Electricity Market Reform

Lord Marland Excerpts

Tuesday 12th July 2011 Lords Chamber

[The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Lord Marland)]

My Lords, with the leave of the House, I shall now repeat a Statement made in the other place by my right honourable friend the Secretary of State for Energy and Climate Change. The Statement is as follows.

“With permission, Mr Speaker, I would like to make a Statement on the reform of the electricity market.

Since privatisation in 1990, our electricity market has served us well, delivering reliable, affordable electricity, but in the years ahead we face unprecedented challenges. The existing market was not designed to meet them. Over the next decade, around a quarter of our existing power stations will close, threatening the security of our energy supplies. Some £110 billion of investment is needed to replace them and to upgrade the grid. That is twice the rate of investment of the last decade and the equivalent of 20 new power stations. At the same time, demand for electricity could double over the next 40 years as the population increases and we increasingly turn to electricity for heat and transport. We also face ambitious carbon emission and renewable energy targets, as we seek to build a cleaner energy future for Britain and the world.

In order to achieve our goals we need to take decisive action now to increase low-carbon electricity generation, including nuclear, renewable energy and carbon capture and storage. None of these challenges can be met for free. We will have to pay to secure reliable, clean electricity for the future and we cannot ignore the long-term trends in electricity prices. Increases in wholesale costs and in the carbon price are likely to lead to higher bills in the future, even without factoring in the huge investment needed in new infrastructure. So it is vital that we put in place market arrangements that deliver this investment as cost-effectively as possible. The current electricity market is simply not up to the job. It cannot deliver investment at the scale and the pace we need.

Without reform, our reserve capacity—the power plants we can call on when demand surges—will fall to uncomfortable levels. We would face a much higher risk of blackouts by the end of this decade. We would also be locked into a worrying reliance on fossil fuel imports, putting us at risk of rising and volatile prices. Consumers could end up paying even more. That is why I am putting before the House today a series of measures to reform the electricity market, diversifying our generation mix and boosting investment in secure, sustainable and home-grown, low-carbon technologies. There are five key elements to our reforms.

First, the Chancellor announced in the Budget a new carbon price floor to put a fairer price on carbon, reduce uncertainty for investors and provide a stronger incentive to invest in low-carbon generation now.

Secondly, we will send a clearer message that low-carbon electricity is a key part of our future energy mix. We will introduce a new system of long-term contracts in order to remove uncertainty for both investors and consumers and to make low-carbon energy more attractive. Contracts for difference will be introduced for all forms of low-carbon generation, lowering the cost of capital and allowing clean technologies with high up-front and low long-run costs to compete fairly against traditional unabated fossil fuels. This will build on the carbon price floor, providing the additional clarity and certainty that investors need.

Thirdly, we will introduce an emissions performance standard to send a clear regulatory signal on the amount of carbon new fossil-fuel power stations can emit. This will reinforce the requirement that no new coal-fired power stations are built without carbon capture and storage, while ensuring that vital investment in gas can take place. CCS is a key part of our plan to decarbonise electricity generation. It is the only technology that can potentially reduce emissions from fossil-fuel-fired power stations by as much as 90 per cent.

Fourthly, to ensure security of supply in the future we will introduce a new contracting framework for capacity, changing the way we secure our back-up electricity. This capacity mechanism could mean centrally procuring capacity which is set aside from the market and used only when it is needed, or it could mean a market-wide mechanism, in which all providers offering reliable capacity are rewarded. Under both options, we plan to ensure fair and equivalent treatment between all the ways of achieving what we want—demand response, storage, interconnection with our European partners and extra generation. Shifting or cutting demand for electricity is likely to be more cost-effective than simply building more and more power plants. It complements our work to drive down demand through energy efficiency measures such as the Green Deal and smart meters.

Fifthly, we will put in place transitional arrangements to ensure that there is no hiatus in investment while the new system is being set up, and we will create new institutional arrangements to deliver the reform package.

Together, these reforms will tackle the immense challenges facing the electricity market. They will put in place the framework to deliver the capacity and demand-side response we need in order to guarantee future security of supply. They will encourage investment in proven low-carbon generation technologies and they will give investors confidence that there will be a market for electricity generated with commercial carbon capture and storage, confidence that will drive investment in both demonstration and commercial CCS plants.

