Net Zero (Economic Affairs Committee Report)
(6 months, 2 weeks ago)
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Baroness Kramer
That this House takes note of the Report from the Economic Affairs Committee Investing in energy: price, security, and the transition to net zero (1st Report, HL Paper 49).
Baroness Kramer (LD)
My Lords, the noble Lord, Lord Bridges, the chair of the Economic Affairs Committee, sends the House his apologies as he had to be absent today. He wished to move the debate on the committee’s report Investing in Energy: Price, Security, and the Transition to Net Zero because it has been 15 months since it was issued, but any further delay in debating its conclusions and recommendations in this Chamber would have been intolerable, so the role falls to me.
I start by thanking all the witnesses who gave evidence to the committee and expressing our appreciation to the outstanding staff who were essential in enabling us to deliver the report: Adrian Hitchins, Peter Jenion and Gurjeet Rathore, and I also thank one of our current staff, Neil Mellor, who helped me remember a report that I had put aside 15 months ago.
This is a brief debate, so I shall spare everyone a discussion of the impact of the Russian war in Ukraine on global energy markets and the impact of energy price rises on the cost of living of ordinary people. However, both factors were constantly in our minds and part of the background as we developed this report. Our focus was the Government’s commitment in law to achieve net zero by 2050 and their target to decarbonise the power system by 2035. We sought to answer the question: how can the Government mobilise the capital needed to ensure that the transition is orderly and that energy supply is affordable and reliable?
Our conclusions were structured under four headings. First, we considered investment and action in the short term. We urged the Government to seize the moment and respond to public concerns on energy prices by: speeding up the pace of reducing energy consumption, notably by accelerating measures such as home insulation; signalling very clearly that goal to the private sector; and providing far more detail on how such investment will be released. We asked the Government to publish an energy demand strategy and to include financing options and a means of incentivising investment in energy-efficient measures. We are still waiting. We called on the Government to re-examine their limited ambitions for onshore wind, to extend the life of nuclear power stations over coal power stations—that essentially seems to be the focus—and to seek an agreement with the EU and Norway on energy co-operation to manage possible shortages of liquefied natural gas.
Our second set of recommendations focused on increasing investment in the transition. While the committee supported the Government’s clear and ambitious targets for many renewable technologies, we asked for far more policy detail on a range of issues, including long-duration energy storage, market structures and mechanisms for hydrogen production, market models for carbon capture and storage, and investment in transition networks. We also sought more policy detail on the delivery plan for nuclear and sought an explanation for the Government’s target for 24-gigawatt nuclear capacity when the Climate Change Committee can see a route to only something like half that capacity. That question remains essentially unanswered.
The committee also suggested:
“Any extension of oil and gas exploration or investment should focus on projects with short lead times … and not enable substantial levels of long-term production that conflicts with net-zero objectives”.
I shall make a comment about that at the end of my speech.
We sought an assessment of the energy profits levy and any plans for carbon pricing. To oversee the complexity of the energy network, new technology and the security of supply, we recommended a new body, independent of government: the future systems operator.
Our third set of recommendations focused on financial regulation to ensure that the mandate for the Bank of England to support the transition to net zero included having regard to energy security. We received a fairly extensive response from the Bank of England assuring us that it was aware of the issues.
We called for better data and better disclosure. We also asked for the Government to help unlock new capital with Solvency UK; they have made moves in that direction. We asked them to work internationally on green taxonomies—investors need consistency, not just in the UK but across the whole marketplace that they serve—and to consider international opportunities, such as working with the EU common purchase platform. We also raised the issue of access to critical minerals and mitigating vulnerabilities in the supply chain.
All these strands were pulled together in our call for an energy strategy. Throughout the committee’s work, it became increasingly evident that there is a critical missing piece: a detailed and comprehensive plan. The gaps between the Government’s ambition and practical policy are significant. We recommended that the strategy should both set out a proper plan, even if in broad terms, and provide an assessment of costs and savings. A net-zero delivery plan would highlight vulnerabilities, take account of key issues such as energy security and foreign policy, and energy affordability, and help avoid a disorderly transition. An agreed plan in which all parties have confidence removes uncertainty—and, without certainty, the private sector will not make the critical commitments and investments necessary to achieve net zero.
The work of the committee ended here, in essence, but I will add a few comments of my own based on recent developments; I stress that they are my own comments. I recognise that this Government have made some progress—on a hydrogen road map, on identifying our first carbon capture site, and on a plan for insulation—but I agree with the Climate Change Committee in its comments made in March:
“Delivery and deployment of infrastructure must be achieved at a much greater pace”.
I am—as I said, these are personal, not committee, remarks—utterly disappointed by the Government’s decision to approve the Rosebank oil and gas field development. There is no way that I can see that it meets the committee’s recommendation that
“investment should focus on projects with short lead times … and not enable substantial levels of long-term production that conflicts with net-zero objectives”.
The five-year delay of the ban on the sale of new petrol and diesel cars is not just a blow to the UK automotive industry but, indeed, a blow to achieving net zero on time. I think others in this debate will expand on this but, talking to people within the automotive industry, the comment that has struck me most strongly is that the delay has made a fool of those who believed, and made investment decisions based on, the Government’s original commitment. Undermining certainty is a very dangerous thing to do, especially in a policy so critical to us as net zero, and so complex because of all the related activities and decisions.
The decision to delay for nine years the ban on fossil fuel heating for off-gas grid homes; exemptions to the ban on the sale of gas boilers in 2035; scrapping the requirement for landlords to ensure that all rental properties have an energy performance certificate of grade C or higher from 2025—all these are not just disappointments but, again, undercut any sense of certainty for the private sector as it decides how to plan and invest.
