I beg to move amendment No. 36, in
clause 180, page 136, line 30, at beginning insert—
'( ) There shall be an over-riding principle that no area of the United Kingdom shall be subject to higher distribution charges than any other.'.
This a small, but vital, amendment. It will be no surprise to the Committee that this is a matter of great concern to the north of Scotland, and I declare an interest as a consumer in that area. The amendment might also have an impact on many other remote areas in the UK. It may seem odd that a Scottish nationalist should table such an amendment, but if BETTA comes into being, there will be a UK-wide electricity generation and distribution system, and we are nothing if not pragmatic.
The regulatory impact assessment, which hon. Members will have read, gives a good review of the background of the hydro benefit. The original aim was to restrict the otherwise huge difference in the costs of distribution. In northern Scotland the cost is vastly greater than in any other area. The Monopolies and Mergers Commission concluded in 1995 that the principle of hydro benefit was
''in the public interest because it protects consumers, and especially those in rural areas, in respect of the prices charged for electricity.''
Unfortunately, Ofgem concluded last year that those licence conditions should be removed in order to comply fully with European law. That echoes the Committee's earlier discussions, since part 3 of the Electricity Act 1989 requires the regulator to comply with European law, irrespective of its duties and principal obligation to protect consumers' interests.
I should give credit where it is due, and acknowledge that the Government have reacted to the worries that were raised about the matter in Scotland and inserted this clause in the Bill in the other place. If they had not done so, we would have had the problem of high distribution charges being imposed, which would be very serious for northern Scotland. For example, as detailed in the regulatory impact assessment, some 13 per cent. of households in Scotland meet the Scottish Executive's definition of fuel poverty but, as I mentioned earlier, the incidence of fuel poverty in the 16 local authorities that lie wholly or partly within the hydro area is approximately 4 per cent. above the Scottish average, and in some areas it is much greater than that.
I am concerned, however, that the amendment does not enshrine in the Bill the principle that distribution charges should always be equalised across all parts of the UK—the so-called postage stamp principle. Perhaps, with the way the Post Office is going, we should look for another name, but that is a different issue.
In the highlands and islands of Scotland, distribution is costed at £225 per customer, compared to the area with the next highest cost of £131 per customer. However, the benefit is not enshrined for all time, but only for a limited period. We shall return to that point on the next group of amendments. The Bill enables the Secretary of State to put that system into force, but it does not prescribe that he must do so. Given the importance of the issue, particularly in the north of Scotland, there is too much uncertainty in the clause. The amendment would ensure that the principle of postage stamp distribution was enshrined in the Bill so that it was no longer discretionary, but mandatory, to protect those in northern Scotland against hugely higher costs.
The amendment is unwelcome because it would make some customers pay considerably more for their electricity than at present. The effect of price equalisation throughout the country is that some energy users are currently obliged to subsidise others. The alternative approach—the hydro benefit replacement scheme in clause 180—reflects the fact that distribution costs in northern Scotland are a
special case, being much higher than those incurred in any other region of Britain. We believe that it is a proportionate response to the situation facing consumers in the north of Scotland, particularly as its effects on the prices paid by consumers elsewhere are likely to be minimal.
There are also a couple of technical difficulties with the amendment. The clause enables the Secretary of State to make a single order with respect to the area with the highest distribution costs. That is incompatible with the amendment's vision of price equalisation, implying that the Secretary of State should exercise a much broader power than that accommodated for in clause 180. Another effect of the amendment would be to connect the distribution price methodology in Northern Ireland—where responsibility for energy is devolved, and where there is a separate energy market—with the future British market.
I have read the explanatory notes to the clause with great interest, and the Minister has made various statements, and it is fairly obvious that people in the south, for example, or other areas nearer generation will have to subsidise those further away. Has he got any handle on what the costs will be and what the difference will be in what people have to pay? England already gives more support to Scotland through the Barnett formula, because it is further away and so on. That must feed through into various costs being lower for Scottish people.
It is exceedingly long, for which I apologise, but I am trying to give the Minister a bit of time to answer, so I hope that you will suffer it in this case, Mr. Sayeed.
The Minister also talked about the distributor with the highest area costs, but the explanatory notes talk about
''costs that are significantly higher than'' those in
Are we talking about just one area, or could a number of areas benefit from an order?
