chaos and become the plaything of private owners, particularly foreign owners whose only interest is making as much profit as possible and who pull out when it suits them.
Government policy, if it can be discerned at all, is not helpful. Their laissez faire approach deprives the industry of the leadership that it needs and the direction it should take. The policy of the regulator, which has already been mentioned, in driving down prices to unsustainable levels seems to conflict with the Government's other policy of reducing energy consumption on environmental grounds. How can one reduce energy consumption by constantly making it more easily and cheaply available to the general public who use it? It is not a reasonable and well thought out policy. It also does nothing to conserve indigenous gas 1035 supplies. This country will soon be completely dependent on foreign sources of supply. That cannot be good. It will again create difficulties for the whole industry.
The United States group, which I mentioned, bought Killingholme power station for £400 million. It is now worth £200 million. Such losses are unsustainable. What will happen to the industry if there are large-scale bankruptcies of various owners? Who will pick up the tab? If they can no longer afford to generate the needed electricity, who on earth will take over? There can be only one source—the state. If that is to be avoided, it is vital to ensure that the existing arrangements can operate properly, profitably and to the benefit of the consumer.
As I said, it is clear that the current system is not working and that a crisis in security of supply could be looming. The noble Lord, Lord Ezra, is right: we have mothballed plant, both oil and coal. However, it would take months, perhaps years, to bring those power stations back on line, and they would pollute the atmosphere, which is also against government policy. It is the Government's duty to prevent that crisis happening.
Wind power has been mentioned. However, it is the most inefficient and most environmentally damaging way of dealing with alternative energy sources. The noble Lord, Lord Ezra, mentioned combined heat and power and measures to save electricity. All of those were discussed by the Select Committee on Energy; again, however, they were obstructed by the CEGB. Nevertheless, those measures are far better than building wind farms which produce electricity at about three times the cost of gas and cause environmental damage at the same time.
It is difficult for me to give the Government any advice on how to proceed on a macro basis. However, it may be that, while not bringing the industry back entirely into public ownership, they may well have to go back to the Weir report and consider having the national grid under public ownership. That may well be a way of providing leadership to an industry that is currently fragmented and, unfortunately, failing.
The noble Lord, Lord Tombs, was right to put forward his idea of setting up an expert committee to examine the current situation and make recommendations to achieve better cohesion and to ensure that this vital industry and vital commodity are under protection. Other than food, there are two essentials in this country: water and electricity. Without electricity, civilisation collapses. Therefore, the Government do indeed have a grave responsibility. I hope that they will meet it.
§ 4.16 p.m.
§ Lord Patten
My Lords, I am very glad to follow the noble Lord, Lord Stoddart of Swindon. I think that he perhaps undervalued and devalued his own experience as someone at the sharp end in the industry, on the Electricity Council and on the Select Committee in another place, where we served together. I enjoyed his contribution, as I enjoyed greatly the speech by the 1036 noble Lord, Lord Tombs—to whom we are very grateful for initiating this debate. There was much cause for thought in his comments.
Following the remarks of my noble friend Lord Jenkin of Roding, however, I feel that the need is perhaps less for a new mechanism and rather more for quicker and better decision-taking by government. To illustrate those themes, I shall concentrate my remarks on just two spheres. The first is nuclear, which might be considered as the tough end of the electricity generating spectrum. The second is renewable energy, which for many commentators and politicians is at the softer, more politically correct and fashionable end of the spectrum.
Although I have an interest to draw to the attention of the House, having been a non-executive director of a renewable energy company since about the time that I came to your Lordships' House in 1997, I make it clear at the outset that I support both forms of electricity generation: nuclear and renewables. If I may have the temerity to correct the noble Lord, Lord Ezra, however, I should add in passing that there is a bit more to the renewables industry than wind power. There are many plants generating electricity from other sources of renewable energy.
I certainly want to tell the House that I do not belong for one moment to the "nuclear power is evil, wind power is wonderful" school of thought. Nor, however, do I belong to the "burning of biomass is an environmentalist cop-out, while nuclear is the only way, truth and light" tendency. There is no ideal form of electricity generation; all have their problems, costs, inefficiencies and environmental impacts. However, in a balanced and integrated energy generation policy, each has its place, and each should be considered in any strategic decision-making process, for which the noble Lord, Lord Tombs, called, and in any joined-up thinking by government of whatever political colour, Tory or Labour.
I turn first to nuclear power. Having been invented in the 20th century. nuclear power cannot be disinvented. I believe that it should be a component part of any joined-up, 21st century UK energy policy. Without its contribution to diversity and certainty of supply, future availability and continuity of electric power will not be guaranteed, particularly in the face, as other noble Lords have pointed out, of apparent growing over-dependence on potentially volatile imported gas supplies from the Middle East, North Africa, Central Asia and elsewhere.
I believe that any decision on new generation nuclear capacity does, of course, fall into the "acutely difficult" box for any government; there is no denying that. I also believe—although I do not want to shock my own Front Bench that we have a far-sighted and courageous energy Minister in Mr Brian Wilson. He understands these issues and he wishes to catch this particular falling knife. I mean what I say: I do not seek to damage Mr Wilson in any way at all with these warm comments from the Tory Back Benches. I wish to reassure the Labour Front Benchers about that.