Six energy companies supply around 99 per cent of customers in the UK. Alongside action by Ofgem to improve liquidity, these reforms will boost competition within the market and make the UK a magnet for low-carbon investment, generating jobs and growth. This will help energy-intensive industries. However, we are also committed to bringing forward a package of measures to ensure our continued international competitiveness.

Finally, the reforms I have set out today will achieve our aims at least cost to the consumer, with bills for households and businesses likely to be lower and less volatile over the period up to 2030 than if we had left this market as it is. They will enable us to build a flexible, responsive electricity system, one powered by a diverse and secure range of low-carbon sources en route to a cleaner, greener future, insuring us against fossil fuel price shocks, ending 25 years of policy dithering and keeping the lights on and the bills down.

Alongside the electricity market reforms, I am also publishing today the renewables road map. For too long, discussion about renewable energy has focused on barriers. Now, for the first time, we have set out a detailed step-by-step plan to overcome those obstacles. The road map sets out a comprehensive action plan to accelerate the UK’s deployment and use of renewable energy. It puts us on a path to increase our renewable energy consumption fourfold by 2020 while driving down the cost over time. Growth on that kind of scale will be challenging, but necessary. The road map identifies eight technologies that have the greatest potential for the UK, such as offshore wind, where we have abundant natural resource and already have the world’s largest market.

Subject to further value-for-money assessment, the department is setting aside up to £30 million over the next four years to support technology development programmes to improve the efficiency and reduce the costs of offshore wind. With industry, we are setting up a task force to drive the work to achieve cost-competitive offshore wind. The recently published microgeneration strategy also outlines the actions that the Government are taking to tackle the non-financial barriers which could prevent microgeneration from realising its full potential. Together, the renewables road map and the microgeneration strategy will reduce costs for consumers and enable mature renewables to compete against other low-carbon technologies in the longer term.

I am also publishing today the final report of the Ofgem review. The review reaffirms the Government’s commitment to a strong, independent regulator, able to give confidence to investors, protect consumers and help meet our energy and climate targets. The summary of conclusions was published in May; this final report provides further detail on how the Government will seek to strengthen the regulatory framework.

The package of reforms that I have announced today will yield the biggest transformation of the market since privatisation. They will create an enduring framework for future investment and secure our electricity supplies for the future. They will provide our consumers with the best deal possible, help us meet our ambitious carbon targets and put us at the forefront of low-carbon technological development, ready to lead the world in the next energy revolution. I commend the Statement to the House”.

My Lords, that concludes the Statement.

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[Lord Marland]

My Lords, I am very grateful to the noble Baroness for her comments. She rightly said that meeting the challenge is very difficult. The previous Government found it very difficult. I am happy to say that we have played our modest part by encouraging six new nuclear power stations, setting out a road map and introducing a series of measures that will regenerate the energy and electricity supply market—which, as I said earlier, has not happened for 20 years. We have inherited a legacy of inactivity. It is a major structural problem; it is not one that we welcome, but we in this Government intend to get our hands on it and deal with it.

I note the noble Baroness’s point about nuclear subsidy. I shall continue to remind her that we have always said there will be no subsidy for nuclear other than that available to wider technologies. The wider technologies obtain a subsidy and nuclear is now part of that.

On the noble Baroness’s comment about bills, it is fair to say that bills have risen and are going to rise. I go to my petrol pump and find it costs me £1.33 to fill my car—no, I am sorry, it costs me £1.33 per litre. That is more than £1.33 to fill the car—it is about £1,033. Bills are rising outside our control because we are reliant on fossil fuels and oil coming from different shores, rather than the wonderful security in which a number of noble Lords, including my noble friend Lord Lawson, were able to bathe—an oil supply from our own sources. When you invest in a new infrastructure which needs £110 billion there will be bill increases on the horizon. Do we want to do this? Of course we do not—we want to keep bills as low as possible and to reduce them—and the plans we have set out will enable us to recover that position and to not see the same exponential rises that we have had of late.

The noble Baroness referred to feed-in tariffs, doubtless with the solar photo voltaic debate that will take place on Thursday in mind. Do we think it right that the Government should prioritise billions of pounds to support an industry which is not necessarily climatically suited to this country? The Government have to make tough decisions; they have to establish value for money for the taxpayer when deciding where to allocate funds to support developing technologies. The current Government, of which I am proud to be part, do not consider that this technology requires the same degree of support. The industry is becoming mature and the cost of equipment is coming down dramatically and we have therefore taken a view on it.