I thank all the members of the committee, several of whom will be speaking in this debate. They often have much more understanding of the broader issues here than I do, so I hope that their comments will be taken very seriously. Some of our members have passed on to pastures new. I also thank our chairman, the noble Lord, Lord Bridges, even in his absence, for his determination to be inclusive; we were a committee of fairly varied opinions. His wisdom and skill in focusing on the essentials in the end gave us harmony and brought us to a report around which there was a great deal of consensus.
The key messages of the report are the need for accelerated action, for an independent co-ordinating body and, above all, for a detailed and comprehensive energy strategy that gives certainty to individuals and the private sector, and—these are my own words—is not subject to whims and elections. That remains key to achieving net zero and resolving the potential conflict of net zero, affordable energy and energy security. We have to make sure that all three goals are wedded together in the co-ordinated plan that we then deliver. I ask that the House takes note of the report.
Lord Frost (Con)
My Lords, I am grateful for the opportunity to debate this report. I declare my interest as an unpaid trustee of the Global Warming Policy Foundation, a charity.
The committee’s report, as has been said, is now over a year old and therefore, unfortunately, rather out of date. It reflects a world where the policy goal of net zero was undisputed and its economic and financial underpinnings unquestioned. As we know, during 2023, as the real-world costs of the net-zero transition have become more apparent across western economies, we are beginning to see thinking change. Our own Government’s very welcome, though still minimalist, decisions to delay the deadlines for compulsory transition to EVs and gas boilers recognise the reality that the current course to net zero is likely to prove impossibly costly and politically and economically unworkable.
I certainly agree with the committee’s scepticism, though perhaps not from the same direction, about the relationship between the Government’s net-zero plans and hard reality. Nowhere is that scepticism more justified than in one area: wind power. Given the short time available, that is the issue I want to concentrate on today. One often hears it said that wind power is both a cheap form of energy and one that enhances energy security. I am afraid that both those points are fundamentally mistaken. Given the time constraints, I want to make just two broad points.
The first of these is the obvious one: wind power is intermittent and therefore requires back-up. We get wind power only when the wind blows, so widespread use of it means that we must maintain a back-up source of dispatchable power, currently gas. It is argued that the back-up to wind power in the future will be electricity storage. Unfortunately, this is implausible. Doing so through battery power will be fabulously expensive—several times the annual GDP of this country—if it is even possible at all. Hydrogen might be a little cheaper, though still well beyond what can plausibly be paid for. I am afraid that last month’s Royal Society report about hydrogen storage, which purported to show its feasibility, is based on rather implausible assumptions. At least, I hope they are implausible. For example, there is a belief that total UK electricity demand in 2050 will be half what it is now. We face a rather bleak future as a country if that is so.
The truth, which wind power proponents shy away from, is that the more wind power you have, the more gas you need as well. The resultant rickety generation system then makes the overall grid less reliable, while balancing it becomes ever more complex and costly—last year it was nearly £4 billion for this alone. This stressed renewables grid cannot be relied on by a modern economy.
Secondly, as a result of these things, wind power is expensive. It is obvious that running wind plus back-up will always be more expensive than just back-up. Moreover, running that back-up gas network at partial efficiency brings extra costs and deters the investment that we want to see. It is widely believed that wind power costs are coming down fast, but this really does not seem to be the case. The estimates produced by the department are a little disconnected from this reality.
If, as the department claims, an offshore wind farm can deliver power at £44 per megawatt hour, or £55 in current money, why did no wind farm developer take up the offer last month of contracts for difference at £65 per megawatt hour? Why did Vattenfall cancel its plans for the Norfolk Boreas wind farm in July, rather than deliver energy at the price it was contracted to—prices, by the way, that ignore the costs of back-up or strain on the grid? It is obvious from examining the published accounts of companies that costs have not fallen to any great extent, onshore or offshore. A policy based on the assumption that they have therefore makes no sense.
The truth is that the whole wind power project risks being a huge waste of effort and resources. It is going to deliver us, at fabulous cost, an electricity grid that is more unreliable, less secure and more expensive than the one we have now. The correct way forward to reach any serious target to reduce carbon emissions has to be a gas to nuclear programme, first by more modern CCGT generation at existing sites and restarting fracking, following that with a revived nuclear programme. We will obviously be able to do that only if we can eliminate the market distortions and the massive subsidies and consumer costs that come with the current wind power programme.
I do not have much expectation that this is going to happen, given the investment that this Government and their predecessors have made in wind power. I still hope that my noble friend the Minister and his department will look at these issues with a fresh eye and perhaps at least put in place a proper red team review of the wind power programme, before it is too late.
Viscount Chandos (Lab)
My Lords, the noble Baroness, Lady Kramer, has made a masterly introduction to this debate on the Economic Affairs Committee’s report Investing in Energy: Price, Security, and the Transition to Net Zero, a profoundly complex and challenging subject. I was proud to be a member of the committee at the time of the inquiry and, like the noble Baroness, I pay tribute to the noble Lord, Lord Bridges, for his excellent chairmanship and the work of other committee members and the staff.
A week is a long time in politics, so the 65 weeks that have elapsed since the publication of this report is an age. Unlike the noble Lord, Lord Frost, I believe that its analysis and conclusions stand up well to the changes during this time, although three different Prime Ministers and, in particular, breathtaking U-turns by the current incumbent of 10 Downing Street—in residence but not in power—have continued to move the goalposts hugely on government policy. I should draw the attention of the House to my interests as disclosed in the register and in the report: as a trustee of the Esmée Fairbairn Foundation—a major funder of environmental causes in the UK as well as, through its endowment, an investor in sustainable energy funds—and as a personal shareholder in Greencoat UK Wind.