However, my prediction for the New Year is that, following the much-spun forthcoming White Paper, the Government will fudge the nuclear issue. They will 1037 take no decision on nuclear power before the next general election. Thus uncertainty will reign and growing insecurity of supply will follow in a sector which, by any standards, has exceptionally long lead times.
I have made these points about nuclear power as an entirely disinterested observer. As regards renewables, I have a long and very direct set of experiences, as I declared to the House earlier, as a director of Energy Power Resources Limited, which is a company with a portfolio of plants from wind to those burning biomass, making it easily the largest generator of electricity from alternative sources in the United Kingdom. Indeed. I am told that it now accounts for about one quarter of all the electricity generated from biomass in the whole of western Europe. But companies such as these are still very much in the foothills of development, as is probably the company of the noble Lord. Lord Ezra.
Governments of both political colours have recognised that and have encouraged the growth of alternative energy. I do not doubt for one moment the good intentions of this Government. I can see a slight nervousness coming over the face of the Minister in that more praise is going in the Government's direction from these Benches. I believe that the Government have had very good intentions. However, in promoting the principle and practice of renewable energy, it is not to decry those good intentions to say that in my judgment progress is so slow that the UK has absolutely no chance whatever, on present trends, of meeting the Government's targets in the matter of the generation of electricity from renewable sources, whether for the middle of this decade, for 2010 or for 2020. If the Minister who is to reply to this debate disputes that, I hope that he will set out exactly when and how these targets are going to be met. I believe that the Minister understands the science of all this very well indeed and better than most of us. He knows the figures and the trends derived from them as well as I do.
In the interests of realism, which suits all of us concerned in these matters and which certainly suits the national need, perhaps the Minister might add another spot of what I understand to be called in polite No. 10 circles these days "target revision". I understand that that is what it is called in polite spinning circles. The Minister might add a little target revision in this area to the plethora of government target dumping which has so noisily been falling around us since the turn of the year: from targets about the misuse of drugs to those about participation rates in higher education, all of which have been thudding to the floor as they have been dumped by the Government.
In the face of the looming shortfall, probably the biggest waste of taxpayers' funds would be for the Government and the department to conjure up lots of fancy new grants for new plants in this area of renewables. There is certainly no special pleading from me on and for that: indeed, to the contrary. Present regimes need watching very carefully indeed. Perhaps I may give a couple of small examples. There is the bio-energy capital grants scheme, which currently sets out 1038 a requirement that renewable energy plants of over 20 megawatts capacity should use about 25 per cent of energy crops by the third year of their construction, and 50 per cent by the sixth year of operation.
Those are exceptionally unlikely targets to be met; they are impractical expectations. Targets are a good discipline for all of us privately; but pragmatically and practically they should be realistic. Politically they can be very damaging to the Government's health if they are not realistic. Policy-makers should beware of grasping at straws in this area. Probably the best way of killing stone dead at a stroke, as we used to say, the nascent renewables generating industry would be to allow the co-firing of renewable fuels—such as straw, wood residue, miscanthus among the energy crops or coppiced willow—with coal.
We have heard from the noble Lord, Lord Ezra, that there are many large, mothballed old plants waiting to come back to life. If even 10 per cent of the fuel burnt in them with 90 per cent coal was allowed to qualify for renewable purposes, that would overwhelm the small plants which are fuelled 100 per cent by renew able sources. It would also encourage a fresh surge in the burning of fossil fuels like coal as well, which many people concerned environmentally would not wish to see. I can well understand why the directors of these companies considering co-firing wish to see it occur because they have mothballed coal plants in their portfolios and wish to breathe new life into old assets. I see the fearsome figure of the noble Lord, Lord Ezra, rising to his feet.
§ Lord Patten
My Lords, I certainly believe in these forms of technology enabling electricity to be generated from coal or from anything else. The point which I am making is that the kind of proposals current in the industry at the moment concern people wishing to bring back into use mothballed coal plants and co-firing them with some renewables which count towards the renewables obligation. That would breathe new life into the mothballed assets of companies which have already been written down or written off entirely in the balance sheet.
I believe that policy makers should be aware of the unintended consequences of their apparently benign intentions, which is the line of thinking in the department which says, "Renewable energy is not developing very fast. People have come forward with the idea of co-firing, which will mean that we have a little more renewable biomass fired with coal. Therefore, we can say that we are burning more biomass and more renewable energy is coming". That might be produced for a year or so, but at the same time the genuine nascent renewables industry would be killed off in a very short time. That would be the unintended consequence of the benign intentions of policy makers. We have all seen that.
1039 It would be much better and at nil cost to taxpayers' funds, which I am always anxious to avoid, to kick-start innovative technologies and encourage new entrants, new companies and new investment into renewable energy without any Government support at all, by introducing differential banding under the renewables obligation for different forms of alternative energy regeneration from wind through biomass burning and back again. That would give much greater depth to the industry. Perhaps the Minister will have time to explain why we do not have this differential banding regime in place.
That having been said and that request made, perhaps I may end in the bi-partisan spirit which has rather overwhelmed me this afternoon. I do not doubt the Government's good intentions. I am a particular fan of Mr Brian Wilson and his brave approach. I applaud the spirit behind the Government's good intentions as regards many parts of energy generation. I applaud the spirit behind their target setting although I believe that they are pretty quixotic in quantum and that they will learn to rue having set them year by year.
