Energy Supply

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Dr. Ladyman: The documents seem a little short on geo-political analysis. Have the Commission or the Government taken account of policy announcements by those such as the Russian Government? They have been open about their intention to shift their internal energy demands away from gas and oil, so that by the latter two thirds of the century they can dominate the world market in those sources and sell them to the European Union, because they are convinced that we are not going to able to reduce our demand in time.

Mr. Wilson: My hon. Friend makes an important point, which relates back directly to what I have just said. We have gone from a standing start to being heavily dependent on gas and, within a few years, will be net importers of gas. We will remain heavily dependent on gas that will come not from the North sea but from various sources throughout the world. There is lots of gas in the world and a lot of the gas that we use will undoubtedly come from Norway and other sources that people would agree are stable. However, as my hon. Friend says, we will be in a seller's market, which presents issues of its own.

In the context of the PIU review, it is important that we take account of the geo-political considerations and that we project ahead to 2050, as we are obliged to do. We are not talking about Russia, Kazakhstan or Algeria as those countries are today. We must look ahead 50 years and consider whether it is a good idea to be 70 per cent. dependent on gas, with 90 per cent. of that gas being imported. We need to know exactly where the gas will come from and be able to reach an informed conclusion about the conditions of supply that will pertain at the time.

The Chairman: Order. That brings us to the end of the time allowed for questions.

Motion made and Question proposed,

    That this Committee takes note of European Union documents Nos. 5619/01, the Commission Green Paper, Towards a European Strategy for the Security of Energy Supply, and 7218/01, relating to common rules for the internal market in electricity and natural gas; and supports the Government's welcome of both these documents as the Green Paper provides analysis of the energy supply situation and the proposed Directive and Regulation would increase competition in the internal energy market and facilitate cross-border trading in electricity and thereby contribute to security of supply. —[Mr. Wilson.]

11.30 am

Mr. Key: I am glad to have this opportunity to give the Conservative party's response to the documents.

The first thing that strikes me forcibly is the way in which our energy needs and patterns of consumption have changed. We now recognise that the nations of Europe constitute the world's largest energy importer and second largest energy consumer. We are importing more and more energy from beyond our borders—about 50 per cent., but that could rise to 70 per cent. for the European Union countries in 20 years' time. We are also putting increasing pressure on the energy supply system and European energy consumption is rising by about 2 per cent. a year.

Greater energy use is increasing our greenhouse gas emissions precisely when we are committed to reducing them. Part of the reason for that is our reluctance to reduce energy consumption and wastage. In that area, unlike other areas, every single citizen can make a difference through patterns of domestic consumption and decisions such as whether to leave the little red button on their television sets glowing and whether to insulate their homes. Some of those issues have been neglected. In previous years, we made a brave attempt to encourage loft insulation and the use of draught excluders but that has now been left to do-it-yourself and to those who visit Homebase and B&Q on Saturdays and Sundays. I suspect that each one of us needs to take a more responsible attitude to such things.

I suspect that there has been a sluggishness in the UK to exploit renewable energy sources. It has seemed to me for a long time—perhaps, parading my green credentials, since I was the warden of a field study centre, when I had a proper job as a teacher many years ago—that there is something innately conservative about renewable energy resources: about seeking to generate power as close as possible to the point of consumption, about minimising our use of power and, above all, about using natural resources. After all, the islands of the UK are the one part of the European continent where we could probably generate almost all our energy from renewable sources. As the Minister said, that would be extremely difficult because it would require us to set up interconnectors along the west coast, which could be extremely expensive and, given the overall balance in energy policy that the Government must achieve, would not be achievable in my lifetime. With the Minister, I will be pushing up the daisies before we see that vision become reality, but that does not mean that we should abandon or ignore it—quite the reverse.

