Electricity Market (EAC Report) - Motion to Take Note

Part of the debate – in the House of Lords at 7:28 pm on 17th July 2017.

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Photo of Lord Hollick Lord Hollick Labour 7:28 pm, 17th July 2017

My Lords, it is a pleasure to introduce the Economic Affairs Committee’s report on the electricity market, entitled The Price of Power: Reforming the Electricity Market. I thank all members of the committee for their sterling contribution to this far-ranging inquiry, our excellent committee staff Ayeesha Waller, Ben McNamee and Oswin Taylor, and our excellent specialist adviser, Professor Nick Butler.

Security and affordability have been the long-standing objectives of energy policy. From the 1950s to the 1980s, the provision of electricity was the domain of the state-owned Central Electricity Generating Board. Then in the 1990s, at the instigation of Energy Minister Nigel Lawson—now the noble Lord, Lord Lawson—the energy market was opened up to competition, liberalised and subsequently privatised. Tony Blair’s Government strongly supported those measures and the open market, and were able to announce that between 1991 and 2003, annual domestic bills declined by £150 in real terms while supply remained secure.

The Climate Change Act added decarbonisation as a third objective and, in the 2000s, the liberalised market of the previous 20 years gave way to one where the Government introduced a succession of policies to subsidise renewable electrical generation. Oxford economist Dieter Helm describes the degree of state intervention now as,

“more akin to a nationalised model than it is to an open and transparent market process”.

A succession of Ministers has recognised this, lamented the state of affairs and resolved to reverse it, bring back some element of competition and reduce the role of government, particularly in choosing new technologies. The capacity market to provide back-up baseload to intermittent renewable generation is indeed a step in the right direction, but it is essentially a short-term mechanism biased towards short-term fixes. It is not and cannot be a substitute for long-term policy.

The disappearance of the competitive and open market model has led to marked increases in the price of electricity. For much of the first decade of the 2000s, domestic energy bills in Britain were 25% below the EU median. Today, they are only 4% below. As the Government themselves admit—while acknowledging that their data are frustrating opaque—electricity prices for high energy-intensive industry in the UK are now among the highest in Europe. This places UK industry at a significant competitive disadvantage.

The Government are committed to an industrial policy, which is welcome. But industry, in common with individual households, needs energy supplied at a competitive cost. Costs seem to have been an afterthought in the making of policy in recent years. The previous Government stressed the importance of cost but did little to change policy. There was talk before the election of a freeze on certain consumer prices, but that has been watered down to a review by Ofgem. The committee did not advocate a freeze, but we advocate a coherent policy, and that should include the proper regulation of prices by a strong and effective regulator. That is the only way in which trust can be re-established between suppliers and consumers. Will the Minister spell out the remit of Ofgem’s review: does it cover both domestic consumers and industry and will its overall powers be beefed up to allow it to intervene, to ensure that affordability has a consistent champion in the inevitable trade-offs with security and decarbonisation?

The Government’s industrial strategy announced their intention to commission an independent review looking at the cost of energy for households and business and, in particular, the opportunity to reduce the cost of achieving the decarbonisation goals. It was reported last week that Dieter Helm will be appointed to lead that review. We welcome the review and the report that Professor Helm is to head it up. Can the Minister confirm the appointment of Professor Helm and tell us the remit of the review and how it chimes with the Ofgem review?

We recommend that if the Government are to get a better a grip on energy policy, an energy commission be established to act as an independent advisory body tasked with advising on the best way for all objectives of energy policy to be delivered, taking into account changing technologies. It would work with existing institutions such as the climate change committee and would be responsible for managing the open, transparent auctions to generate electricity that we propose in some detail in our report. It would also provide welcome continuity of policy in a department which has had five different Ministers in charge in the past five years. The Government’s decision to have an independent review acknowledges the need for an independent advisory body—a recommendation of the committee—and it could and should be seen as a precursor to an energy commission, as we recommend.

I turn to the security of supply. As unplanned maintenance increases, there are all the signs that our 40-year-old nuclear reactors are reaching the end of their lives. The Government’s plan to replace them through its new nuclear programme is in trouble. Our report was strongly critical of the high cost of Hinkley Point C and the risks and delays in its delivery, and we called for a robust plan B to cope with delays and inevitable gaps in supply. The Government’s complacent response to our concerns border on the negligent. Our concerns were then echoed in the NAO’s devastating critique of Hinkley Point C, which noted that the Government had,

“locked consumers into a risky and expensive project with uncertain strategic and economic benefits. They did not consider sufficiently the risks and costs to customers”.

The NAO also criticised the absence of contingency planning.

Since the publication of our report, the prospects for the new nuclear programme have further deteriorated. Shortly after the surprise departure of EDF’s CEO, Vincent de Rivaz, who appeared before the committee and who is a man who has few doubts, EDF announced that Hinkley Point C would be delayed by a further 15 months and costs would increase by £1.5 billion. The delay over the original timetable is now 10 years; the cost of the project has doubled; and the technology is not yet proven.

EDF is 84%-owned by the French state, and President Macron is likely to take a dim view of French government funds being poured in ever-increasing amounts into an unproven technology to benefit another country. At best, the project will arrive in 2027, just 10 years late. The other main new nuclear supplier, Toshiba, is in grave financial difficulties and is hell-bent on exiting nuclear generation. In these circumstances, it is unclear how the plant at Moorside can be financed.

The Government’s new nuclear programme was planned to deliver 16 gigawatts, or approximately 20% of total electricity usage, by the 2030s. Meanwhile, demand for electricity is now expected to rise above predicted level because of the rapid changeover to electric vehicles. Can the Minister update the House on the problems at Hinkley Point and at Moorside and explain the contingency plans to address the looming gap in the security of supply? Can he also tell us about the negotiations with the Chinese in respect of financing at Bradwell? Are discussions going on with the Chinese with a view to deploying their smaller, modular reactors, dubbed “the nimble dragon”, which use proven technology and can be installed relatively quickly at a fraction of the cost of Hinkley Point C?

Over the past decade, the Government have mandated that billions of pounds be used to subsidise the installation of renewable generation. Much of this funding has been targeted at inefficient, high-cost, first-generation solar panels and wind turbines, to the great benefit of overseas manufacturers, landowners and householders, who then benefit from the very generous feed-in tariffs, for which a large bill will have to be picked up by consumers over the next two or three decades. The committee preferred an approach which prioritised investment in research and development of new technologies to help to promote a UK-based renewables manufacturing sector utilising our considerable research strengths. The committee believes that science and engineering holds the key to developing energy sources which are both clean and competitive.

The Government made a good step forward by announcing the Faraday initiative on the development of research into energy storage, a key technology, in which the UK research community is one of the global leaders. Improved energy storage technologies will make renewables much cheaper and more reliable by reducing or possibly eliminating intermittency of supply and by spreading the demand for electricity generation more efficiently across the day and night. But what has happened to that initiative since the election? There has been no announcement on how the funds will be allocated, or when. This could and should be a source of competitive advantage for the UK. Our universities have some great academic research skills, and we could acquire more as President Trump runs down US research. What are the Government doing to push this forward? Can the Minister tell us what has happened to the Faraday initiative?

The energy market is a hybrid, a combination of public policy and private money that needs careful, thoughtful and consistent management. If there is uncertainty, and if investors are confused by current policy and do not know if today’s approach will last beyond the next Minister, they will turn away. That would leave us with an ageing and sub-optimal system that is vulnerable, insecure and increasingly expensive to maintain, which in turn will do great damage to the whole economy.

I look forward to a lively and well-informed debate and to the Minister’s response to my questions and, I am sure, the questions of others.