Electricity System Resilience (S&T Committee Report)
(8 years, 6 months ago)
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The Earl of Selborne
That this House takes note of the Report of the Science and Technology Committee on The Resilience of the Electricity System.
The Earl of Selborne (Con)
My Lords, the electricity system of this country is embarking on a period of profound change over the coming decades. This change will be driven by technological development such as the increasing penetration of automation and intelligent systems, the deployment of advanced fast-acting control systems, dispersed generation and the transition to a smart energy system. This will increase complexity enormously. We will be increasingly reliant on electricity for transport, heating, air conditioning and much else. This change will also be driven by our national commitment to decarbonise electricity systems, yet our record for anticipating supply and demand, and for ensuring that the desirable capacity margin is in place, has in recent years been unimpressive; and this at a time when these far-reaching changes are really starting to make an impact.
It was against this background, and with some speculation in the media that the country might be subject to national blackouts, that the Science and Technology Committee decided to undertake an inquiry into the resilience of the electricity system. I refer to my interests as listed in Appendix 1 to our report as an honorary fellow of the Institution of Engineering and Technology, a fellow of the Royal Society and a shareholder in two companies. I thank our specialist adviser, Professor Jim Watson, and our clerk, Chris Clarke, for their invaluable contribution to producing our report.
The Government have spoken of the need to “reset” policy and have initiated a number of energy policy changes mainly designed to cap costs to the taxpayer, but have yet to set out a long-term vision for energy policy. Until a comprehensive long-term energy policy has been formulated, there is a danger of the momentum on new investment in the energy sector being lost. The record is quite impressive: more than £42 billion has been invested in renewables since 2010, with more than £8 billion being invested in UK-based renewable energy in 2014. Every Government must be prepared to formulate and articulate a clearly understood energy policy that results in an optimal balance between the three interconnected and competing demands of security of supply, sustainability and affordability, widely known as the energy trilemma.
The fact that security of supply has become a real issue for the next few winters demonstrates that previous Administrations have failed to get it right. Had not demand—that is, industrial demand—been reduced by the economic crisis of 2008, the capacity margins would have been even tighter or non-existent. Obviously, a commitment to nuclear power at £92.50 per megawatt hour, and to some of the more expensive renewable energy technologies such as offshore wind, currently costing around £118 per megawatt hour, has to be reconciled, at least in the medium term, with the requirement for affordability.
We concluded that successive Governments might have anticipated the shrinking margin earlier and taken steps to address it. As a result of inaction, the narrow capacity margin that emerges poses a threat to resilience. The coalition Government addressed this failure of previous long-term planning by introducing at short notice and at considerable cost, and in a way that conflicts with the decarbonisation agenda, the capacity market, also known as the capacity mechanism. From 2018 on, an income stream will be available to capacity providers for keeping capacity available to meet demand when the system is stretched. Interim measures known as new balancing services have been introduced to plug any shortfalls in the period to 2018. The capacity market provides no incentive for the building of new generating plant, the development of demand response or the extension of interconnectors. Instead it rewards incumbents, including coal-fired units, thus acting as a counter to decarbonising policies.
Professor David Newbery of Cambridge University warned us that if the capacity market overprocures, the consequences would be higher prices to consumers, the undermining of renewable energy by transferring support to conventional generators and the weakening of the business case for other options, including future interconnectors, which will be increasingly important as the share of intermittent electricity from renewables rises.
We were surprised by the paucity of information on the true costs of electricity shortfalls. The potential contributions of interconnection with foreign suppliers and of industrial back-up generation need to be rigorously assessed to make the appropriate decisions on the procurement of capacity. We recommended that the Government review the contribution that interconnection and industrial back-up generation could make to capacity margins. Since our report, the national grid has published some helpful information on interconnection in its 2015 Electricity Capacity Report.
In the medium to long term, new technologies and the development of existing technologies will be the key to achieving a resilient electricity system. As with every aspect of our economy, we will depend on investment in research and development to be competitive in the long term. We must ensure that we attract to this country the innovative companies that are most likely to advance these technologies. Investors value continuity of policies and want to be assured that whatever national energy policies are put in place will stay in place for at least the medium term.
Investors will also be attracted to this country by the quality of our publicly funded research. There is a case for public funds also to contribute to development and to the demonstration of new technologies, but such support should be given only if, in the medium term, it reduces the costs of these new technologies. A technology with long-term reliance on subsidies is clearly not sustainable.
Our national record of improving energy efficiency of buildings compares unfavourably with that of most other European countries, yet energy efficiency can make the greatest contribution to the affordability of electricity. Improving energy efficiency is also often the cheapest way to bring down emissions. The Committee on Climate Change has noted that industrial energy efficiency lacks effective policy. The Government have terminated the Green Deal, while the energy company obligation is due to end in March 2017—both measures aimed at improving energy efficiency in the built environment.
The key message from our report is that we need to improve our long-term planning of the electricity system. This requires clarity of the roles of the many participants in the electricity market and openness about the present and foreseeable state of the technology. It is imperative to look at the electricity system as whole so that complex interactions are not missed between the many components of the system.
The Institution of Engineering and Technology made the case to us for an “electricity system architect”. This architect would have responsibility for embedding whole-systems thinking across the whole electricity system. We agreed, as did the then Secretary of State Ed Davey, that the IET was asking the right questions, and that it is imperative that the electricity system is looked at as a whole to enable effective engineering integration across the electricity system as changes occur.
The major players involved in maintaining resilience are the Government, of course, the national grid, Ofgem, the electricity generators and the distribution network operators. The IET in supplementary evidence said that while there was wide industry consensus on the need to introduce effective whole systems, there was continued debate on the role of government and industry self-regulation in delivering this. The network companies, for example, would be concerned about the possibility of close government engagement in aspects of their business that require specialist technical knowledge and experience. However, given their policy objectives, the Government have had little choice but to play a greater role in managing the electricity system. We therefore endorse the Government’s adoption of a managed market and stress that it is explicitly for the Secretary of State to provide leadership and clarity on responsibilities.
The Department of Energy and Climate Change has asked the Energy Systems Catapult to investigate further the concept of a systems architect and to provide evidence of what functions will need to be performed in the future power system as a result of transformative change, and by when. This is a helpful response. The sooner this exercise can be undertaken the better. Can my noble friend the Minister tell the House when he expects the Energy Systems Catapult report and what its role might be thereafter in this respect?
Many believe that we should be heading towards a system of small-scale, decentralised power generation, with an integrated grid based on flexibility. New nuclear power plants have the potential to provide greater flexibility through emerging technologies such as small, modular reactors, yet we seem to be favouring large-scale block generation such as at Hinkley.
Demand-side response describes the process of electricity users adjusting the amount of electricity they use at certain times in response to incentives. We heard that while demand-side response has significant potential, current policies do not set it on an equal footing with generation and more could be done to harness its potential. We recommended that the Government develop a plan with specific targets for the public sector to implement demand-side response measures and so set an example to others. Technologies such as electricity storage, interconnection, carbon capture and storage, and demand-side management will all be key to a resilient electricity system.
I said that it is incumbent on each Administration to formulate a clearly understood energy policy, which results in an optimal balance between the competing policy demands of security of supply, sustainability and affordability. Investors in big projects for post-2020 electricity generation and transmission—indeed, any investors—need to understand what policies will be in place and to have confidence that such policies will not be overturned by short-term considerations. We need to seek consensus on UK energy policy based around the trilemma and we need to achieve this consensus soon. I beg to move.
Viscount Ridley (Con)
My Lords, I congratulate my noble friend Lord Selborne—I think I can call him my noble kinsman, since we share a great-grandparent —on this excellent report and on chairing this inquiry with his characteristic skill, courtesy and perceptiveness. I declare my interests as listed in the register, including, most importantly, an indirect interest in coal mining and a small shareholding in National Grid.
I would like to make four main points. The first is that I think our report was, if anything, a little too sanguine. The string of closures of power plants since then has left us even more exposed. The closure of Longannet, Eggborough, Ferrybridge and Ironbridge and the delay to the Trafford gas-fired station make the capacity margin even tighter this winter. As Professor Dieter Helm of Oxford University told our inquiry:
“It is a quite extraordinary state of affairs for a major industrialised economy to find itself even debating whether there is a possibility that the margins may not be sufficient in electricity to guarantee supply”.
My second point is that “the lights going out” is a red herring. The national grid has many weapons at its disposal to keep the lights on somehow. That is a misleading test of policy health. The risk of system failure, which is always present, can be kept within bounds—but by pouring consumer funds into the sector.
My third point is that rising costs are the correct index of policy success or failure, and here I am afraid the news is bad. Even leaving aside the emergency costs of bringing on diesel generators when the wind does not blow, we are paying very heavily to have a resilient electricity system because of what I would consider deliberate policy mistakes. The Office for Budget Responsibility has recently published data showing that the cost projected for the capacity mechanism, which my noble friend mentioned, will be £1.3 billion in 2020—about 10% of the total levy control framework cost in that year. As my noble friend said, it is not for new capacity but for existing capacity. We should remember that most of that is going to fossil fuel plants, which should not need subsidising at all.
So why are we subsidising them? Because we have destroyed all incentives to build new, efficient, dispatchable generators, by using the law to force unproductive, expensive renewables on the consumer. That is why nobody is building new combined cycle gas turbine plants here unless they get subsidised. We should remember that those subsidies do not come from general taxation. They are added to electricity bills so they hit the poor hardest. As Rupert Darwall of the Centre for Policy Studies told our inquiry,
“if you subsidise high-fixed-cost, zero-marginal-cost intermittent electricity generation, you will end up destroying the market and incentives to invest in the capacity to keep the lights on when the wind is not blowing and the sun is not shining. That outcome was wholly predictable but wholly unanticipated by policymakers”.
Can my noble friend the Minister assure us that the study currently being carried out by Frontier Economics into whole-system impacts of electricity generation technologies will take this into account—how much has wind prevented new gas being built and at what cost?
We have spent £14 billion so far subsidising renewable electricity. The cost is rising rapidly and will soon hit roughly £10 billion a year and stay that way for decades. What are we getting for that money? A less reliable electricity system, a big increase in cost and no discernible cuts in CO2 emissions, because of the need for back-up, the failure to allow gas to replace coal, and the leakage of energy-intensive industries to other countries with the loss of jobs here. I do not think that is a trilemma: it is a trisaster.
