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Orders of the Day — Electricity Bill

Part of the debate – in the House of Commons at 8:48 pm on 13th December 1988.

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Photo of Quentin Davies Quentin Davies , Stamford and Spalding 8:48 pm, 13th December 1988

The most striking aspect of the Bill is the boldness and originality of the concept that it embodies. Until now, only two models for the organisation of electricity generation and distribution, or variations or combinations of them, have been practised in the Western world. The first is the model of the public or private sector vertically integrated utility company with an effective regional monopoly. That is the model which obtains in Germany and the United States and household names in those countries, such as RWE and Con-Edison, are excellent illustrations of it. The other model is the nationwide, vertically integrated, publicly owned monopoly, of which EDF in France and the CEGB in England and Wales are among the most distinguished examples.

My right hon. Friend the Secretary of State has launched today a completely new departure which represents a third option that has never been tried before. Its novelty and originality appeared to the hon. Member for Sedgefield (Mr. Blair) as a condemnation in themselves. That may be an interesting sidelight on the intellectual state of the modern Labour party, but it is a short-sighted view to take. I am convinced that, in a number of respects, the new model represents a real advance on previous thinking in this important area of industry.

I shall highlight three of the aspects in which the Bill represents such an advance. First, for the first time, we shall have real competition in power generation in this country. That means that for the first time the British public will have the assurance that resources in this area are being used efficiently, and they will be the first public in the world to have that assurance. The CEGB, unique among monopolies in world history, may have been able to avoid generating any monopoly costs of its own. It may be that it does not suffer from overmanning, from feather-bedding of any kind or from cosy relationships with particular suppliers: we shall see. There are two possibilities: either we shall have the evidence that, until now, electricity has indeed been generated as cheaply as possible, or we shall succeed in saving those monopoly costs.

The second important benefit that the Bill will bring is the assurance that all existing generating capacity in this country will be used efficiently, including that standby or surplus primary capacity that exists at present in British manufacturing industry. Under the present regime, there is no way that that existing capacity can be used efficiently, since, effectively, the electricity produced by it can be offered for sale only to the CEGB, which is itself the major competitor of these potential suppliers. That anomaly will be removed by the separation of the national grid from the generating industry.

The third great advance represented by the Bill, which has not been mentioned in the debate so far but is worthy of the attention of the House, is that, for the first time, we shall achieve real diversification among suppliers of electricity in this country. I do not just mean diversification between alternative sources of energy. Theoretically, we can achieve that even with a single monopoly producer. That has already been achieved under the CEGB regime, although arguably to a very inadequate degree. Diversification between suppliers does not just mean diversification between alternative sources of energy. It does not just mean the benefit of achieving the cost reductions through competition that I have already mentioned. It means that we shall also be diversifying those investment risks that are so crucial in the electricity generation business.

At present, only one body of men takes the key investment decisions about where and how new generating capacity will be constructed. In future, a whole range of companies will take those decisions. Precisely because the uncertainty of the assumptions that need to be made when investment decisions are taken in this sector is so high, particularly the uncertainty of the assumptions that must be made about the future costs of energy, and because the lead times in respect of construction and commissioning in this sector of industry are so long, those risks are inordinately high and anything that we can do to reduce those risks is well worth while.

I have no doubt that, left to itself under the present regime, the CEGB, if decided as it apparently has, that we shall need approximately 12,000 MW of additional power between now and the end of the century, it would proceed in its normal way to construct four or five conventional thermal or nuclear power stations. Perhaps we should invest more in alternative renewable sources of energy, or in gas turbine-generated energy which, as the House knows, has the highest thermal efficiency of all, about 56 per cent. Thermal efficiency, unlike energy prices, does not vary, except very slowly with improvements in technology.

However, it would be wrong for any individual or single body of men to reserve to himself or to themselves the decisions that will need to be taken in this area. It is important to diversify the source of those decisions. Diversification of risk in this area, as with diversification of risk in any area, means reduction of risk. Over time, reduction of risk means reduction of cost. Here again, we are scoring a real advance in the Bill.

Finally, I wish to say a few words about the distribution companies. It is utterly absurd for Opposition Members to hint, as they have done in the debate, that we should somehow attempt to break the natural monopoly in distribution. Surely they do not seriously mean to say that we should duplicate or triplicate the enormous fixed assets involved in a domestic distribution network.

In the Bill, we have gone over to a concept that has not been mentioned by Opposition Members, but which they would do well to contemplate. It is the concept of yardstick competition, the ability of both the market and regulators to assess the economic performance of a distribution company by reference to the performance of other comparable companies in the same sector of activity. It is an entirely new concept to be introduced into the electricity industry. It is full of promise and makes me confident that I can commend to the House as much the proposals on distribution as those on the generation of electricity.

I am convinced that, in years to come, the British public and the British media will give accolades of gratitude to my right hon. Friend the Secretary of State both for the boldness with which he has conceived the structure of the electricity industry as enshrined in the Bill and for his courage in putting over, and, I believe, already successfully persuading a great part of the establishment in the generating and distribution sectors of the industry to accept, the merits of his new concept. I believe also that in the coming months we shall see his success in persuading the House of the merits of that concept also.