Clause 18

Energy Bill – in a Public Bill Committee at 10:30 am on 26th February 2008.

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Requirements relating to grant of licences

Question proposed, That the clause stand part of the Bill.

Photo of Sir David Amess Sir David Amess Conservative, Southend West

With this it will be convenient to discuss new clause 18—Provision for regulations for a carbon dioxide performance standard on electricity generating stations —

‘After section 36B of the Electricity Act 1989 insert—

“36C Generating stations: carbon dioxide emissions performance standard

(1) The Secretary of State may by regulation prescribe a carbon dioxide emission performance standard applying to any generating stations requiring consent for construction or extension under section 36.

(2) Regulations under this section must prescribe a carbon dioxide emission performance standard that is in no case greater than 400 kilograms of carbon dioxide per megawatt hour of electricity generated at any individual generating station.

(3) Regulations under this section may prescribe—

(a) the ways in which proposed generating stations are able to demonstrate compliance with the carbon dioxide emission performance standard including by way of carbon capture and storage;

(b) the information that must be submitted with an application under section 36 to demonstrate compliance with the carbon dioxide emission performance standard;

(c) how compliance by generating stations that have demonstrated compliance with the prescribed performance standard and are granted consent under section 36 shall be monitored and enforced, including appointing and conferring powers on an appropriate agency to carry out such monitoring and enforcement;

(d) any sources of electricity generation that are deemed to be compliant with the carbon dioxide emission performance standard including electricity generated from renewable sources.

(4) The Secretary of State shall not grant a consent under section 36 for any generating station that does not comply with any prescribed standard.

(5) Before making regulations under this section (including setting the level of performance standard), the Secretary of State shall consult—

(a) electricity generators;

(b) the Gas and Electricity Markets Authority;

(c) the Gas and Electricity Consumer Council;

(d) the Environment Agency with regard to England and Wales;

(e) the Scottish Environmental Protection Agency with regard to Scotland;

(f) other persons or bodies representing the interests of the electricity industry, local government and the environment, and

(g) any other persons or bodies as he may consider appropriate.

(6) The Secretary of State must make regulations under this section no later than 12 months from the date on which this Act is passed.

(7) Any regulations under this section shall not be made unless a draft at the instrument containing it has been laid before, and approved by a resolution of, each House of Parliament.

(8) In this section—

“carbon dioxide emission performance standard” means a standard prescribed by regulation setting the maximum amount of carbon dioxide that may be emitted from a generating station.”’.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

I am looking forward to hearing about new clause 18, but first, I will speak briefly by way of introduction to our clause. The clause will enable the Secretary of State to make regulations by the negative procedure that prescribe the circumstances in which carbon dioxide storage licences may be granted. The Liberal Democrats worry about the burdens placed on the hard-working Secretary of State, but he has some support, so I do not want them to get too anxious.

The clause states that the regulations may prescribe who may apply for licences, what information would have to be supplied by the applicant, the financial security arrangements and other requirements. Having such regulations in place will help to ensure that only appropriately qualified and financially sound operators engage in CO2 storage activities and that certain conditions are satisfied before a licence to commence operations can be obtained. I now look forward to hearing the arguments in favour of new clause 18.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

I shall first address the stand part debate, particularly in respect of clause 18(2)(e). The impact assessment signed by the Minister raises an interesting question on page 19 about carbon caption storage falling within the European Union emissions trading scheme. Future leakages or losses of carbon dioxide from geological or other storage facilities will attract financial penalties, because permits are technically required for such carbon emissions.

As the Minister has pointed out, we are talking about very long-term prospects. He almost issued the phrase, “A millennium is a long time in politics”, and I wish that he had; as it would have been a good one. I want to ask about the licensing regime and whether the future obligation not to lose carbon dioxide from storage facilities will be incorporated within the licensing regime. From the impact assessment, it seems as though it should be, but it is obviously a challenge to design that licensing regime to cope with the very long time scales that might be involved.

The hon. Member for South Thanet was right to draw a comparison with the nuclear clauses, although we would make the obvious distinction between one industry that we would rather discourage and another that, in this case, we would rather encourage. That legitimises a different approach. After all, when instantly released, CO2 does not start poisoning anyone or making their hair fall out.

Photo of Stephen Ladyman Stephen Ladyman Labour, South Thanet

First, I take issue with that final statement. If there was ever a massive release of CO2 from one of the carbon storage places, it would be catastrophic. Secondly, the Liberal Democrat position might be to discourage nuclear energy. If these two chapters had been phrased in a distinct way, I could understand it. My position and that of my hon. Friend the Minister is that we see nuclear energy as having a positive and benign role in fighting climate change. So, in those circumstances, the two chapters should be written on a more even keel.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs) 10:45 am, 26th February 2008

The hon. Gentleman makes a perfectly legitimate point. We look forward to the Minister’s further comment.

The new clause addresses another crucially important issue in terms of carbon capture and storage. For many organisations and observers of our debates, there is a glaring omission: for all the commitments to store CO2, once it has been captured, there is nothing in this Bill that mandates its capture or puts in place a regime with powers for the Secretary of State to enforce, strongly encourage or incentivise its capture.