As regards nuclear, alas—as I said, the noble Lord, Lord Sainsbury, well understands the science—I certainly doubt the courage of the Cabinet, even when collectively cheered on by the Minister to whom I have referred quite enough already. As regards alternative energy, I doubt that the members of the Cabinet fully understand the impact of some of their policies, be they co-firing or the lack of banding under the renewables obligations.
I greatly welcome the opportunity provided by the noble Lord, Lord Tombs, to take part in this debate. Should the Government decide to accede to the request of the noble Lord for a committee of inquiry, the Minister will easily find his number in the telephone directory. If the noble Lord demurs from the chairmanship of the committee, I should be happy to put my name forward. However, given the rather straight-faced look of the Minister, I believe that I am unlikely to receive that invitation.
§ 4.30 p.m.
§ The Earl of Mar and Kellie
My Lords, the noble Lord, Lord Tombs, has provided us with a good opportunity to discuss the matter. So far we have heard many authoritative speeches. However, I fear that mine will probably not be among them. I have certainly noted the emphasis on the need for stable prices and security of a diverse supply of electrical energy. I have the privilege of owning some commercial woodland in Scotland which could be used as biomass.
I recently tabled a Question for Written Answer on the replacement of the generating capacity at Chapelcross nuclear power station in Dumfries which has been closed. I was most surprised when I received the answer that the Government had no policy for such a replacement and that it was being left to the market for new generating capacity to evolve. Noble Lords 1040 will be mindful that energy is a largely reserved matter in Scotland and is, therefore, a matter that we can debate in this Chamber.
I was almost astounded to read that a Labour government had no expectation of a power generating policy. That seems to be remarkably laissez-faire. In Scotland we have been generating power by various means for a considerable time. More power is generated in Scotland than is consumed in Scotland. So, electricity is an export along with whisky. computers and tourism.
Much to the chagrin of some political parties in Scotland, 42 per cent of electricity is generated by nuclear at Hunterston and Torness. Coal and gas stations supply just over 20 per cent each. Some 12 per cent comes from renewables and most of that is from various forms of hydro, which I am certain have not yet been mentioned today. Hydro accounts for 10 per cent of Scottish generation. New style renewables provide up to 2 per cent. There is good potential in and around Scotland for developing the various forms of modern technology. Wind is obviously in abundance and a new factory has been established at Machrihanish to produce aerogenerator equipment. Wave and tidal resources are naturally very available around Scotland. Solar potential, both wet and photovoltaic, is good though patchy. Biomass is distinctly possible but issues of transport and siting are involved. Combined heat and power is very possible.
The potential for micro generation at home is as good as anywhere else, but my fellow Scots are a fairly conservative bunch and are not yet in sufficiently pioneering mode for micro generation to be widespread. I fear that it is still viewed as being only for eccentrics. Evidence from pilot projects would help with that. So here there is a definite role for government to become involved.
The issues of transport and voltage drop are relevant in a country with plenty of land and a sparsity of population. I am undoubtedly in favour of more hydro schemes but I recognise that most of the existing ones are situated a long way from our cities. However, this is a proven technology. It is clean and it is easily absorbed into the landscape as an asset. Some other renewables are not so acceptable in the landscape.
In an ideal world the generating station would be situated on the edge of the town or city, which does away with the voltage drop problem. That is difficult to arrange but it may not be as difficult as we think. It probably depends on getting the right economies of scale.
If one considers a biomass generator on the edge of a town, one has to accept that it needs to be surrounded by an industrial scale forest to provide the fuel without exorbitant transport costs. I am in favour of such an approach for only 45 per cent of commercially produced timber goes to the sawmill. The lop and top is anything up to 55 per cent. However, I also recognise that Scotland is a land of small woods, and that we object to wall-to-wall plantations. A multitude of small woods is a valuable 1041 landscape asset and is a very marketable tourism asset as well. We need to make a judgment between biomass generation and tourism and recreation.
Energy generation in Scotland is an issue with which government could be more involved. I know that the siting of generation plants is more the responsibility of the Scottish Parliament and local planning authorities but it would be helpful if a more positive steer came from the United Kingdom Government. It is, of course, deducible that the United Kingdom Government favour generators that do not produce greenhouse gases to meet Kyoto targets. I wish that the Government would agree that they favour nuclear, hydro and modern renewables and that they are less in favour of coal, gas and oil.
Assistance could be given towards small-scale generators and towards micro generation to encourage its take-up by citizens who see themselves as normal. More schemes akin to the biomass district heating plant in Lochgilphead would help to normalise those new approaches, as would that which is proposed on the Isle of Arran.
Government could promote various types of generation and pilot new ones. Why will they not do so? I look forward to the White Paper.
§ 4.37 p.m.
§ Baroness Miller of Hendon
My Lords, I congratulate the noble Lord, Lord Tombs, on being successful in the ballot and thank him for introducing this important debate. I congratulate him also on the way in which he promoted the debate, drawing enormously on his expertise and experience. Like the noble Lord, Lord Stoddart of Swindon, and the noble Earl, Lord Mar and Kellie, I wish to mention the excellence and experience of those noble Lords who have already spoken. I very much hope that not only the Minister but also Members of another place will treasure that expertise and experience.
