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Energy: Electricity Supply

My Lords, I congratulate the noble Lord, Lord Tombs, on once again securing a debate on electricity supply. His annual ““audit”” of the Government’s record on this issue is much looked forward to by noble Lords, and I have enjoyed listening to this informed and measured debate. I shall be disappointed if this is the last in the series. The noble Lord, Lord Tombs, and other noble Lords expertly outlined the main issues facing the electricity industry and I will discuss the Government’s position shortly. However, I should first like to address the assertion that a strategic decision-making mechanism would in some way address the issues facing the electricity industry more efficiently than the system we currently operate. I will not repeat in detail the comments made by my noble friend Lord Davies of Oldham during the debate on this subject last year. He spoke of the Government’s desire not to turn back the clockto a more centralised approach to energy markets. Indeed, noble Lords are aware that Her Majesty’s Government remain committed to the UK’s competitive energy market. This was confirmed in the recent energy review. We do not, therefore, believe that a strategic decision-making mechanism is either desirable or necessary. We see no reason to think that decisions by a single central authority would be any more successful in correctly identifying and providing what will be needed to meet the nation’s energy demands than are decisions by industry professionals in a market where companies compete to do just that. It is an immensely complicated business, involving assessment of factors such as likely future demand, supply, fuel and electricity price, fuel availability, technological development, carbon prices and so on. In fact, all our experience has shown that a more centralised decision-making process could stifle the very incentives that encourage private sector investment. Without that investment the taxpayer would be left to pick up the bill. With statistics showing private sector investment of more than£12 billion in new generating plant since 1990, and more than £10 billion in gas infrastructure projects likely between 2005-10, this would be a very large bill indeed. As mentioned by several noble Lords, one of the issues facing the electricity industry is an increasing reliance on imports of gas, currently the main fuel for electricity generation. On security of supply, I refer to a point raised by my noble friend Lady Ford about the physical security of our installations. That is kept under constant review. I am sure that noble Lords will understand that I do not wish to go into further detail on that. Security of supply is in itself a major issue. Several noble Lords referred to Russia and Gazprom and their impact on the country. The Government remind the Russian Federation of the St Petersburg energy supply principles that it signed up to at the G8 in St Petersburg, in which it committed itself to open, competitive and transparent markets. There has been no Gazprom bid for Centrica or any other major UK company, so I would not wish to engage in a hypothetical discussion. Net imports currently account for some 10 per cent of the UK's annual gas demand. In 2010, a third of demand may be met from imports, but by 2020 it could be 80 per cent or more. That reflects our debate. A number of our competitors in Europe have, of course, relied on imported energy for many years, but we have been fortunate in our proximity to the North Sea’s reserves of gas. However, we must face up to the fact that this good fortune will gradually come to an end. A number of noble Lords asked what action the Government are taking to secure our energy supplies. We are aiming to maximise our oil and gas reserves by boosting the attractiveness of investment in the UK, compared with other regions of the world, and that will help recovery from fields that are already producing an established infrastructure to the west of Shetland for our undeveloped heavy oil resources. HM Treasury is also discussing with industry the wider structural issues of the oil and gas fiscal framework, which will be important. Noble Lords mentioned on a number of occasions the need to ensure diverse sources of supply to reduce our gas dependency through energy efficiency. Her Majesty’s Government and I would agree that that is an essential part of our strategy, looking at both the demand and supply sides. Improving energy efficiency is a core of that. That will also depend on improving the investment environment for distributed generation for renewables, for example, and for nuclear generation, if we go down that path when the White Paper is published. I will return to those issues in a moment. We are also facing the closure over the next two decades of about one-third of total generating capacity, as the noble Lord, Lord De Mauley, mentioned, including just under a third of the UK coal fleet, due to ageing plant and strict environmental limits. Included in this is the planned closure of a significant part of our nuclear generating fleet over the next two decades—equivalent to nearly 20 per cent of the country’s electricity generation, as the noble Lord, Lord Redesdale, said. All that is set against the background of the urgent need