In one of the evidence sessions, the hon. Member for Copeland asked whether we were betting the house on carbon capture and storage and whether it would be the cornerstone of future energy policy in tackling climate change and without which the whole project might fail. To be honest, the answer could be yes. We hope that energy efficiency and, in some cases, nuclear power or at least renewable energy, will do something to close the energy gap, but they will all struggle to do that within the time scales we have in front of us. Carbon capture and storage is therefore a vital component of the campaign to meet our emissions reductions in the medium term.

If a new generation of coal-fired power stations such as Kingsnorth is to go ahead, that cannot be done without a regime in place that would at the very least enforce carbon capture and storage as soon as it is available. The sooner that regime is enabled, the better for industry and for investors to plan for it.

The risk is that we commission new power stations and then later, once the technology is up and running, we spring the regulatory regime on the industry. That is the kind of thing that industry persistently tells us is bad for investment and future planning. The clear direction of the Stern report is that action now to incentivise and make clear the strategic direction of the Government provides certainty for investors and reduces costs in the long term. We need to lock ourselves into a regime that will make carbon capture and storage an inevitable part of any new generation of any fossil fuel powered stations.

There is a good precedent. California has introduced a greenhouse gas emissions standard, including a facility-based element that targets particular power stations. The standard sets a level of carbon dioxide emissions per megawatt-hour. In new clause 18 we suggest a level of 400 kg of carbon dioxide per megawatt-hour. That figure is not plucked out of the blue; it is based on the current performance standard of the best modern combined-cycle gas turbine power station. That should be the baseline against which the Secretary of State will have the power, as the technology comes on stream, to reduce and enforce lower emissions of carbon dioxide from fossil fuel powered stations.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

I was struck by the phrase, “as the technology comes on stream”. I thought that was significant, so will the hon. Gentleman say more about that? At first sight, I thought his new clause might be saying that no coal-fired power stations would be allowed until they could be capture-ready. Is he saying this power would come in only once CCS had been proven?

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

I am grateful for the Minister’s intervention. Perhaps I have not made myself sufficiently clear.

We need to set aside the debate as to whether Kingsnorth goes ahead without carbon capture storage technology in place right now. Many of us might be sympathetic to that but it is outside the remit of the clause in front of us and perhaps even the Bill. We are seeking to establish a clause that would give enabling powers to the Secretary of State and would give him the mechanisms with which to enforce carbon capture and storage, at the very least as the technology becomes available. In other words, a clear strategic direction and a clear direction of travel for industry and investors would be set out. They would be very clear that if and when the technology became available—and we all hope it will become available sooner rather than later—the Secretary of State would already have the powers in place to reduce acceptable amounts of carbon dioxide per kilowatt-hour and to enforce an increasingly stricter regime so that it became cripplingly expensive to run a fossil fuel powered power station without carbon capture and storage.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

I am listening to the hon. Gentleman with great interest, may I take him to the actual wording of his new clause? Subsection (2) says:

“Regulations under this section must prescribe a carbon dioxide emission performance standard that is in no case greater than 400 kilograms of carbon dioxide per megawatt-hour of electricity generated”.

That is a very prescriptive approach and does not seem to tie in with his talking about “when this technology becomes available” and “when it comes on stream”—the two do not seem to tie in together.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

Again, I must have not quite sufficiently explained my thinking because I thought I had addressed that issue already. The number has not been plucked out of the sky and I have some sympathy with the view that it should not be too prescriptive—that is something we have argued in other clauses.

The number is based on the Californian model of taking the best emissions performance of the best modern power stations. In this case, modern combined-cycle gas turbine power stations emit 400 kg per megawatt-hour, so that is where the standard has come from. The new clause says we should do no worse than we do at the moment and would give the Secretary of State the power, in due course, to reduce that level on a progressive basis, as the technology allows. It sets out the opportunity for the Minister to emulate Governor Schwarzenegger, to become “The Terminator” of dirty coal-fired power and to be the champion of clean coal and gas-fired power stations in the future.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

I will talk firstly to new clause 18 and then ask questions about the clause as it currently stands. No doubt the Minister “will be back” in a Schwarzenegger way to respond formally to the points that have been put forward.

I think there is mixed thinking in what we heard just now from the hon. Member for Cheltenham. This approach has been taken in California and the companies there know that they cannot build a power station unless they are going to adhere to very strict standards of emissions. However, they are part of a nationwide structure so they can always import energy  from other parts of the US if coal-fired power stations do not get built in California. I see the attraction of having an absolute limit; it gets us away from the target culture, and as the Minister will have heard me say before, I think the target culture is fundamentally flawed because it just means that, in 15 years, somebody else can come along and explain why the target was not met. An absolute limit does not provide that wriggle room, but there is an inherent contradiction in what the hon. Member for Cheltenham has been saying.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

The hon. Gentleman seems to be criticising the Californian system, but the Californian level is established very specifically at 1,100 lbs of CO2 per megawatt-hour, which is about equivalent to 500 kg, and it is on a state-wide basis. It does not depend on any national scheme, because there is not actually a national emissions trading scheme in place in the US yet.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

I am not criticising the Californian system—it has different sources of energy from those we have available to us—but I am not sure it is immediately applicable to us. I am particularly intrigued by some of the language. The hon. Gentleman said that Kingsnorth would be built, but on the condition that carbon capture and storage would be implemented “as soon as it is enabled”. That would mean asking those who are investing in that power plant, E.ON, to build a power plant without knowing what the costs would be and probably assuming that the technology would be available, but certainly not knowing whether Government support would be available to help them meet the costs. My expectation is that if Kingsnorth were to have carbon capture and storage technology built in from the outset, it would add an extra £400 million or £500 million to its construction costs. The investors would have to gamble that they might get some of that money back from somewhere. They would not do that; they are part of a global company, so they would go and invest in other forms of energy elsewhere in the world. We would therefore find that the hard-line approach that the new clause suggests would drive away investment in some areas.