My fourth point is that interconnectors, while clearly a good thing, are in many ways irrelevant to the resilience debate, for two reasons. First, the current ones from France and the Netherlands are running one way—into the UK—at near-full capacity most of the time anyway, so they are no use for extra electricity in times of emergency. Secondly, they are not much use in in managing the variability of large renewable fleets because, as John Constable of the Renewable Energy Foundation pointed out to us, wind speeds are well correlated across Europe: a calm day here is usually a calm day in Germany. At 3 pm today, for instance, I looked up how much electricity was coming from wind in this country and in Germany: 1.4% in this country and less than 1% in Germany.
Where do the four points that I have raised leave us? It is now clear that instead of building windmills in the North Sea, whose electricity will cost three times the wholesale price, we should have been using cheap gas to phase out coal and putting more money into R&D designed to bring down the price of nuclear power. What Professor Helm called the “Miliband-Huhne-Davey policy” was based on the assumption that fossil fuel prices would go up. Instead, they went down.
In the spreadsheet released last year by Department of Energy and Climate Change, in the low fossil fuel price scenario, the cost of renewable subsidies for small and medium-sized businesses would add 77% to their electricity bills by 2020. Even in the high fossil fuel price scenario, the impact is still an increase of 45%. In other words, even if fossil fuel prices go sky high, the policies do not in fact offer any significant protection.
Every part of the world is increasing gas consumption at the moment except one: Europe. All the others—North America, South America, Africa, Asia, the Middle East, the former Soviet Union—are all increasing their use of gas, often to displace coal, as a response to the falling price of gas thanks to the shale gas revolution. Europe is doing the opposite. The Competition and Markets Authority has reported since our report that the renewables target is more of a constraint than the carbon budget; that is, there are cheaper ways of meeting our carbon targets.
I feel that we have the worst of all worlds: a system that has the high finance costs of the private sector but where all decision-making is nationalised; a system that has all the costs of renewable energy but trivial emissions reductions; a system that depends on regressive subsidy for even the cheapest and most reliable power; a system whose high cost is driving employers abroad; and a system with such low margins that costs will spike in the months ahead. I think there is a lot of work on my noble friend the Minister’s plate.
Lord Teverson (LD)
My Lords, I am not a member of the committee but I am pleased to take part in the debate about this important subject. I would say one thing about the logic of the noble Viscount, Lord Ridley, on wind-power renewables not reducing carbon. He said that it was because there has to be an equal amount of back-up, but that logic does not work. Even if you need that amount of back-up, if it is not operating then it is not producing carbon. I do not understand the logic there. With the existing regime, even without renewables, the utilisation of generating capacity is, on average, about 50%. It is estimated by National Grid—these are not my figures—that intermittency with renewables becomes a real problem only when they are at about 20% of total generation, so I am not sure whether all that really adds up. However, I agree with the noble Viscount that we should absolutely be taking out coal. I am glad that he agrees with these Benches on that. We should also be getting on and substituting gas in the short term. He was absolutely right about that, too.
I want to concentrate on a couple of things in an excellent report, which is a good reference and has a number of important issues in it. I particularly like the space it gives to the demand side. As the noble Earl said so well, energy efficiency effectively solves the energy trilemma. It helps security, brings down bill costs—even if not necessarily the unit price—and decarbonises the economy. There has always been frustration for all Governments in how to turn that benefit and make that leap, without causing all sorts of unaffordably large public expenditure. Unfortunately, the Green Deal was not very successful in the coalition Government period. It is unfortunate that it seems to have disappeared altogether rather than being improved, which is what was needed. I hope we can move forward in some way in that area.
Demand reduction is key and the UK economy has been quite good at that in recent years, increasing energy efficiency by some 2% or 3% per annum, but the other part of demand is demand-side management. Again, the report tackles that subject, which has been very unfashionable. It has often been forgotten about and is only starting to be considered. In that context, the report specifically mentions capacity payments, which are particularly important. What has effectively happened is that the aggregation of demand-side management, which should really be competing with generation under the capacity payment, has been discriminated against. I remember from the coalition Government years that there were all sorts of issues in DECC about getting the two to compete properly that were legally quite difficult. I do not know but it certainly seems that it should be a priority of government to make sure that demand-side aggregation and management plays an equal part to that of capacity in the capacity mechanism.
The noble Earl was also right to say that most of the existing capacity mechanism has brought in fossil fuels, which is unfortunate. But demand-side management aggregation on the capacity mechanism would make absolutely sure that we do not build extra capacity. We actually need less and should solve it in that way, by taking out the peaks.
I also wanted specifically to mention interconnectors, which is an important area but has been relatively sleepy over the past few years. DECC may have got involved in this again in the last couple of years, so we now have interconnectors with Ireland, the Netherlands and France. We have opportunities, perhaps, for geothermal to come in from Iceland; that may be rather a big ask but I know we have a memorandum of understanding with the Icelandic Government. I would be interested to hear from the Minister where interconnector policy is going. That would not only seem to take out the peaks but has export potential for us as well. We should very much welcome it.
My last point on this excellent report concerns storage. As renewables grow and intermittency becomes a problem, energy storage will be part of the solution. There seems to be a frustratingly slow evolution of efficiency in energy storage. We have run out of capacity in dams and water, and all that side of energy storage. The Tesla corporation seems to be making good progress in the commercial field but I would be interested to hear from the Minister what investment the Government are stimulating in R&D at present. There is clearly a worldwide demand for this, especially in the UK. I commend the report fully and look forward to the Minister’s reply.
Lord Hennessy of Nympsfield (CB)
My Lords, I declare my membership of your Lordships’ Science and Technology Committee and thank our chairman, the noble Earl, Lord Selborne, for his skill in guiding us over some complicated and, for some of us non-scientists, rather stretching terrain.
Among the gifts that we like to think we possess as a people, there is a special cluster on which we pride ourselves: strategic thinking, horizon-scanning and forward planning. The subject before us, I regret to say, does not sit easily within this pleasing self-image for when it comes to the divine spark of electricity, we all too often believe “It’ll Be Alright on the Night”. We are an all-right-on-the-night nation in so many areas, including this one. Our optimism is sometimes burnished by our belief that just over the horizon lies a technological and scientific breakthrough that will match cheapness with abundance, leading to a bright, well-lit future that takes care of itself for generation upon generation, while avoiding harming the planet as a bonus. I am of course talking about nuclear fusion, which I remember reading about as a boy in the late 1950s.
In January 1958, science and energy journalists were invited to Harwell to be briefed on Project ZETA, the Atomic Energy Authority’s nuclear fusion experiment. They were enthused—they really were—and news of it fired up the national newspapers and straddled the globe. The Prime Minister, Mr Harold Macmillan, was on a Commonwealth tour at the time and when he reached New Zealand its prime minister, Walter Nash, asked Macmillan how ZETA worked—a testing question for a classical scholar. As the British high commissioner, Sir George Mallaby, recorded:
“‘Well’, said Mr McMillan, looking vaguely about him, ‘You just take sea water and turn it into power’”.
He paused for effect before adding:
“We are pretty good at sea water”.
We are still waiting for the promise of fusion to be fulfilled. Some experts think it might now be a mere decade away; others reckon that another 40 years should do it. All the rest of us can do is live in hope that the shining hour will come.
This evening I should like to concentrate, first, on the need for a consensual, long-term strategy for electricity supply, as outlined so well by our chairman. I am pleased that this will be central to the work of the new National Infrastructure Commission, for which I generally have high hopes. Secondly, I should like to anticipate briefly the array of threats that we may face as an advanced society, ever-more dependent on an uninterrupted supply of electricity.
There are certain thresholds that a country cannot afford to reach, let alone to cross. Electricity supply is one of them. As the committee’s report notes, last winter:
“National Grid procured extra capacity to raise the capacity margin from 4.1% to 6.1%”,
to,
“guard against a potential shortage of electricity”.
The committee stressed that it was,
“a matter for concern … that this extra capacity was put in place at short notice, at considerable cost, and in a way which conflicts with the decarbonisation agenda”.
The report goes on:
“This should not be allowed to happen again; it is not acceptable for an advanced economy, hugely dependent on electricity, to sail so close to the wind”.
As the noble Earl, Lord Selborne, emphasised, the committee also noted that but for the economic slowdown which followed the financial crash of 2008,
“capacity margins would have been much tighter”.
I must confess that it is a mystery to me why this question has lacked the bite it deserves in the Cabinet and across Cabinet Committee rooms over several Governments. In political terms, there are few surer or swifter sappers of public confidence in a Government than serious interruptions to electricity supply, as those of us who lived through the 1970s winters of discontent remember all too vividly.
In its own way, security of power supply is a first-order element in the defence of the realm. Indeed, given our justified anxieties about the nature and scope of future cyberattacks, it will rise higher still up the hierarchy in the risk register. Already, we are facing between 150 and 200 serious cyberattacks on government and business every month. Those wishing us serious, widespread and swift harm in the future will go for the electricity grid first. Our ever-greater reliance on the internet and on the coming internet of things will no doubt bring great and accumulating economic advantage, and improve personal consumption and comfort, but the risks will rise too.
I am a natural consensualist but not, I hope, an indiscriminate one. I am convinced that a sure and safe electricity supply is an area where consensus is justifiable and desirable. By all means let us have our arguments about the ingredients of our energy mix, and the respective roles of the state and private suppliers, but the evidence presented to the committee during its inquiry demonstrated a near-universal belief that electricity supply is, and must remain, a managed market in the United Kingdom. Muddling through, however smartly, is not enough. The problem we are dealing with today requires an enduring national effort, ranging from sustained political attention to large-scale investment, energetic R&D on the possibilities of electricity storage, the development of interconnectors with our neighbours, as other noble Lords have mentioned, and as many cyberdefences as our scientists and technologists can provide.
Short of a devastating solar event—which we considered, for reasons of completeness, I am sure—about which we could do very little, remedies are very much in our own hands. Let us seize them and avoid our becoming an outage society. If in future we go into the dark, our people will be unforgiving, and they will be right to be so.
Lord Teverson
My Lords, just before the right reverend Prelate speaks, I want to apologise to the House. I think I referred to “the noble Earl” when I meant the noble Viscount, Lord Ridley, when I addressed the House. I apologise for getting my titles wrong.
The Lord Bishop of Sheffield
My Lords, along with many others, I warmly welcome this report and its principal recommendations. It seems to me to be clear and timely, and the issues it highlights for the United Kingdom in the medium term are very significant indeed. I particularly welcome, along with others, the recognition that the electricity market is now a managed market. I underline the statement in paragraph 37:
“Balancing security of supply, sustainability and affordability (the trilemma) is a first order issue for the Secretary of State”.