to reduce carbon dioxide emissions. These issues were of course very much at the heart of the recent review of energy policy, which examined the UK’s progress against the medium and long-term goals set out in the 2003 energy White Paper. As the noble Lord, Lord De Mauley, said, the review highlighted two major long-term challenges in UK energy policy: the need to tackle climate change by reducing carbon dioxide emissions, and the need to deliver secure, clean and sustainable energy at affordable prices as we move to increasing dependence on imported energy. While remaining committed to the UK’s competitive energy market, our aim is to set theright regulatory framework to encourage and enable the market to move in the right direction to meetthe long-term challenges. Despite the many real challenges facing the UK’s energy industry, it continues to deliver secure sources of energy supply. We have seen proposals come forward for new and innovative electricity generation, including clean coal and renewables projects, as well as a number of gas-fired stations. The noble Lord, Lord Dixon-Smith, rightly focused on the importance of heat. That issue will be taken up in the forthcoming White Paper. A number of noble Lords also mentioned the importance of developing combined heat and power plants; that, too, will be addressed. As I have mentioned, some £10 billion of actual and planned private investment in gas supply infrastructure and related transportation is likely between 2005 and 2010. Some of that is already bringing gas to the UK, leading to a welcome fall in wholesale prices compared to last year. Those gas import projects are potentially delivering gas from such diverse sources as Norway, the Netherlands, Russia, Algeria, Qatar and other liquefied natural gas exporter countries. The Government are working on a comprehensive programme to help these and future gas supply projects proceed in a timely fashion. The noble Lord, Lord Redesdale, was right to say that coal will remain an important part of our future energy mix. Last year, more than 50 per cent of our coal imports came from the Russian Federation. We are consulting on measures to reduce the regulatory burden for offshore gas infrastructure and onshore, and we are considering simplification measures in the context of the forthcoming planning White Paper. A number of noble Lords mentioned the importanceof planning issues in terms of large infrastructure projects and smaller-scale microgeneration projects. These issues are being looked at in detail, with regard to both the energy White Paper and the forthcoming planning White Paper. We have been supporting the European Commission in its efforts to enforce the energy liberalisation legislation and we welcome its recent sectoral inquiry into the operation of energy markets across the European Union. I welcome the support of the noble Lord, Lord De Mauley, for the European Union’s efforts in that area, especially those of the Commission, to ensure the liberalisation of the EU’s energy market. I can assure him that we fully support the strategic energy review recently published by the Commission and the findings of its sectoral inquiry—and we support the un-bundling of the energy market. Progress there would bring benefits to consumers right across Europe, just as consumers in the UK have already seen the benefits of competition in choice of energy provider. We have proposed significant measures in the energy review to reduce carbon dioxide emissions and to ensure the security of our energy supplies. We aim to encourage the use of cleaner energy and will continue to be steadfast in our commitment to long-term carbon pricing. I shall return to that issue, because it was raised by a number of noble Lords. We are seeking to boost renewable energy by strengthening the renewables obligation and tackling barriers such as planning. I agree with the noble Lord, Lord Redesdale, that we are aiming for a broad energy mix, not a one-solution fix to the future challenges of energy needs and tackling carbon emissions. We are looking at a broad range of energy sources and introducing renewables is an important part of that. The noble Lord, Lord Tombs, mentioned the importance of wind power, although he said that it was not enough in itself to solve our future energy needs. I agree that it is not enough on its own, but wind energy remains the fastest-growing renewable technology and in 2005 all records were surpassed on the amount of new wind capacity installed. As of January 2007, the UK had some 1,963 megawatts of installed onshore and offshore wind capacity. The noble Lord, Lord Dixon-Smith, mentioned tidal and wave power. We have a £50 million fund for marine renewables, £42 million of which has been earmarked to kick-start the construction of large-scale demonstration wave and tidal projects around the UK. The noble Lord, Lord Teverson, mentioned deep geological thermal production—otherwise known as ““hot rocks””. The Government are looking at a wide range of emerging energy technologies and at the scope they must play in meeting our carbon targets. So we are aware of the potential of hot rocks technology and will give it further consideration. We will also take steps to recognise the potential for distributed generation, which would enable us to generate energy efficiently