I have great sympathy for the concept that we want carbon capture storage to be applied to Kingsnorth but I do not believe that the new clause will achieve that—it is far too prescriptive. The hon. Gentleman has also got to tell us how we are going to fill the energy gap.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Environment, Food and Rural Affairs

The specific example of Kingsnorth is very germane to this new clause. Could the hon. Gentleman verify his own view on the criteria—should it be a cap of the sort envisaged here? If he were Secretary of State, would such a project go ahead without any conditions? How would he try to achieve these goals?

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

I find the prospect of Kingsnorth without carbon capture storage quite horrific. It is clearly a cleaner technology than the old coal-fired power stations. The idea of building a massive new fleet of power stations when we could be using other technologies or when CCS could be involved would be profoundly disturbing. I therefore wish very much that  CCS is part of the Kingsnorth project and that will no doubt be part of the bidding in the pilot scheme. We will have to see what the Government decide in due course but if Kingsnorth does not get financial support under the pilot scheme, the Government will have to address the problem. Without such support at the outset, I doubt whether the investment would go ahead.

We will need at some point to discuss how we fill the looming energy gap. The Liberal Democrats are not in favour of nuclear power; they are not in favour of some of the new-build coal that is being suggested; they are not keen to have imported gas; and Liberal Democrat councils are stopping wind applications. Are we going to go backwards? We are going to have a rather dark, cold future, presumably sitting in a hut, waiting for somebody to rub some sticks together and invent some heat for us.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

I will give way because I believe that Kingsnorth will be built adjacent to the hon. Gentleman’s constituency, or at least very near it.

Photo of Stephen Ladyman Stephen Ladyman Labour, South Thanet

I was going immediately to declare that interest: Kingsnorth is not very far away from my constituency in Kent and many jobs are going to be dependent on it. Like the hon. Gentleman, I very much hope that it will include carbon capture and storage. However, if we did something that would discourage the development of the new Kingsnorth, would that not mean that the existing plant—which is dirtier and produces far more CO2—is likely to be further extended into the future? It is in the interest of the environment that we give E.ON the support it needs to develop these new technologies and, in addition to that, press it to include carbon capture and storage at a later date.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

My understanding is that the current facility has to close down because of EU requirements in any case and that the new plant proposed by E.ON would be much cleaner than the old one. However it still would not be acceptable unless CCS can be involved at some stage. That is why the way in which the pilot project is going to go ahead will be fundamental to deciding whether that happens; coal can have a future, but only if carbon capture storage can be made to work. My concerns about this new clause is that, by laying down at this stage such a prescriptive approach, people will be asked to invest without knowing what the costs are going to be and without knowing what Government support might be available. In those circumstances they will simply walk away.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

I cannot let the hon. Gentleman’s criticism of Liberal Democrat policy remain unanswered. He asserted that we are against the import of natural gas. I do not remember having said that and nor do I remember any of my hon. Friends saying such a thing. The import of natural gas may be not be  desirable, but we certainly would not be in favour of stopping it. In terms of carbon capture and storage for fossil fuel powered power stations, he seems to take a view that is supported by comments from the right hon. Member for Witney (Mr. Cameron). If the hon. Gentleman rejects the new clause on technical grounds, I would therefore be interested to know what he suggests in its place.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform) 11:00 am, 26th February 2008

If I have misunderstood the Liberal Democrat position of expressing concerns about being heavily reliant on imported gas—in particular, the proportion that comes in from Russia—I apologise if I misinterpreted their stance.

We have said that it is clearly desirable for carbon capture and storage to be part of the pilot project at Kingsnorth. If it is not part of that project, the Government have to find another way of supporting it. If the CCS plan is not involved from the outset, the environmental costs of Kingsnorth are almost too great to contemplate. However, new clause 18 is not the right way to deal with that. Setting such a strict target—or such a prescribed limit—at this stage would drive away investment, rather than enabling the partnership approach to develop.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Environment, Food and Rural Affairs

This has been a very worthwhile debate, and I just want to add a couple of brief comments and questions. I am interested in an issue that has arisen, which I would call double jeopardy: if there is leakage from stored carbon, my understanding is that a permit is needed under the emissions trading scheme—so, effectively, it must be paid for—but can the Minister clarify whether a separate penalty regime will apply? I have been looking through the clauses in this series, and there are all sorts of penalties for not keeping the books properly, but I am slightly confused about whether there is a penalty for allowing CO2 to leak. The penalties do not seem to include one for actually letting the stuff out. Is that because a permit is needed under the ETS and there is the penalty, or is there a penalty in the clause in respect of licenses? I am unclear about that.