Dr. Ladyman: I agree with what the hon. Gentleman says about the practical difficulties of exploiting renewables, but I disagree with his first statement that we could produce all our energy from renewables if we wanted. How could we deal with issues such as base load? Has the hon. Gentleman read the royal commission report on climate change and energy production, which suggested that it would not be possible to overcome the practical difficulties and produce all our energy from renewables, even if we wanted to?

Mr. Key: I said, ``not in my lifetime'' because of the difficulties that the hon. Gentleman rightly identifies. One of the problems that the Minister faces and that I will face when I take over from him in a year or two—[Laughter.] Oh, they laugh, Mr. Olner, but I have seen some funny things in my time in the House.

As the Minister said, we do not start with a clean sheet of paper. All of us who are involved in discussions of energy policy know that we have inherited a massive backlog of problems from previous generations. Every advance in energy technology produces its downside. The coal industry produced massive environmental disadvantages and huge social problems and it is the same with every succeeding generation.

Not to be deflected by the hon. Member for South Thanet from saying what I intended to say, the nuclear industry is another challenge. I was absolutely fascinated by the intervention of the hon. Member for Teignbridge (Richard Younger-Ross). With typical Liberal credentials, he mentioned the first sentence on nuclear energy, where the Green Paper says that nuclear energy and solid fuels are the undesirables among energy products, but he did not even finish the sentence, which ends by stating:

    ``their contribution within the global energy balance, which is restricted almost exclusively to the generation of electricity, is enormous.''

The section on nuclear energy in the document ends by stating:

    ``The European Union must retain its leading position in the field of civil nuclear technology, in order to retain the necessary expertise and develop more efficient fission reactors and enable fusion to become a reality.''

Before the hon. Gentleman rushes out a new edition of the Liberal ``Focus'' newsletter in Teignbridge, I must warn him that I will circulate copies of the record of the Committee around his constituency. I will not be deflected by the threat of Liberal ``Focus''.

Mr. Wilson: Has the hon. Gentleman never heard of the waste paper directive?

Mr. Key: I take it that that is directed at focus groups all over the country.

I was delighted to read the speech to the London School of Economics of Loyola de Palacio, the Commission Vice-President responsible for transport and energy, in which she said

    ``Another challenge to our energy security is the decision by some member states to phase out nuclear power. I find it very difficult to see how we can tackle climate change and maintain a diverse energy base unless we retain the nuclear option. Although I fully respect the decisions made by member states, it seems wise, in my view, to keep the options open.''

I agree. I am also reminded that European integration was founded on energy policy. The European Coal and Steel Community and Euratom were the first institutions of the European Union. That is why we must take the matter seriously, and indeed we are.

Mr. Lansley: My hon. Friend will recognise that the European Coal and Steel Community, as one of the founding treaties of the European Union, is due to expire. The Green Paper rather dismisses the future contribution of coal to the energy mix. If coal and nuclear both declined, our problems of security of supply might be greatly exacerbated. Does my hon. Friend agree that the EU should consider promoting some of the new technologies that might enable coal to continue to make an economical contribution?

Mr. Key: Clean coal technology undoubtedly has a future. The question is where that future lies. I suggest that we must handle dirty coal technologies first, but I agree with my hon. Friend. There are, as ever, conflicting objectives in energy policy. On the one hand we want low price and constant supply, and coal can certainly meet those criteria. On the other hand, we have a problem with producing coal electricity cleanly. I refer my hon. Friend to the current situation in which the increase in the price of gas has led to some old coal-fired power stations coming back on stream, notably the one at Tilbury, which is now pumping out the filthiest emissions of a kind that most of us thought had disappeared years ago. That is because of energy prices in Britain. However, I am glad that my hon. Friend the Member for South Cambridgeshire (Mr. Lansley) brought that up, because the future of the European Coal and Steel Community has been marginal to EU development in recent years, and we can no longer allow that. We must give it the consideration it deserves.