Within the committee, we debated whether the challenge of balancing the issues of cost, security and achieving net zero could helpfully be described as a trilemma. I argue that it is even worse, not least in mangling the English language: it is a quadrilemma, as security must not involve unacceptable conflicts with, or compromises of, our foreign policy. For that reason, in the short to medium term the committee concluded, based on evidence we received from witnesses across the range of interested parties, that there needs to be further selective investment in fossil fuel production to meet the country’s need for energy security, consistent with other foreign policy objectives. But my personal view, at least partly shared by the committee, I think, is that to help meet the net-zero target, which is not an essay crisis with a last-minute deadline but a continuous path of action and emissions reductions over the next 27 years, the Government may need not just to prioritise the approval of short lead-time projects but to find ways to underwrite shorter periods for exploration of new fields. Stranded reserves may need to remain stranded.
In my remaining time, I will touch on two big themes: technology and money. The astonishing creativity of scientists and the technology sector as a whole must not be an excuse for inaction now. Technology in a wide range of areas, such as hydrogen, network transmission, carbon capture and, most significantly, nuclear, lies at the heart of the progressive improvements and reductions in emissions that are essential to achieve the underlying objectives of net zero: keeping global warming to no more than 1.5 degrees centigrade, and, importantly, a 45% reduction in emissions by 2030—seven years’ time.
Investment, both pure science and commercial, is highly important. However, a realistic assessment of how quickly technology can deliver results must be factored into the policies the Government adopt. Investors in hydrogen projects see no prospect of it being a valid means of storage in this decade. The Government have placed great weight on small modular reactors riding like the cavalry to the rescue, but the technology is still unproven. The first licence in the US was granted at the beginning of this year after the expenditure by the company concerned of half a billion dollars over 10 years.
Finally, on money and timescale, if a week is a long time in politics, then an hour is a long time for hedge fund traders. That seems to be the only explanation for the Prime Minister’s claim that recent decisions were essentially long-term ones. Net zero cannot be achieved without the expenditure of money. Just kicking the can down the road beyond the next election, perhaps betraying a lack of confidence from the Prime Minister that it will be his problem, is not acceptable. A Labour Government will make that investment within the constraints—
Lord Mott (Con)
My Lords, can we keep all our speeches to five minutes, please? Could the noble Viscount now wrap up his comments?
Viscount Chandos (Lab)
A Labour Government will make the investment that this Government have failed to.
Lord Turnbull (CB)
My Lords, I am now a member of the Economic Affairs Committee, but I was not when this report was published. Had I been, I would have endorsed it for bringing a measure of realism and proportion to the debate about net zero. It is helpful that the report recognises that there will be a transition, which will take several decades, during which there will still be a requirement for fossil fuels in the British economy.
When I first worked on energy policy some decades ago, the dominant framework was the so-called trilemma. Energy policy had three objectives. The first was sustainability; it had to advance the Government’s environmental objectives, especially on climate change. Secondly, there was the objective of affordability; the price of energy should not impoverish unfairly poorer people or small businesses, nor make major industries uncompetitive. Third was security of supply and resilience; it should protect energy consumers and society from major shocks. The aim was to find a solution which optimised a combination of those objectives. It was not to pick one objective and maximise the achievement of that at the expense of the others.
The Climate Change Act 2008 demolished this framework, giving climate change primacy. It is the only objective protected in statute. The Climate Change Committee was established to warn government about progress towards its environmental goals and to propose measures needed to correct course. The CCC has also been backed by extremely eloquent and well-paid spokesmen, some of whom were sitting here a few minutes ago.
As well as no statutory backing, the other objectives have had no equivalent sponsor. There has been no body equally resourced and voiced to defend the interests of poorer people, small businesses and traders, nor to speak for major industries. Nor, more dangerously, has there been a body of equivalent authority to monitor the state of energy security or resilience. This has become glaringly apparent since the Russian invasion of Ukraine. Witness the reluctance to start filling the Rough storage facility. For too long we have tolerated dependence on our enemies, such as Russia, or our Saudi fair-weather friends. With such a lopsided structure it is unsurprising that policy decisions have been warped.
The EAC report is therefore to be welcomed for bringing a greater sense of balance between the three objectives. It is also consistent with the Prime Minister’s latest set of announcements. The reaction from the CCC has focused on two issues in particular: the coal mine in Cumbria and the go-ahead for offshore oil and gas exploration. The CCC argued that these measures have no effect on energy prices and that they do not enhance security of supply. Despite the eminence of their proponents, both arguments are flawed.
The EAC report acknowledged that extra UK fossil fuel output will have little effect on prices, which are set in world markets, but this is not the knock-down argument it claims to be. If, during the transition to net zero, UK output of oil and gas is higher and world prices go up, the value of that extra output will also rise—in effect, creating a natural hedge to offset what would be a loss to UK national income.
On output, it is argued that security will not be enhanced if the extra output is contracted to be exported. However, that depends on how the contracts are written and the terms the Government set for extraction licences. For example, is there an obligation to contribute to building up our strategic reserves? I doubt if any other country in the world takes the view that having greater domestic output has no bearing on the security of supply.
Notice the contradiction here. It is said that extra fossil fuel output is too small to be material on prices, but that same increase in production is claimed to be big enough to have a damaging impact on world CO2 emissions. You cannot have it both ways. Eventually the CCC is forced back on to the argument that the extra output will reduce our influence in the world debate. However, with our CO2 emissions being only about 1% of the world’s total, we are not major players, and we will be seen as having a loud voice but carrying a small stick.