I will focus my remarks on two specific areas. The first is to highlight the importance of the needs of industry and manufacturing when looking at our future energy needs. It seems to me that this area is not addressed in sufficient depth in this otherwise excellent report. The future forecasts of energy consumption are largely focused on the demands of domestic consumers. The report focuses on the rise in the use of electric cars and heat pumps, and on the demand for more air conditioning—rightly so. But there is very little if anything about research into the future energy needs of the manufacturing sector, which is so critical to a rebalanced economy, particularly in the north of England.
Your Lordships will be all too familiar with the crisis facing the British steel industry. I made a visit in October, a few weeks ago, to Tata’s Speciality Steels in Stocksbridge, near Sheffield. I saw at first hand the process of rolling the steel made from recycled scrap metal into immense 60 or 80-metre bars for use in parts for the aerospace, energy and car industries. The future supply and price of energy is vital to the future of the steel industry and of engineering in this country. In 1970, the industrial sector was responsible for 40% of final UK energy consumption. By 1990, this had fallen to 24%, and by 2014 to 17%. But manufacturing remains a vital part of our economy. Competitively priced electricity is essential.
Conversations with the senior team in Stocksbridge during my visit focused on future energy pricing and supply. The British steel industry currently pays much more for its energy than its competitors in Germany and the rest of Europe. The playing field is not level. According to Luis Sanz, managing director of Celsa, quoted in the Financial Times on 27 October, his company faces electricity bills of €68 per megawatt hour to run its steel plant in Cardiff. A similar operation in Germany would cost about €24 per megawatt hour.
The Government have promised a full package of measures for energy-intensive industry but only once they receive clearance from the EU on state aid rules. I do not believe we can wait any longer to bring this vital help to our steel industry. We have already seen the closure or reduction of plants in Redcar and Scunthorpe, with the consequent damage to communities and to Britain’s industrial base. I urge the Government to act and bring forward this support in the Chancellor’s Autumn Statement.
The present and future pricing of electricity in the reality of a managed market is very different for domestic consumers and for industry. Our industry is competing month by month for contracts in a global market. It is vital that manufacturing continues to grow again as part of our economy. Our energy pricing must take account of the needs of industry in the leadership offered by the Secretary of State across the sector.
My second area of focus is on the need, for environmental reasons, to decarbonise electricity generation while keeping the lights on at an affordable price—the energy trilemma. The Government have made, and I hope are about to make, clear promises to the international community in the new global goals and in the forthcoming climate change talks in Paris to reduce our carbon emissions significantly. This is vital for the future of our planet and for the poorest people on the earth. The Committee for Climate Change has rightly recommended an ambitious target: that carbon intensity of power generation should be reduced from 500 grams of CO2 per kilowatt hour to 50 grams of CO2 per kilowatt hour by 2030. This represents an enormous transformation in our energy market over the next 13 years—a very short time. I warmly support the Government’s strong manifesto commitment to reducing the impact of climate change by reducing greenhouse gas emissions. Much in this report supports that agenda.
The report underlines the importance of honest, straightforward communication about the energy trilemma. It highlights the benefits of better long-range planning and information about the costs of energy shortfalls. It recommends the rapid rollout of smart meters and better information for Parliament and consumers. I particularly highlight, as others have done, the key recommendation at paragraph 244 on page 87 of the report:
“We recommend that the Government publishes a systematic review of the evidence available on the predicted costs of integration to 2030 and beyond, taking into account a wide range of scenarios”.
This seems to me to be a plea for a much more detailed and transparent long-term energy budget. I encourage the Minister to respond to this recommendation in particular in his response to the debate.
Managing the future of our energy supply is vital for our quality of life, our industry and our economy, and for the future ecology of our world. Along with other noble Lords, I warmly welcome this report.
Lord Dixon-Smith (Con)
My Lords, it is a privilege to follow the right reverend Prelate, because he reminds us, as we should not need reminding, that this industry is wholly about serving individual people. We of course are an unrepresentative bunch here, but the effects of the decisions that we can influence can be very profound for people across the whole country. I wish this evening to talk about something that we did not really get into in this particular debate.
We heard that we were able to get away with the low-reduction margin of electricity at present because the system was very diverse and, very complex, and, if there was a breakdown, it would affect only a small part of it. That meant that there was resilience, because if a small part breaks down, it is not the same as if, let us say, the new power station at Hinkley Point were to break down, because that would knock a large chunk of generating capacity offstream in one go.
One thing that we did not talk about, because it was not particularly helpful, is the amount of heat that the whole electricity-generating industry creates. It is remarkable that not least of the vital factors in running a major generating plant is how you cool it. We then produce electricity which we supply all over the country, to industry, commerce and private homes, a large proportion of which will be used to produce heat. Somehow, we have to escape from the historic trap that we are in because of the planning system. The old coal-fired generating stations, in particular, were pretty dirty places and caused a great deal of atmospheric pollution, which could affect local communities. Quite rightly, we put the generating plant as far away from people as we could.
We can now escape from that, and we need to look at the whole planning system so that we can bring our generating capacity to the very fringe of the communities it serves, if not actually within it. I hope that no one will be too surprised at this, but we used to have a wonderful generating station in Battersea. Part of the solution to the heat-generation problem was to use it to heat the houses in large parts of Battersea and a certain amount of Chelsea. We could considerably reduce overall electricity demand, I suggest, if we began to put our power, generating plant on the urban fringe or even in the urban areas on industrial sites.
There is a policy implication there that we rightly did not go into. I have no concern about the health implications of bringing, let us say, the Hinkley Point generator on to the fringe of London, although some people unquestionably might have. My view is set by the fact that a large and vital part of our Navy is now totally nuclear powered. We have men who live, apparently without any ill effect on their health or anything else, in a totally enclosed environment next to a nuclear reactor. I do not think we have a health issue if we start to bring plant such as Hinkley Point to, let us say, the fringe of London or even—although it is too late—Battersea Power Station. We would diminish the pressure for increased electricity generation at a stroke if that were to happen.
Rightly, we did not look at that during this examination, because we were looking at the way we are doing things now, but I hope that the Minister in his reply will acknowledge that there are policy aspects to this issue that need radical reconsideration. I hope that by the time my grandsons are my age, we will have a much more effective system and they will not be looking back and saying, “Why didn’t my grandfather and his generation, who knew there was this problem, do something about it?”.
Lord O'Neill of Clackmannan (Lab)
My Lords, I have interests in the electricity industry, and I have declared them in the register. First, I congratulate the noble Earl on this report. He and I have served as colleagues on the committee for many years, and I was more than delighted when he assumed the chair. He has already acquitted himself with great distinction today and in the production of the report.
When we embarked on this inquiry, I do not think we anticipated that we would be debating it at such a significant time of year. About now there is usually a meteorological Cassandra forecasting the coldest winter in living memory and concluding that we are all doomed to months of freezing darkness. Although I would not want to adopt a Panglossian view of the prospect for the next few months, I think that some cautious optimism is called for, at least for 2015-16.
National Grid, the system operator, has forecast a loss of load expectation of 5.1% de-rated capacity margin, which will be met by 2.43 gigawatts of additional balancing services. At the time we were given the evidence, I could probably have explained all that to your Lordships in very simple terms, but I will not trouble the House this evening by going into great detail. Suffice it to say that a major element will be demand-side management.
When we were taking evidence, we were told, as I said, that we could be confident that in 2015-16 the lights would not go out. National Grid has a reasonably sound track record in that area. The question remains: what of subsequent winters? It is perhaps easy to say that the margins are getting ever narrower and that we should have dealt with the anticipated problem earlier. I have been participating in debates in the other place and here for nearly 40 years, and I have always heard people saying that we must have a long-term strategy.
I came into Westminster in the 1970s, when, like the welfare state, the coal industry was big. It was something that we took pride in. Within about five years, the coal industry was to be destroyed. After 1989, we embraced gas because we could start burning the gas in the North Sea to keep our houses warm. There was a major change in European policy, and we embraced gas-fired power stations at the expense of everything else. We abandoned nuclear. Then we discovered that it might be a wee bit dangerous if we were to be completely in thrall to gas, because we did not always know where it was going to come from. The somewhat hyper-enthusiasm for gas of the noble Viscount, Lord Ridley, this afternoon suggests that he has forgotten where a lot of the gas that we depend on comes from. We might not want to be overdependent on some of the sources of supply.
Nuclear was out; gas was going to be the answer. Then, people began to wake up to the fact that we were going to be shutting down our nuclear power stations, which in those days accounted for about 25% of our power. Even if we kept just a few coal-fired power stations and imported the gas, European diktats were going to require us to start closing them down as well.
So I am very cautious when people tell us that what we need is a long-term strategy, because most long-term strategies last about seven or eight years, maximum. At the same time, if we are investing in nuclear power, it is very expensive at the beginning but has a very long life. It is therefore possible to pay it back over time. Nevertheless, it is a major expense. We know at the moment that it is very difficult to attract investors to it.
We have been looking at the closure of power stations, the reduction in our capacity quickly to replace them and, at the same time, our dependence on renewables. The dependence is on plants that are too small and, invariably, interruptible. Therefore, while we can look forward with some confidence to Hinkley, it is not quite in the fusion category, yet it is taking rather longer than we had anticipated. It is not that many years ago when we thought the Christmas turkeys of 2017 or 2018 might be being roasted with nuclear-generated electricity; it might be more realistic to talk in terms of 2027. Certainly, the French record of building nuclear power stations is none too encouraging, although one would hope that, having had two test runs in Finland and France, they might be able to make a better job of Hinkley than they have hitherto. One thing that is certain is that the electricity that will come out of Hinkley will not be cheap, because unfortunately the first-generation kit being constructed in the UK is the most expensive, and takes the longest and is the most difficult to build. Some might say that we could get new nuclear from other sources almost as quickly as we get it from Hinkley—but that is another issue.
Demand management, which is really the self-imposed reduction in demand by major consumers, is seen by National Grid as an important contributor. It will ensure that there will be no enforced blackouts in the foreseeable future, but this will have to be achieved in the context of emerging electricity markets, which are in the process of being reformed. The committee expressed concern about the quality of information on which many judgments are being made, particularly the appropriateness of the reliability standard. The Government are required by law to monitor that every five years. They would be well advised to produce annual reports to let us see what the thinking is, rather than dashing to get the information in place in the last nine months before the end of the five-year period.