The noble Baroness referred to RWE. I believe that RWE is less certain of its future in its home country than it is here. It has various jurisdictional issues in terms of the future of its own nuclear industry that present it with far-reaching problems beyond our shores.

The Government have committed to the green investment bank and we have allocated funds to it. You cannot just click your fingers and establish a funding bank overnight, but in 12 months we have got to grips with the issue and it is well on the path.

We have consulted on the issue of EPS but we have not changed fundamentally what we set out to do. It is important that we have standards for companies that do not comply with a reduced performance format. That is the long-stop part of regulation which will set a clear regulatory path of where people can perform in energy supply.

Clearly we need to take into consideration the energy-intensive industries and we are consulting with them at the moment. We will announce a package of support for them to encourage them towards lower carbon usage. They are major employers in the country and major international exporters. It is important that we recognise that in any regulation we introduce, and at the end of the year we will announce a package of measures to support that.

I hope that that explanation goes a long way towards answering a number of the excellent points made by the noble Baroness. I have a feeling that there will be some more excellent points in a moment.

[Earl Attlee]

I remind the House of the benefits of short questions in order to allow everyone who wants to get in an opportunity to do so.

[Lord Lawson of Blaby]

My Lords, this is a most extraordinary Alice through the Looking Glass Statement. Is my noble friend the Minister not aware that almost every single assertion in it is the precise reverse of the truth? Is he not aware that if renewable energy was genuinely cheaper than conventional carbon-based energy, there would be no need for this plethora of measures? Is he not aware that every single energy expert, from Ofgem to all the independent experts in the universities, Professor Dieter Helm and so on, has said that the Government’s policies will lead to a substantial increase in electricity prices?

My noble friend mentioned 2030. Is he not aware that the Treasury has estimated that the carbon floor price alone will lead to an increase in electricity prices of between 60 and 70 per cent by 2030, to the great detriment of the consumer, British industry and the British economy, which—goodness knows—is in a fragile condition as it is? On this issue, the Government’s policies are not the solution but the problem.

[Lord Marland]

It is always a joy to hear my noble friend—as indeed he is. Let me quote him back a figure on prices. Is he not aware that electricity prices went up 18 per cent in one week? Forget 60 per cent in the time span he is talking about; they have gone up 18 per cent in one week. Why? Because we have been reliant on fossil fuels imported from other countries, with no control over security of supply.

With due deference to his great knowledge and to his great achievements as an Energy Minister and in the Treasury, he must be aware that there has been no investment in the energy infrastructure of this country in the past 20 years. The Government of which he was part and the previous Government were part of that. He must at least give credit for the fact that we are about to embark upon a massive investment and that, in order to establish an investment, you have to set out a pathway on which people have clarity for their investment.

My noble friend has quoted various institutions to me, and I would like to make him aware that we have consulted and discussed this with every energy supplier in the country and with a wide range of people. By and large, as much as one can possibly tell, this has been universally applauded by the industry and those who are seeking to invest. We may be proven wrong but, at the moment, it is all looking quite good.

[Lord O'Neill of Clackmannan]

The Minister has to take some credit for making another stab at market reform. It is not the first one for 20 years; there were two in the late 1990s—the NETA and BETTA reforms—so he is wrong to say that nothing has taken place in this matter. However, those reforms are now out of date. We need reassurance for investors and I think that, to an extent, we will get that from this document. However, I am not sure whether the social dimension and the cost to the consumer will necessarily be given equal weight.

The emission performance standards rely heavily on carbon capture and storage being realised—taken out of the laboratory, on to the factory floor, produced and then adapted for use in power stations with turbines in excess of 400 megawatts—but that seems to be a long way away. I worry that, come 2015 when we have the large plant directive, we will deny ourselves access to coal-fired power stations and will not have CCS available by that time. We could, therefore, well have a dash for gas on the scale that we had in the 1990s, with all the price implications that the Minister has already stated. When does the Minister expect carbon capture and storage to be available to British power generators, and particularly to the coal-fired industries? Unless we get that assurance, this will be, in large measure, a pipe-dream of the Government. I say that more in sorrow than in anger. We need to have a clearer indication of when we are likely to get carbon capture and storage. My inclination is that it will not come before 2020 at the earliest.