More generally, on giving the go-ahead to new plants, our new clause includes a specific figure as an upper boundary. If a figure were not put in the new clause, it would simply say that the Minister could set any ceiling. If the Minister set a very high ceiling, it would be a non-binding constraint and have no impact. We did not think it sensible to table a new clause that would have no impact if the Government just decided that it would not have one. We are trying to beef up what the Government do. That is why we have included a specific figure.

It seems to me that the right approach to new applications, whether at Kingsnorth or elsewhere, is that we first need a public inquiry, as it will be the first of many and this is of strategic national importance. I hope the Minister will tell us whether or not we will get an inquiry. We should not give the go-ahead in the hope that the technology is on stream, although many of us have understandably expressed such hopes. We should not give the go-ahead for an indeterminate future point at which the stuff that is going to be  spewed out might be captured. We should not give the go-ahead with that degree of uncertainty.

Personally, my judgment would be that the go-ahead should not be given to any new coal-fired power station until there is a determinate period in which carbon capture can be applied. Indeed, the requirement should be that, when the go-ahead is given, the power station is CCS ready in a very specific sense—ready for a technology that we know will work in a realistic time scale. That seems to be the right way forward.

In response to the hon. Member for Wealden, I suggest that the industry would then have certainty; it would know the time scale over which it had to put CCS in place; it would know the technology required to implement it; and it would have some idea of cost, because the technology would be near market. That is probably the right balance to strike. I hope the Minister can clarify the Government’s strategic approach, because our new clause is all about the limits and conditions on a new generation of coal-fired power stations, and it would be helpful to get a steer at this point from the Minister on the Government’s strategic approach.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

This has been a useful discussion. May I say from the outset that it would be inappropriate for me to comment on any live application for a power station—or indeed on the timing of any decision by the Secretary of State. The Secretary of State operates in a semi-judicial world in that respect, and I am afraid that our hands are tied. Obviously, for any application, the Secretary of State would want carefully to consider all representations.

The licensing regime for CCS will be flexible enough to cover liabilities for leaks, among other things. The European Union’s ETS liabilities will therefore also be covered for as long as the licence is in place. After that—as I think we were teasing out earlier—the liability in the long, long term will have to pass to the state.

I was also asked whether, if there were a leakage—of course, we hope there will not be any—there is a penalty regime in the Bill. I am advised that clause 19 explains what can be contained in a licence, although the list of terms and conditions is not exhaustive. We expect requirements to remedy and to notify of a leak to be included in every licence, as standard. Failure to notify of a leak will be a criminal offence under clause 22. The operator will also be liable for damages under the environmental liability directive.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Environment, Food and Rural Affairs

Clause 19(3) contains a list of the things in the licence, but the Minister appears to be saying that leakage is not yet included. I am puzzled about why that was not put in the Bill; it seems to be fundamental to a licence to store carbon.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

I have said that the list is non-exhaustive, and we expect such things to be included, but perhaps I can say more about that in the debate on clause 19. Committee sittings may be exhausting, but the list is non-exhaustive.

I have listened carefully to the hon. Member for Cheltenham speak on the new clause, but I have also listened to the hon. Member for Northavon, and I am  not sure whether there was consistency. I think of myself as a conviction politician, but I have a weakness for searching for consensus. The consensus is—surely, this is a happy situation—that we all want carbon capture and storage to work, because of its importance to contributing to CO2 reductions. We are all frustrated that CCS is not on the shelf, ready to take off and apply to fossil fuel power stations. The issues that confront us are probably about timing, and of course, energy supply and security are crucial.

I see myself as more of a spectator in the discussion between the two Opposition spokesmen, and as the only Minister on the Committee, I welcome that distraction from time to time. I enjoy it, and it is often interesting. Nevertheless, supply is important. The climate change and energy world is full of sometimes well-qualified people who say no to things—they are the Dr. Nos. They say no to nuclear and no to fossil fuel power stations, and they say yes to other things in principle. However, I am afraid that the hon. Member for Northavon is right. I use the word “afraid” because the Liberal Benches are often full of Liberal MPs who, in practice, say no to wind farms in their constituencies. The simple truth is that, unless we are going to jeopardise our security of supply and unless we become even more reliant on gas imports than we will need to be anyway, we must start to say yes to things.

I do not think therefore that it is unreasonable if, either during debates in Committee or on the Floor of the House, serious political parties say serious things about where the stuff is going to come from. That is a perfectly legitimate point that the hon. Gentleman raised. I was searching for consensus and I have spoilt it, but there we are. The consensus is that we want carbon capture and storage to work, but we have to confront a timing problem. It is not unreasonable that we have different views about that problem.

I can understand the motivations behind the new clause. I shall explain why we have not included provisions in the Bill similar to those recommended by the hon. Members for Cheltenham and for Northavon and why we believe that it will not be appropriate to do so. Section 36 of the Electricity Act 1989 requires a development consent to be obtained from the Secretary of State in England and Wales and from the Scottish Executive in Scotland for all new power stations of 50 MW or more.