As has already been said, it is not all about indigenous generated power, because we have interconnection. However, the situation is not very clear, as the information we received on back-up generation and interconnection was somewhat less than satisfactory. It would be interesting to hear from the Minister whether that information has been updated. Certainly, we would want reassurance regarding the scaremongering that often provides the headlines, fills the space between the adverts in social media and feeds the paranoia of the bedsit conspiracy theorists; we need better information to dampen those anxieties at source. It is fair to say that we were impressed by the awareness of the appropriate authorities of the dangers of cyberattacks on the system and terrorist threats generally. There was a reassuring absence of complacency; they certainly seemed to anticipate what the bad guys would be trying to do. In that sense, we have some degree of consolation. Nevertheless, eternal vigilance is required in this area, as in so many others; we underestimate the dangers of cyberattacks and other attacks on our system.
We must be cautious. People say that we will have smart meters and better integrated grids, and that all kinds of technical possibilities will be realised, such as storage batteries, carbon capture and storage, electrical vehicles and electrification of the transport system. All those technologies will come at a cost; many are still immature and cannot really be depended on with any degree of certainty. We have to strike a somewhat cautious note, but it is a bit frustrating for Select Committees when the report has been produced and we have what we think is the most up-to-date information, yet we get very cautious responses. I draw some consolation from my experience in Select Committees, which goes back quite a while. I am reminded of what George Bernard Shaw said—that when he was 18 he was convinced that his father was one of the most ignorant men he had ever met; yet, by the time he was 21, he was surprised how much his father had learned. We often find that, within a very short time— before the dust has settled on Select Committee recommendations—civil servants, the machinery of government and eventually Ministers change their tune. It will be unfortunate if that does not happen here, because this excellent report can be ignored only for so long. We ignore it any longer at the peril of our economy and our quality of life.
Viscount Ridley
The noble Lord says that he is concerned about where the gas is going to come from, but we are more dependent on imported coal than on imported gas, in that 85% of our coal comes from abroad and 40% of it comes from Russia.
Lord O'Neill of Clackmannan
I am not sure whether I am supposed to respond to that. My point is that there are a number of uncertain sources of gas. I think we would all agree that the nature of our dependence on coal is essentially temporary. The long-term requirements of a section of our fossil fuel demand will be met by gas, which will still come from areas that will be unpredictable politically and socially, to say the least.
Lord Broers (CB)
My Lords, this was a rigorous inquiry, chaired with consummate skill by the noble Earl, Lord Selborne, and supported with detailed expertise by Professor Jim Watson and highly professional co-ordination by the committee staff, led by Chris Clarke. I join others in congratulating them all and declare my interest as a fellow the Royal Society and the Royal Academy of Engineering, and also the national academies of engineering of the United States, China and Australia, where I have also discussed energy.
I shall discuss only the committee’s recommendation that:
“The Government should ensure that incentives are in place so that all new generation is built in such a way as to maximise its flexibility, whilst ensuring that the costs to consumers are minimised”.
The emphasis is on flexibility, but it is really about costs. I will briefly discuss the recommendation that,
“the Government should also disseminate more comprehensive evidence on the potential costs of low carbon generation and improve communication with the public”.
There has, in fact, been significant progress over the past two years in telling people what is happening. Despite what the noble Lord, Lord O’Neill, has just said, we had been in a worse situation. We now have the full set of strike prices, including that for nuclear power, and it is becoming possible to evaluate the various scenarios open to the country. This is a welcome change from the time when it seemed that no one knew what was possible, or even what was happening. For example, I recall the Government in late 2009 insisting that we would have 8 gigawatts of offshore wind capacity in the North Sea by 2011, which was clearly impossible and revealed a total lack of understanding of the challenges of that technology.
I experienced the new openness in a letter from the noble Lord, Lord Bourne, in answer to a supplementary question I asked earlier this year, and I thank the Minister for his letter and apologise for being so late in doing so. I had asked whether the capacities that he had referred to for various renewables were the gross capacities or the power actually delivered to the grid. He pointed out in his letter that they were the latter, and that the load factors used for onshore wind and solar were 24% to 32% and 9% to 11% respectively—a welcome recognition of reality. Solar PV yields 1/10th of what it says on the label.
It is clear that DECC is getting to grips with the complex and difficult energy trilemma. Five years after we were being told we would have 8 gigawatts of offshore wind in the North Sea, we are at least approaching 4 gigwatts and data are being produced that help us to estimate the real costs of offshore wind, although it will be a long time before we can assess the maintenance costs of these huge machines in the hostile environment of the North Sea. There is also some action, rather than endless talking, on new nuclear, even if, regrettably, we are not going to build it ourselves but will put it in the hands of the French and the Chinese.
Overall, we now have enough data to assess quantitatively different combinations of power generation type. Some of these have been laid out in the Electricity Market Reform Delivery Plan. What becomes clear, however, is that renewable energy generation is extremely expensive. The strike price for offshore wind, for example, has been set at more than three times the cost of electricity today: at £155 per kilowatt hour compared with £50 per kilowatt hour for conventional fossil fuel, which is the reference price. It is also more than 50% higher than the £92 per kilowatt hour projected for nuclear in 2023.
So the high deployment of the offshore wind scenario, in which offshore wind provides about a third of the power, shown in the EMR delivery plan would require the taxpayer to provide a subsidy amounting to two-thirds of the present cost of electricity, which is twice the reference price for about a third of the power generated. In fact, if one relies on the data available today, the high deployment of the nuclear option would seem to provide the lowest cost for meeting our carbon targets, especially as nuclear can be used to back up the intermittent renewables as well as producing little carbon itself. However, this cost will be much higher than the cost of electricity today. The high deployment of the CCS option may emerge as attractive in the future, but there is too little evidence available at this time to evaluate it. The hope is that large cost reductions will be realised as the renewable methods are scaled up, but this is anything but certain.
It is also argued that energy bills are already coming down and that this trend can be continued, but the reductions we have seen recently have nothing to do with progress with low-carbon generation. They have resulted from other factors, and I shall mention some of them. First, there have been significant reductions in the cost of fossil fuels. DECC data show that, between the second quarter of 2013 and the second quarter of 2015, UK energy suppliers paid 20% less for natural gas, 23% less for coal and 40% less for oil—the noble Viscount has mentioned some of this already. Secondly, there is what DECC calls products policy. This is the adoption of Europe-wide standards and energy labels that have increased the efficiency of household appliances. It is a truly excellent initiative. There is also the 80% energy saving that results from the use of LEDs rather than incandescent bulbs, and the increasing use of improved insulation, even if we are not as good at that as the rest of Europe, and the ability better to monitor usage through the use of smart meters.
Realising these gains is very good news, but they are likely to be overwhelmed by the vast increases in renewable generation cost, and taxpayers are going to have to bear the burden imposed upon them when the strike prices are higher than the reference price. It is essential that we continually monitor progress across the spectrum of low-carbon energy generation and adjust the mix to minimise cost, while, of course, meeting our carbon targets. At present the data suggest that this will mean maximising the use of nuclear power despite its higher cost, so I impress upon the Minister the need for the Government to press on with nuclear, and I include the small-scale modular reactors which the noble Earl, Lord Selborne, mentioned.
Before finishing, like others I emphasise the need to increase support for R&D in energy generation and, as stated in chapter 8 of the report, ensure that the objectives of the nuclear industrial strategy recommended by NIRAB are met. I shall also look forward and join the noble Lord, Lord Hennessy, in saying a few words about fusion power. There has been and remains a lot of scepticism about fusion, but there has been recent progress in plasma fusion on three fronts. First, at ITER—the international thermonuclear experimental reactor project in the south of France, where a doughnut-shaped reactor the size of the Arc de Triomphe is being built with the aim of producing half a megawatt of net output some time in the late 2020s—there have been delays and management problems, but in September an important milestone was achieved. A billion-dollar contract was placed to deliver the 200 kilometres of superconducting wires that will produce the magnetic field used to compress and confine the plasma and reach the temperature of 10 times that of the sun needed to produce fusion.
Secondly, here at Culham and at Princeton in the US two new tokamaks are being built to explore a new geometry for the fusion chamber. These are known as spherical tokamaks where the reactor chamber is not a torus, or doughnut, but is spherical, more like a cored apple with a single conductor down the middle. This geometry has been shown to be three times more effective in harnessing the magnetic field, and there are hopes that this may make reactors smaller than ITER feasible.
Lord Lawson of Blaby (Con)
My Lords, listening to the fascinating account of developments in fusion given by the noble Lord, Lord Broers, I am brought back to 34 years ago when I was Secretary of State for Energy. All my scientific advisers assured me that fusion would be economic within 25 years at most. Is it not dangerous to engage in wishful thinking?
Lord Broers
I thank the noble Lord, Lord Lawson, for that intervention. It is dangerous to be overly optimistic, and people have accused some of the people working on the new types of reactors of overoptimism, but the promise of fusion, as the noble Lord, Lord Hennessy, said earlier in this debate, is great. I am not suggesting that we replace huge quantities of investment elsewhere with work on fusion; I am just suggesting that we continue working on it because of its very great potential. It would be criminal not to continue to pursue it, particularly as we are making advances today. I am not suggesting at this stage that it is going to be tomorrow’s answer. It has always been tomorrow’s technology, but sometimes tomorrow’s technology comes home to roost, sometimes when we least expect it. I shall end on that optimistic note. If we could harness fusion power, we would have a lot of our problems resolved.
Lord Howell of Guildford (Con)
My Lords, I was not a member of this excellent committee. I declare an interest as an adviser to Mitsubishi Electric. Like others, I agree that this is an extremely valuable report. In fact, I would go further and say that it casts a much-needed beam of light on an area where in the past we have not been told the full facts or what it is going to cost us. So the report is excellent, and its message is quite appalling. That reliability of power supply should be even an issue in one of the world’s leading industrial nations—the nation that founded the Industrial Revolution based on steam and power—is quite amazing and deplorable. It makes one ponder what has gone wrong and what has happened. This report helps enormously in beginning to answer that question.
Of course, the lights will stay on in the short term. That is obvious, and we are right about that. Thanks largely to the immense skills of National Grid, which is a brilliant company, and various devices, which I will come to, on the supply side and the demand side, in the short term, in the next two or three years, we will have adequate power, even at the most difficult times, unless something really catastrophic happens. It is going to cost us; it is going to be expensive, and I will come to that, too.
Then we come to the medium-term future. The issue is the capacity margin, however you define it: the derated margin or the full-capacity margin. That is a central issue. Here I have one slight quibble with the report, although I think that the noble Earl, with his excellent chairmanship and his excellent speech, clarified this. Paragraphs 23 and 71 state that the additional capacity that would be brought forward by the capacity market is 49 gigawatts. That is true, but it does not quite tell the story, which is that in terms of new capacity the auction so far has brought forward miserably little: 2.7 gigawatts, which consists of only one single combined-cycle gas turbine, the Carlton Power one, which admittedly is quite a big one, and a lot of small capacity. The larger figure of 49 gigawatts comes not from truly additional new capacity but from existing companies in the power game crowding in and seeking to get contracts for capacity payments to add to theirs so that they can get capacity revenues on top of market revenues. That is natural; any one of us would do the same.