The New Electricity Trading Arrangements (NETA) were introduced in March 2001 by Ofgem and the DTI. They seem to have been successful in increasing competition and reducing wholesale prices by 40 per cent compared with 1998. One of the main reasons for the fall in prices is that there was a significant degree of generating overcapacity. Of course, some overcapacity is certainly needed not only to meet peak demand but also to allow for the fact that inevitably some plant will be out of action from time to time because of breakdowns and the need for servicing. It is estimated that there is 22 per cent more capacity than is needed to meet peak demand.
Currently the wholesale prices of electricity have actually fallen below production costs by as much as £5 to £7 per megawatt hour, which has caused grave financial problems to various generators, as the noble Lord, Lord Tombs, mentioned. I had intended to discuss the problems of British Energy but my noble friend Lord Jenkin of Roding has already done so and, as time is running on, I shall not mention that.
The problems of electricity generators have resulted in the renegotiation of contracts with BNFL, which will cost the Government between £150 million and 1042 £250 million a year for the next 10 years. I say that quickly, but that amounts to some £1.5 billion to £2 billion, and that is only for the next 10 years—and even that may not be the end of the road. There will be a further knock-on effect on the struggling British coal industry. Powergen has so far mothballed two of its plants, and is seeking a credit line of no less than £9.3 billion. TXU Europe has been cut adrift by its American parent and is in danger of insolvency. The German company Innogy is under pressure to mothball capacity.
We in the Conservative Party strongly believe in the market governing prices and supply, but we are also concerned about the continuity of supply of this essential utility. On 18th November 2002, the noble Lord, Lord Ezra, asked whether the problems being encountered by generators would lead to difficulties in supply. In a supplementary question, raised the matter of the Californian experience, in which uneconomic pricing and the insolvency of Enron resulted in widespread electricity blackouts. I received reassuring replies from the Minister, who told me that,it is likely that generating capacity will be taken over by another supplier".—[Official Report, 18/11/02; col. 134.]The noble Lord, Lord Ezra, was told about the many plants that had mothballed. He commented today, as did the noble Lord, Lord Stoddart, that it takes some time to take plants out of mothballing.
We are having the debate today on the premise that there is an absence of a strategic decision mechanism for the electricity supply industry. We on these Benches believe that in a sense there is one with which we should not interfere. On the one hand, it is right and proper that the market should govern prices, the number of identity of suppliers and the sources of fuel. On the other, it appears that Ofgem is doing a good job in regulating prices in the network monopolies of distribution and transmission and in ensuring continuity of supply, which are its essential functions. It is also right that we have abolished the old mechanism whereby there was only one monopoly supplier and uncompetitive prices were a hidden stealth tax imposed by—and I freely admit this— successive governments.
From the investor's point of view, it is equally right that the regulation of the industry should be in totally independent hands, and not subject to the political vacillation of successive governments or of Treasury policy.
The Conservative Party's energy policy was succinctly set out by my honourable friend the Member for Maldon and Chelmsford East, in a debate in another place on 20th June 2002. He indicated that our four key objectives were economic efficiency, security of supply, environmental benefit and relief of fuel poverty. With the exception, to some extent, of economic efficiency, the other essential and worthy objectives cannot be the sole responsibility of the commercial concerns, supplying an essential utility to industry and private consumers at prices that are in effect controlled by the regulator, however lightly.
1043 The delivery of our electricity supplies, whether in the form of the power stations, the Grid or the power lines in the street leading to our homes, offices and factories, are as much part of our national infrastructure as are the roads, the railways, the water and sewage systems. It is the responsibility of the Government, as well as that of the generating and supply industry, to ensure that the essential framework is there, because of the national policy decisions that are required. My noble friend Lord Jenkin of Roding made that point.
Diversity of supplies is essential. With finite natural resources of our own, we cannot allow ourselves to be dependent on only one type of fuel or one supplier. Our energy is currently produced in approximately equal thirds of gas, nuclear power and coal, with a mere couple of per cent of renewable sources. So what of the future? What percentage of our electricity should come from coal, for example—and, indeed, which coal? There are billions of tonnes lying under the British isles that are mostly uneconomical to extract because it is cheaper to import it from abroad, sometimes even from the other side of the world.
The next four paragraphs of my notes relate to Drax, but my noble friend Lord Jenkin and the noble Lord, Lord Tombs, discussed that so thoroughly that I shall not bore your Lordships by repeating what they said.
What percentage of our electricity should come from gas? Our current North Sea reserves are estimated to last for about 11 years at the year 2000 rate of consumption. It is believed, although "hoped" might be a better word, that there are further as yet undiscovered reserves. However, by 2005 we shall certainly have to start importing some gas. At some time in the future, our own gas will run out, and we will then he entirely dependent on overseas sources of supply. To that extent, we could be in the hands of far from stable suppliers. We shall also have to compete with the many other gas users for the available supplies. As was pointed out during "Utility Week", on 2nd November 2001, the United Kingdom will no longer be self-sufficient in oil and gas later this decade.
