Lord McCabe
To ask His Majesty’s Government what plans they have to review the effect of the marginal pricing structure on the cost of electricity for domestic consumers.
The Minister of State, Department for Energy Security and Net Zero (Lord Whitehead) (Lab)
Delivering lower bills and a secure energy supply for working families and businesses is at the heart of the Government’s sprint toward homegrown clean energy. Marginal cost pricing has historically incentivised the cheapest forms of energy to provide as much power as possible. That worked well when the competition was between fossil fuel producers, but less well when there are many cheaper bids from renewable sources for power supply but still the price can be set by more expensive and volatile gas. Accelerating the development of renewable generation, as we are now through clean power 2030, will progressively reduce to a residuum the amount of time that gas sets the price.
Lord McCabe (Lab)
I am grateful for that Answer and I welcome the direction of travel on energy security and price stability, but do we not need to work harder and faster to decouple gas from electricity prices? Is it not true that gas accounts for about 30% of electricity generating but that the effect of gas on the price mechanism is responsible for the huge bills landing on households and businesses up and down the country?
Lord Whitehead (Lab)
My noble friend is absolutely right. Although gas accounts for only 30% or so of the market, at the moment it sets the price over 60% of the time with marginal cost pricing arrangements. It is right that we need to go faster and further. Indeed, today the Government have announced plans, among many other things, to ensure that the element of the renewable input into the system—on renewables obligations rather than fixed-price contracts for difference—can be moved over to that latter category as soon as possible, thereby bearing down on the amount of time that gas sets the price in the market.
Earl Russell (LD)
My Lords, we cannot afford continued fossil fuel dependency. We welcome the move from legacy contracts to cheaper ones. Indeed, my party proposed similar over a year ago. I support the Greenpeace Power Shift RAB model to remove gas, the most expensive component, from the market. Are Ministers still looking at these proposals, and will they take them forward? If not, why not? Together these proposals fall short, and that is my worry here. Despite the way they have been trailed, they will not deliver the savings we require.
Lord Whitehead (Lab)
The Government are looking actively at many different ways of going further and faster as far as the green energy revolution is concerned. Indeed, they are actively looking at the Greenpeace and Stonehaven report on not only delinking but strategic reserves for gas in future. My personal view is that what they are proposing is a little early in the cycle but, nevertheless, could be an important element later on, in how the system stabilises itself once it is mainly renewables and low carbon.
Lord Redwood (Con)
Is the quickest way to get energy prices down not to cut some of the rip-off taxes that the Government impose? How does imposing an extra windfall tax help?
Lord Whitehead (Lab)
Imposing an extra windfall tax, on those elements of the system that are within the renewables orbit but outside the CfD arrangements, takes away the excess profits that those elements make as a result of being aligned with gas in charging those volatile prices. So it is a very sensible thing to do, to make sure that excess profits are not taken from consumers but instead reside with them as lower prices.
Lord Vaux of Harrowden (CB)
To follow up on that, can the Minister explain how a windfall tax paid to the Treasury ends up reducing people’s bills?
Lord Whitehead (Lab)
The effect of the windfall tax is, essentially, to start returning some of those excessive bill contributions back to bill payers so that their overall bills are less than they otherwise would be.
Baroness McIntosh of Pickering (Con)
My Lords, does the Minister not agree that Denmark—where renewables, on which Denmark excels, are highly developed—is the largest producer of oil and gas in the European Union? We will continue to need fossil fuels, in addition to renewables, going forward.
Lord Whitehead (Lab)
The reference that the noble Baroness makes to Denmark is an interesting one, inasmuch as the Danish system is wholly integrated between renewables, heat and power of different kinds—particularly district heating and various such things, which can be used in conjunction with other forms of energy to provide a balanced overall system. It is true that Denmark continues to produce oil and gas but also that Denmark is, along with the UK, looking at methods of making sure that relates to production for the future rather than exploration.
Lord Grantchester (Lab)
My Lords, this is one aspect of the high cost of electricity in the UK. The wider question it raises is: what plans do the Government have to reduce the cost of electricity? On the electrification of the energy mix of the future, which is among the many answers that my noble friend the Minister may wish to give, do the Government need to consider bringing forward a strategic national plan with a focus on the lessons to be learned from this present crisis?
Lord Whitehead (Lab)
I thank my noble friend for that question, because he has, remarkably, just anticipated the development of the strategic spatial energy plan and a reformed national pricing delivery plan, both of which came out this morning. Both plans address exactly the longer-term balance arrangements as far as electricity is concerned, particularly how prices can be the lowest possible for the deployment of electricity and gas resources across the country.
Lord Teverson (LD)
My Lords, the most effective way of bringing down household energy bills is through the energy efficiency of homes. I welcome the Government’s move to apply the future homes standard, which will bring up energy efficiency, but they are not going to implement it until 2028—before which, some 100,000 or more homes will be built inefficiently. Can the Government please bring this forward, at least to 2027?
Lord Whitehead (Lab)
I thank the noble Lord for that question. I cannot stand here and guarantee that that move will be brought forward by one year, as he suggests. It is a very sound idea. The future homes standard, which is now in place, is instead of the net-zero low-carbon standards that should have been implemented about 15 years ago, if the previous Government had not thrown them out. We are catching back up, as far as possible, and making sure we can get that done in good order.
Lord Moynihan (Con)
My Lords, by our doubling down on intermittent renewable wind and imported Chinese solar, as the Secretary of State announced this morning, does the Minister agree that while the wholesale price link to gas and electricity constitutes, as he said, only some 30% of the consumer price, the main culprits of ever-escalating industrial and domestic prices are the Government’s green levies, the taxes and the system costs, which constitute the remaining 70% and are increasing month by month? When will the Government address these costs?
Lord Whitehead (Lab)
Of course, the Government have addressed those costs, particularly in the recent move to take elements of the levies away from levy arrangements and into the general Exchequer. That is part of the £150 off energy bills that the Government have recently reported. The noble Lord is absolutely right about the effect of levies on prices, but I hope he will also accept that that is exactly what the Government are doing at the moment: bringing prices down for the consumer by transferring how those levies work for the future.
The Earl of Clancarty (CB)
My Lords, it is good news that the Government have enabled standing charges to be reduced, but should standing charges not be got rid of completely? They are basically daylight robbery.
Lord Whitehead (Lab)
The noble Earl treads a fine distinction between the possible daylight robbery of standing charges and the fact that some charges need to be levied collectively because of the various fixed costs that the system has, which have to be contributed to in order to deliver the service to individual consumers. How you charge those standing charges is a matter of considerable debate and something that the Government are looking at. Whether, for example, you charge them as an overall fixed sum or as a sum per household, depending on its energy bills, is a matter of considerable debate at the moment. The idea that standing charges should relate more exactly to what standing charges should be for in the first place is a point well made.