So that is terrific: except, as my noble friend Lord Ridley reminded us, in 2018-19 it is going to cost just under £1 billion—£956 million, to be exact—which will all be piled on to the consumer, and I think that he mentioned an even higher figure for 2020. These are enormous sums of money, and what are they buying? We are going to need at least 20 to 25 new gigawatts of capacity in the late 2010s and early 2020s to compensate for the fact that our coal stations are being closed at a great rate, thanks to the European directive for larger combustion and the fact that our nuclear fleet is ageing and some of it will have to be closed as well. So that is the scene up to 2018.
In the short term, as I said, the national grid will be able to cope. It will use all sorts of devices such as the supplemental balancing reserve, which will cost a bit, and the demand side balancing reserve, which may involve what we used to call in the old days of gas supply interruptible contracts, where a firm agrees that it could bring on its own local generation or somehow manage to do without for a time if there is a crisis—all of that, of course, at more expense. As one of the reports before us today reminds us, domestic bills have doubled since 2004. Paragraph 217 of this excellent report tells us that up to last year green policy costs had added 15% to bills; by 2020 that figure will be 27% and by 2030 the figure will be 29%. There is a case for subsidy. I am not against the idea of infant industries being encouraged, but only up to a point.
The report reminds us that the policy of the last seven or so years, at the end of the Labour Government but particularly under the coalition, which was largely under the guidance of our then friends the Liberal Democrats, went too far, too fast. Many good things emerged from the coalition but, frankly, our energy policy was not one of them. It was a bad legacy. I heard one of your Lordships say in last Thursday’s debate what a wonderful success energy policy had been under the coalition, and I did not know whether to laugh or cry. In fact, on almost every front that success has turned into a miserable failure; my noble friend Lord Ridley put it in even more graphic terms. It was of course a policy inherited from Labour, particularly from Mr Miliband when he was at the Department for Energy and Climate Change. It was called the trilemma and someone was going to solve it, but in reality it has been a complete failure on the three fronts.
What are those three fronts? The first is affordability. That has gone out of the window: we have some of the most expensive electricity in Europe. We have households having to go to fuel banks in order to get tokens to get enough money to stay warm, which is an incredible situation in this country. We had a story graphically put before us by the right reverend Prelate the Bishop of Sheffield about the impact on our steel industry, which is appalling, and where energy costs have undoubtedly played a major part. So affordability has been a failure.
The second aim was supposed to be reliability. Well, here we are, talking about reliability and security; I think that we will get through, but it has been quite a narrow margin and will continue to be.
The third front was decarbonisation. There are different views on this. If you look only at the production of energy, it is true that CO2 has fallen quite dramatically, partly because of the recession and flat demand, and partly because of various measures taken. Of course, carbon does not come only from the production of energy; it comes from a huge range of sources, and carbon per head is consumed in vast quantities by imports as well as by the whole carbon leakage process that other speakers have described. This is a scene that leaves one—“sad” is the right word, but I shall say almost “depressed” that so many policy errors have been made and applauded that have led to such an appalling situation.
We have been saved for the moment by the national grid. I think that later we will be saved to some degree by the interconnectors: we should be able to get up to 5 gigawatts from interconnectors in the middle of the next decade, which will be—this will please the climate change lobby—mostly green electricity. There will be volcanic from Iceland, if we build a wire to there, and hydraulic storage from Norway, while the Danes will supply us with wind power; they have such a surplus that someone suggested that they would actually pay us to take it. We will also be saved a bit by prolonging the life of the old warhorse, AGR reactors. They can go on a little longer into the 2020s, so that is another possibility. We will be saved if the storage technology develops fast, and may be saved a bit by the development of local power of various sorts—small modular reactors and so on.
I do not know about fusion, which the noble Lord, Lord Broers, referred to. When I was Secretary of State, the late Walter Marshall came into my office to try to explain it to me. He began by saying, “It’s like trying to put the sun into a bottle”. That was his description and it rather left me without words. As my noble friend Lord Lawson said, it all looks very much the thing of the future, but somehow it never arrives.
For the longer term, we have to have a safe system. We cannot go on living with this constant worry about margins for the next 10 or 20 years. We need a new, less expensive and more realistic policy, frankly explained and costed. This report does a marvellous job in helping in that direction—but, my goodness, we certainly need it.
Lord Harris of Haringey (Lab)
My Lords, I declare an interest regarding the work that I am currently doing with the Electric Infrastructure Security Council. I congratulate the noble Earl, Lord Selborne, and the Science and Technology Committee on producing an interesting and extremely important report. The report is interesting for me because when I was very young, more than 30 years ago, I was deputy director of an organisation then called the Electricity Consumers’ Council. It used to produce all sorts of papers on electricity supply questions that were no doubt deeply irritating to the noble Lord, Lord Tombs, who is not in his place today but who then led the electricity supply industry as chair of the Electricity Council. This was, of course, pre-privatisation.
One of our concerns was the financial burden borne by consumers of what then seemed like an excessive margin of overcapacity. If I recall correctly, the margin was something like 40% over maximum likely demand. The late Lord Marshall of Goring, whom the noble Lord, Lord Howell, just referred to, described that as a strategy of belt, braces and string as regards protecting the country from power outages. However, the pendulum has now swung very far the other way, with, as the report says, capacity margins of potentially 3% or 4%. It is no longer belt, braces and string but a wish and a prayer. I therefore welcome the central conclusion of the report that the Government must play a greater role in managing the electricity system. However, I will focus on one very narrow part of the report, which I would have liked to be much larger, although I am sure that the pressures on the committee made it much more difficult to do that. That is the focus on what happens if, or perhaps when, something goes seriously wrong. I am talking here not about a short-term power outage but a catastrophic failure—one that goes on for more than a short period.
Chapter 4 talks about the threats to the resilience of the electricity system. It identifies four areas: technical failures; extreme weather, including flooding; terrorism—both physical attack and cyberattack—and space weather. Not included of course is earthquake, which is fortunately a very low-probability event in the UK. Therefore, when the report talks about a variety of technical failures—the fires at Ferrybridge, Ironbridge and Didcot—and the precautionary shutdown of four nuclear reactors at Hartlepool and Heysham, these incidents all call into question the capacity margins now available. Let us consider those technical failures coupled with other things that might happen.
There is extreme weather and flooding. Christmas two years ago saw storms that resulted in 750,000 households being without power and, as the report notes, the incidence of severe weather is likely to rise as a result of climate change. Then there is threat of physical attack—such as the IRA’s planned attack in 1996 to cut off the electricity supply to London—or cyberattack. For serious and sustained disruption to take place, clearly there would have to be multiple attacks, which we know terrorist groups have in the past envisaged or contemplated. Perhaps it may be beyond them at the moment, but one should certainly consider that possibility.
On the cyber side, as the Institution of Engineering and Technology has pointed out, the UK electricity system is heavily reliant on ICT systems, and that reliance is increasing, with more and more automated systems increasing the vulnerability. The IET also warns—I am well aware of this from the interest I have taken in security over the years—that foreign states and others have been identified as probing the systems that underpin our critical national infrastructure. Imperial College, as quoted in the report, highlighted the vulnerability of SCADA systems and the reliance on legacy unsupported software platforms. My noble friend Lord O’Neill talked about the reassuring absence of complacency in looking at these issues and recognising that these threats are real and significant. I am pleased that there is no complacency, but the very fact that there is a reassuring lack of complacency indicates that these matters must be taken very seriously, which concurs with the private discussions I have had. Let us therefore be quite clear that there would be catastrophic consequences in the event of something significant happening.
I should just mention the risk of adverse space weather or solar storms. I think the noble Lord, Lord Hennessy, suggested that this was perhaps less likely than some of the other risks. Such solar storms can generate geomagnetically-induced currents into power systems. In 1859, solar flares were so intense as to produce red, green and purple auroras all round the world. At that time it made the telegraph systems go haywire and fail catastrophically, with spark discharges that gave telegraph operators electric shocks and set telegraph paper alight. That was in 1859; our reliance on electrical systems is rather greater now than it was then. More recently, in 1989, a geomagnetic storm knocked out power in large sections of Canada. These are things that happen which could have catastrophic consequences.
The report acknowledges the importance of these threats, but what about these low-probability events which would have a very high impact? How well prepared are we as a nation to deal with them? It is a characteristic of complex integrated systems that we now have, such as the United Kingdom’s critical national infrastructure, that a combination of low-probability events coupled with those integrated systems may produce a catastrophic domino effect—a catastrophic failure—which becomes more likely rather than diminishingly rare in prospect. It might be one of the threats already discussed or a combination, or it might be some incident or issue not previously encountered. However, let us consider what might happen and how ready we would be to respond as a nation.
Most vital services have contingency plans in place to deal with power outages; most have emergency or standby generators. Usually—although not always—they work. The reason I add that caveat is that I am well aware of the incident a few years ago when some overenthusiastic workmen cut through a cable in Victoria Street, cutting off the power to New Scotland Yard. When the Metropolitan Police said, “This isn’t going to be a problem—we have two back-up generators and, what is more, every day somebody checks that the fuel gauges are still working”. They had not taken into account that both fuel gauges were faulty, and in fact they did not have sufficient fuel. Fortunately, the Metropolitan Police has a back-up control room that is not in New Scotland Yard, and the issue was rapidly rectified.
However, even assuming that the standby generators are functional and working, they have fuel to last only 12 or, at most, 24 hours. What if the high-impact event leads to a widespread outage that lasts longer than that? What plans are in place then? How will the consequential domino effects be managed? Who, for example, will take responsibility for arranging and prioritising the distribution of emergency fuel to the standby generators? Who will have priority, and who will determine that priority? Will it be the emergency services, the hospitals, the water industry and the sewerage system, food warehouses or supermarkets? Eleven years ago, MI5 warned that Britain was four meals away from anarchy—that is just as true now as it was then. Our systems are based on the assumption that if something goes wrong, it will be rectified in most areas within 12 hours. That is not necessarily the case.