I was delighted to read the resolution of the European Parliament on the Green Paper, published in the minutes of 15 November 2001. It pointed out the mix of different EU electricity generation throughout the Community. The figure for nuclear power is 35 per cent., for solid fuel 27 per cent. and for gas 16 per cent. Incidentally, the UK's gas figure is about 39 per cent. and rising. The EU figure for renewables is 15 per cent., but it is about 2.8 per cent. in the UK. The figure for oil is 7 per cent., but it is only 1.5 per cent. here.

The European Parliament resolution mentioned the dependency of the EU on middle east countries for 41 per cent. of our oil imports, the security of which depended largely on the foreign and military policy of the United States of America. It suggested that we depended on Russia for 41 per cent. of our gas imports and 18 per cent. of oil imports, and on Algeria for 29 per cent. of our gas imports and that 95 per cent. of our uranium requirements were met from imports. We cannot afford to ignore the international dimension.

It was pleasing that the European Parliament document made an interesting statement, the thrust of which I agree with, about the need to

    ``encourage the shift towards zero-carbon emission fuels for power, notably electricity generation from nuclear energy, hydrogen for transport fuel from biomass, hydroelectric, solar and wind energy sources, both by removing existing legislative obstacles and by making them subject to a specific EU-wide exemption from all excise duties, energy taxes or climate levies and also by providing incentives to encourage a shift towards efficient energy production plants, including combined heat and power.''

I agree with the thrust, but not with the tax policy or regime that the Parliament promotes. Nevertheless, it recognised the importance of the subject.

The document went on to discuss the role of nuclear power. Paragraph 47 of the resolution states that the European Parliament

    ``Recommends that special emphasis be placed on research into new designs for safer and less costly fission reactors with more efficient fuel consumption, given the need, whatever the future of nuclear power may be, to remain sufficiently capable of drawing upon a diverse range of energy sources that do not emit greenhouse gases, should dramatic geostrategic shifts in the world or a sudden adverse trend in climate change render it vital to update nuclear power stations in Europe once the current generation of power stations reaches the end of its useful life''.

That is startling, given that it comes from the European Parliament. We do not normally associate such sentiments with the feelings expressed by our representatives there.

The document continued by calling on

    ``Member States who presently enjoy the benefits of nuclear generation of electricity which have not already made provision for the treatment and disposal of their own radioactive waste material to adopt appropriate measures as soon as possible''

and encourage much more research into the subject, which is absolutely right. We need more research, because the nuclear industry has a problem. There is not a lot of public debate on energy, let alone nuclear energy, although there is a mass of prejudice from small numbers of people. What public debate there is suggests that the nuclear industry of the future will somehow be dominated by the problems of the past. That is not the case. We must remember that the origins of the nuclear industry lay in defence. The choice of fuels and the processes that led to the civilianisation of nuclear energy in the 1940s, 1950s and 1960s was defence led. That is in the past and when we decide whether to pursue a nuclear future, we should bear that legacy in mind.

I was also fascinated by the inquiry by Sub-Committee B in another place into security of energy supplies in the EU, in response to the Green Paper that we are debating. I was interested in the submission from Dr. Burckhard Bergmann, the chairman of the executive board of Ruhrgas AG from Essen in Germany. He was interrogated by their Lordships, who asked:

    ``Is there a need for a European Energy Policy? What effect would a European Energy Policy have on global markets?''

He replied:

    ``A policy for safeguarding energy supplies must take account of the respective national conditions, i.e. be based on the principle of subsidiarity. Responsibility for energy policy should therefore continue to be borne primarily by national governments. There is no need to include an energy chapter in the EU Treaty or increase the powers of the EU Commission in the field of energy policy.''

And so say all of us in the Opposition.

I was also delighted to discover an exchange between Lord Brabazon of Tara and the Minister of State. According to the Minister's explanatory memorandum, Lord Brabazon wrote to him on 10 July 2001, saying that

    ``the United Kingdom is already virtually compliant with the requirements in the proposed Directive, and the electricity and gas markets operating in the United Kingdom are compatible with the proposals in both the Directive and the Regulation.''

He then asked about

    ``the position of all the other Member States on this important aspect of the liberalisation of energy markets in the European Union.''