The new clause suggests that no such consent should be granted unless the relevant power station is capable of meeting a prescribed standard for the emission of greenhouse gases. Although I am still confused about the timing of when the new power will come into force, but perhaps that is a detail. The Government do not believe that prescribing emission limits in that way is the most effective route to low-carbon power generation. Such an approach goes against the Government’s fundamental approach to energy policy, as set out in the 2007 White Paper. In the UK’s competitive market framework, the choice of fuel and technology for a new power station is a matter for the energy company. The Government’s role is to set the right framework to incentivise private sector investment, consistent with meeting our energy goals of tackling climate change and providing energy security.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

Yes, although I have a lot more to say, which I am sure will meet the hon. Gentleman’s requirements, but of course I give way.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

I am grateful to the Minister for giving way. He is doing a good job of answering many of the points that we have raised. If not under this regime, how does he imagine that existing gas and coal-fired power stations will be incentivised to adopt carbon capture and storage? Is that set out in the Bill?

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

By some happy coincidence, I am going to touch on that in the next few pages of my speech. It is the Government’s view that the EU ETS has an important role to play in reducing greenhouse gas emissions from new and existing power stations. We believe that it is the most cost-effective way to make the transition to a low-carbon economy.

The EU ETS is a market-based mechanism that sets an overall EU cap on carbon dioxide emissions. It operates by setting an absolute cap on the CO2 emissions that can be emitted by the installations covered by the scheme—for example, a cement factory or a power station. The cap on emissions is distributed to installations via allowances that are either given or auctioned off to individual installations. The allocations of allowances specify how much carbon dioxide may be emitted by each installation. Installations that emit less carbon dioxide than their allowance and therefore have an excess can sell it on the market, and those that emit above their individual allocation must purchase the allowances from installations with a surplus.

We believe that the EU ETS is the best way to tackle this issue for two reasons.

Martin Horwood rose—

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

Would the hon. Gentleman mind if I make some progress? First, the in-built scarcity in allowances that results from the imposition of the cap creates a price for carbon, thus encouraging investments in generating technologies that emit less carbon dioxide, which is the same objective as that in the new clause.

Secondly, the EU ETS provides flexibility for the market to identify the most cost-effective way to reduce emissions. The ETS allows companies to use credits derived from the so-called Kyoto flexible mechanisms—the clean development mechanism and the joint implementation mechanism—to offset carbon emissions in the UK. Thus, where this is cheaper than reducing emissions in the UK, project developers will take action to set up emissions-reducing projects in the developing or transition countries and will sell the emission reduction credits derived from such projects to entities covered by the EU ETS.

Given the flexibility in the EU ETS, we can therefore reduce emissions at the lowest economic cost, while facilitating technology transfer to developing countries. The new clause would be to remove that flexibility. For example, in the short term, an operator may build a coal power station in the UK and buy allowances through the clean development mechanism. With the benefit of a proven technology, such as CCS, the same operator may then choose to retrofit CCS and benefit  from the emission reductions. Carbon emission reduction is a global objective and we need to deliver it through the most cost-effective means. That is a lower cost way of reducing emissions, and I believe that it is right that developers should have that option.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

I am grateful to the Minister for indulging me again by giving way. I want to question him before he sits down and allows me to speak substantially on the issue. He is describing the process by which carbon pricing is achieved through the emissions trading scheme. That was quite specifically addressed by Sir Nicholas, now Lord Stern in his report. He said:

“Carbon pricing alone will not be sufficient to reduce emissions on the scale and pace required”.

The reason for that is pretty clear, from the way in which the ETS is operating in practice. The carbon price that it is generating is not sufficient to drive investment into clean technologies. This is an explicit problem with emerging emissions trading schemes and one with which we are all familiar. Does the Minister now disagree with Sir Nicholas Stern’s assessment that something more than simply an emissions trading scheme and carbon pricing is required to drive forward such technology?

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform 11:15 am, 26th February 2008

I agree with Nick Stern’s analysis, although I want to say a little more about the ETS. It is part of the answer and becomes a more significant part if the carbon price increases as we become tougher in phase 3 of the ETS. I certainly concede that, as far as we can tell at the moment and for the foreseeable future, it is not the whole answer, just part of it.

We have outlined our commitment to consolidating the EU ETS in the energy White Paper and we are currently working closely with the Commission to ensure that the revised EU ETS directive continues to play a key role in ensuring that the EU and the national emissions reduction targets are reached. I hope that members of the Committee agree with the Government’s view of the ETS as a cost-effective means of delivering our goals in achieving emissions reductions. It does that while, at the same time, allowing progress towards achieving all our energy policy goals, including maintaining reliable supplies.

As the Committee will be well aware, without new electricity capacity, the United Kingdom potentially faces a growing gap in its generation capacity. The hon. Member for Cheltenham has made that point. It is significant that nine fossil fuel power plants, comprising 12 GW of capacity, which is about 20 per cent. of peak demand this year, are scheduled to close by the end of 2015. Six nuclear power plants with the combined capacity of about 6.3 GW are also scheduled to close by 2016, with another 4 GW in later years.