I have one reservation with the report. It looks favourably on the discussions going on to ensure that banks and other sources of finance pay greater attention to the risks of fossil fuel investments becoming stranded assets. Indeed, they could be—just like the canals. But there are many places where one will find stranded assets. A lot of them are more immediate and closer to home. A walk down the high streets of Britain or its office districts will show you many stranded assets. The airfields of the south-west of the USA are littered with surplus aircraft, which are stranded on someone’s books. By all means, be wary of stranded assets, but do not treat oil and gas investments as a special case.
In conclusion, I welcome this report, with its greater recognition that oil and gas will be needed during the transition, and indeed beyond 2050, and that we must pay more attention to all three objectives in the trilemma. So long as we continue to be a consumer of oil and gas, it would be better to produce a higher proportion of it for ourselves.
Baroness Bennett of Manor Castle (GP)
My Lords, it is a pleasure to take part in this debate. I listened particularly carefully to the speech of the noble Lord, Lord Frost, who represents a small but very vocal segment of the debate covered by this report and the broader net-zero issue. I would like to correct one statement the noble Lord made about the Royal Society report. It does not assume a halving of electricity demand. I will quote a paragraph from the report:
“The demand for electricity in Great Britain in 2050 is taken to be 570 TWh/year in this briefing, roughly twice current annual demand”.
I thank the committee for the report and the noble Baroness, Lady Kramer, for her excellent introduction. I will make three points, pairing the 86 pages of the report and the Government’s 28-page official response—I am not counting the letter from the right honourable Mr Rees-Mogg, who was briefly relevant as the Secretary of State—because, despite the change in governing regime, it seems that there has been disturbingly little change in government energy policy.
The noble Baroness, Lady Kramer, focused on paragraph 121 of the Economic Affairs Committee’s report, and I make no apologies for focusing on it as well, because it is absolutely crucial. It quotes Dr Fatih Birol, the executive director of the International Energy Agency:
“Nobody should imagine that Russia’s invasion can justify a wave of new large-scale fossil fuel infrastructure in a world that wants to limit global warming to 1.5°C”.
But in the Government’s written response, as in their subsequent response, there is reference to launching a
“new oil and gas licensing round”,
which is exactly what they have gone ahead and done. You might think that they have not read the report at all. The noble Lord preceding me referred to stranded assets. I point out that the Committee on Climate Change estimates that new oil and gas licences take, on average, 28 years to begin producing. We are talking at a time when we clearly cannot use any significant amounts of oil and gas.
My second point is on the committee’s recommendation that the Government publish an “energy demand reduction strategy”, focusing particularly on home energy efficiency. This is just one of the many disaster areas of energy policy. It is worth noting that insulation rates in homes today are well below where they were when David Cameron, as Prime Minister, decided to “cut the green crap”. Listening to the Prime Minister’s comments at the recent Tory party conference, you might have thought that, given the committee’s report’s focus on the need for green skills—these are often debated in your Lordships’ House—they might have been a focus of Tory education policy. So can the Minister say how the proposed new British baccalaureate, the major education policy announcement, fits with the green skills agenda?
Thirdly, on carbon pricing, the committee calls for the provision of
“clarity to investors and … incentives to fund projects necessary for the transition”.
The official government response here has since been overtaken by events. We have recently seen a sharp decline in the carbon price, attributable to the Government’s decision to release 53.5 million additional allowances from a reserve pot to the market between 2024 and 2027. That means that emissions prices have fallen to less than half of the EU equivalent, when they used to be more or less at parity.
I credit the Financial Times for noting the financial and economic impact of this. It has left British exporters facing hundreds of millions of pounds in EU carbon border taxes within the next decade. That means that money that would have come to the British Treasury will now go to the EU; are the Government happy about that?
Baroness Noakes (Con)
My Lords, I declare my registered interests as an investor in a number of energy companies. I too am a member of the Economic Affairs Committee, and I pay tribute to the chairmanship of my noble friend Lord Bridges of Headley. It is a shame that he is not able to be here to lead this debate, but I thank the noble Baroness, Lady Kramer, for introducing the report so ably.
It has taken 15 months for there to be a debate on this report and, after all that, we are allowed only five minutes. Our Select Committees should be an integral part of how Parliament holds the Government to account, but they are being sidelined. I hope that the Government will do better in future to allow Select Committee reports the time they deserve in your Lordships’ House.
A lot has happened in the energy space in the last year since we reported. I particularly welcome the Government’s recent announcements, which have brought a welcome sense of pragmatism to the delivery of net zero. As we heard, the report focused on how much investment was needed in order to deliver net zero by 2050 and where that investment would come from. The Government’s response has not shed much more light on this. But the even bigger questions, which the report did not set out to look at, are: who pays, when they have to pay it and how much they have to pay. These are the biggest challenges facing the delivery of net zero.
The Government have never been clear with the public about how much the cost of achieving net zero will affect them. Indeed, my noble friend Lord Hammond has recently said that successive Governments have been “systematically dishonest” about it. The public have little understanding about how green levies are already inflating their energy bills or about what they will pay for in future, including the impact of delivering a nuclear programme. We need a proper grown-up debate with the public about what costs they are prepared to accept.
The advocates of net zero often assert that, in the long run, the costs are likely to be outweighed by the benefits. Long-range forecasts, such as those from the Committee on Climate Change, are only as good as the underlying assumptions on which they are based, and it is not surprising that many of those assumptions are highly contestable. They were also made at a time when interest rates were near zero, and today’s “higher for longer” environment does not improve the calculations.
The renewables sector lives on subsidies and, as we heard, it imposes costs by way of extra investment in grid infrastructure and in back-up storage or generation capacity for when the sun does not shine and the wind does not blow. Consumers pay for all of that. As my noble friend Lord Frost pointed out, renewable energy itself seems to be getting more expensive rather than less, as the latest auction round showed. Who really knows what renewables will end up costing consumers, not in a hypothetical 2050 but in three, five or 10 years’ time? A 25-year forecast has no meaning to those who pay bills in the short and medium term. Today’s energy consumers should be centre stage in the conversations about the cost of delivering net zero.