near to where it is used. On nuclear energy, raised by a number of noble Lords, if we confirm our belief that it has a role to play in the UK’s future low-carbon energy mix, when we publicise the energy White Paper we propose to address the regulatory barriers to, and reducethe uncertainty for, new nuclear investment. Unlike the noble Lord, Lord Jenkin of Roding, we welcome the Franco-British Nuclear Forum and collaboration, because we think that we can learn from each other about the work that is being done in this sphere. As I mentioned, we intend to refer to nuclear power in the White Paper, which, I repeat, should be published in March. Consultation on a proposed policy framework for nuclear build has just closed. This was the first step in the process of creating the right regulatory and investment framework to allow nuclear to compete with other low-carbon options. The noble Lord, Lord Teverson, said that he did not believe that nuclear power could be built without subsidy. However, it remains the case that any new build will be initiated, funded, constructed and operated by the private sector, which will have to cover the full decommissioning costs and pay a full share of the long-term waste management costs. Long-term issues were mentioned. CoRWM deals with waste management issues and last July produced a report which made the case for a deep geological repository to deal with long-term nuclear waste. The noble Lord, Lord Tombs, argued for a centralised body, such as the former Electricity Commission, to take forward policy on new nuclear build. Our energy review states, as I mentioned, that it remains the case that any new build will be initiated, funded and so on by the private sector. That is the Government’s position, but the initiative for any new build will have to come from the private sector. A number of noble Lords, including my noble friend Lady Ford, mentioned climate change and the Stern report. That is the background to the whole energy review, combined with issues of security of supply and our future needs for secure and sustainable energy supplies. We agree that it is an absolute priority to tackle climate change. My noble friend Lady Ford and, I think, the noble Lord, Lord Redesdale, mentioned the restructuring of government ministries and asked whether there should be a Secretary of State for energy. Of course, historically there have been Secretaries of State for energy, but I can tell noble Lords that energy is one of the key issues for the Government from the Prime Minister downwards, regardless of the machinery of government—and I’ll leave it there—which I think is sufficiently sweeping. I assure your Lordships that Her Majesty’s Government take very seriously the difficulties faced by consumers, particularly those on low incomes, due to the current high energy prices. Increased gas supplies to the UK, combined with lower demand due to relatively mild weather, have so far resulted in significantly lower wholesale gas prices compared with last winter. However, many customers are still facing high energy bills. Ofgem has said that it will keep a close eye on suppliers to ensure that there is no undue delay in passing on any sustained reductions in wholesale prices. I very much welcome that. The noble Lord, Lord De Mauley, mentioned price rises. The noble Lord, Lord Redesdale, mentioned Centrica’s announcement of a price reduction, which will come into effect on 12 March. I am pleased to see that one or two suppliers are announcing their intention to reduce their prices and I look forward to more companies following suit. In that, I agree with the noble Lord, Lord Redesdale. Affordable energy, particularly for the more vulnerable in our community, is of key importance. That is why we have taken a number of important measures in this area. Warm Front, and its equivalents in the devolved Administrations, is the Government’s key programme in this area. It provides free central heating and insulation measures to all qualifying households. The Government also provide all pensioner households with winter fuel payments of £200 per year to those over 60 and £300 to those over 80. Other benefits, such as pension credit, are also available. Where decisions could be made, we made them, but the energy review also announced a long-term package of proposals where further work was required. An intensive period of public consultation will help to formulate our position on a range of energy issues to be published in the energy White Paper. Essential to the measures will be allowing everyone to be confident of being able to heat and light their homes. I shall refer to one or two specific questions that were raised. I had brief notice of the question from the noble Lord, Lord Jenkin, on carbon trading, although I did not have the detail. We are committed to strengthening the EU Emissions Trading Scheme and we agree about the importance of carbon pricing. We also agree that there is a need for certainty on this issue, and we are looking at that. The Government are mindful of the need to give investors more certainty about the carbon market as soon as possible, and we will work with the Commission, other member states and internationally to achieve that. The noble Lord, Lord Redesdale, mentioned carbon capturing and storage. Again, this issue is being examined—