The Minister replied on 18 August, saying:

    ``France is resisting 100 per cent. market opening and will, at present, only commit to liberalising down to industrial and commercial customers. We understand that there is no possibility of the French Government agreeing to allow domestic customers a choice of supplier until after the Presidential elections in May 2002. We are hopeful, however, that the French will agree on a final date for full liberalisation at that stage. You referred to French reluctance to open their gas market and may wish to note that the Commission is taking legal action against the French Government for failure to implement the 1998 Gas Directive on time. The Commission is taking similar action against Germany too. These are moves which we strongly support.

    Germany is in favour of full market opening, but has fundamental objections to many of the Commission's proposals, particularly independent regulation and transparent and non-discriminatory tariffs for access to the network. The Germans are not supported by other Member States on the substance, but German resistance serves France's purposes well, at the present at least.''

The Minister concluded by saying:

    ``The liberalisation timetable is therefore inevitably going to slip, as the proposals also have to be agreed by the European Parliament. The UK Government's view, however, is that, provided the structural measures and a final date for market opening are agreed, a one or two year delay is acceptable.''

That is astonishing.

I tabled a parliamentary question on encouraging competition in the energy market, and last night I received an answer dated 27 November. The Minister said:

    ``The Government supports the proposals published earlier this year by the Commission to complete the internal energy market by 2005''—

I suppose that I can give him that two-year slippage. He continues:

    ``These measures would provide the mechanisms and regulatory structures needed for a functioning single market in electricity and gas.

    The proposals are currently being negotiated in the Energy Council, where we are seeking their early adoption.''—[Official Report, 27 November 2001; Vol. 375, c. 787W.]

I want to press the Minister on that. We cannot afford to put up with such slippage. By giving the Minister hell over the next couple of years, I hope that we shall encourage him to push the Commission to persuade the German and French Governments to behave responsibly towards consumers. It is outrageous that French consumers must put up with an absurd arrangement that we have not experienced for a decade. The coalition Government in Germany includes the Greens, and it is astonishing that they wish to hold up the introduction of transparency into energy transmission. That tells me that a lot of people wandering around Brussels must be on another planet. Consumers in Germany and France should have something to say about that, even if the oligopolistic approach to energy is more prevalent in those countries than it is here.

To return to the development of security of supply in Europe, energy transmission in France and Germany is a huge impediment not only to a potential European policy, which is not desirable or likely to work, but to the consumer interests of all the countries in the European Union. Britain has led the way in creating and opening up the single market, and we must not stop now but continue to apply pressure. I urge the Minister for Industry and Energy to use every fibre in his body and campaign as in the old days, when he campaigned on the West Highland Free Press, in the interests of consumers not only in the West Highlands but in the European Union as a whole.

I should let you into a secret, Mr. Olner. When I was younger, we used to go on holiday to the West Highlands of Scotland, where I would read the West Highland Free Press and see what the Minister was up to—and hasn't he done well!

We face a geo-political risk. We are at the risk of swings in the politics of the middle east, in particular, and must recognise that there are potential areas of instability in that region that we must encourage to remain stable. If the worst happened, it would be very serious for us indeed. On the other hand, I am convinced that the situation in Russia is more stable than we could have dreamed even five years ago. The whole Russian nation is now economically driven and, given that Russia is deeply dependent on exports of energy, we can have some confidence that the supply from that country is reliable.

We can have confidence in security of supply—that little bit of the energy equation is fine—but diversity of supply is a different matter. As the Government know, we must maintain that balance in our energy sources, which, whether by design or good fortune, is better than it has been in our history. On the whole, Governments do not make good decisions about diversity but react to individual circumstances, making short to medium-term rather than long-term decisions. People ask why the French are 70 per cent. dependent on nuclear power, but that was a direct result of the French Government's response to the oil shock of the 1970s. At the same time, when we were discussing Sizewell, we made similar judgments. However, as the Minister said, in future Governments will not be the ones building nuclear reactors, even if they decide on that policy.

