Electricity Market (EAC Report) - Motion to Take Note

Part of the debate – in the House of Lords at 8:11 pm on 17th July 2017.

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Photo of Lord Turnbull Lord Turnbull Crossbench 8:11 pm, 17th July 2017

My Lords, energy and climate policy displays a great deal of groupthink and a reluctance to challenge long-held assumptions, even when the evidence changes. So it was refreshing to work on this report, which questions many of those assumptions.

As has been pointed out, the report identified two main failings in current energy policy. First, we have moved rapidly from a framework which allowed market forces to shape the energy market to one where virtually every major investment decision is taken bureaucratically. In the process, we have lost almost completely the idea of a merit order in which different technologies can compete.

Secondly, successive Governments have paid lip service to the trilemma of three objectives: security, affordability and carbon reduction. But in the Miliband/Huhne/Davey—and even Clark—era, one of those objectives consistently trumped the other two. Whenever there was a conflict, carbon reduction, in particular through the promotion of renewables, has prevailed. Other objectives, such as security and affordability, but also air quality and land use, have taken a back seat. The promotion of renewables has been accorded not one but two major privileges: not just subsidies of many billions of pounds but the first right of dispatch, so that, if at any time there is surplus supply of electricity, other fuel sources must yield. As a result, the economics of gas-fired capacity has been shot to pieces, and very little such capacity has been created, at a time when coal and nuclear output will be declining. While some premium can be justified for renewables on account of their low carbon intensity, inadequate account has been taken of the cost to the system of providing back-up capacity to cover intermittency.

As a result, the margin of spare capacity has been severely eroded. I do not, however, believe that the lights will actually go out. The risk will manifest itself in a different way. In response to this situation, the Government have cobbled together a range of measures, including the capacity mechanism. The criticism is that they will prove costly; have unwanted consequences, such as the promotion of diesel generation; and will encourage old fossil-fuelled stations to remain on the grid rather than encourage investment in new, efficient gas-fired stations.

The report recommended that the top priority should always be security of supply, with the best achievable balance between affordability and carbon reduction being sought subject to that. It is clear, however, that affordability too has taken a back seat. The report demonstrates that in the past decade, compared with the rest of Europe, energy costs in the UK, for both households and businesses, have gone from being relatively competitive to relatively expensive. The environmental add-ons have played a significant part in this and are projected to increase. The precise figures, however, are unclear, with what are really environmental taxes being disguised by being routed through the accounts of the energy companies, thereby evading parliamentary accountability.

There is a further dimension in which decisions on energy are being distorted. Surrounding the whole debate is a synthetic urgency—“100 months to save the planet”, and all that. Under the Climate Change Act, the Committee on Climate Change sets a forward trajectory for CO2 emissions, currently extending into the 2030s, which the Government have invariably adopted. But given the small and declining size of UK emissions in the world, a less ambitious target or a slower path towards it is, quite frankly, immaterial. Instead, the Government have allowed themselves to be hustled into decisions rather than taking the time to invest in the search for new technologies. Peter Atherton of Cornwall Energy told the committee that,

“a lot of our really poor policy decisions have been driven by the fact that we set very hard timetables in law—that we have to hit certain targets by 2020, 2030 and, subsequently, 2050”.

Nowhere has this unnecessary haste been more damaging than in the nuclear sector. It has been glaringly obvious that EDF has been struggling to build a reactor to a new and much more complex design, anywhere near the original cost and time estimates. In the light of the latest announcement from EDF on cost and time overruns, the response we received from the Secretary of State was utterly complacent. It is a mistake, as other noble Lords have pointed out, to take comfort in the fact that cost overruns fall to the constructor. If costs were to rise too far, the project could be abandoned, with the risk being handed back. Therefore, it is essential that a comprehensive plan B is acted on.

As the recent NAO report revealed, the emphasis on getting an early deal on Hinkley Point ruled out several options—for example, waiting until construction risk was reduced, establishing a competition with other bidders or the exploration of other financing models. In my view, at the heart of all this is a flaw in the design of policy-making. One objective—rapid decarbonisation—is well entrenched and has a whole apparatus of support and defence. It is the only objective to have statutory backing and the only objective with a dedicated watchdog, the Committee on Climate Change, which is guaranteed access to Parliament. Indeed, there has always been cross-membership between this House and the committee. The committee is not just a consultative body; it has the right of first proposal.

I also discovered that the four strategic objectives listed in the committee’s annual report make no mention of security of supply or affordability. By comparison, the objectives of security of supply and affordability have no equivalent protections or advocacy. Therefore, it is not surprising that decision-making has been unbalanced. Instead of optimising between three conflicting objectives, we have seen the maximum pursuit of one of them at the expense of the other two.

There is one other mantra in the Committee on Climate Change theology—sadly, repeated by the Secretary of State in his response to the EAC—and that is the claim that, as a result of the Government’s policies, energy costs will be reduced. This is achieved only by claiming that increased energy efficiency will offset the various environmental levies. However, that is a fallacy because the pursuit of energy efficiency could be undertaken independently from decisions on energy costs.

However, there are one or two hopeful signs in this rather depressing story. The Conservative manifesto was a curious document—not a curate’s egg but a curate’s daughter’s egg. One of the better passages in it was that on energy, where the language was more balanced. For example, it said:

“Our ambition is that the UK should have the lowest energy costs in Europe, both for households and businesses”,

and that,

“after we have left the European Union, we will form our energy policy based not on the way energy is generated but on the ends we desire—reliable and affordable energy, seizing the industrial opportunity that new technology presents and meeting our global commitments on climate change”.

That appears to acknowledge the trilemma and an end to the automatic primacy of the renewables objective.

The other ray of hope is the promise of an independent review into the cost of energy. Better still is the appointment of Professor Dieter Helm as the review’s chairman. He has been a severe and clear-sighted critic of current energy policy. This review is important and it should be wide ranging. Since the gestation of the Climate Change Act a decade ago, much has changed, although the thinking behind it has not. Global temperatures have risen but on a track well below the range of most climate change models. Incidentally, can anyone tell me where I can find the scientific basis for regarding an extra 1.5 degrees centigrade as a tipping point, or is it just a nice line in a communiqué? Many of the predictions about the harmful effects of climate change have been exaggerated.

Fossil fuel prices, which were assumed to continue rising in real terms from the $100 a barrel mark to the point where renewables reached “grid parity”, have instead fallen. With extensive use being made of contracts for difference, the effect has been to raise the cost of the subsidies required. Only last week, Bob Dudley, the CEO of BP, said:

“I think we’ll all look back in history and think the period of three years at $100 per barrel or above was an aberration”.

There are other reasons for looking again. No other country has followed us down such an extreme unilateralist and legislated path. Severe damage has been done to our energy-intensive industries, and money has been transferred from the pockets of poor families to those lucky enough to be able to install solar panels or wind turbines. For two of the technologies which were thought essential to achieve the CO2 target at reasonable cost, one—nuclear power—is struggling and, in the case of carbon capture and storage, research has been abandoned.

Therefore, there is a lot to revisit, but if the EAC’s report and this debate contribute to this rethink of policy, they may well have proved worth while.