The country as a whole remains supportive of the Government’s net-zero ambitions, but polling shows that support weakens when the impact on bills is factored in. As energy bill payers discover what net zero is costing them, and as those costs increase, so support for the policies will likely decrease. At the end of the day, net zero will be delivered in this country only if the British people are prepared to pay for it, either in their bills or in higher taxes. The Secretary of State for Energy Security and Net Zero described net zero as a form of religion. Religious belief is all very well, but it does not pay the bills.
It was never sensible to sign a blank cheque to deliver net zero in a country that accounts for less than 1% of global emissions, and we certainly ought not to sign a blank cheque for some notion of global leadership. This House must never forget that the British people will decide what happens, whatever the politicians and the metropolitan elite think.
Lord Howell of Guildford (Con)
My Lords, I apologise for delaying the Front-Bench speakers a few minutes in their replies to what I regard as a really excellent report. In fact, I rate it the best one that has so far come from your Lordships’ House on the great energy transition.
In my brief intervention I will simply add one point. The report rightly explains that most of the funds for the great energy transition ahead will have to come from the private sector, which will have to do the heavy lifting. Governments may be strapped for cash—all Governments, not just this one, or any future one—but, as the report rightly says, there is certainly a huge amount of investment money around the world in both pension funds and sovereign wealth funds. Indeed, I declare an interest in advising one of the biggest funds, as in the register.
These funds will come here only if there are investible projects, and this applies acutely in the nuclear power field, which is central to our all-electric future. The present UK plan, as I understand it, is to build another mega-gigawatt plant at Sizewell in Suffolk, described as a replica of the unfinished and vastly overbudget one now being built at Hinkley Point C. This is just not very attractive for investors; even with the regulated asset-based idea, which piles the money on the consumer and taxpayer from the start, the attraction is not really there. The EPR design is anyway full of problems; even the French say that it is too complicated. The prize one that was supposed to work in China had to be partly closed, and others are full of difficulties. The taxpayer and the struggling consumer have to carry the full burden and a good deal of the risk.
Smaller new designs, which are becoming available and can be built much quicker off site, should right now be the absolute priority, as in many other countries. They could be highly attractive to investors and are ready to produce clean electricity from existing nuclear sites. Of course such sites will have the wiring already, which many other sites do not, and they can be ready before these risky and out-of-date white elephants are anywhere near finished, and well before the end of this decade. Therefore they will make a major contribution to our net-zero aims.
Please will my noble friend confirm that the Government are at least aware of those key facts before they mistakenly plunge ahead with Sizewell C, committing billions to it, which I understand could be very soon? Indeed, it would be nice if the opposition spokesmen could also confirm that they are aware of these realities, which so far seem to have escaped too many people.
Lord Teverson (LD)
My Lords, I also declare my interest: it is in a company called Aldustria Ltd, which is into energy storage. I absolutely agree with the noble Lord, Lord Frost, that there are many issues around energy storage, particularly in the long term, on which I know the Government have done a number of consultations.
I congratulate my noble friend Lady Kramer on her introduction to this report. She is absolutely right: it has taken far too long to get it to the Floor of the House. As the noble Viscount, Lord Chandos, said, there have been three Prime Ministers since the report came out. The only thing that I would say is that it has actually managed to get to the end of its process slightly quicker than the Government’s Energy Bill, which started in the same month that this report was published but has still to be completed. I hope that that will happen before the end of this month. That shows the urgency that the Government wanted to put into their energy strategy but did not, particularly on electricity and carbon capture and storage.
I shall come back on energy costs for a minute, in response to the noble Lord, Lord Frost. The noble Viscount, Lord Chandos, is absolutely right about 2050. It is not about reaching net zero that year—you have to get it all the way through. I do not think that methane was mentioned in the report—I may be wrong—but that is one area where there may be some quicker wins.
I absolutely agree with the noble Lord, Lord Turnbull, about Rough storage, although I think that only a small amount of that facility is contracted to the Government. Centrica is hanging on to the rest of it, and there is no guarantee that it will be there long term. That is a real vulnerability.
As for new gas and oil and, particularly, coal facilities, I do not see any UK Government banning exports of those products. I do not see that ever happening, which is why I do not think that there is any effect on our energy security or, indeed, on global pricing for those new openings.
I shall come back on demand reduction in a minute in response to the noble Baroness, Lady Bennett, as it is an important area. But I just say to the noble Baroness, Lady Noakes, that I came up as a traditional economist, and it always seemed to me that it was really important to cost the idea of externalities into actual pricing systems. With carbon emissions we have huge externalities that are not priced into market competition—and that is why there have to be differences.
I also say to the noble Baroness that, of course, there is a huge kickback at the moment to the Government on contracts for difference through the Low Carbon Contracts Company, whereby at the moment actual market prices are hugely higher than strike prices. I would be interested to understand from the Minister—
The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)
It is not a kickback to the Government—it is a kickback to the consumer.
Lord Teverson (LD)
Yes, exactly. The Minister corrects me. That is even more to the point. I think it has got to several billion pounds in terms of coming back into that sector working the other way, which probably exceeds now the green costs that there were. That is quite an optimistic look at that.
It seems to me that one real problem in this area—because the world has moved on since last July—is with those recent announcements that my noble friend went through from the Prime Minister. They probably did not have as big an effect as some people said, but they did drive a horse and carriage through our international reputation, as indeed did the coal decision in Cumbria. Our being seen as a global leader in this area, which the report was keen to emphasise, has been trashed to a large degree, and has been seen as such by allies such as America and the European Union.
