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CHP Schemes

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Fitzpatrick.]

12.12 am

Richard Younger-Ross (Teignbridge): I am pleased to speak in a debate on combined heat and power. Its timing is appropriate—although at this time of night I use the word advisedly. I am also pleased that we are spending 10 times as long on this debate as we had for the entire Third Reading of the Anti-Terrorism, Crime and Security Bill.

The Government often say that they are in favour of CHP schemes. Indeed, the Deputy Prime Minister, when he was also Secretary of State for the Environment, Transport and the Regions, said in a letter to companies in June 1997:

The Government have reiterated their support for CHP schemes and gone as far as saying that they wish to double the output from 5 GW to 10 GW of power by 2010. The commitment even found its way into the Labour party manifesto.

As that level of commitment goes back four years, why have there been 1,400 job losses in the sector this year? In addition, why has Centrax in my constituency seen its orders for CHP units cut dramatically? When it was forced to announce 250 job redundancies recently it was not able to move any from the aerospace division to the gas turbine and CHP division. Again bearing in mind the Government's commitment to CHP, why does another local company, British Ceramic Tiles, advise me that the CHP unit that it bought two years ago is mothballed because it cannot afford to put it on line?

Why are companies such as British Sugar having difficulties? British Sugar recently said that it was encouraged by the Deputy Prime Minister's letter to invest some £70 million to upgrade two of its CHP plants, at Wissington in Norfolk and at Bury St. Edmunds. Those are now showing heavy losses, and the company has pulled its plans for investment of a further £100 million in two plants which would have added about 150 MW to the Government's CHP target and saved a further 150,000 tonnes of CO 2 emissions per year.

Is there a lack of joined-up government thinking on CHP? Was the Deputy Prime Minister simply speaking out of turn in his 1997 letter, or are the Government's actions light years behind their promises? If the latter is the case, I suggest that they take the advice of Professor Stephen Hawking, who can advise them on the time relativity paradoxes of Government policy. The Chancellor of the Exchequer stated in November 1999 that he would end the climate change levy on CHP. I do not expect that the Minister will tell us the contents of the statement to be made by the Chancellor tomorrow, but I hope that we will see a commitment to honour the promise made two years ago.

The Combined Heat and Power Association has raised several concerns about the lack of progress, and it has written to the Minister several times to ask for help. I ask

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him to consider its questions, because it has claimed that, without Government action, there will be a crisis in the industry. It is looking for action, not words, saying that

because the incentive to achieve energy efficiency targets using CHP is reduced, despite the Government's claim that CHP accounts for up to half the cost-effective savings in reduced levy sectors and will benefit from such agreements.

The CHPA says that there is also a problem relating to the Government's incentives. The Government introduced a concession that businesses could claim enhanced capital allowances on investment from good quality CHP, but finance leasing does not qualify. They have announced that plant and machinery that is part of good quality CHP will be exempt from the assessment of the rateable value for a site or business. However, only the electrical generator qualifies, and heat generation is excluded.

We need incentives, not disincentives, for CHP, and action, not consultation. The Government must accept that CHP needs to be exempt from the climate change levy and, as I said, I hope that we will hear more about that tomorrow. I also hope that the Government accept that they need to support changes in the new electricity trading arrangements and to work through Ofgem to reduce the penalties that are currently imposed on CHP units. I hope that the Government will consider placing an obligation on suppliers to purchase from CHP units. Currently, there is a scheme requiring power to be bought from renewables. I am not suggesting that it should be bought at the same rate, but two thirds of that cost may be appropriate.

Mr. Barry Gardiner (Brent, North): The hon. Gentleman mentioned the new electricity trading arrangements, or NETA. Does he accept that the Government deserve credit for the introduction of NETA and that generators and suppliers are expected to balance anticipated generation and demand with contracts for the sale and purchase of electricity through that system? The balances and imbalances are therefore cashed out. On balance, NETA has been extremely positive improvement on the previous pool arrangements.

Richard Younger-Ross: In the context of CHP schemes, I disagree with the hon. Gentleman. BCT, the company that I cited earlier, is not affected by the climate change levy because of the industry of which it is part. Its complaint largely concerns the effects of NETA on that industry. NETA might work for larger suppliers, but it disadvantages smaller suppliers. I hope that the Government recognise that; indeed, I am asking them to look at changes to NETA to help smaller suppliers.

Mr. Gardiner: I agree that there are problems with NETA. However, does the hon. Gentleman not accept that, on the whole, NETA has been positive for the industry? There is a problem for CHP, as opposed to renewables, because it typically produces excess electricity to produce the required heat output for the host site. Such problems arise because of the demand to balance within NETA CHP's overproduction and its variable supply to the market, and that needs to be resolved by Government action.

Richard Younger-Ross: If one follows the hon. Gentleman's logic, CHP schemes would not exist because

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they need to be protected from that eventuality. NETA simply does not work for CHP schemes. There are two ways round that; one can change NETA or require suppliers to purchase from CHP schemes. One has to do one thing or the other; one can even do both. I hope that the Minister will comment on that in his summation.

I know that the Minister has spoken and written on this matter many times. On 8 March, he gave a written answer in which he said:

I accept those good intentions, but the industry needs action now. Measures can be undertaken to stimulate the industry. I am certain that if we can make progress soon, it will be good not just for jobs in the United Kingdom—jobs in my Teignbridge constituency are desperately needed at present—but for the environment.

12.23 am

The Minister for the Environment (Mr. Michael Meacher): I congratulate the hon. Member for Teignbridge (Richard Younger–Ross) on choosing CHP for this Adjournment debate, which will enable us to examine what, I accept, are very serious problems facing the industry. It gives me an opportunity to emphasise again the Government's determination to achieve our CHP target of at least 10,000 MW by 2010.

The recent Ofgem report on the initial impact of NETA on smaller generators suggested, as I made clear in parliamentary answers, that the export of power from CHP has fallen by about 60 per cent. since its introduction. Some estimate that the figure may be closer to 80 per cent. That is obviously extremely serious.

The hon. Gentleman mentioned the loss of 250 jobs, which is about 25 per cent. of the work force at Centrax in Newton Abbot. Centrax makes jet engine components for Rolls-Royce, which produces jet engines for the American executive jet market. Centrax also makes gas turbines for use in the general power generation sector, not just CHP. The job losses occurred largely as a result of the events of 11 September.

Orders for jets are no longer being received, as the airlines have cut back. Whereas Centrax might have been expected to build five or six turbine sets during the next six months, it is possible that only one will be built. In addition, the European market is in similar circumstances as a result of the transitional period following the deregulation of energy sectors. There are, therefore, special considerations in the case of Centrax, which is, I think, the only UK company associated with CHP that has announced job losses. However, I am aware that the association believes that in the current circumstances, there may be further job losses in the pipeline. I accept that the situation is extremely serious.

The hon. Gentleman is right about NETA. It poses particular problems for smaller generators. The asymmetry between falling electricity prices and rapidly rising gas prices has added to the problems. NETA is a

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matter for Ofgem and the Department of Trade and Industry. My Department has been working closely with the DTI to identify the action necessary to address the adverse impact that NETA appears to be having on the smaller embedded generators, which is identified by the Ofgem review. The Government have issued a response to Ofgem's review and through that are consulting on ways to ensure that CHP and the renewable generators can operate effectively under NETA.

My hon. Friend the Member for Brent, North (Mr. Gardiner) is right about the gains in NETA in general, relative to the pool price that existed before, but it is undoubtedly a problem for the smaller generators. We are examining ways in which we can reduce or eliminate those problems.

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