The use of coal and gas as fuel for generating electricity results in the production of acid rain, sulphur and nitrogen, contributes to global warming and is directly contrary to the Government's environmental targets.
Then there is nuclear power. I have heard many noble Lords say that this is a cleaner source, without quite as many unhealthy emissions. However, the nuclear industry has its own costing problems, not merely because of the necessity of operational safety factors but because of the decommissioning costs. The nuclear industry has to factor those in, whereas the gas, coal and oil industries do not have to internalise the cost of dealing with the pollution that they cause.
Since 1995, both Conservative and Labour governments have said that building nuclear power stations must be a commercial decision, but it can be done only if there is a governmental willingness that it 1044 should happen, including ensuring that planning consent is given after due public inquiry. The commercial decision then would be for the industry to decide whether to take up the opportunity offered by the Government's policy. Even when the commercial decision is made, it must be borne in mind, as the noble Lord, Lord Ezra, said, that, what with one thing and another, it takes a long time from deciding to build a nuclear power station and bringing it into commission. One way or t'other, some decisions need to be taken now, or certainly very soon.
The Conservative Party's policy on nuclear power was stated by my honourable friend the Member for South Suffolk, in another place on 22nd October 2002. He said that a future Conservative Government,would not take a decision to replace nuclear with nuclear; nor would they rule out new nuclear-generated electricity if, with the legacy costs provided for and the associated risk accounted for, it proved to be the most economic way of continuing to meet the global requirement of addressing climate change".—[Official Report, Commons, 22/10/02; col. 223.]I think that that means that the Conservative Party would take the decision—I do not think that the word "not" was originally there. It must have been typed in by my secretary. Many noble Lords asked about that. Will the Minister answer the question of my noble friend Lord Jenkin as to why the nuclear industry still has to pay the climate change levy? Everyone is interested in that. I remember asking that question myself, and the Minister said that it was cost neutral, but it is worth asking again.
Finally, I come to the policy on renewable energy sources. As the Trade and Industry Select Committee pointed out almost a year ago, successive governments have claimed to support the development of renewable energy sources for more than 25 years. However, those sources have their own difficulties. Wind farms on land are deemed by their neighbours to be too noisy and by neighbours and environmentalists to be unsightly, while seafarers regard offshore sites as a hazard to shipping and an impediment to what remains of the fishing industry. The noble Lord, Lord Ezra, pointed that out, and my noble friend Lady Wilcox is saying it from a sedentary position. Either way, the amount of electricity produced would be too small, too intermittent and too costly.
As to tidal power, despite the large sums poured into research—that was not intended as a pun—the engineering problems have proved so far to be insurmountable. Unless global warming results in some future climate change in the United Kingdom, solar power is also totally out of the question in this country. My noble friend Lord Jenkin and the noble Lord, Lord Ezra, have discussed combined heat and power, and I shall not go into it again. Nuclear fusion—the creation of energy by fusion of hydrogen atoms—is well into the distance.
We believe that the electricity industry will work best if governed by the market. As to the sources of supply of the raw materials for generating electricity and distributing power to consumers, and inevitably the amount that is charged for it, we support the regulator and his work. But the industry cannot 1045 operate on its own, utterly divorced from input from the Government. It most certainly cannot operate in a strategic environment that changes as often as the weather. At one time there was a so-called "dash for gas", and then, in an attempt to prop up the indigenous coal industry, new gas-fired power stations were barred. At one time, nuclear power stations were seen as the future of total power self-sufficiency. However, perhaps because some Labour politicians opposed them root and branch until the realities of office sunk in, they gave them only a grudging nod of approval. As I have said already, renewable energy sources have been sought by successive governments, but none of them has been prepared to put in the funding and to say that, if and when it proves practical, those development costs will be written off so that the power can be generated economically.
I remind the House very briefly of the report of the European Union Committee of this House dated 14th February 2002. It said:We see no fundamental conflict between liberalisation and energy security. Indeed in our view, liberalisation can help promote security by promoting more flexible and diverse markets'".Ofgem's statement of its corporate strategy for 2003 to 2006 includes,monitoring the wholesale electricity market as it develops so that electricity supplies remain secure and the market continues to be competitive".We endorse that and its other objectives.
What is required is for the Government to lay down the framework, and then minimise their day-to-day involvement by leaving it to Ofgem—the regulator— to ensure the continuance of those flexible and diverse markets not for the short term, which can take care of itself, but for the medium and long term. That must be a realistic market that allows the industry to develop and operate for the benefit of its customers, determines what fuel sources are to be used, in what proportions and from what sources, and determines to what extent the Government accept the responsibility of ensuring that the infrastructure—especially that part affecting the environment—is in place.
In common with other Members of your Lordships' House and, I have no doubt, the entire power industry, I hope that the Government will take the opportunity afforded by the debate to tell us exactly what their commitment to the objectives is and how and when they intend to bring them about.
§ 4.53 p.m.
§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville)
My Lords, I thank the noble Lord, Lord Tombs, for his speech and others for their contributions and insights. I am very conscious of the fact that they are based on knowledge of the energy and electricity industry at the highest levels.