I want to come back to those announcements, one of which was to abolish the Energy Efficiency Taskforce. The Minister was chair of that, and I understand that four meetings took place. Whether you look at security or at cost, the most secure energy is the energy that you do not need. The energy-efficiency side is important in that area, as well as cost. I would be interested to understand from the Minister why he was made redundant by the abolition of that committee. The UK should be a real leader, and really move in this area. The report asks for an energy demand reduction strategy, and that is really called for. It is not just around buildings, as the Government’s response said that it was; it is around a much broader area, including appliances and other interests.
One thing that has been emphasised during this debate is private investment, which it is clear is absolutely essential to deliver net zero. I am not pessimistic about this. Most private investment takes place to reduce costs, not to increase them. Companies do not invest to increase prices; they invest to reduce prices, and that is what we should aim for with the net-zero strategy.
One problem with the Prime Minister’s announcement, and all the other issues that have happened, is that we have a wobble with investor confidence—absolutely we do. Those messages that go out to industry and the investment sector say that we are no longer reliable on our government policy or on the foundation of confidence going forward. That has an even bigger effect when we have the Inflation Reduction Act in the United States and the EU green deal industrial plan on the other side of the channel. I would be interested to understand from the Minister when the Government will really respond to that huge financial challenge, which really prejudices how we can deliver net zero through the private sector in future.
I will make one or two further points, as I am sure the House will want to move on. The noble Baroness mentioned the UK Emissions Trading Scheme. I have been very hopeful—not because I am pro-European but because of liquidity and various other areas—that there should be a tie-up between the UK Emissions Trading Scheme and the EU equivalent. I understood that that was a government objective, but now we have a huge divergence in prices. The UK ETS a year ago was about £100 per carbon tonne; it is now down below £40. In the EU, it was around €100 per tonne a year ago but is now down to about €80. A huge difference has opened up. I would be interested to hear the Minister’s reaction on how the carbon border adjustment mechanism will affect that, as Europe starts to develop it over the next few years. That price signal is so important in terms of taxation and disappearing incentives for investment in our economy.
I am glad to see the noble Lord, Lord West, is here, because one of the key issues in energy security at the moment is defence, which has not been mentioned in this debate. In Finland, we have seen potential interference with the explosion of one of its energy pipelines and we have seen Nord Stream 1 and 2 destroyed. We know from our intelligence that the Russian Federation is keeping a very close eye on our undersea energy and communication networks. The Minister may not have an answer to this, but it is one of our major concerns in energy security as we move forward and have more interconnectors offshore. I am sure he agrees that this is a major thing we must look at.
Finally, coming back to consumers, the energy companies and Ofgem estimate that, as we reach the end of summer and enter winter and higher bills, the outstanding energy bills from consumers will be about £2.6 billion. Are the Government happy with that? Do they think it is sustainable for low-income families? Do they intend to do anything about it? This is probably the biggest challenge of all. Although the noble Lord, Lord Frost, talked about the importance of gas, which will be important for many years, the gas price has driven inflation and the high costs to families of keeping warm. It has led to inflation, which has led to the failure of those offshore wind projects. It is important that we restart that, but the problem is not the technology and the price coming down in real terms; the problem is inflation. What will happen to families over this winter?
Lord Lennie (Lab)
My Lords, I thank the noble Baroness, Lady Kramer, and, through her, the noble Lord, Lord Bridges, and other members of the Economic Affairs Committee for producing this weighty report. July 2022 was also when the Government first announced their intention to legislate for the country’s future energy needs in the Energy Bill. The Energy Bill has now expanded to some 400-plus pages, has still not become an Act of Parliament and is due for further consideration by the other place later this week.
Lord Callanan (Con)
It would not if the Government acted as Parliament recommended.
Lord Lennie (Lab)
There is a process to go through. The amendments we made were to the benefit of the Bill rather than to take away from it.
There is some crossover between the Economic Affairs Committee report and the legislation but, sadly, nowhere near enough. The starting point of this report was back in February 2022, when the Economic Affairs Committee launched an inquiry into how the Government could support investment in UK energy to achieve greater security of supply, improve affordability and meet the UK’s net-zero targets.
The committee considered how the Government planned to achieve the following two separate but related objectives. First was the commitment in law to achieve net zero by 2050 alongside the target to decarbonise the system by 2035. The committee considered how this target might be achieved while ensuring the UK’s energy supply was “affordable and reliable”. It argued that encouraging private sector investment was the key to achieving net zero. However, the committee said there was
“a gap between the Government’s ambitions and the practical policy that is needed to provide confidence and clear market signals to investors”.
The second was the Government’s plans to mitigate the effect of rising energy prices exacerbated by Russia’s appalling invasion of Ukraine in 2022.
The report produced by the committee recommended that the Government should take the following measures over the next three to five years—now two to four years. First, they should publish a net-zero delivery plan which would detail how the UK could achieve net zero in an orderly way. Secondly, they should publish an energy demand reduction strategy which would include measures to increase incentives for investment in energy efficiency measures for buildings and to support the development of resilient supply chains and workforce skills—as the noble Lord, Lord Teverson, pointed out, this has not happened. Thirdly, they should increase the deployment of renewable energy sources to reduce the UK’s dependence on gas markets, including onshore wind, which it describes as
“one of the cheapest and fastest ways to increase renewable energy generation”,
despite the reservations of the noble Lord, Lord Frost. Fourthly, they should maintain existing energy generation in the immediate future while extending the life of nuclear power stations over coal power stations, as this would result in lower carbon emissions. Finally, they should seek to reach agreement with other European countries to manage energy supply emergencies. Have any of these measures been taken on board?