I am advised that the distributed cost, if it were spread, would be about £1 a year. That relates to only one area, if we considered the north in isolation. It is up to the hon. Gentleman to decide whether he can sell a price increase to his constituents on that basis. We believe that there are other ways to tackle the issue which do not appear in any way to penalise anyone for being in an area where electricity is less costly to produce. However, we recognise the steps that have already been taken to try to minimise the difference in electricity prices throughout the country, taking account of the infrastructure required to supply electricity in rural areas with a dispersed population. I am sure that more steps could be taken to improve the balance even further, but this proposal is not one of them.
I have listened to the Minister and I take on board some of his points. I am not sure whether the hon. Member for South-West Hertfordshire was speaking in support of the amendment. If he wants to discuss the Barnett formula, that could be another interesting debate, but I suspect that it is not one for this Committee. I accept that there are difficulties with the amendment as currently worded. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
The object of the amendments is to remove subsection (11) in clauses 180 and 181 and thus to remove the time constraints and review periods. Our previous debate focused briefly on the nature of the hydro benefit and its successor, and I do not intend to comment further on that subject, other than to ask the Minister why there is a review every three years.
Clause 181 deals with the slightly different but related problem of high transmission costs. Again, that is a particular problem in the north of Scotland. Both energy companies in Scotland, Scottish Power and Scottish and Southern Energy Group, have said that if the transmission arrangements for England and Wales are imported to Scotland, that will lead to much higher charges for Scottish generators. Scottish and Southern, in particular, is concerned about the possible impact of transmission charges on its area.
There have been arguments as to whether the charge should be made cost-reflective. I understand that to be Ofgem's position and that it is shared by the National Grid Company. The argument is that transmission costs should fully reflect the costs of transmission, if that does not sound too convoluted. I submit that it is a fairly extreme position and, if adopted, would mean that generators in the north and other remote areas could face very substantial transmission costs, perhaps up to four times current costs. Such an increase would kill the renewables industry stone dead, as many of the potential sites for those schemes are in remote rural areas. It may interest the hon. Member for Western Isles (Mr. MacDonald) to know that the cost of connecting schemes in the Western Isles under the cost-reflective principle could be six times the present cost of transmission. That would be fairly disastrous.
Again, to be scrupulously fair, I must point out that the Government have, in clause 181, reacted to that concern. I have the same concerns about that as I have about clause 180, namely that it is permissive rather than mandatory. However, the reason for the amendment is to find out why subsection (11) takes the form that it does. As it is worded, the benefit would be for five years only, possibly renewable for a further five years to a maximum 10-year period. Given the nature of the business, it seems that the relative cost of
transmission is unlikely to fall greatly in the foreseeable future. Why is there such a time constraint in the subsection?
The amendments raise important questions, to which I hope the Minister will respond. Both clauses are very welcome in the north of Scotland. The first replaces the longstanding hydro benefit, which has been a necessary part of the scene since the introduction of electricity, and even survived privatisation under the Conservative Government. It would be regrettable if the hydro benefit were to disappear because of a European requirement, so I am glad that the Government listened to the case that was put to them and came up with clause 180, which finds a way round the problem.
The measure is necessary because the geography of the highlands and islands means that distribution charges are inevitably extremely high, so something like hydro benefit will always be needed. That being the case, I question why a review is required every three years. The geography is not going to change and the population is not likely to increase massively—although it is increasing, unlike that in the rest of Scotland. However, the conditions that gave rise to the need for the hydro benefit in the past, and to the need for this clause now, are unlikely to change substantially, so it would be useful to hear from the Minister why there is a requirement for a review at such frequent intervals.
Turning to amendment No. 38, I can tell the Committee that clause 181 is particularly welcome in the north of Scotland. It will benefit not only companies wanting to set up renewables projects in the north of Scotland, but the whole country, which will look to the north to supply a large amount of renewable energy that will enable the whole country to meet Government targets over the next 10 or 20 years.
Without the clause, renewables would be in danger of being priced out of the north of Scotland. It is therefore very welcome. However, precisely because the need for the measure is unlikely to change in the next 10, 20 or 30 years, I repeat that it would be useful to know why the Government consider it necessary to have a review after five years, and why it is necessary to for this to be a sunset clause, with the requirement ending after 10 years.