We are not therefore in the position to rule out key elements of the UK’s energy mix, which is what the hon. Gentleman’s new clause would effectively achieve by setting greenhouse gas emission standards at approximately half of what is currently emitted by a new super-critical, coal-powered station. Currently, coal accounts for about one third of our electricity supply, but that proportion will reduce during the next  five to 10 years as stations close. Coal-fired electricity generation plays an important part in reducing and managing the risks of growing dependence on gas, such as in the winter of 2006 when gas supplies were tight and prices were extremely high, and the market was able to reduce gas emissions by generating electricity from coal. Indeed, during that winter for several months some 50 per cent. of our electricity was generated by coal in a difficult global gas market.

We should not prevent the market from providing such flexibility as we become more dependent on gas. Although the Government are committed to meeting EU renewable energy targets and have paved the way for new nuclear, neither technology is currently well suited to providing large-scale, flexible generating capacity on the time scale that can respond quickly to changes in the supply-demand balance. Fossil fuel power stations are presently the only means that we have of ensuring the flexible and responsive back-up capacity that we need.

Therefore, instead of ruling out one type of energy supply, the approach favoured by the Government is to maintain a diverse energy mix and to support the EU ETS that sets absolute caps on carbon dioxide emissions, and thus sends a clear carbon price signal to the market. That incentivises the industry to bring forward cost-effective investments to drive carbon dioxide emissions reduction.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

I have listened to the Minister with great care. He will be well aware that the price of carbon as set out under the EU ETS has fluctuated enormously. It has been up to €30 a tonne; it has been down to a few cents a tonne. Will he clarify the Government’s thinking on a floor price of carbon in the event that they decided that the EU ETS was not doing enough to switch people away from carbon because the price was too low? Will they consider a floor price?

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

The short answer is yes, as we have said in our documentation. We are reluctant to have to get to that place. All our efforts are in developing and making stronger the ETS, so that CCS can be brought in, as can aviation and so on. We can have some confidence that, as the phases progress—phase 3, for example—we will see a stronger price for carbon. That is kept in reserve as a possibility.

On my understanding, the new clause tabled by the hon. Member for Cheltenham asks for regulations on emissions standards and for carbon capture readiness to be made within 12 months of the Bill’s enactment. The fact is that the technology will not be ready by then. It will not have been tested in the UK or anywhere else. Again, that raises the issue of what timing the Liberal Democrat Members have in mind. This is not a debating point, it is a serious matter—I am still slightly hazy about whether they envisage a number of years when no fossil fuel or coal power stations would ever be allowed because the technology would not be ready. I am genuinely unclear about that.

The issue of carbon capture and storage readiness is an important point referred to in new clause 18(3)(a). I would like hon. Members to note that we are currently considering whether we should require future fossil fuel  power stations to be built “capture ready”, and if so, what the options would be for doing that. We will be launching a consultation on carbon capture readiness later this spring. The consultation will take into account the recent draft EU directive on CCS that promotes mandatory carbon capture ready conditions. It will consider the capture readiness requirements that may need to be contained in future applications for consents and how practically we might deal with the UK’s consenting process. It would therefore be premature to refer to carbon capture readiness in the Bill prior to the outcome of the consultation.

Photo of Paddy Tipping Paddy Tipping Labour, Sherwood

I accept that that is a sensible approach, but there is currently one planning application—Kingsnorth in Kent—and the Minister will have to be careful how he talks about it. Presumably that application precedes the consultation and will not be affected by the statement that he has just made.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

My hon. Friend might have been out of the room; indeed, I know that he was attending another Committee when I said at the beginning that I would not comment on any one application for reasons that he will understand. However, I have heard his comment.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

Can the Minister define what he means by carbon capture ready? My understanding is that being carbon capture ready could mean having better scrubbing facilities for sorting out the SOx and NOx, because if they are not removed from the system one cannot apply the carbon capture technology at a later date. Also, it is about having additional space for building a carbon capture facility adjacent to the power station. Is that also his understanding or does he have something more fundamental in mind?

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

I invariably have more fundamental things in mind. The answer is yes: we want to consult because this, like many other questions, is not as simple as it sounds. We want to consider the capture readiness requirements that may be contained in future applications. In other words, we want to consider exactly what we mean by capture readiness. We want to have a consultation so that we can answer the hon. Gentleman’s question properly and technically. The issue deserves some technical work, hence our consultation.

In summary, I hope that I have reassured the hon. Members for Northavon and for Cheltenham that the provisions contained in the new clause are not necessary. The EU emissions trading scheme offers the most cost-effective means of ensuring that greenhouse gas emissions are reduced. However, I have always been happy to concede that, in the foreseeable future the ETS is unlikely to be the whole answer as it will depend on the price of carbon. Therefore, the consultation is important, as is the development of the CCS demonstration project as soon as we can.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

I warmly welcome the Minister’s announcement of a consultation on readiness of carbon capture and storage. That is a very positive development that Liberal Democrats welcome.

It is a moot point whether locking in carbon capture and storage to the licensing regime in respect of new power stations is premature, or whether it is premature of the Bill to go ahead before that consultation has taken place. We can leave that to one side.