The committee also recommended that the Government should take action to increase investor confidence to make more private capital available to support the transition to net zero, by setting out a cost analysis of their targets to achieve 24 gigawatts of nuclear capacity. As the noble Baroness, Lady Kramer, pointed out, this figure is more than double the capacity assumed by the Climate Change Committee. Can the Minister explain the variance between the two? It also recommended they provide more detail on the capacity, timeframes and expected costs of increasing long-duration energy storage, outline the market structures and mechanisms that would be used to support increased hydrogen production and support carbon capture and storage by fulfilling their commitment to develop four low-carbon industrial clusters. They should also design “market models” to provide information to investors on the types of technology required, to give potential investors greater confidence in the long-term viability of carbon capture and storage. Is there any sign of this happening?
Since the report was published, a number of government changes have affected energy policy. The Energy Bill was introduced in 2022 under Prime Minister Boris Johnson. It included measures intended to leverage investment in clean technologies, protect customers and maintain the safety, security and resilience of the energy system. It reached Committee on 7 September 2022 and was thereafter paused by the new Prime Minister, Liz Truss. Following Liz Truss’s resignation, in December 2022 Committee started again and, under Prime Minister Rishi Sunak, the House of Commons is now scheduled to consider Lords amendments on 18 October. In February 2023, BEIS was replaced, with responsibility for energy policy transferred to the Department for Energy Security and Net Zero. Grant Shapps served as Secretary of State for Energy from February to 31 August; currently, the Secretary of State is Claire Coutinho, but for how long is anyone’s guess.
Chris Skidmore published his review Mission Zero: Independent Review of Net Zero on 13 January 2023. It concluded that the UK was not on track to meet all its targets towards achieving net zero and stated that the Government needed to do more to make the most of the economic opportunities arising from the transition to net zero. The Government have published a series of policy updates on their plans. In March 2023, Powering Up Britain was Secretary of State Grant Shapps’s launch of the new Government’s energy strategy. In the same month, Mobilising Green Investment: 2023 Green Finance Strategy updated the previous green strategy. In this, the Government committed to commissioning an
“industry-led … review into how the UK can enhance our position and become the best place in the world for raising transition capital”.
Has it happened?
On 20 September 2023, Rishi Sunak, still the PM, gave a speech in which he announced some changes to government policy on achieving net zero. While working towards meeting their overall 2050 net-zero target, he said that policies including the ending of the sale of petrol and diesel cars and vans, plus the sale of new gas boilers, would be pushed back by five years to 2035. How does this help achieve net zero? Its effect has been to deter investment by undermining the commitment and consistency required by business, as the noble Lord, Lord Teverson, and the noble Baroness, Lady Kramer, said.
This is the framework in which the Economic Affairs Committee report is being considered. Of its 38 recommendations, only a small handful have been taken forward. However, the Government’s initiatives to secure private capital by certainty and leadership are woefully inadequate. In the meantime, more changes have been confirmed. Alok Sharma, chair of COP 26, is standing down. Chris Skidmore is not going to contest his seat in the next general election. The offshore wind auction attracted no bids because the strike price was wrong.
Tony Blair once said:
“I’ve not got a reverse gear”.
It is a pity the same cannot be said of Rishi Sunak. The report rightly states that the Government cannot be expected to accurately predict what is going to happen in the future. Surely, though, we can expect more than what is currently on offer.
Labour would establish Great British Energy. It would invest in order that Britain can lead the world in carbon-free energy and technologies. Labour will ensure that we have the grid we need to rewire our country. Our public investment will stimulate private investment to bring prosperity to every part of Britain.
Lord Callanan (Con)
First, I add my thanks to the noble Baroness, Lady Kramer, for securing this debate, as well as thanking noble Lords for their insightful contributions.
It was a bit rich for the noble Lord, Lord Lennie, to criticise us for not getting the Energy Bill on to the statute book. The reason we have not done that is because the Opposition—despite saying that they support it—have supported largely irrelevant and superfluous amendments to the Bill. If the noble Lord is so keen to get it on to the statute book, he has the opportunity to prove it next week when it will come back to this House. I hope the Opposition will agree with the passage of the Bill, rather than just saying that they support it. We will then be able to get it on to the statute book and proceed to the secondary legislation, which will result from the primary powers, on things such as hydrogen, CCUS, et cetera.
Lord Lennie (Lab)
I think it is a bit rich for the Minister to say that the Opposition parties are responsible for the delay to the Energy Bill. It was paused by the Government for three or four months, when they went absolutely silent. We were knocking on the door asking what was happening with the Energy Bill, but nothing was forthcoming.
Lord Callanan (Con)
We would have had the Energy Bill on the statute book by now if it was not for the amendments the Opposition had supported. My point remains.
As the Prime Minister made clear in his recent speech, it is extremely important that we chart the fairest credible path to net zero, bringing people with us through democratic debate. As several noble Lords have mentioned, we have shifted to less drastic targets on phasing out fossil fuel cars and boilers because of the potential for sharp upfront costs to families already struggling with the cost of living.
The 2035 target for decarbonising the power sector, however, remains in place. Why is that? It is not just because this a critical bridge to net zero by 2050—which, I remind the House, we have a legal obligation to deliver —but, in response to my noble friend Lady Noakes, because wind and solar are the cheapest forms of electricity, which is also the reason why I, as a fiscal conservative, am in favour of them.
Against that, and as the noble Lord, Lord Turnbull, noted, international fossil fuel markets are volatile as they are driven by geopolitics, and our own reserves are now declining. Yes, the price of offshore wind has now risen from a historic low, but it remains well below that of gas, nuclear or gas with CCUS. In response to my noble friend Lady Noakes, we are going hard for clean electricity because it is not in tension with cheap electricity; nor is there tension in such electricity having the security of being produced domestically. It is, if you like, electricity with a UK flag plastered upon it.