It strikes me that what the hon. Gentleman said about reviews occurring every five years is wrong. My understanding is that the clause can last only for 10 years—five years, then another five years—and that there is no provision for it to continue thereafter.
That is my understanding as well. My point was not that there will be a review every five years, but that a sunset provision will mean that after 10 years the clause falls away. My concern is not simply a self-interested constituency concern arising from the effect that the provision might have on the north of Scotland; I think that there is a national—a
UK—case for the clause because it will encourage and allow renewables generation to take off in the north of Scotland.
If a sunset provision is embedded in the clause, companies that may be thinking of investing tens, or perhaps hundreds, of millions of pounds in developing renewables projects in the highlands and islands—and expecting a 20-year payback time on that investment—will worry that the clause will radically change the circumstances in which they will be making their investment 10 years hence.
To sum up, there is concern not only about the provision for reviewing the clause after five years, but, even more so, about the 10-year sunset provision. It is at odds with the Government's desire to encourage companies to invest in renewables, particularly in the highlands and islands, and it undermines the good work that the clause would otherwise do.
I congratulate the hon. Member for Angus on moving the amendment so eloquently. Mention has been made of European Union implications for this matter. I bring to the Minister's attention the fact that there will be energy provisions in the EU constitution. The Prime Minister has a passing conversational knowledge of French, but I am slightly concerned because I do not think that his knowledge of a French legal text is quite that of a juriste linguiste or a fully qualified EU translator, so I shudder to think what he has signed us up to. Will the Minister tell us the precise implications of EU law as it impacts on clause 180 and the amendments?
I am cognisant of the fact that the clause relates particularly to the ongoing so-called hydro benefit scheme. One would not want to detract from the background that, as the Minister mentioned, pertains in Scotland—low income, poor climate and a high energy supply cost—but would the Minister be minded to apply the clause and the amendments in other locations? Obviously I make special reference to North Yorkshire, not so much the Vale of York but the hillier parts on either side, where the cost of distributing and supplying electricity is much higher. In particular, if an application were made for undergrounding transmission of electricity, would that fall under the provisions?
As the debate has moved on to clause 181 as a result of the amendment tabled by the hon. Member for Angus, I speak in support of the point made by my hon. Friend the Member for Western Isles. Although the clause is essential to protect renewable energy from the impact of higher transmission charges resulting from a locational transmission charging regime, unfortunately, as currently drafted, it contains sunset provisions, and the implications of that are clear.
I understand that this clause was inserted by their lordships. I suggest to the Minister that the Government consider tabling amendments on Report to deal with the issue of the sunset clause. As my hon. Friend the Member for Western Isles said, the provisions will last for a maximum of 10 years, because it is stated that schemes will run from the beginning of
the operation of the clause. Therefore, if an installation does not get going for a couple of years, it will receive only eight years' protection at maximum, whereas the capital payback period that investors will have to consider in relation to renewable energy generation will be 20 years. The Committee has already agreed that if we are to promote the Government's policy on renewable energy, it is essential for investors to be given confidence. If investors are to be confident, they must know that there will be consistency in market conditions over a sufficiently long time scale for them to calculate their investments. Without that consistency, there is the real possibility that investors will be frightened off and will not invest.
I therefore want to reinforce my hon. Friend's point and ask the Government urgently to review the sunset provisions in clause 181(10) and (11); otherwise they could devastate the prospects of renewable energy deployment in the north of Scotland, which is essential if the Government's policy on climate change is to be achieved.
These are important matters, and the new scheme has a number of benefits that I want the Committee to consider carefully. The cost of the new scheme, unlike hydro benefit, will not fall on just one company; it will be borne by all electricity suppliers, and all suppliers will be treated in the same way. That is why the Government are confident that the new scheme is not contrary to EC law, which is another important point that was raised.
I shall deal with the sunset clauses in a moment. I will first address the points made by the hon. Member for Angus and my hon. Friend the Member for Western Isles, by setting out the case for a three-year review, rather than a review after five years or longer.
Recent evidence and experience shows that the electricity market is a changing market and that it will probably continue to change. That change will affect distribution price controls and the level of distribution costs relative to other areas, and it will reflect the impact of BETTA and Ofgem's plans to move transmission and distribution charges on to the same basis within three years. The clause gives the Secretary of State the power to take all those aspects into account when the scheme is reviewed in three years. I am advised that if we removed that power, we would remove an important mechanism by which we intend to ensure that the future level of subsidy is appropriate. No one is in any doubt of the value of the subsidy to date, and my hon. Friend the Member for Western Isles, who has taken a keen and expert interest in the matter over many years, is aware of its value as well as the complexity of the issues before us.
