Electricity Market (EAC Report) - Motion to Take Note

Part of the debate – in the House of Lords at 9:15 pm on 17th July 2017.

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Photo of Lord Grantchester Lord Grantchester Shadow Spokesperson (Energy and Climate Change), Shadow Minister (Environment, Food and Rural Affairs), Shadow Spokesperson (Business, Energy and Industrial Strategy) 9:15 pm, 17th July 2017

My Lords, this has been a very interesting debate on an important report from your Lordships’ Economic Affairs Committee, which makes powerful reports and has a very strong membership. I congratulate the chairman, my noble friend Lord Hollick, on his excellent stewardship of the committee. The report has taken the long perspective of Britain’s energy policy and examined it, posing some fundamental questions and approaches. This highlights two clear areas of focus where it has expressed key concerns. The first relates to security of supply and the second to the cost of energy policies for consumers and businesses. The debate has benefited from so many committee members’ strong contributions, and it is wonderful that the report has brought forward other Members of the House to speak tonight.

In its rather more long-term view of the objectives of energy policy, the report could have drawn more attention to the fundamental shift in paradigms over recent decades; we now live and operate in a more global context, which signifies transnational interdependences. The report takes it as a given that the UK is committed to reducing carbon emissions, when it might have shown more support and recognised the global challenge of climate change. This has reframed the debate over the energy trilemma of security, affordability and clean energy. Most speakers tonight have examined that trilemma, whose three objectives can perhaps be brought together into one outcome, or even market—strange as it may seem—as expressed by my noble friend Lord Darling.

The Government must ensure that the UK has secure energy supplies that are consistently reliable, affordable to the lowest cost and clean from global warming emissions. This inevitably means that there will be trade-offs on the balance, while the UK has to manage the fundamental transition to a low-carbon economy. The committee is right to examine that in detail.

The Government have to maintain a consistency of approach, a stability in policy framework and a compatibility of policy goals. The answers need to recognise the imperative need to tackle climate change, maintaining investor confidence to support the massive task ahead, phasing out old technologies as new, innovative, low-carbon industries emerge.

In sharing the two key challenges in the report—security of supply and the cost on consumers and businesses—I would like to raise some inconsistencies of approach, not in the report but in government policy, which could result in contradictions.

The report mentions development of interconnectors, and several noble Lords have asked questions on the security of interconnector supply. At the moment, there are five interconnectors able to supply up to 4% of capacity, and additional ones could double this over the foreseeable future. Interconnectors can obviously act as an insurance regarding supply. On EU insistence, they are included in the capacity market, but the energy exchanges of these interconnectors are not calculated or included in monitoring supply margins. What interpretations need to be given to the narrowing of supply margins if interconnectors are not included? If supply through interconnectors is not included in the critical margins, should we be less concerned at the tightening of supply? How secure can they be in the context of being available, not necessarily at times of peak demand but, more importantly, at critical capacity margins? What will be the position and costs regarding access to international supplies on Brexit, should the UK leave the internal energy market? What assurances can the Minister give that reliable access will be not only maintained but increased further?

The challenge of leaving the EU will impact on the energy market, as it will with others. To foreshadow the debate in your Lordships’ House later this week, Britain’s membership of Euratom is also crucial, with Britain’s wider civil nuclear strategy unclear. Putting aside the reasons, and their validity, for leaving Euratom, leaving will have three key consequences. First, it will be more difficult to ensure a long-term supply of nuclear fuel, of which the UK has no domestic sources. In concluding that Britain must leave Euratom, can the Minister be confident that this will not reduce access to nuclear fuel? Secondly, leaving Euratom risks the timely supply and supply chains of isotopes used in nuclear medicines. Thirdly, leaving Euratom risks access to nuclear research funds, scientific programmes and scientists. Are the Government being consistent in their reasoning regarding energy policy?