The UK energy system in 2035 and beyond is going to be a mixture of tried and trusted technology and new innovation. We have connected approximately 40 giga- watts of renewable electricity—primarily wind and solar—to the grid since 2010. The point made by the noble Lord, Lord Teverson, is completely valid: with the high price of electricity, driven primarily by gas, the vast majority of those contracts for difference are now paying back into the system and subsidising consumer bills. It is not the case that the amount of renewables we have on the grid is contributing to the high price. It is driven entirely by international gas prices, and the problem is that we do not have enough of it connected to the grid. If we had more, prices would be lower.
On the nuclear side, Hinkley Point C and Sizewell C are under development, and we have set up Great British Nuclear, whose first objective is to support small modular reactor development, which my noble friend Lord Howell will, no doubt, be pleased to hear.
My noble friend Lord Frost raised an issue about wind and solar. Wind and solar are clean, cheap and homegrown. Of course, my noble friend is right to say that they currently rely on unabated gas as back-up. UK gas usage has declined in the past decade as wind power has proportionately increased. Of course, it is true to say that we need a portfolio of technologies to replace unabated gas, including power CCUS; hydrogen; short- and long-duration storage; renewables, such as tidal and geothermal; interconnection; energy efficiency; and demand side flexibility. We need all these technologies. My noble friend Lord Frost and the noble Lord, Lord Teverson, will be pleased to hear that there is currently nearly 38 gigawatts of electricity storage in its various forms in the planning pipeline.
Resilience comes from having diversified sources of supply and strong relationships with trusted partners and allies. We will work closely with the EU and bilaterally on both short- and long-term energy security. As the noble Viscount, Lord Chandos, will be pleased to hear, I was delighted recently to launch a UK-German hydrogen partnership with German State Secretary Nimmermann, where we are working on a broader energy and climate partnership.
Of course, investing in energy security is about demand as well as supply. We have made great progress in upgrading what is probably the oldest housing stock in the world. Despite what the noble Baroness, Lady Bennett, would have us believe, residential emissions in this country have fallen by something like 31% since 2010; that is the second biggest improvement in the G20.
The noble Lord, Lord Teverson, was concerned about the decision to discontinue the Energy Efficiency Taskforce. The body was formed very much around Dame Alison Rose as my co-chairman and, without her, we believed it was better to streamline its function into existing work. We remain extremely grateful to the members of the task force, who produced some excellent work and recommendations; I continue to meet them regularly and we will continue to listen to their wise and trusted advice on the importance of energy efficiency.
The noble Lord, Lord Lennie, mentioned demand management. I can inform the noble Lord that the National Grid is planning to run its demand flexibility service again this winter—subject to Ofgem approval—as it proved so successful last winter.
The noble Lord, Lord Teverson, asked about the UK ETS, and that remains a cornerstone of our climate policy. It remains the fact, though, that the price is set as a market mechanism. The UK ETS is a separate market to the EU ETS so it is possible, as we have seen, that prices will fluctuate and differ, although both do have similar levels of ambition. The noble Lord will have noted that in the summer, we decreased the cap and aligned it with our net-zero ambitions. This means that the number of permits we issue in the future will continue to decline in line with our net-zero ambitions.
A number of noble Lords raised the important issue of nuclear, and our current nuclear fleet is of course ageing. While the Government have no direct involvement in the decision to expand lifespans, we are pleased that extensions are happening where the technology is performing above original expectations, and I am pleased that the noble Baroness, Lady Kramer, is in agreement on this point. On new build, we are continuing towards taking Sizewell C to final investment decision this Parliament.
The noble Baroness, Lady Kramer, did however note her personal opposition to Rosebank, as did a number of other noble Lords. Notwithstanding the shift towards renewables, it is important to remember the total UK energy use in 2022 was still 77% oil and gas. Following extensive scrutiny by regulators, including environmental impact assessments and a public consultation, we have granted new licences, including for Rosebank. As the noble Lord, Lord Turnbull, alluded to, domestically produced gas is around four times cleaner than imported liquid natural gas. Oil and gas production also provides around £17 billion to the UK economy each year and supports around 200,000 jobs.
Let me address directly the point made by the noble Baroness, Lady Bennett. New licences will merely slow the already inbuilt decline in UK production levels, rather than see them increase above current levels. Even with continued exploration and development, oil and gas production is expected to decline by 7% per year. This decline is faster than the average global decline needed to align with the UN 1.5 degrees centigrade pathway. Even with new licences, the amount of oil and gas produced in the UK sector will continue to go down as these fields come to their natural end.
I will deal with the point on the AR5 auction round. It was successful in broadening contracts to both tidal and geothermal projects, but, of course, we were disappointed by the lack of offshore wind bids. That was because developers were experiencing unprecedented economic conditions. However, as we have now moved to an annual process, in less than a year AR6 will open, and we will of course incorporate the lessons learned and ensure that AR6 reflects the most recent evidence.
As stated, we remain committed to the challenging but deliverable target of decarbonising the power sector by 2035, while at the same time, and most importantly, maintaining security of supply, which is absolutely critical. The Government are supporting investment, innovation and regulatory reform across the full range of technologies that will need to be developed and deployed in concert.
Baroness Kramer (LD)
My Lords, all that remains is for me to say thank you to all of those who participated in this debate. We have heard a very wide range of views and I think anyone listening to this range of speeches, including the Minister’s, would turn around and say “Yes, energy strategy and fast, energy demand reduction strategy and fast, and it sounds like we need infrastructure far more rapidly than we had previously planned”. I hope that those are the lessons that are taken away by everybody who is here, and I thank everyone for participating in this report and taking note of its content.