My hon. Friend rightly highlighted the issue of sunset clauses. The power set out in the Bill is designed to give a helping hand to renewables while the industry gets on its feet and gains commercial respectability and the confidence of investors. A 10-year period has been set in which to achieve that; the power is not intended to be an ongoing means of support for renewables. The
Government have already planned for substantial support for renewables through the renewables obligation, which hon. Members will be pleased has recently been extended to 2015.
The Minister is right in stating that the renewables obligation lasts until 2015. However, the current value of the renewables obligation to a renewables generator is approximately half a penny per kilowatt-hour on top of the wholesale price. The potential difference in transmission charges without protection would be about three times that, so, unless something changes, the benefit of the renewables obligation will be nullified.
In response to my hon. Friend's earlier point, I said that the provision is designed to give comfort to renewables and those investing in them over the next 10 years. The argument that it should be longer has not been accepted by the Government, hence my reference to the parallel help given through the renewables obligation. The Government believe that setting in stone a longer period than 10 years is neither practical nor desirable for a fast-evolving market.
Future Ministers and Governments will closely monitor the trend towards the increasing use of renewables, which we all support. If further provision has to be made, so be it. However, our intention to provide support for 10 years focuses the commercial sector on ensuring that it has commercially viable products, which I believe it will increasingly have as technologies improve, rather than giving the signal that such subsidies might continue beyond that.
Just to clarify, the Minister is saying that any renewable development—for example, a wind farm—that is set up and starts to operate in the north of Scotland over the next two or three years will suddenly find in 10 years' time that the cost of transmission and the charging regime will markedly increase compared with that for a wind farm off the coast of Northumbria or Cornwall.
No, I can tell my hon. Friend that that is not what I am saying. Given technological developments and investment in the transmission and distribution infrastructure over the next 10 years, the cost differential may not be of the order that someone has suggested to him.
My hon. Friend has introduced a considerable number of uncertainties, which investors will have to take into account. The only thing that is set in stone is that the protection will end in 10 years.
What is set in stone is the fact that investors will have protection over the next 10 years. If my hon. Friend can think of any other area of commercial activity in which there will be such certainty over the next 10 months—never mind the next 10 years—I would be interested to hear about it. However, I am not inviting analogies, because safeguarding energy production and using renewables are key Government priorities.
No decision has been made as to whether the power will be necessary. However, as my hon. Friend knows, any decrease in transmission charges would be worth much less to a renewables generator than the renewables obligation. The figures that my hon. Friends and other hon. Members have floated are very much hypothetical, and although that does not detract from their value, they are extreme. The cost of energy production and distribution in different areas over the past five or 10 years has changed dramatically, and given developments in technology, we can expect to be equally surprised by the direction that things take in future. I take an optimistic view, and I hope that I can encourage hon. Members to do the same.
I have listened carefully to the Minister's remarks, but I would like to repeat the scenario that I put to him earlier. We are talking about a particular renewable source of energy in Scotland, but would his Department look favourably on, for example, an application for a wind farm in Vale of York or elsewhere in North Yorkshire? In such a scenario, there would have to be transmission lines connecting the onshore or offshore wind farm to the grid. Would his Department look favourably on extending the provisions to such a location in North Yorkshire?
Applications from any part of the country would have to be viewed in relation to the powers in the clause, but we would, of course, have to revisit it if it was deficient in terms of providing powers to undertake desirable developments in any part of the country.
On a point of order, Mr. Sayeed. We appear to be discussing clause 181, but I understand that we are considering clause 180 and its associated amendments. The issues are quite dissimilar, and I would like some advice before we proceed.
In that case, I shall confine my remarks to clause 180 and hope to catch your eye when we come to clause 181.
It is worth making it clear that clause 180, which refers to areas with high distribution costs, does not contain the sunset provisions that hon. Members have mentioned. It is important to make a distinction between the two clauses, which cover different areas and have different provisions. The hon. Member for Angus has ''leave out subsection (11)'' in both his amendments, but the clauses do not deal with the same issues.