Regarding nuclear power and its supply to Hinkley Point C, the report has highlighted issues around the cost, value for money and when it is likely to be redundant. Can the Minister answer the critics who argue that a gap in supply could open up in the mid-2020s? My noble friend Lord Hollick underlined the growing difficulties with Hinkley Point C in his opening remarks and several noble Lords have spoken passionately on its finances. The noble Lords, Lord Howell and Lord Kerr, devoted their speeches to the risks of this undertaking.

Onshore wind also reveals an air of inconsistency in government policy. It is the cheapest form of renewable energy, yet it is not allowed to compete in the latest round of contracts for difference. The recent Policy Exchange report showed that repowering old wind farms could be eminently sensible as they would be relatively cheap to rebuild and have existing connections. Can the Minister justify why onshore wind, the cheapest form of energy to the consumer, is not allowed to compete, even at zero levels of support? In contradiction, capacity payments have been made available to diesel generators and to coal. Yet, at the same time, coal is being asked to pay the carbon price support, with a view to being phased out over time. In effect, we pay coal to stay open and then impose a charge on it so that it closes down. Both costs get passed on to the consumer. The noble Lord, Lord Forsyth, highlighted this nonsense.

The committee’s report highlights the present intermittency of supplies of renewables—solar and wind—both of which have been instrumental in powering the increase in renewable generation. This precariousness of supply would be transformed by battery storage development. As this technology develops, is the Minister confident that the regulatory framework is ready to implement this innovation? Does he agree that a new definition of storage is needed to reflect its roles in the three areas of generation, demand and network balance? A new licensing scheme could recognise the flexible use of battery storage. The long-term strategy must be to develop storage, not only to augment the security of supply from day to day but to provide interseasonal balance to the winter, when renewable power is often limited to wind generation.

The committee’s report also calls for the Government to be technology neutral and to allow an open auction. While the Government would agree that they will not pick winners and losers, they should perhaps be prepared to support what I shall call late developers rather than losers. I note in this regard that tidal lagoon technologies could be supported in this present round of CfDs. This highlights the cost of capital in the development of new technologies. If the Government were to take a stake in technology investments, the costs to the consumer would be greatly reduced. One of the criticisms in the NAO’s report on Hinkley Point was that the Government could have reduced costs to the consumer if they had taken a stake. In the light of tonight’s debate, others may argue that that would have posed even more risk to the UK. In the transformation of the UK’s power supplies, would the Government be willing to review this policy in the interests of future customer bills?

Although this was not mentioned by other speakers tonight, the report is also right to mention the Government’s introduction in 2013 of the levy control framework that sets the budget cap for expenditure on renewal, low-carbon generation which is added to consumer bills. This has resulted in several peculiarities and inconsistencies. Reducing fuel prices have pushed up the costs through the payment of CfDs. This rapid rise and exceeding of the cap has prompted widespread changes to framework schemes. The National Audit Office highlighted that the capacity market is not included in the LCF and that it produces a cost to the consumer. The Committee on Climate Change has also recommended that the Government should report regularly on the full costs and impact of all their levy-funded schemes, recognising that framework schemes can reduce energy costs as well as add to them. Furthermore, the rapid reversal of policy has severely impacted on investor confidence to participate. Can the Minister confirm that a full review of the LCF is ongoing and will assess all the concerns regarding this policy instrument?

The noble Baroness, Lady Bowles, made an important and powerful speech on the governance of energy policies. I hope that the Minister will reflect on her comments and those of the noble Lord, Lord Burns, on switching, especially in relation to the capping of the standard variable charge, on which there was a special ministerial Statement the week before last.

I would like to ask the Minister about the fifth carbon budget and the decarbonisation target for 2030. Under the last Energy Act, the Government have the power to set a decarbonisation target for the power sector for 2030. Will the Government now come forward and set such a target?

In conclusion, taking the report of the committee and the speeches of noble Lords tonight as my text, this report has raised challenges that need to be addressed if we are to have a successful outcome for the UK’s future energy policies.