The report talks about the importance of the single emergency number, but that will not help very much because our landline telephones will not work without mains electricity and our mobiles will run out of charge. If there is no power to pump water underground, in London the pipes underneath the ground will probably collapse because in many cases they have not been repaired since the Victorian era, and without water going through them the ground pressure will cause them to collapse. Therefore, even if the power is restored, water supplies will remain disrupted. Without power, the sewerage system cannot function and, without being too graphic, the contents of the sewers are likely to solidify and will not be easily cleared. Food refrigeration cannot work without power, and supermarkets relying on just-in-time distribution will run out of stock. We are not equipped in this country to run our medical services without electrical power.
Therefore my questions to the Minister are the following. We are told in the report that the Secretary of State has been involved in exercises on these issues. For how long was it assumed in those exercises that the power would be off, and over how widespread an area? With local authorities already having made budget cuts of up to 40%, and with more to come when the CSR is published later this month, how resilient are the contingency plans for managing this sort of emergency? Do the authorities have a prioritised list of service providers that will need emergency fuel to keep their standby generators going? What arrangements are in place to distribute emergency fuel under such circumstances? How will food supplies be maintained? What steps are in place to ensure that water and sewerage systems continue to function, and how will communications be maintained to a no doubt increasingly panicked population with no power to maintain telephone systems, charge mobiles or power televisions or radios?
Individually, these threats may have low probability; each threat might be a once-in-50-years event, but any one of them could have a high, not to say devastating, impact. Our chances of avoiding all of them over the next few years are not necessarily as reassuring as one might hope. The nature and complexity of integrated systems and an increasingly power-reliant and ICT-reliant world mean that we ultimately depend on those services and that we are all the more vulnerable.
The report warns us that the Government must play a bigger role in managing the electricity system, given the narrowing of capacity margins. Can we be reassured also that the Government are actively preparing for the handling of a significant outage that turns out to stretch beyond 24 hours?
Lord Rees of Ludlow (CB)
My Lords, it was a privilege to serve under the noble Earl, Lord Selborne, in preparing this report, which highlights the narrowing gap between supply and potential demand. Further decommissionings in the last few months have surely sharpened these concerns.
We talk about keeping the lights on, but if there is a power cut, the blackout of lights is by no means the worst downside. IT systems, the infrastructure of cities, the habitability of high buildings all depend on electric power. Rather than multiplying the number of emergency diesel generators, at great expense and no little environmental damage, it is surely prudent to prioritise an enhanced safety margin in our primary generating capacity.
Moreover, although National Grid’s methodology is careful and transparent, it underweights the most devastating risks, about which the noble Lord, Lord Harris, has just been curdling our blood. When crises arise, there can be a knock-on effect, where a malfunction, either mechanical or cyber, cascades through the system. The Cambridge Judge Business School, in collaboration with Lloyds, recently explored a hypothetical scenario of this kind in the eastern United States, claiming that economic damage could run into hundreds of billions of dollars. So I think we should be prepared to pay a higher insurance premium, as it were. This clearly requires a change in the regulations and incentives to ensure that fossil fuel stations are not decommissioned prematurely.
The downside of gaining this extra security would, of course, be to raise our CO2 emissions in the short run. Indeed, the most plausible projections towards 2050 envisage continued substantial dependence on gas-powered stations, but the hope, of course, has been to fit them with carbon capture and storage—CCS. However, the construction of CCS demonstration plants worldwide, especially in the UK, is lagging compared to what we had envisaged five years ago. Even if a demonstration project works, can we be optimistic that the technical, legal and environmental hurdles will be surmounted on a scale that allows widespread deployment, even by 2050? I wouldn’t bet on it.
If we are serious about achieving 80% reductions in CO2 emissions by 2050, as mandated by the Climate Change Act, then diminishing optimism about CCS means that nuclear power must be a bigger part of the mix. Indeed, DECC projections indicate that 30 or 40 gigawatts of nuclear power may be required—far more than current plans envisage.
According to recent statements from EDF, the operators of Hinkley, it should be on stream by the end of 2023, but few consider this credible. There may be legal challenges within the EU to be dealt with first; it might in any case be prudent to wait until at least one of the comparable EPRs now under construction, in France and Finland, have been completed. They are both famously billions over budget and years behind schedule. Realistically, Hinkley cannot be on stream before 2025, and if it suffers even a fraction of the delays of its two precursors, this date could slip towards 2030. It is not clear whether the lifetimes of existing power stations can be extended that long, nor that Bradwell could be constructed by then. Even if we are optimistic about the growth of renewables, nuclear cannot provide all the balance so there will be a gap that would surely have to be met by gas, without CCS.
Let us look further ahead. Decisions we make today will resonate well beyond 2050 and on that longer timescale there are prospects, even in the nuclear arena, that could lead to more economical and flexible baseload generators. There is no other high-tech area where one would be satisfied with 30 year-old designs. This was emphasised in a short debate last month initiated by the noble Viscount, Lord Ridley.
Can we seize these opportunities? In an earlier report in 2011, the Science and Technology Committee discussed the nuclear industry, revealing a depressing picture. We have lost expertise in fields where the UK was once a world leader. That is why new nuclear reactors will be state-owned, but by the French or Chinese state and not by us. That is why we do not have the indigenous expertise to be major players in the development of fourth generation nuclear reactors.
We should surely aspire to spearhead some of the developments, especially when we are budgeting £80 billion over the next few decades to decommission Sellafield’s dreadful legacy of nuclear waste. From that perspective, it is anomalous that the National Nuclear Laboratory cannot spend more than the current few tens of millions per year on R&D.
Looking beyond 2050, there are exciting prospects for renewables. Although wind, tides, geothermal and bio have contributions to make, my prime long-term bet would be Europe-wide large-scale solar energy generation. We would need DC grids, which are transcontinental, carrying solar energy from north Africa and Spain to the less sunny northern Europe, and east-west to smooth peak demand over different time zones.
Moreover, if solar or, indeed, wind is to become a dominant source of energy, it must be capable of being stored, and supplied when and where it is needed. There is already a big worldwide investment in improving batteries. An exciting potential breakthrough in lithium air batteries was intimated just last week in an important paper from Professor Clare Grey and her Cambridge colleagues. There are also other possibilities, including thermal storage, capacitors, compressed air, fuel pumps, flywheels, molten salt, pumped hydro and hydrogen.
This is an arena where public and commercial efforts need to mesh together. The forthcoming Paris conference offers an opportunity to encourage nations to expand and co-ordinate their publicly funded R&D into clean energy, especially solar power, storage techniques and the design of smart grids. I would add fourth generation fission and, indeed, fusion into the mix. At the moment, only 2% of publicly funded R&D is in clean energy. Why should energy research not be comparable to spending on medical or defence research, higher than it now is?
This welcome and timely debate has focused on the short-term resilience of the electricity on which our lives depend. It is a wake-up call, a reminder that we need a long planning horizon. Our present anxieties are a legacy of decisions dating back decades. Likewise, decisions made today will resonate to 2050 and beyond, so let us hope that we get them right.
Baroness Worthington (Lab)
My Lords, it is a pleasure to speak in this debate. I thank the noble Earl for his excellent chairmanship of the committee which prepared the report. I also thank the committee members, many of whom have spoken today, and the committee staff, who worked incredibly diligently to prepare an excellent report.
This has been a characteristically deep and wide debate on a topic of particular significance. As has been said, the timing of the debate comes when we expect to see from the media the characteristic response that the lights are going out and woe is upon us. Perhaps this report has helped to calm some nerves and to demonstrate that, although there are issues in front of us in the short term, we have a resilient electricity system. That is the overriding point that I take away from the report. However, there are some challenges, some of which have been raised today.
I start by referring to my noble friend Lord Harris and the noble Lord, Lord Rees, who expertly drew our attention to the fact that we should not be complacent. Rare events which might have catastrophic impacts should be part of our planning, and we need to bear them in mind as we also try to grapple with the more mundane issues of maintaining a resilient system, keeping the lights on and maintaining the power supply to our essential services in a day-to-day sense. I am grateful that those perspectives have been highlighted this evening.
A number of noble Lords talked about the trilemma. The noble Viscount, Lord Ridley, coined a new, delightful phrase: “the trisaster”. Energy policy is complex and there are always competing tensions, and it is definitely necessary for Governments of any colour or description to produce clarity and clear strategies. A number of noble Lords, including the noble Earl who began this debate so expertly, referenced the fact that we seem to lack a long-term strategy at the moment. I hope that everybody will agree that we are waiting for the Government to produce a document that sets out a new approach to a long-term energy strategy. I believe that there has been a shift since the coalition Government and we now need to see a restatement from the Government. We look forward to that. I suspect that we will hear it in the autumn. Perhaps it will coincide with the comprehensive spending review or another such convenient juncture at which the Government can clarify their position.
A number of noble Lords touched on different technologies. In particular, this evening we had quite a detailed debate about the role of nuclear, which is often the case when we debate this issue in this House. Clearly, there is more that the Government could do in setting out their strategy beyond the immediate concern of trying to get Hinkley off the ground. There needs to be a much more comprehensive look at the role that nuclear can play in providing resilience. There may well be a much scaled-down version of nuclear that helps to replace, in more bite-sized chunks, capacity that is being lost. By that, I mean that we will be losing Magnoxes and will eventually lose the AGRs. Those could be replaced by similarly scaled capacity, rather than the huge 3.X gigawatt projects that we seem to be struggling to get away on time. We also need to look at the slightly medium-scale and smaller-scale options for nuclear—a point raised by a number of noble Lords.
Whenever we talk about the resilience of our electricity system, we should look not only at supply; we must also look at the demand side, as has been raised by a number of noble Lords. I thought that the report was excellent in highlighting that the demand curve has changed. It is now in decline, and that is not simply as a result of the recent financial crisis and recession. It looks as though our demand for electricity peaked in around 2005 and it has been coming down steadily since then. The right reverend Prelate the Bishop of Sheffield highlighted one aspect of this—our continued deindustrialisation, which has obviously been picking up pace, or at least has hit the headlines, in recent weeks, but it is not a new phenomenon; we have been seeing the loss of industrial capacity over decades. That has been one contributing factor.
On the more positive side, we have seen big advances in energy efficiency and demand reduction. Some of that has come about as a result of policy; some of it has come about simply through technological improvements. One of the most notable successes that we have seen has been the revolution in lighting in recent years. The use of LED lighting for street lights and all over the place has happened almost invisibly, almost without government involvement. In response to energy pricing and the availability of new technology, we have seen a significant shift in demand, and those sorts of advances are likely to continue. The same can be said for flat-screen televisions and computer screens. There has been an awful lot of change, including in refrigeration motors. I could continue with the list of areas where we have seen progress in the more efficient use of energy, which has helped to soften the demand curve.