[Lord Marland]

The noble Lord, Lord O’Neill of Clackmannan, is an expert in his field. He also knows that I am responsible at the moment for leading the negotiation on carbon capture and storage. I am delighted to make the Statement in your Lordships’ House because it withdrew me from the negotiation process where we are in something called lock-in at the moment. I will not venture to suggest the outcome of the negotiations. They are extremely determined and it is a very complex programme. At the moment, we have three energy providers and me in one room at different times trying to bottom out where we can get to. I have been set the task of achieving this in operation by 2016. We may or may not get there. I am not going to predict one way or the other because it is a quantum leap. We must not underestimate the extent of that.

The noble Lord is quite right that a number of our energy policies are predicated on carbon capture and storage—but by no means all of it. The fact is that the EPS provides for gas. As my noble friend Lord Lawson would ask me to say, gas is fundamental to the future. I completely support his view on that. It is much less carbon intensive, will be fundamental to our electricity generation going forward and will be a large proportion of it.

[Lord Teverson]

My Lords, I generally welcome this Statement and the reforms that are there, in two areas particularly. We have often said in the House that if we had a proper carbon price that managed, in the jargon, to internalise the externalities of the cost of carbon we could then just let the market get on with it. Unfortunately, the EU ETS has not managed to deliver on that sufficiently. I understand that we only have a carbon price floor here for electricity generators. At least that is a move in that way.

I also particularly welcome the emissions performance standard. I have argued for that for ages and could never understand why, if we have emissions standards for cars and various other implements that we buy, we do not have them for the largest energy users such as power stations as well. I am not so concerned by a short-term dash for gas as long as that supply is diverse rather than concentrated in terms of our energy security.

I want to ask the Minister two things. He is absolutely right that the real risk to pricing is fossil fuels but it is also to a degree market concentration. How will these reforms make sure that there is less concentration of market power in the energy industry and how are we going to make sure that there are new entrants that can grow substantially to challenge that existing power? In terms of the market mechanisms, is he confident that there will be enough liquidity in the markets to make sure that these contracts for difference and that whole mechanism will work, so that we are able to deliver the policy objectives as he wants?

[Lord Marland]

My noble friend Lord Teverson has always asked the apposite question. First, we want to get away from the language of a “dash for gas”. Gas will be fundamentally important. We are not dashing for it. We have to make sure that we separate the price of oil and gas. Gas is now a very competitive energy product, as we have noticed in the USA where shale gas has been discovered. We do not want to call it a dash for gas. It is long-term support for gas.

As to the market mechanism, Ofgem will be tasked with bringing liquidity into the market as the regulator. It has got to show some teeth in generating regulation. You get there by people generating their own electricity and feeding into the market on the one hand, and on the other requiring less from the electricity providers by having energy-saving products such as the Green Deal and smart meters—part of the programme that we have been pretty unified in wanting to adopt.

[Lord Jenkin of Roding]

My Lords, I will be quite short but can my noble friend answer one or two questions? First, we have waited a long time for this Statement. As I understand it, the reforms will require legislation. When are we likely to see the Bill? Secondly, he referred to the various forms of energy generation but I am a bit disappointed that we have in this White Paper a framework for renewables when we also need a framework for nuclear—my noble friend will realise that the Select Committee is currently looking at this. While I welcome the regular statement that is put out by Ministers on the importance of nuclear, there is huge doubt at the moment about what is going to happen after what they call the interim date of 2025. This is certainly affecting the idea of any investment for the future.

Finally, my noble friend referred to the need for new institutions to administer the FIT with contracts for difference, and also the new capacity payments. Can he give us a little more indication of what form those institutions might take? They are clearly going to perform a very important role in the new market structure that the White Paper foreshadows.

[Lord Marland]

As ever, the noble Lord, Lord Jenkin, knows the subject. I am slightly disappointed that he does not believe that there is a nuclear framework. We announced that there are to be six new nuclear power stations and reaffirmed that announcement two weeks ago and the sites where they will be located. Realistically, there are a number of issues in terms of the balance sheets of some of the companies wanting to invest—as we have seen from the fall-out in Germany. Having spoken with EDF, Iberdrola and others this week, I know that they are very committed to the cause of the nuclear framework.