The Minister is also right to identify the major problem facing energy supply in the UK, which is that tens of gigawatts of power are to go off stream by the middle of the next decade. That is why carbon capture and storage is critical and why it is essential that a regime that locks in carbon capture and storage—not just in terms of storing the carbon but of mandating its capture—is so important. With the best will in the world, energy efficiency, renewables and nuclear—whichever we prefer—are not going to be ready in time to meet our emissions targets by the middle of the next decade when this large-scale generating capacity is lost.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

I seek clarity from the hon. Gentleman. I could understand an argument that says that as soon as the technology is ready it should be a requirement. I am not saying that that would be the Government’s position, but it seems a logical argument. Is he saying that, or is he saying that until the technology is there a Liberal Democrat Government would never approve a coal-powered or fossil fuel powered station? What is the position on timing?

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

I am grateful for the Minister’s question and the opportunity to clarify. We are seeking to lock in a process whereby it will be clear to investors that absolute mandatory conditions, of the kind that he just seemed to open the door to, will be part of the regime and will be in the Bill to give the Secretary of State powers to mandate reductions in specific carbon dioxide emissions from power stations, including fossil fuel powered ones. It will be for the Secretary of State to judge when the technology has reached the point at which those powers can be exercised and the restrictions introduced. The Minister suggested that the exact limit on emissions set by the clause would stop the development of all new fossil fuel powered stations, but in practice that could be a matter for debate. If the level is wrong, we can have the same essential regime with a different level, if that needs to be negotiated.

Similarly, the Minister questioned whether the technology was ready to put this kind of regime in place. The point is not to prejudge the technological developments. We are trying to avoid that. This is technology-neutral. We are trying to send a clear signal to investors and the industry—as requested by Stern and in so many other arenas—that this will be the regime, the landscape, the policy and the clear strategic direction. At the moment, there is nothing about that area in the Bill. There is nothing in the Bill that reflects the comments that the Minister has just made about being open to the idea of setting limits on individual power stations. We are trying to introduce that.

The Minister’s broad position at present, as I understand it, is that measures outside the Bill, in particular the emissions trading scheme, are a sufficient incentive to industry to bring forward the new  technology. That is a respectable and logical position. It is one that I hope, under some pressure, he might be persuaded to modify.

I find the Conservatives’ position less logical. They seem to support in principle the idea that we need to lock in some process to mandate carbon capture and storage, but to criticise the only practical and positive suggestion on the table, which is the new clause. There is no Conservative alternative. If Conservative Members are not going to support the proposal in front of us, I have to concede that it is unlikely to go forward.

Photo of Brian Iddon Brian Iddon Labour, Bolton South East 11:30 am, 26th February 2008

My difficulty is that if we disincentivise the industry operating in this country, we may get a greater volume of imported energy, whereas the EU ETS scheme at least applies to neighbouring countries as well as to Great Britain.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

I am grateful for the hon. Gentleman’s intervention, which was well informed as ever. He raises a legitimate concern, but we could debate the level at which the restrictions are set and whether the Californian model on which the new clause is based works well in practice. Such debates could all be had. At the moment, the new clause is the only practical suggestion for locking in capture, as opposed to storage, that is being suggested in the Committee.

As I said, I find the position of Conservative Members unsatisfactory because they are not proposing any alternatives despite appearing to support the broad approach in principle. I hope that consensus will emerge at a later stage in the Bill, but for the moment I concede that the new clause is not going to receive support. Therefore, I beg to ask leave to withdraw the motion standing in my name.

Photo of Sir David Amess Sir David Amess Conservative, Southend West

Sometimes procedure in Committee can be confusing. Perhaps I should have made it clear at the start that although we are debating that clause 18 stand part of the Bill and new clause 18, the moving of new clause 18 will not happen until the end. That is when new clauses are moved and when there can be a Division on them. None the less, I have taken note of what the hon. Member for Cheltenham has said.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

Thank you, Mr. Amess, for that clarity. I think that we are all much wiser—well probably no wiser but certainly better informed.

The debate has gone to the heart of the energy challenge that we face. We know that, in 20 years, there are going to be many new sources of energy. Marine and tidal technology will have proved what they can achieve, and we will know what other forms of renewable energy, such as photovoltaics, can deliver. We have a massive energy shortfall coming down the line and we have to make decisions on how we are going to address that at an earlier stage. The challenge is that we do not know what technology can deliver economically.

We probably all believe that CCS is technically possible, but the challenge will be to ask industry to invest in new coal technology and coal-fired power stations when it does not know what the cost will be or  who will pay for it. Industry will be aware that it will cost hundreds of millions of pounds to add CCS to each power station. If the Government were going to come forward with the money, by using some of the credit from the EU ETS for example, that would make a completely different investment environment from the one there is now. Although I am sympathetic to and understand what Governor Schwarzenegger has achieved in California, my concern about the new clause is that it would introduce too many uncertainties into people’s investment decisions in this area.

I want to raise with the Minister a number of general points about clause 18; there are areas where greater clarification will be helpful. Is he seeking to have international agreements and standards on these matters, rather than the UK going it alone? It would be a matter of concern to us, if we felt that the UK had different standards to other countries, particularly if those countries were adjacent to us. I hope that he will take a generally global view on that. The countries that may be able to do most in this area are those such as Norway and the United States, so we should not just be looking at an EU solution but to genuinely international standards.