I begin by recognising the considerable achievements of the electricity industry both while it was in the public sector and in the private sector. The nationalised industry, particularly in the post-war 1046 years, had huge achievements, not least in bringing electricity to virtually everyone in our country. Before privatisation, the main investment decisions were taken at the centre by the government and the Electricity Council and its associated boards. While that approach had strengths, it also lent itself to investment decisions which were supply rather than demand-driven, and to decisions being made on a political rather than on a market basis.
I was surprised that the noble Lord saw nothing wrong in the performance of the nationalised industry. In a sense, I was disappointed by his speech, because he did not really deal with the question that I thought he would raise; that is, that of strategic decision-making or what the noble Lord, Lord Jenkin, called a co-ordinated policy framework, which we should have. He seemed to hark back to an overall large corporate approach that market forces played no part in. That was also the approach of the noble Lord, Lord Ezra, who said that we should somehow go back to planning our energy policy on a national basis rather than seeing a role for both market forces and a co-ordinated policy framework.
§ Lord Sainsbury of Turville
My Lords, if that is the case I take back my comments. I thought that the noble Lord was harking back. He seemed to say constantly that he wanted governments to take decisions about which energy sources should have priority, where decisions should be made about investment, and so on. That is not the role of government. As the noble Lord, Lord Jenkin, rightly pointed out, the role of government is to provide a coordinated and coherent policy framework in which the decisions are made by private industry.
I say to the noble Lord, Lord Tombs, that it is not an answer to have an expert commission to decide what the body should be. We have debated the matter a great deal over the past 50 years. We have a system now: the question is whether it provides the right strategic mechanisms or whether we should seek to change it. If the noble Lords, Lord Patten and Lord Tombs, are looking to the chairmanship of an expert body to resolve that question, it will probably be in vain. However, what I say will not come as any surprise to them.
Privatisation released electricity companies to invest and to innovate in ways that were previously impossible. Companies, not government, now made key investment decisions. That allowed managements to make many good decisions and savings. which regulation passed on to consumers. They also made some mistakes. The key difference is that in this situation the private sector takes the risk, makes the returns when things go well, and makes losses when things go wrong.
1047 The electricity industry now operates in a market environment, but also, it must be stressed, within a framework designed by the Government to ensure that our policy objectives are delivered. We see four such objectives, which, until this debate, I thought were uncontroversial. The objectives are those that the noble Baroness, Lady Miller, stated clearly. They are competitive prices, security of supply, a low-carbon future, and addressing the problems of the fuel poor.
I was surprised that the noble Lord, Lord Jenkin, did not mention competitive prices in his three objectives. He seemed to start by giving approval to market forces, and then complained about prices coming down, which I would have thought it was hoped competitive market forces would produce. He was concerned about the closure of redundant capacity. If one wants a quiet life and no change, the thing to do is to have a planned economy and accept all the inefficiencies that go with it. However, if one brings market forces into areas such as energy policy, one will get changes. One will get situations such as that involving British Energy. One will get changes such as those that have happened on combined heat and power because electricity prices have come down. One will get situations—I say this to the noble Lord, Lord Stoddart—where the value of a company changes. That is the nature of market forces.
§ Lord Jenkin of Roding
My Lords, I thank the noble Lord for giving way. Inevitably we are constrained by time, but on a previous occasion I warned the Government of the dangers of running the electricity market on the basis of short-run marginal cost. As the noble Lord will know from his own experience, to run a business by pricing based on short-run marginal costs is the surest way to bankruptcy. That is what I am concerned about. I hope that either the Minister today or the White Paper will address that. Prices have fallen by 40 per cent. Look at the damage that has been caused.
§ Lord Sainsbury of Turville
My Lords, I accept that there will be moments—anyone who has worked in industry will know this—when prices in the marketplace do not give good returns. One has to ask the question whether the prices we had before were the right prices. Of course they were if one wanted to keep large amounts of redundant capacity in place. But if one accepts the principle of a market economy, one has to accept that prices will reflect supply and demand and there will be periods when prices fall and one does not make highly desirable levels of profitability. That is the nature of the market. Frankly, the market will respond with people taking action on capacity to bring it into line with the supply. If one does not want that, one must go back to some kind of planned economy.
The point I want to make was that as well as the electricity market now being part of the market, it is also co-ordinated, both on a day-to-day basis and more strategically by a number of bodies. First, the DTI is the ministry responsible for policy towards the electricity industry and is the sponsor department of Ofgem.
1048 Ofgem of course is the major body responsible for economic regulation of the gas and electricity industry in Great Britain. It operates under the direction and governance of the Gas and Electricity Markets Authority, which sets all major decisions and policy priorities. There is also the National Grid Company, Transco plc, which, as the owner of the licensed electricity transmission company in England and Wales and the main licensed gas transporter in Britain, co-ordinates the electricity—and now also the gas— market under the rules set up by Ofgem and the DTI.
So strategic decisions are not left only to the market. The Government maintain responsibility for the overall framework. We have put in place measures to shape the strategic framework and to keep that framework under review.
On coming to power we rebalanced the regulatory system in favour of the consumer and established Ofgem to better co-ordinate gas and electricity regulation. We created the network operating companies, which have been much under the spotlight in recent months, to underpin competition and to focus management on their core responsibility. We have also underpinned the fledgling retail market with new wholesale electricity trading arrangements (NETA) and made other changes to reduce market power.
