Energy Bill

Lord Roper Excerpts

Tuesday 18th June 2013 Lords Chamber

[Lord Roper]

My Lords, it is a particular pleasure to follow my noble friend Lord Deben, who is a very effective advocate for this Bill, even if the levy-controlled framework is, I think, a little more complex than he described. Given the complexities and the length of this Bill, I have begun to regret that just over a year ago, when I ceased to be chairman of the European Union Committee and I decided to take up a new subject from scratch, I chose energy. Given what we have come to, I think it may have been a problem, but I am extremely grateful to the noble Lord, Lord Oxburgh, and to the DECC officials, who, in the informal group that has met on the draft Bill and more recently on this Bill, provided particularly useful tutorials in helping me to understand a pretty complex subject. As the noble Baroness, Lady Worthington, said, each time one thinks one understands it, one discovers yet another twist to the complexity.

Before giving this Bill a Second Reading, we have to agree that there is a need to decarbonise our electricity industry and, if that is the case, whether the principal elements of the electricity market reform set out in Part 2, the contracts for difference, strike prices and the capacity mechanism, are the right way to achieve such reform. On the first issue, over the past year, I have tried to follow the debate on global warming. Indeed, there are those who argue against it, sometimes —we may well hear them later—fairly effectively. But although there are significant arguments against the scientific consensus, I have reached the judgment that in applying the precautionary principle there is no case at all to resile from the commitments which this country took under the Climate Change Act 2008.

As referred to by my noble friend Lord Deben, the argument is also developed that our efforts are of little relevance given the absence of comparable actions elsewhere in the world, with the statistic of three coal-based stations being built a week in China perhaps being most frequently cited. In fact, as we have heard this week—indeed, he referred to the work done on climate change in China—China is rolling out an emission trading system starting in Shenzhen and then extending elsewhere in the country. It has been carrying out a significant programme of work on carbon capture and storage which compares favourably with what we have done in this country. Therefore, the argument that there is no point in doing anything because things will go wrong elsewhere does not seem to hold very much strength.

Given the case to move to a low-carbon generating technology and to encourage the necessary investment, what are the policy instruments which can do that most effectively? Sitting on these Benches and having been taught some of my micro-economics by Milton Friedman, I have to look very carefully at any attempt to intervene in markets. That often causes more harm than good. I was very glad therefore that my noble friend the Minister in her opening remarks was able to assure us that the contracts for difference and strike prices are transitory measures, particularly that they will be set on an administered basis for this transitional period. My noble friend also referred to the fact that the delivery plan will be published in July. I hope very much that when the Captain of the Gentlemen-at-Arms produces an order of consideration, the sections dealing with Part 2 can be placed towards the end of our consideration in Committee in order that we will have the benefit of seeing the delivery plan before we come to consider them.

Subject to that, the very useful impact assessment published with the Bill shows that the market failures and imperfections justify the proposals for electricity market reform in Part 2. Contracts for difference are the means of providing revenue certainty for low-carbon generators and thereby the incentive for investment in nuclear and renewable generators. They would enable development of such projects to obtain the finance for their investments and the impact assessment shows a significant net present value. As we have heard, the capacity market is the mechanism for ensuring security of supply and although the impact assessment in this case shows that there could be small net costs compared with a perfectly functioning energy market, it is very difficult to accept that we have a perfectly operating energy market. It seems a rather useful insurance mechanism to avoid loss of supply.

The question of the nature of the energy market is, as we have already heard, central to our consideration of the Bill. There has been much discussion on the illiquidity of the market, and Ofgem’s announcement last week is therefore of great importance. We shall need to consider it when we come to consider Chapter 6 of Part 2 of the Bill. The asymmetry of the market between the larger generators and suppliers and the smaller ones has led to many reports of illiquidity and difficulties for small developers of renewable projects in accessing the market. In the Commons, consideration was given to a green power auction market. This was resisted by the Government. Others have suggested an off-taker of last resort. It will be essential for us to return to this in Committee as energy market reform will not succeed unless we provide a satisfactory route to market for independent generators.

There have been difficulties in the recent past for such generators to get satisfactory power purchase agreements with large suppliers, and the nature of PPAs will themselves change with the introduction of contracts for difference. How do the Government intend to ensure a satisfactory development of PPAs after EMR? As my noble friend Lord Teverson and the right reverend Prelate said, Clause 37 is extremely important. It is the amendment which was introduced on Report in the Commons to deal with demand management. Although the reference is to a pilot scheme, I think that if I remember rightly, in moving the report, the Minister referred to several options within this pilot, so perhaps it is not quite as narrow as was suggested by the right reverend Prelate.

I also find some confusion, probably it is my ignorance, between permanent reduction in the demand for electricity as described by the right reverend Prelate, and demand-side response in the context of the capacity market. Will my noble friend tell me which of the two is being referred to in Clause 37?

I welcome the fact that Part 1 gives the Secretary of State a power to set a decarbonisation target range for 2030 and implicitly prevents him from setting it before 2016. As we have already heard, there will no doubt be discussion in Committee on the date. However, I hope that as well as the date, it will be possible to consider whether the Bill should be amended to require him to set a target rather than to give him the power to set a target, which is an important distinction.

Finally, I wonder if my noble friend can tell us about the position of the European Commission as far as any possible state aid implications of the Bill are concerned. Are we likely to have problems with that at a later stage? I think that this is a difficult Bill, but I look forward to continuing my education on the subject in Committee.