It is necessary to include safeguard provisions for those with high distribution costs, but in the wider strategic restructuring of the United Kingdom's energy industry, which is necessary over the coming decades, we must ensure that an increasing proportion
of our generating capacity is nearer to the areas of largest consumption. One must therefore retain in the system some sensible location signals so that that process is encouraged through market forces.
Although we fully accept the need to protect an area with a special geographical problem, it is important to ensure in the long term that the energy generated in this country is closer to the south and south-east of the country—I mean both the United Kingdom and England—where there is the fastest increase in energy consumption. I hope the Minister recognises that, in reaching a special arrangement, as clause 180 does, we must not lose sight of the need to provide appropriate location signals.
In contrast to the point of order, the hon. Gentleman's remarks have strayed on to the territory of clause 181. Regardless of where the energy is generated, clause 180 is about the costs of distribution to consumers in the highlands and islands, which is a huge geographic area with a small population. Whether the energy comes from the highlands and islands or is pumped from the central belt, there is still a high distribution cost that must be offset by a mechanism such as a hydro benefit or the one in clause 180.
Order. Before the hon. Member for Hazel Grove responds, I am grateful to the hon. Member for Western Isles for doing something that I should have done, which is to remind the hon. Gentleman that we have not yet come to the stand part debate on clause 180, on to which his discussion and comments have strayed. If he confined his comments to the amendment, I would be most grateful.
Thank you, Mr. Sayeed. I have been quite properly hoisted by my own petard, so I will conclude and seek to catch your eye later.
I have listened to the Minister's response and I am not satisfied. The hon. Members for Western Isles and for Brighton, Kemptown (Dr. Turner) made very good points about the clauses, but I have heard nothing from the Minister to explain why we have the reviews when we do.
The hon. Member for Western Isles rightly stated that things are unlikely to change in the foreseeable future. Although the Minister talks about the changing costs of energy, the relative costs between the north and the south are unlikely to change very much because the same costs of distribution and transmission in the north will remain whatever the overall price of energy.
The sunset provisions and clause 181(11) in particular are of great concern. I was interested to hear what the hon. Member for Brighton, Kemptown said about the renewables obligation, but if I heard him correctly it runs out in 2015. That is just 11 years away, so we could have a problem with it and the scheme in subsection (11) running out at about the same time. That could be disastrous for any renewable energy projects that are up and running. Many of those projects will take a long time to become established and produce electricity.
The sunset provisions are misguided. This is not, as the Minister suggests, a case of commercial activity only; it is an important strategic industry for the future, which must be treated differently from an ordinary commercial industry if we are to rely on it. I am not satisfied with the Minister's answer and I want to press the amendment to a Division.
I would like to press each of them, because they are different.
I seek clarification from the Minister of the true electricity distribution costs by region. There is some useful relevant material in the Government's regulatory impact assessment. Page 130 shows, surprisingly, that the average cost of distribution in the north of Scotland is not much greater than that in the south of Scotland, which in turn is not much greater than that in, say, Yorkshire.
Against that background, and bearing in mind the renewables obligation that the Government have imposed on utility companies and electricity companies in particular, and given that the figure for network length in the north of Scotland is a staggering 66.4 km per 1,000 customers—more than double the figure for the south of Scotland and probably almost three times that for Yorkshire—does the Minister share my surprise that the cost of distribution for the north of Scotland is not greater than what is shown in the table on page 130?
No. I do not share the hon. Lady's surprise, for several reasons. There is a long history to this. The previous provisions covering what we call hydro benefit go back to 1940, so there is a long history of close Government involvement in ensuring the cost-effective production of electricity in the rural north of Scotland, and, indeed, the part of the country that I was brought up in, the rural south of Scotland. That is one relevant factor. Obviously, the co-operation between the Government and the private sector introduces other factors that influence the cost to which the hon. Lady referred, so it is perhaps not as strange to me as it may be to others.
I very much welcome the cost-effective production of electricity in Scotland, but we do know that the greater distances and problems of access—as well as the problems of climate that mean that power lines, for example, are subject to much more severe weather and storms than anywhere else in the UK—bring costs with them. I would be the first to applaud the work done by the distributors and transmitters in ensuring that disruption continues to be minimised and that electricity is available at a cost-effective price.
Question put and agreed to.
Clause 180 ordered to stand part of the Bill.