A number of noble Lords, including the noble Lord, Lord Tombs, believe that NETA has been causing what I think the noble Lord referred to as a situation of "chaos", although I felt that the only evidence he produced was that prices had fallen sharply. I do not regard that as necessarily a sign of chaos. The fact that companies had to adjust their strategies does not seem to be a chaotic situation but one that is highly desirable in the circumstances.
The noble Lords, Lord Tombs and Lord Stoddart, were concerned about foreign ownership. Foreign owned utilities are subject to exactly the same level and scope of regulation as those owned by their UK parents. They pay tax to the UK Treasury and must compete in our market. This situation of acquisitions is not one way. British utility companies own assets abroad; the most obvious being National Grid Transco itself, which is now one of the largest operators in New England. Our utilities, like our economy at large, are rapidly beginning to operate as part of a European and indeed global economy in which we are all interdependent.
I agree very much with the noble Lord, Lord Patten, that we need to keep open options on energy sources. I further agree that we simply do not know which energy sources or which combination of energy sources will best meet our four objectives in the future. Therefore, I believe that the key thing is to keep those options open, to put in the right framework and, in particular, to give the incentives for areas such as renewables and then to leave the matter to the market to choose which option within that framework, with its social obligations, provides the right targets.
I am not in favour of the idea of banding types of renewable energy. That sounds remarkably like trying to pick winners. I am—and I am sure the noble Lord 1049 is—against that as regards commercial matters. Although, obviously when one is looking at where one allocates R&D resources, one takes account of what are the most likely winners in terms of the technology.
I say to the noble Earl, Lord Mar and Kellie, that it must be clear from our policies that we are wholly supportive of renewables. Again, they have to compete in the marketplace. But we have given them huge incentives in terms of the climate change levy and the renewables obligation, which is a very strict and important obligation on electricity companies. As to hydro schemes, the problem is that we are simply using all the hydro power that there is in Scotland. There is very little scope to have more.
The noble Lord, Lord Jenkin, and the noble Baroness, Lady Miller, raised the question of nuclear waste. I agree with them: this is an issue that we must get on with. On the other hand, we must face up to the fact that the previous policy failed in 1997 because it did not have a broad level of support. Therefore, having a consultation period to try and get support is a critical part of the whole process.
The security of electricity supply was raised by a number of noble Lords. As I have said previously in the House, the situation for this coming winter is that we have a reasonable level of capacity. We have about 17.5 per cent spare capacity. There is also mothballed capacity, but I accept that that takes some time to be recovered. The longer-term issues have been assessed in the White Paper. Also last year we set up the joint energy security of supply working group so that officials from the DTI, Ofgem and National Grid Transco could carefully monitor developments affecting security of gas and electricity supplies.
I am glad that the noble Baroness, Lady Miller, reminded the House that liberalisation of markets—
§ Lord Stoddart of Swindon
My Lords, I am obliged to the Minister for giving way. On the question of security of supply, a matter which I have questioned before, is it not true—according to the newspapers—that over the weekend during this cold snap the supply reached within a hair's breadth of about one megawatt the figure of 54,000 megawatts? That really is not security of supply. I think that the noble Lord should look at it.
§ Lord Sainsbury of Turville
My Lords, as I understand the position, we have this quite considerable margin of supply of 17.5 per cent. That is on the assumption that a certain capacity is mothballed, which of course it may not be. So in fact the figure is very close to 20 per cent. which is usually given as being the correct or ball park figure within which it should be. I shall however check those figures and write to the noble Lord if they are wrong.
I was going to say that I was glad that the noble Baroness, Lady Miller of Hendon, reminded the House that liberalisation of markets is not in conflict with diversity and security. On the contrary, markets give the security that we seek.
1050 I hope that, overall, noble Lords will take comfort from the fact that we continue to address the strategic issues that face the electricity industry. Strategic analysis continues to be carried out, and the Government, the regulators and the industry are all fully engaged. We also need to prepare policies for the coming century. The Government's energy White Paper will outline the key energy policy issues for the future. It will be published in the spring.
We must address the long-term future security of energy supplies. Fuel diversity requires that we enhance international relations, especially with producer countries. We must deal with nuclear waste and the future of nuclear energy. We must move to a low-carbon economy. Deeper emission cuts will be necessary in the longer term. If we grasp the opportunities in time, innovation and technology will help us to address that and provide export and inward investment opportunities. We must remain competitive and—last but by no means least—we must protect the most vulnerable by working in partnership with industry to address fuel poverty through low prices and energy efficiency measures.
The Government have the strategic capability to deliver on our objectives. However, the measures that we need to take can and should be implemented against a background of liberalised markets operating over regulated networks that are required to apply non-discrimination towards their customers. In that way, we can use the benefits of the innovative and investment skills of good industry management to deliver service to our customers and the policies that we need to see brought in over coming years.
§ 5.11 p.m.
§ Lord Tombs
My Lords, I have enjoyed the discussion that has taken place. It was almost always well informed, and I am grateful for that.
The noble Lord, Lord Jenkin of Roding, raised the question of the meaning of "decision" in my Motion. I can see how it could easily be misconstrued, so I shall explain it further. Decisions must be taken at various levels. The executive decision to build a power station rests with the company building it; the decision to create a climate in which that is legal, possible or desirable rests with the Government; and the decision to provide the finance rests with the market. There are a lot of decisions.