That has been both a blessing and a curse. It has certainly helped to make sure that the margins are not tighter than they would otherwise have been. However, it also makes investors rather lack confidence. It is quite easy to build into a market where the demand is growing. Where demand is shrinking, it starts to look a little harder to justify the spending of billions of capital. That is the nub of our problem at the moment. We have recognised that we have a low-carbon agenda which is delivering capacity, but fast deployment in that category is intermittent or varying and therefore is not providing firm power. The slower versions—CCS and nuclear—will eventually help us but we have no confidence that they will be available in the near term. As a result, we have a low-carbon agenda which is certainly helping to build capacity but it will not be firm capacity unless we ramp up our use of energy from waste, which of course is firm and classed as a renewable.
We have had another intervention—the capacity mechanism. I hope that noble Lords will forgive me if I dwell on this because it is a crucial issue and was referenced by the noble Earl. We have a capacity mechanism that is currently in conflict with our low-carbon agenda. The right reverend Prelate the Bishop of Sheffield also mentioned this, as did others. It is a curiosity that we have this mechanism, which was intended to bring forward investment in new gas generation. If the Treasury’s or DECC’s gas strategy is to be believed, this was the policy that was going to bring forward investment in replacement capacity for our CCGTs, which are both efficient and relatively clean compared with our ageing coal fleet. However, the first capacity market auction did not deliver anything like what we expected.
The noble Lord, Lord Howell, and others referenced the fact that we are not seeing the volumes of new capacity in the capacity market that we might have expected. That is despite the fact that a 15-year contract was made available to encourage such investment. The problem is that, in addition to the 15-year contract, one-year and three-year capacity market contracts were given for existing capacity. Of course, if you had existing capacity, your capital costs would have been amortised decades ago and you could bid in at very low prices, and those in that position have taken the lion’s share of the capacity auction contracts. Of the £11 that DECC’s capacity market is expected to add to the average consumer bill, just 53p has been spent on new infrastructure and £7.50 will go to the big six for their existing capacity. When we need to see new capacity being built, you have to ask whether this policy is calibrated in the wrong way. This has been an ongoing discussion and we have certainly raised the perverse effect that it has had in making old coal stations last potentially longer than need be the case, giving coal an advantage over gas. In a market where there are already problems with the relative prices of coal and gas, is that sensible?
I turn to the latest problem that seems to have emerged in the capacity market. Page 3 of tomorrow’s FT carries a story about the rather odd fact that we are now funding distributed diesel generators, a huge number of which will be relied on to keep the lights on under certain circumstances. We raised this at the Report stage of the Energy Bill and the Minister was kind enough to acknowledge it. He knows that there is an issue but, as yet, we do not seem to have had a response. Given that no carbon price is paid by these diesel generators, that they have almost no air-quality restrictions and that they were going to be subject to tax breaks, one can see why the market has flooded into this new loophole. In the first auction, we saw 2 gigawatts of small-scale generators coming forward—around 700 megawatts was successful; in this auction, which is scheduled for this December, the number has risen to 3 gigawatts pre-qualifying, half of which we think are diesel. We can only speculate as to how many of those will be successful.
In the context of the UK not being compliant with our air quality standards and of the VW scandal, which has highlighted the damaging effect that diesel has on our human health, is it sensible that our capacity market should be about to flood our electricity market with a whole host of distributed diesel generators? It does not feel like the energy policy of a modern, industrial, rich country; it feels as if we are looking at a policy that you might deploy in a developing country such as India or even an island state. We can do better than this. I think that it was the noble Lord, Lord Hennessy, who said that we seemed to be muddling through. I could not agree more. In this case, we are muddling through, relying on a quasi-market system that is delivering the worst of all answers—which is distributed diesel—to keep the lights on. The Government must act on this. The FT article quotes Tim Emrich, the CEO of UK Power Reserve, as saying that the only answer is to pause this year’s auction. Will the Minister respond to this? What is the Government’s plan? How will we prevent the opportunity cost of having a capacity market that simply delivers us massive amounts of distributed diesel as the answer to our capacity problems, when it should deliver sound investment in future-proofed, firm, low-carbon power? That is what we would expect the capacity mechanism to deliver. I look forward to the Minister’s response.
It was the noble Lord, Lord O’Neill, who pinpointed with most clarity the blackouts problem. We have this cycle of debate that takes place in the media. Often, it is filled with rather more sound and fury and not too much sense or fact. What the report and this debate have shown is that, when we look at the facts and present them properly, it brings a lot of light to the subject. I wonder whether the time has come for us to consider whether we need a permanent body of people to oversee energy security questions. When we look at the trilemma or trisaster or whatever one wants to call it, we see the climate change element taken care of by and large through the Committee on Climate Change, which does an excellent job of taking into account a whole host of factors and making recommendations about the pace and nature of our decarbonisation efforts. When it comes to costs, we have Ofgem, which perhaps does not have the teeth that it should have but is certainly set up to protect consumers. That is a price regulator; it is a very clear role. But who is responsible for that security of supply? It is often a ball that gets passed between National Grid, Ofgem, DECC and assorted other people, including now noble Lords, who have done a valiant job in trying to bring some sense to this question. However, the committee will move on to other topics, and that three-way tug of war between DECC, National Grid and Ofgem may just continue, with the media throwing in their own interpretation of the facts.
Is it not time that the Government got a grip and created some body of experts that could oversee this issue? We know that a body of experts was recruited to help DECC with the Energy Act 2013 and presumably they still exist. What has happened to them? Are we going back to them to ask for progress reports on how things have turned out since the passing of that Act? A number of noble Lords from all sides of the House have raised concerns that the EMR may not be delivering as expected for various reasons, the change of Government also having had an impact on that. We need to continue to create important frameworks that can help government to navigate this issue of how to make energy affordable, reliable and low-carbon. It is that security-of- supply aspect that lacks an overseeing body at the moment.
I shall not detain the House any further. It has been an excellent debate. The report is incredibly illuminating, thoughtful and well written. We need more of this sort of analysis and I do not think that the committee can be relied on to do it. It is incumbent on the Government to set out their long-term strategy and, within that, to tell us how they propose to manage this situation going forward.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change and Wales Office (Lord Bourne of Aberystwyth) (Con)
My Lords, I thank the noble Earl, Lord Selborne, for this important discussion, for the excellent way in which he has obviously chaired the committee and for the report. I also thank noble Lords for their contributions to this first-class debate—it has been a debate of extraordinarily high quality.
I start by saying how much I agreed with the comments of my noble friend Lord Howell about the excellence of the national grid. My first ministerial visit was to National Grid at Wokingham to see the excellent work that it is doing, which is really reassuring.
There is no silver bullet. If one thing has been clear in this debate, it is that there is no single source of energy to solve the trilemma. If there were, I am sure that somebody would have come forward with it by now and we would not be debating these issues. It is a very complex matter.
Just to illustrate the point, the right reverend Prelate the Bishop of Sheffield—with whom I remember sharing an introduction day; we came in at the same time—in an extraordinarily profound and well-thought out contribution talked about the importance of the Paris COP negotiations at the end of the year. Indeed, they are important, they are vital and we are playing a leading part in them. That negotiation is centred on decarbonisation.
The right reverend Prelate spoke also, quite rightly, about the need to do something for the steel industry, which we are doing. What we are doing is what we are being pressed to do by people of all political persuasions and none, which is to provide some sort of subsidy, payment or compensation in relation to carbon emissions. Nothing could better illustrate the nature of the problems that we have to address as a Government, as a country and as a department. They are unchanging, whoever that Government are.
I will not ramp up this debate by making it a party- political knock-out issue. I share many of the views put forward by the noble Baroness, Lady Worthington, which I think she knows, and I think that there is broad agreement in this House about many issues. I regret that that is not the case in the Commons. If we are able to get to a position where it is, we will benefit from it. I think that is a view broadly shared.
The committee’s report was a wide-ranging and important contribution to this vital debate. I will try to touch on a few of the main themes discussed, picking up points made by noble Lords, and then I will go back and perhaps pick up one or two points that are broader than the committee’s report.
It has been rightly identified that we are wedded as a Government—again, there is a consensus on this—to the trilemma to ensure security of supply. I share the view put forward, for example, by the noble Lord, Lord Hennessy, and my noble friend Lord Howell and all others that this is central. We have recently published the Statutory Security of Supply Report 2015 to Parliament.
Secondly, we are determined to ensure that energy is sustainable. The Government have recently responded to the Committee on Climate Change’s annual progress report on meeting the carbon budgets. I would mention the key role that we are playing in the climate negotiations: my right honourable friend Amber Rudd has played a leading part on the finance and the Prime Minister has made a powerful statement about the Government’s commitment to helping developing states. That, too, has been widely welcomed, and I know that it has from speaking to representatives of other countries.
Thirdly—these are not in any significant order; they are the trilemma in whatever order we address them—there is the issue of affordability. Many people, including my noble friend Lord Ridley, have stressed the importance of this and quite rightly so, because this is central: we have to ensure that electricity is affordable for consumers, both for domestic consumers and for industry. Points were made about the position in Germany in relation to the steel industry. It is true that electricity prices are cheaper for industry, but domestic bills are far higher, so again there is no silver bullet in this.
Perhaps I may say something about the Government’s report to Parliament Statutory Security of Supply Report 2015. This fulfils our statutory duty and obligations, and we take this very seriously. I thank the noble Lord, Lord O’Neill, for much of what he said about nuclear and the consensus, but I disagree with him when he suggests that this report, as far as the Government are concerned, is ignorable and being ignored. Let me reassure noble Lords that that is not the case. The department takes the report very seriously, and rightly so. At the same time as our report was made to Parliament, National Grid published its winter outlook, setting out its view of the electricity and gas supply and demand situation for the winter ahead. It shows a margin of 5.1%, which is well within the Government’s reliability standard and gives us confidence that there is enough spare capacity to meet demand even in tough system conditions such as cold weather. We are confident that the capacity margin is manageable this winter and we have the right tools in place to address the immediate future.
Points were rightly made in the debate about the long-term future, and this relates to the vision behind the energy policy of the Government that many people have talked about. I think that we have made some things very clear, and no doubt other points will be made clearer this autumn. As the noble Baroness, Lady Worthington, suggested, we are in the middle of a spending review. Some things are clear, one of which is the importance of nuclear. We have made headway with Hinkley Point, we are making headway with Sizewell, and after that comes Bradwell, although that is in its early stages at the moment. It is not limited to that type of reactor because we are also bringing on Wylfa B.