In achieving the right balance, we must identify market imperfections. We hope that the market will find a solution, but we have to trust Governments to tweak market solutions to improve them in the overall policy equation. For example, as I may say in response to my hon. Friend the Member for South Cambridgeshire, who spoke about coal, the new electricity trading arrangements will encourage a resurgence in that fuel. Of that I have little doubt.

I turn to the infrastructure in security of supply throughout Europe and the United Kingdom, where there are real problems. Gas is landed at five points in the country, but there is no economic nexus between the offshore producers and Transco, for example. One may consider the cases of St. Fergus and Bacton. It is difficult for Ofgem to know what it should say, or whether it should say anything at all to persuade Transco to put in particular investment at a particular point. For example, if we wanted to increase our imports of gas from Norway, it is no use suggesting that we should do that through a particular landfall if the capacity does not exist. I suspect that Ofgem has a responsibility to encourage Transco to respond to market signals, and I suspect that Ofgem is doing that.

I turn to the electricity distribution system in Europe and in the United Kingdom. We have a legacy from the Central Electricity Generating Board in the national grid, but some major constraints are imposed by planning. The point has been raised already that we have an opportunity in the Government's decision to review planning procedures further to encourage the sensible and appropriate distribution of electricity in the UK. The fact is that we suffer huge transmission losses, about 9 per cent. of electrons being lost in transmission. That is pretty unacceptable. I hope that we shall see a drive towards electricity being generated closer to the point of consumption—as I said, it is a deeply conservative principle.

Some things are going wrong, however. The north Yorkshire line is an example that must be close to the Minister's heart for the grief that it causes him—not to mention the people of north Yorkshire. We also have a little problem with the storage of gas in the salt deposits in Northwich. Some planning issues need to be considered. We also have the problems of balancing energy hour by hour, the profiling of energy and so on.

It is important that the Minister addresses the problem of investment in power generation. It is a complex matter. Generally speaking, when prices are low there is no incentive to invest. That is one of the problems in California; the low prices there are artificial because they are capped, but it led to energy suppliers signing contracts that made supplies much more expensive than the capped price.

I do not quite follow another aspect of our energy policy. Perhaps the Minister will enlighten the Committee. At the moment, long-term contracts available for the purchase of electricity supply are simply not taken up. That is one aspect of NETA that is not working properly. Why is that? I believe that companies are not taking up those long-term contracts because of uncertainty about future oil prices. I applaud the fact that we have the best energy market if not in the world certainly in the EU, but that uncertainty is a disincentive for suppliers of electricity for retail consumption to take up long-term contracts. That needs to be investigated.

I have referred to the balancing necessary for the day-to-day security of supply, which will involve some tweaking. I know that studies are being made into what would happen if a major energy supplier simply went bankrupt. The globalisation of ownership of those resources and assets means that we cannot ignore the fact that one of the big retailing companies could go bust—not a UK company, perhaps, but one in the United States of America. What measures are the Government taking to address the potential collapse of one of our major suppliers, which could be extremely disruptive?

Several hon. Members have asked why NETA is not working for small producers. I suspect that NETA includes consolidation arrangements but, for one reason or another, they seem not to be working. If consolidation arrangements were in place, all the little producers of CHP such as wind farms could get together and, at least in theory, they could sell to the market. But such arrangements are not in place. Not even medium-sized producers such as Slough Heat and Power Ltd, which I visited last Thursday, can sell electricity. As a result, it is operating at only 50 per cent. capacity, even though it generates from waste products. That needs investigation.

Another problem is that the NETA system is not working in Scotland. My recollection is that the retail price of electricity and gas in Scotland used to be about 10 per cent. below the English price; it is now 10 per cent. above it. That is strange. Particularly as the Minister for Industry and Energy is Scottish, I do not understand why Scottish consumers face higher prices than English consumers? The answer obviously has something to do with NETA and our system.

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