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Energy Bill

We are in deep financial and business waters in which I was floundering until the noble Lord, Lord Jenkin, threw me a lifeline by saying that my noble friend Lord O’Neill had so accurately identified the issues and clarified the noble Lord’s mind that there was nothing for me to add, except that I agreed with him. I do agree with him, but then the noble Lord, Lord Jenkin, said, ““Yes, but I think that the Minister should add a little more”” on a significant point that I should attempt to respond to, although I will base a great deal of my response on what my noble friend Lord O’Neill said. I am able to reduce my response because he has done a signal service to the Committee by outlining what he sees as the potential benefits from innovation and learning over time. It would be a strange industry—certainly it would be strange for the nuclear industry which is at the cutting edge of technology—that did not reap advantages over time in terms of technical innovation and improvement. I am grateful to my noble friend for identifying his optimism on that and the expectations of all of us. Our problem with the nuclear industry is that the timescale is always so surpassingly long that, in terms of decisions taken by business, it raises some very fundamental questions indeed. I will attempt to address those fundamental questions. The noble Lord, Lord Jenkin, will see whether I respond adequately to his points. Clause 45 sets out who can propose a modification and what the proposal can consist of. Modifications to an approved funded decommissioning programme under this clause could include both financial and technical modifications. The persons who can propose modifications are clearly listed: the Secretary of State, the site operator and any other person who has obligations under the programme, provided that the site operator consents to the proposed modification. The aim of the power is to allow for the principle about which the noble Lord spoke; that is, the modification of a programme after it has been approved. It is obvious that that is necessary; otherwise, we would be in a state of stasis which would ill befit an industry with capacity for significant development. The operator would be expected to propose modifications where a technical or operational change in the station had a significant impact on decommissioning or waste cost estimates. Modifications might need to be made also where there had been a breach in the programme. It is important to stress that the Secretary of State can exercise his power to make a modification only in order to ensure that the programme continues to make prudent provision for technical matters and the financing of designated technical matters. The clause allows the Secretary of State also to impose new or additional obligations on any body corporate associated with the operator. This might be necessary where the level of security that a body corporate could provide had diminished in some way and there was a requirement for another body corporate associated with the operator to provide that additional security. The Secretary of State’s power to make modifications or impose obligations is of key importance if a programme is to remain up to date and to ensure that the cost estimates, technical plan and financing arrangements remain prudent. It is also integral to the enforcement and sanction regime. In the event of a breach in the programme, the Secretary of State might choose to modify the programme prior to, or instead of, taking formal enforcement action. Similar powers in relation to the modification of a decommissioning programme exist elsewhere. We have the experience of the oil and gas industry. The Petroleum Act 1998 gives the Secretary of State a power to revise a programme to decommission offshore oil and gas installations. The provisions of the Energy Act 2004 give the Secretary of State a similar power in relation to decommissioning of offshore renewables installations. I speak by way of broad introduction to the important issues that the noble Lord, Lord Jenkin, raised with his amendment. As currently drafted, the clause already enables the Secretary of State to increase or decrease the target sum or propose other technical modifications which do not alter the target sum that a fund will be required to meet, provided that it is prudent to do so. Therefore, I do not think that the amendment is necessary. However, the noble Lord is probably less concerned about whether the amendment is necessary than about the issues that he raised with regard to costs, to which I shall come. I have described the Government’s powers, but it is fair to say that discussion to date has focused on the worst-case scenario, with an underlying assumption that costs will increase. It is arguable that as a Government we are obliged prudently to focus on that scenario. However, the amendment raises the valid question of what would happen if a solution to minimise the amount of waste or reduce the amount of moneys needed to meet the liability came forward. As I have already said, the clause as drafted allows for modifications that decrease the target sum where it is prudent to approve them. The framework provided by the provisions allows for operators to propose effective ways of dealing with decommissioning and waste management other than those set out in guidance issued by the Government. But that answers only—I hope that the noble Lord will bear with me—the question on approvals for modifying the programme. Any proposal to decommission a nuclear power station and dispose of its waste will also need regulatory approval from, among others, the Nuclear Installations Inspectorate and the Environment Agency. Furthermore, any proposal from an operator to reduce their estimates of the costs of decommissioning, waste management and disposal liabilities would need the agreement of those managing the operator’s independent fund. Additionally, any proposal that involves the shipment of waste would need to conform to existing UK policy. Any proposal to decommission a new nuclear power station and to dispose of its wastes will have to conform to existing policy, as will any proposal to accelerate decommissioning. However, I want to emphasise that this approach does not rule out the consideration of alternative or new methods of decommissioning or waste management techniques, the point addressed by my noble friend Lord O’Neill in his contribution. It is for this reason that the Government have not taken a prescriptive approach to the technicalities involved in waste and decommissioning in the Bill. The guidance issued under the Bill allows operators to develop and propose innovative decommissioning methods. The noble Lord, Lord Jenkin, asks: where is the gain and therefore the incentive for operators to do this? First, let us deal with the crucial point about the concept of the fixed unit price. The fixed unit price will reflect the most up-to-date estimates of costs available at the time when the price is set, and the level of certainty the Government have on those costs. Consequently, dependent on the date of construction of a new nuclear power station, operators of different stations may be set different fixed unit prices for waste disposal. For example, the fixed unit price for a power station to be constructed in five years’ time could be different from the fixed unit price agreed for a power station to be constructed 10 years hence. The difference may arise because over time it is likely that understanding of the expected costs of the geological disposal facility and associated activities will increase, and therefore at the time the agreement is entered into, the Government could be more comfortable attaching a different risk premium on the fixed unit price. Of course the Government have a primary duty to safeguard the taxpayer’s position when they are bearing a very substantial risk. The fixed unit price will be set based on estimates of the costs of the geological disposal facility and the level of confidence we have in the cost estimates at the time a company comes forward. Business wants clarity and certainty, and has indicated that it would be prepared to pay a significant risk premium in return for having the certainty of a fixed unit price. It is that which the Government are seeking to respond to. If operators can carry out decommissioning more cheaply than originally envisaged, provided that all the regulatory steps have been taken, any surplus in the fund set aside for decommissioning will be returned to the operators—and there is the gain. A fixed unit price gives a guarantee to the operators of what their maximum costs could be against a background where the price needs to be set to safeguard the interests of the taxpayer, but if techniques and technologies are developed that reduce the costs, the fund set aside for decommissioning can be returned to the operators, who then gain from the position.