In proposing the expert committee to which the Minister takes such exception, my intention is that its decision would create a climate in which the other decisions could be made. That does not exist at present. The fragmentation of an industry is the antithesis of long-term planning. It results in the adoption of narrow-minded, short-term views that relate to the welfare of an individual company, and that is exacerbated by the short-term view of the markets, which require performance this year in an industry that requires long-term commitment.
An example that struck me at the time as coming high up the stupidity scale was the combination of electricity and gas in Ofgem: they are different industries. The gas industry, like the water industry, is 1051 concerned with the exploitation and distribution of a natural resource. The electricity industry is a conversion industry that takes a series of feedstocks and converts them using complex and capital intensive mechanisms. The investment and planning requirements of each industry are different. It is tempting, as Ofgem has done, to bring to the job the retailing of the product. I understand that the Minister is in sympathy with his own background, but that does not address the problems of the industry. The problems of the industry are safeguarding investment and supply in 15 to 20 or 30 years' time.
The White Paper is no substitute. It should do the Government's job and should set out a sensible strategy for the country. However, for the reasons that I gave, it cannot decide or, at least, achieve the building of individual plants. It should recognise its responsibilities.
I have some sympathy with the views of the noble Lord, Lord Ezra, although I recall that our relations were not always cordial. Occasionally, we disagreed on the price and quantity of coal. I was particularly taken with his description of micro-generation and his alarming suggestion that the whole electricity system might be re-wired. It is an incontrovertible fact that an electron does not mind whether it travels from right to left or left to right along a conductor. I do not see why such mythical micro-electricity exportation should create any more problems for the conductor than its importation. I would be glad of an explanation of that at some stage.
§ Lord Tombs
My Lords, that is not the same thing as re-wiring the country. It may be re-wiring the brain of the regulator, which may be more difficult.
We had some discussion on nuclear power, and I went out of my way not to get drawn into that subject. It is a subset of what I am trying to discuss today. Nuclear power, wind power, wave power, solar power or coal require important decisions within the electricity industry, but the framework for the electricity industry to work and make such conclusions does not exist. That is the burden of what I said today. If I have not made that clear, I do not know how to make it clearer.
I was greatly impressed by the noble Earl, Lord Mar and Kellie. He over-responded to my request for nonpartisanship. Perhaps, it was the noble Lord, Lord Patten, and not the noble Earl. I apologise.
§ Lord Tombs
My Lords, I was greatly impressed by the contribution made by the noble Lord, Lord Patten, although I thought that he overdid his response to my request for non-partisanship. I am delighted to see that there can be compliments from one side of the House 1052 to the other, but I did not want it overdone to the point at which they agreed all the time. That would be depressing for the rest of us.
The noble Earl, Lord Mar and Kellie, displayed a sensible approach to the balanced use of renewables and other forms of power, including nuclear power. However, he fell into a trap: I had not made clear what I meant by "decision". The noble Earl was in favour of government decision making, I am in favour of governments making decisions in the areas in which they can make decisions but not pretending that they can make what I would call macro decisions—those that are strategic in the sense that they are long-term but individual in the sense that they are short-term.
I was disappointed by the Minister's reply. It struck a new low in my experience of government responses to new ideas. It is not possible to say, for example, that I saw nothing wrong in nationalised industries. I agree that the nationalised industry was supply-driven and that it incurred costs. However, I mentioned that I had resigned because the Government would not allow the industry to be organised efficiently, and I would have thought that that was sufficient indication that I did not think that nationalised industry was perfect. That was a substantial error.
The Minister made reference—flippantly, I hope—to some competition for the chairmanship of the expert committee. I rule myself out of serving on any such mythical body, desirable though it may be. I rule myself out partly on age and partly because I have spent far too much of my life trying to advise governments who do not listen. I have no ambition to extend that career. It needs to be done, but I would rather that somebody else did it.
There is a pressing need that was not evident in the Minister's reply. I do not know how I can get the Minister to recognise it. I hope that he will think more deeply about the arguments. There is a need for a consistent framework in a fragmented industry that is subjected to short-term impulses. By its nature, such a structure cannot produce coherent decisions, and it is not fair to expect the Government to make such decisions. The Government have an important strategic role, but they must see, receive and evaluate a view from an industry that, in its present framework, is not capable of producing it.
I shall not withdraw the term "chaos". It is there, and it will increase. I note the Minister's confidence that we will not have power interruptions in the next few years. I do not share that confidence. I am not surprised that he has withdrawn the existing 17.5 per cent margin of supply. He was right to do that.
I did not intend to be unduly critical of the Minister. I know how difficult it is for a Minister to come to a debate in this House with no real notion of what it will be about and deal with a subject that is not primarily his. The Minister did that well and did it bravely, and my critical comments were not critical in an overall sense.
1053 I thank your Lordships for allowing me to ventilate the topic. The House, in general, has appreciated the debate. and I hope that the Government will think more deeply about the matter. With some pleasure, I beg leave to withdraw the Motion for Papers.
§ Motion for Papers, by leave, withdrawn.