Who does the Minister think will be able to apply for a licence under clause 18(2)(a)? What restrictions does he have in mind? Are there categories of people who will be likely to be barred from making applications? He has indicated in the past that it was unnecessary to bar people from making future applications, because if they did not adhere to the rules and regulations, this is the area where they could be ruled out. Are there other categories, particularly international ownership of organisations, where that may be the case? Would that give him grounds for anxiety? What will the fund, as set out in clause 18(2)(e), be used for? Will it deal with problems during the facility’s operation? How will financial security be provided? Will it just be from funds contributed, or will there also be a duty on parents and associated companies? Does that also take account of any decommissioning costs?

The store itself will clearly not be decommissioned—the intention is that the CO2 will be there for all time—but a small amount of apparatus will be necessary for injecting the CO2 into that facility. Who will be responsible for the decommissioning of that and will it be covered from this fund? Further, who will look after the fund—will it be ring-fenced? Will that be managed by the Government, or will it be invested elsewhere? Could it be used, for example, to offset levels of Government debt? Greater clarity as to how the fund will be looked after would be helpful.

Finally, I refer the Minister back to the comments made by my hon. Friend the Member for Northampton, South, who sadly cannot be here this morning. He talked about the need for a financial security test. At the time, the Minister said that that related more specifically to CO2 than to gas storage elements, so perhaps this would be an appropriate moment for him to comment on that. My hon. Friend said:

“I understand the need for a financial security test with regard to the financial standing of certain licensees when that test suggests that their ability to meet their obligation may be at risk. However, we need to temper that with an understanding that this should not be an automatic presumption to ensure that  companies do not make unnecessary financial provision over a sizeable period of time.”——[Official Report, Energy Public Bill Committee, 21 February 2008; c. 160.]

I hope the Minister will respond to those details, but in general, it seems to be a benign clause that we will certainly support.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

I thank the hon. Gentleman for that intervention. I think I indicated last week—certainly there will be an opportunity later this morning, or later today—to say more about the international framework that we are developing. However, he is obviously right that there is no point in us just developing ideas about CCS or any other proposals on carbon reductions here in the UK. We have got to play our part. We are responsible for 2 per cent. of the world’s CO2 reductions but given that that means—if my arithmetic is right—that 98 per cent. is the responsibility of other countries, we need to work internationally. Without going over territory that I can cover later, we are, for example, working very hard with the Norwegians on carbon capture and storage, including the reform of international conventions that have prevented the dumping of waste at sea. They clearly need modernising and we are making great progress on that. We are, of course, working within the framework of the European Union but I will say more about that in due course.

The classes of persons and who can apply for licences under the clause will be prescribed by regulations. Those persons will have to be financially sound and sufficiently expert to undertake the activity of carbon storage. In essence, all the normal safeguards will apply. We obviously have to be scrupulous about the criteria; we have to make sure that those companies coming forward are fit for purpose in all sorts of ways—in terms of finances and technologies.

The hon. Member for Wealden asked how the funds will be provided—will parent companies pay? We will be consulting on the nature of financial security. Our aim is to provide protection for taxpayers at least cost to the operator; we do not want to regulate for the sake of it. The operator will be responsible for decommissioning facilities and we will bear the cost—as is the case for other offshore facilities. Will the hon. Gentleman be happy for me to write to him about the precise nature of the fund? I understand the points that he is making and I can assure him that this will of course not be used as a pot for our friends at the Treasury. However, we need to have appropriate safeguards in terms of setting up the fund to make sure that it is there for its purpose.

Photo of Anne Main Anne Main Conservative, St Albans

I should like some elaboration on what is required for people decommissioning offshore facilities. Is there enough clarity over what will be left when this is capped off—I cannot think of a better way of putting it? What structures will remain, will there be ongoing observation of the state of the site and what can people expect? These structures, as we know with the North sea, often end up in some fjord as a crumbling wreck. Exactly what do we imagine remaining in perpetuity for shipping, wildlife and the marine environment as a whole?

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

We have much experience to draw on and will do in the coming few years—from the decommissioning of our oil and gas rigs in the North sea and the wider UK continental shelf where we have very clear procedures on what we mean by decommissioning. We discuss that regularly with the industry. We were saying last week that the company will have the prime responsibility, not the only responsibility, for monitoring the operation while it is live and before it is finally sealed off and capped, but we also said that our own departmental inspectors, whose experience is in oil and gas, will have a major responsibility, but with all the extra technical assistance that will be required. When the carbon dioxide storage is concluded—when it is finally sealed or capped—the state will, in one way or another, have the ultimate responsibility for long-term monitoring.

The hon. Lady will appreciate that the details will need to be finalised at the appropriate time. At the moment the UK has no direct experience of this kind of storage of CO2, but we are able to draw on the experience of the Norwegians in the Sleipner gas field, where CO2 storage has now occurred for 10 or so years. I have done my best to answer all the questions, but I will write to the hon. Gentleman about the fund.

Question put and agreed to.

Clause 18 ordered to stand part of the Bill.