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Energy Bill

I thank the noble Lord, Lord Oxburgh, for speaking to his amendment. It is a serious amendment and has serious people supporting it. I appreciate that he may not be in a position to come back on this amendment this evening. I have a feeling we may return to it on another occasion, although I may be wrong about that. The Committee will completely understand why that is so, and he has been courteous enough to explain to me in detail why that is so. We have heard a lot of debate during the passage of the Bill as to whether the duties of Ofgem—I mean the Gas and Electricity Markets Authority—are still fit for purpose, particularly in the light of the EU renewables target. All three amendments—I include Amendment No. 59 in the name of the noble Lord, Lord Redesdale—attempt to address what some noble Lords feel is perhaps an imbalance in Ofgem’s overall focus, namely that Ofgem should have a primary duty to secure and sustainable energy and a secondary duty to competition and consumers. At present, Ofgem’s primary duty is to competition and consumers. It will be of considerable interest to the outside world to know that the Official Opposition now want Ofgem’s priorities to be changed in this way. The noble Lord, Lord De Mauley, made a short but significant speech this evening. Before I cover the specific issues raised by the amendments, I shall briefly remind the Committee of the rationale for having an independent economic regulator for these markets in the first place. We believe that delivering our energy objectives of tackling climate change and ensuring secure supplies of energy is best achieved through a competitive and effectively regulated energy market. That is our starting point, and I do not think that other political parties would disagree with it. It is important to know their view on that. Clearly it is the Government’s role to set the framework for social and environmental policy, and it is the economic regulator’s role to police markets and competitiveness. We are therefore committed to delivering safe, secure and sustainable energy supplies through independently regulated and competitive energy markets. The Committee will hardly need reminding that that is in line with the findings of this House’s recent Select Committee report on regulators, which highlighted the promotion of competition as vital, and even recommended that we use legislative opportunities to require regulators to promote competition where they do not do so already. Ofgem has been specifically established as the independent regulator for the gas and electricity markets, with consumer protection and competition as its primary duty. The intention of independent regulation is to provide the regulatory stability necessary for investor confidence through a clear statutory framework and independence from government, to introduce competition into the market wherever possible, and to regulate the prices of any natural monopolies where it is not possible. Unlike in some other sectors, investments in the gas and electricity industry—be it networks or generation—are generally significant financially and are normally long term. Returns can be made only over a lengthy period. Once the investments have been made and the infrastructure built, it can be particularly costly for companies to pull out. That is why companies need to be confident that there will be a stable and long-term regulatory framework to invest in the first place. Ofgem’s independence helps to ensure that regulatory decisions about the market will be made for the long term on an economic basis, not a political one, and it has a clear statutory framework of duties under which it takes decisions that are fundamental to crucial investor confidence. That combination provides companies with the stability and regulatory certainty that they need before they will invest with confidence in power stations, gas infrastructure and electricity networks, thereby providing the security of supply that this country clearly needs. We believe that changing Ofgem’s duties in the ways suggested in the proposed amendments could have serious repercussions for investment, first by creating regulatory uncertainty, and secondly by transferring to the economic regulator political decisions that are properly made by government. Moreover, at a time when we need significant new investment in the system to maintain security of supply and to help us make the transition to a low-carbon economy, and with no evidence to suggest that Ofgem’s existing statutory duties are preventing this investment, such significant changes to Ofgem’s primary remit seems to be an unnecessary risk to take. The Select Committee report on regulators, which I mentioned a moment ago, supported this argument. It states: "““Government should be careful not to offload political policy issues onto unelected regulators””." During the Bill’s passage in the other place, the Minister talked about the trade-offs involved in making decisions about sustainability issues. Let me reiterate those points. In Amendments Nos. 61 and 62, the third principle defines sustainability as delivering electricity and gas in a manner most likely to minimise adverse social and environmental impacts. However, there is an inherent tension between them. For example, renewables are generally more expensive than conventional forms of energy, and higher fuel prices will lead to greater pressures on social policy. Should non-elected organisations be allowed to choose where the balance between such vital issues should lie? We argue—I am surprised to hear any other political party argue the opposite—and the report on regulators points out, that it is for an elected Government to make the political decisions about such trade-offs and the intergenerational distribution of costs. Ofgem and others who gave evidence to the Select Committee on regulators said they already thought that there is such a tension between Ofgem’s social and environmental duties. However, these are subservient to its primary duties, and the fact that Ofgem’s primary duty is to protect consumers through competition provides clarity where such tensions exist. Such clarity would be jeopardised if the duties were swapped in the ways suggested here. Perhaps I will quote for the final time, if I may, the Select Committee report on regulators. It highlighted the importance of, "““an effective and transparent mechanism … for resolving potential policy conflicts so that the regulators are able to carry out their economic function without interference””." Moreover, one of the key points is grounded in Ofgem’s economic function. We must remember that Ofgem is an economic regulator, and its tools—for example, price controls—are economic tools. It is the Government’s role to make strategic policy decisions about the level of financial incentive that should be made available to support investment in low-carbon technologies, such as the support available for renewables through mechanisms such as the RO. Ofgem does not have the tools to function in this way, and we do not believe that an unelected, independent economic regulator should have them. Most importantly, we have received no evidence to show that Ofgem’s duties as currently framed are a barrier to increasing sustainability in the energy market, either in deploying more renewables or in delivering our overarching objective to reduce carbon emissions. Indeed, they are quite the opposite. Representatives of the sector, which between them will be responsible for making the majority of the new investments, in capacity terms, that we need to see in renewables, have told us that they do not want to see a change Ofgem’s duties. Investors tell us that the barrier to renewables deployment is not the authority’s duties but the difficulties in securing planning consent, grid access, transmission and ongoing financial certainty of subsidy. We have been told that downgrading and diluting the duties on protecting the consumer and competition would not be a solution in the current climate of high prices. In fact, retaining a strong consumer focus, as it currently does in its primary role, will be even more important than before because the transition towards a low-carbon energy system may well raise costs in the short term, even if it leads to lower economic costs in the long term. There must be a need to ensure that those costs are efficient and not excessive, and the regulator can help us with that. Specific examples of the work to tackle these specific investor concerns include our work with Ofgem on the transmission access review, which we will publish tomorrow. The review has examined the technical, commercial and regulatory framework for the delivery of new transmission infrastructure and the management of the grid. Its aim is to ensure that the system and framework remain fit for purpose as the proportion of renewable generation on the system grows. The final report will include some proposals on how the regulatory regime might evolve to facilitate essential investment, and we will produce proposals on exactly this point very shortly. We have also, with Ofgem, recently published new proposals for facilitating the connection of renewables to the lower voltage distribution networks. We are also launching a wider consultation over the summer on increasing our deployment of renewables. This consultation is based on the evidence we have received to date and will include any further measures that might be required over and above what will be set out in the final transmission access review report. What investors are looking for from Ofgem is to see the Government’s social and environmental guidance, to which Ofgem must have regard, updated and strengthened to properly reflect the significant developments in energy policy since 2004, when the guidance was last revised. We intend to consult very shortly on such new guidance alongside the renewable energy strategy. The updated guidance will set out the Government’s expectation of the contribution that Ofgem should make on these issues. It will, as industry has requested, provide Ofgem with a clear steer on priorities such as facilitating the faster deployment of new generation such as renewables, both onshore and offshore, and the development of distributed energy. On the social side, it will, among other things, address our expectation that Ofgem will play a full part, consistent with its principal objective and general duties, in co-ordinating activity to help consumers who are on low incomes or who are otherwise vulnerable to fuel poverty—