As to when the legislation will happen, we are obviously hoping that it will start at the end of this year. There are some timing issues, even with getting the first Energy Bill back to this House—as we all know. The legislation issue will be difficult because there is a certain logjam in the other place.

On who will operate and regulate the supply, this will largely be Ofgem, which will have greater teeth. As we are running a little bit out of time, I am happy to discuss at a later time with the noble Lord the various component parts of that rather than going into it now—if he is happy for me to do so.

[Lord Reay]

My Lords, this is an extremely important White Paper—

[Lord Boyd of Duncansby]

My Lords, I want to ask one question, relating to the position of the devolved Administrations, particularly Scotland. The renewable obligations are executively devolved to Scotland and that has enabled the Scottish Executive—now the Scottish Government—to shape that as they wish. What role does the noble Lord anticipate that the Scottish Government will be able to play in the new feed-in tariffs with contracts for difference? What will be the relationship between the Scottish Government and the new institutions that he talked about?

[Lord Marland]

Naturally, we work very closely with the devolved Governments. We are all travelling down the same path. However, HM Treasury, rather than the Scottish Government, will be responsible for the renewable heat incentive funding. That is in the spirit of the union, I think.

[Lord Reay]

My Lords, this extremely important White Paper sets out to introduce the reforms, if one can call them that, which the Government consider are necessary if they are to meet their targets for extremely high-cost, heavily subsidised renewable energy. I hope we will get the chance to debate it.

I have just one question for now. The Statement mentions offshore wind on three occasions but makes no mention of onshore wind. Can we take it that the Government are lowering their sights with regard to onshore wind and, it is to be hoped, abandoning their targets altogether? It is a deeply unpopular form of renewable energy, it bitterly divides local communities and it is destroying some of our finest countryside.

[Lord Marland]

I do not think my noble friend can take that from our Statement. The reality is that onshore wind does divide communities—my noble friend puts his finger on it—and it therefore becomes an issue for local communities to decide through the local planning process whether they want it. A large number of local communities in Scotland are embracing onshore wind whereas a number of communities in this country—I am sure my noble friend Lord Reay’s community is one of them—do not want to embrace it. The reality is that the Government have a target. Two-thirds of that target for onshore wind is either met or is in the process of being met so there is a very limited amount of headroom. Our real push is to get offshore wind up to the target we wish to achieve.

[Lord Dixon-Smith]

My Lords, I hesitate to intervene but there is one thing I need to say and one question I need to ask. We should stop worrying too much about cost. I have said this before but I have seen farm tractor diesel prices rise by well over 4,000 per cent since I started in business. That has been vexing occasionally. It is always difficult to put up with rising costs but we live in a different world. This is an evolution in costs over a similar period. If we can keep the costs down below that sort of increase we shall have done very well indeed. That is a harsh reality which my noble friend Lord Lawson may find uncomfortable. However, when he was Chancellor of the Exchequer, he may have had something to do with what has happened.

The Minister is essentially setting out a programme through until 2030. The difficulty is that the major infrastructure investment he requires will consist in many instances of projects which will still be running in 2050, by which time we shall have to have a carbon-free, or virtually carbon-free, energy industry. There will still be one or two essential uses. What is the Minister going to do if he finds that the 10 per cent of the carbon which still has to be emitted in a coal-fired power station is incompatible with the 2050 target when he is committing a 40-year investment? That is what it will be if he gets someone to build a CCS power station today.

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[Lord Marland]

My noble friend Lord Dixon-Smith asked me what I would do in 2050 if we had not reached our targets. By my calculation I will be about 90 so I will either get on the plane to Switzerland or I will not worry about it because I will not have my marbles to worry about it.

On a serious note, it is very impressive that all of us in this Room are thinking about the next generation and the supply of electricity and how we are going to get to it. I take issue slightly, but not with the sentiment, that we have to stop thinking about prices. We have to think about prices. It is absolutely fundamental that we find ways of keeping the country competitive with the rest of Europe, as we are at the moment in terms of our prices, and that electricity and energy are affordable to the people of this country. However, I think the fundamental point my noble friend is making is that prices are going to go up, they do go up and they have gone up. It is a fact of life, unfortunately, but it is incumbent on government to ensure that the cost to the people of this country is as low as possible and is mitigated as much as possible.