Energy Bill [HL] — Second Reading

Part of the debate – in the House of Lords at 1:29 pm on 22nd July 2015.

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Photo of Viscount Hanworth Viscount Hanworth Labour 1:29 pm, 22nd July 2015

My Lords, the Energy Bill that we have before us today contains two unrelated sets of measures. One set concerns projects for establishing onshore facilities for generating electricity by wind power. The second concerns the establishment of a new agency for regulating the extraction of oil and gas from the North Sea. I will deal with these matters separately and in that order.

The legislation affecting wind power proposes an early end to the subsidies that have been received under the renewables obligation. The subsidies will end on 1 April 2016, which is one year sooner than had been agreed by the partners in the coalition Government. The legislation will also appoint local authorities as the primary decision-makers in respect of planning applications for new onshore wind farms. The measures in the Bill were pledged in the Conservative Party election manifesto. Their purpose was to appease a vocal faction within the Conservative Party that regards wind turbines as a blot on the landscape and to seek an advantage for candidates who were vying for election in marginal rural seats. It is notable that 37 out of 198 marginal constituencies were in rural areas.

Of the available sources of renewable energy, the cheapest by far is onshore wind. It has dismayed environmentalists to see the Government pursuing a policy that is in utter contradiction to their declared intention to provide renewable energy at the lowest possible cost. There are currently some 5,000 onshore wind turbines, which satisfy close to 6% of the electricity needs of the UK. It is reckoned that about 250 planned onshore wind farms are likely to be cancelled as a result of the early end to subsidies, which would mean that 2,500 planned turbines will not be built. This will have a devastating effect on the wind power industry, which is said to be in a fragile state. Moreover, given that around 70% of wind turbines are to be found in Scotland, the adverse economic effect of the cancellations will be concentrated in that region, which has infuriated Scottish MPs. The question arises of why the changes to the planning regime will affect onshore wind but not shale gas. Why should local authorities be given a power of veto over wind farms but not over fracking installations? There is no honest answer to that question.

The second part of the Bill concerns the extraction of oil and gas from the North Sea. The aim is to maximise the recovery of the remaining resources by establishing a regulatory regime that is more effective than the present regime, which faces challenging circumstances. The Bill deals with some complex matters, and to reach sound opinions on the quality of the proposed legislation, one needs to acquire detailed knowledge of the regime that grants licences to the companies operating in the North Sea. To evaluate the proposals, one needs to know, in detail, how the industry is organised and how the operators within it are liable to interact. One also needs a fair understanding of the technology for the recovery of oil and gas, of the state of repair of the installations in the North Sea and of the geophysical details of the continental shelf that surrounds the UK. It is fortunate that the parliamentary Recess is available to us for researching these matters.

We are also fortunate in having the excellent Brown report at our disposal, which has made recommendations that have been adopted by the Government. The report records some startling realities, such as the vast contribution of offshore oil and gas to the UK economy over the past five decades. As we have been reminded, production from the UK continental shelf met 67% of the UK’s demand for oil and 53% of its demand for gas in 2012. It also contributed £6.5 billion in corporate taxes in the year 2012-13. Some 42 billion barrels of oil equivalent have already been extracted from the area, and it is estimated that somewhere between 12 million and 24 million barrels remain to be produced.

Those who are concerned to limit the effects on the global climate of the burning of fossil fuels might be happy to see a rapid decline in the output of the North Sea. However, a further decline in its productivity will have serious implications for Britain’s balance of payments and economic welfare. In fact, the recent fall in output has been dramatic: production fell by 38% between 2010 and 2013. Levels of investment have fallen and the rate of discovery of further reserves has halved in that period.

The Brown report attributes a large proportion of the decline in output to a fall in productive efficiency, although it gives no indication of how that efficiency is measured or calibrated. The truth is that the many operators who are scattered throughout the North Sea are tripping over themselves. In the early years, a few major operators exploited large and plentiful fields under a relaxed regime of light-touch regulation. Over time, the number of fields has increased to more than 300. New discoveries are much smaller than hitherto and many of the fields are marginal and highly interdependent. There is also increased competition for a depleted stock of ageing infrastructure. There may be better prospects for the operators elsewhere in the world, and unless a more orderly structure is imposed and they can be offered more attractive fiscal incentives, they are liable to go elsewhere.

The Brown report recommended that a revived regulatory body should be established at arm’s length from DECC, which has previously performed the regulatory functions. The number of staff within the department who have been deployed recently in this capacity is half what it was previously, and the cuts that have been imposed on the department will undermine their role. It is now proposed that the new Oil and Gas Authority should be funded wholly by the industry, which should save something from the Government’s budget. However, one has to ask whether such an arrangement will run the risk of regulatory capture. This is a process, familiar in the United States, by which regulatory agencies eventually come to be dominated by the very industries they were charged with regulating. We can look forward to a discussion of these matters in the Committee stage of the Bill, for which I understand four days have been scheduled. At first this seemed an excessive allocation, but I am beginning to think that the detailed scrutiny of the Bill will fully occupy the available time.