Mention has been made of small modular reactors, and many noble Lords who took part in the recent debate on nuclear power will recall the issue coming up then. I responded by saying that there is going to be a progress report on it in March of next year. I will make sure that the letter I wrote to noble Lords on that occasion is also sent to those who have participated in this debate because there is a read-across, certainly on the nuclear issue and possibly on one or two other things that were touched upon in that debate as well.
I shall move on to say something about the capacity market. I may possibly disappoint the noble Baroness when I say that it would not be responsible to cancel or defer the capacity market auction this winter. Although she did not ask for the latter, there is the demand-side response option which comes in in January of next year. We have a trilemma, and if we were to do that, I think it would prejudice things. I have to say that that will not be happening. We believe that the capacity market is the right tool for incentivising long-term investment and we need to deliver security of electricity supply. There is an issue that the noble Baroness has touched upon. I rightly acknowledge that and we are looking at it. This was also touched upon by my noble friend Lord Howell. We have to refine the capacity market and see how we can deliver capacity while ensuring that it is new capacity and that it is not from diesel and so on. I accept that these are things that we will have to address, but at the moment there is no evidence to suggest that it is going to be purely or substantially diesel.
Baroness Worthington
I understand that it will not all be diesel, but my point is that each successive auction diminishes the pot for future auctions because we sign 15-year contracts. Once those 15-year contracts are signed, they cannot be repealed or changed; they are simply granted. Every time we build a diesel generator, we are not building something that could be cleaner, more sustainable and more efficient.
Lord Bourne of Aberystwyth
That is a point well made, as I have indicated, but I do not think the right answer is to cancel the auction for this winter. I hope that the noble Baroness will accept that that would not be the right approach at all.
Baroness Worthington
But there needs to be a response because this is a loophole that is being exploited. It started last year and it is now building up into a worse problem. As I understand it, the Secretary of State has quite significant powers under the electricity market reform to shape that auction. Now that this has come to light, what are the Government going to do about it? Are they simply going to let things go on as they are now, which will see 15-year contracts granted to large numbers of diesel generators?
Lord Bourne of Aberystwyth
As I have indicated to the noble Baroness, what I will not do is make policy on the hoof and I certainly will not recommend that we cancel the auctions this winter. But as I say, it is an issue that we will look at.
Let me move on to say something about the reliability standard, which was mentioned by the noble Lord, Lord O’Neill, among others. The committee recommended further research into the true costs of electricity shortfalls to set the reliability standard. We agree entirely that an understanding of the costs of shortfalls is crucial to an assessment of the measures taken to prevent them. They are difficult to assess given that, I am pleased to say, there is a lack of much historic evidence domestically in relation to this issue because we have not had shortfalls. In 2013, a comprehensive study was jointly commissioned by Ofgem and DECC that resulted in the current figure of £17,000 per megawatt hour, which we use for the purposes of our reliability standard. The research looked at the position overseas in a thoroughgoing and exhaustive exercise, and it was as evidence based as possible. We are working with National Grid and the independent panel of technical experts to investigate further the costs of dealing with electricity shortfalls, and we will take action accordingly.
Let me say something about resilience. The major contributor on this issue was the noble Lord, Lord Harris, who spoke with some passion, and spine-chilling it was, too. In preparing for this debate and looking at the issue more broadly, I asked many of these questions as well; that is, what do we do if the following happens? The noble Lord suggested that there are things that perhaps we cannot foresee happening, and I seem to recall that a similar exercise was undertaken after 2011 in which there was a review of procedures. I think he will understand when I say that detailed information cannot be given out on something like this. If it was something in the nature of a terrorist attack, obviously we would not want to publish any detailed blueprint about what we would do in particular situations. But what I will try to do is ensure that we get a response around to noble Lords to set out the position in broad outline. There are plans in place to take the necessary action in so far as we can. But as the noble Lord rightly said, there are situations which we probably have not foreseen. Again, I will ensure that noble Lords are given a response on this matter in whatever detail is possible, although I think that it will be broad in nature.
The noble Lord also mentioned the three-digit number and rightly said that it was not going to be a silver bullet. It will help in some situations but not in the most dire ones. Noble Lords will be aware that this is due to be implemented in April 2016, so for those situations that fall short of the catastrophic, obviously it is still important that there is a three-digit number that people are able to use to ensure that they know what is happening in their locality and what the advice is in a particular situation.
Perhaps I could say something in relation to demand-side response and on storage, which was rightly brought up in the debate. The report stresses the potentially important role of newer technologies such as demand-side response management and storage. Demand-side response could mean industrial customers shifting the timing of their electricity-intensive processes away from peak times, for example. We will ensure that an auction will take place for demand-side response in January 2016, with the first capacity payments for those who are successful following in 2017. An analysis of the currently available evidence indicates that demand-side response in existing generation does not generally require as significant up-front capital investment as new-build plant and therefore does not require as long-term capacity agreements as new-build plants do, and that is the reason for the shorter period in relation to that auction. On 15 October, we published an assessment of this issue which shows the diverse nature of the demand-side response, and one or two noble Lords raised questions about that report.
On storage, we very much share the view put forward in the report of the potential role that energy storage could play and the flexibility that storage offers as a balancing solution. While we are not currently planning to introduce a framework of incentives specifically for energy storage, we are encouraged that in the recent pre-qualification for the next capacity market auction, which is to take place this December, the majority of existing pump storage sites have pre-qualified this year, bringing a potential 2.7 gigawatts de-rated capacity of storage into the capacity market.
Some noble Lords also mentioned battery storage in the context of zero-carbon cars and the noble Lord, Lord Teverson, referred to Tesla. Work on this is, as yet, at a relatively early stage but we are the second largest producer of zero-carbon cars and the Government are determined that we do not lose our market edge.
Smart metering is clearly important and work is progressing on it. We have around 1.7 million meters already installed. I had a meeting about smart meters this morning and, as one would expect, it is beginning to ramp up. This will make a difference to demand, which is welcome.
The significant issue of interconnection was raised by many noble Lords, including my noble friends Lord Selborne and Lord Howell. We are committed to increasing Britain’s interconnection capacity, which can help to lower consumer bills and meet decarbonisation objectives. Great Britain currently has 4 gigawatts of interconnection, across four interconnectors, to France, the Netherlands, Ireland and Northern Ireland. Earlier this year, financial investment decisions were reached on two new interconnectors—one to Belgium and one to Norway. Denmark and Iceland are also being talked about but they are not yet at the decision stage. Interconnectors will bring additional security of supply benefits by giving access to generation beyond our national borders when it is needed. I stress that connection to neighbouring countries with different sources of generation increases the resilience of our electricity system.
Cybersecurity is one of the Government’s top national security priorities. I welcome the supportive comments made by the noble Lord, Lord O’Neill. This is taken seriously across government and certainly within DECC, which is working with government departments and agencies, as well as with industry partners, to ensure that the risks to the energy sector are understood and that appropriate mitigations are established. This includes ensuring that cybersecurity factors are considered, where possible, at the early design stages of future systems, as they have been at Hinkley C, for example. Smart meter security has been a key consideration at every stage of system development.
At the outset, my noble friend Lord Selborne rightly talked of the importance of looking at the whole-system impact. The committee’s report recommends the Government take a look at the whole-system costs of low-carbon technologies. The report on the Energy Systems Catapult is due to be published early in 2016—I think that the noble Earl raised a question about that—and DECC has also commissioned Frontier Economics to examine the whole-system impacts of electricity generation. Its report will be published in March 2016. These points were also raised by the right reverend Prelate the Bishop of Sheffield and my noble friend Lord Ridley. The Frontier Economics review aims to systematise DECC’s understanding of the impacts of electricity technologies, system balancing, overall capacity adequacy and networks.
My noble friend Lord Selborne, and other noble Lords, mentioned energy efficiency. I agree that it is vital and we are committed to insulating 1 million homes in this Parliament.
The noble Lord, Lord Dixon-Smith, talked about the importance of the planning system. I agree that it is central to this issue. He also mentioned the loss of heat from the production of electricity. DECC takes this very seriously, too.
This has been a high-quality debate, to which noble Lords have brought different perspectives. However, it has demonstrated, once again, that there is no silver bullet. There is a diversity of energy supply. Renewables and CCS—to which the noble Baroness, Lady Worthington, referred—are in the Energy Bill and are central to what the Government are doing and were mentioned in the manifesto, and there are the two projects at White Rose and at Peterhead.
Baroness Worthington
Can the Minister respond on the structural question of how we govern the security aspect of the trilemma, compared to the other two, given that Ofgem looks after costs and the CCC looks after climate change? Who do we rely on to get expert, apolitical advice on security of supply? Should we not be thinking of creating something that helps us to bring this kind of analysis to the table more regularly and with a similar degree of rigour?
Lord Bourne of Aberystwyth
I will ponder on what the noble Baroness has said. As she knows, I was very responsive to the committee in looking at the CCS policy across parties: I was very willing to take it forward and it will be covered in tomorrow’s Third Reading debate. I will look at it—at present it is the responsibility of DECC, within government, and I do not want to say that we will have another committee just for the sake of it. However, I will consider what the noble Baroness has said because she has put it forward in a very constructive way.
I thank the noble Lord, Lord Broers, for what he said about the substantive reply I gave him. I am pleased about that—we do not often get complimented on our parliamentary responses. He is right about the importance of capacity factors, nuclear and so on and about the fact that solar and wind costs are coming down. At the outset, the noble Earl said that we did not want a system on subsidies. We need them to get things moving initially and there are subsidies that remain, but, ideally, we do not want a system driven by them.
My noble friend Lord Howell mentioned fusion. That will be covered in the letter on nuclear that I will ensure goes to noble Lords. Work is being done by the Government, a lot of it at the excellent Culham centre in Oxfordshire, and it is certainly part of the mix. The noble Lord, Lord Rees, talked about support for battery storage and other methods of storage. The Government are looking at that.
I apologise for going over time, but I thank noble Lords for a very high-quality debate. We will ensure that any points that I have missed are picked up and covered in correspondence. I have undertaken to consider some points and will do so, but without commitment.
The Earl of Selborne
I thank the Minister for his very constructive response. I agree that this has been an interesting debate and we have benefited enormously from a great deal of expertise and experience of the energy sector from around the House. I join in the appreciation for National Grid. My noble friend Lord Howell drew attention to the fact that we should not be facing these capacity margins, but we recognise and respect the expertise of National Grid and the way it is approaching this.
As my noble friend has just explained, the Government are looking for a reset of energy policy. We are looking for a realistic, fully costed energy policy which recognises the complexity and wide range of scenarios which we could face over the next two decades.