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Standing Committee B
Tuesday 8 June 2004
[Mr. Jonathan Sayeed in the Chair]
The Chairman: I would like to make a brief statement on the scope of the debate. We have already had a broad debate on promoting renewable energy. This morning's debate concerns regulatory objectives for the purposes of part 1 of the Electricity Act 1989. Hon. Members should not repeat general arguments from the previous debate. In addition, those sitting at the back of the Room who wish to make points should speak up. Otherwise, the Hansard writer will be unable to hear them over the noise of the air conditioning.
Gas and Electricity Markets Authority sustainability duty
Dr. Desmond Turner (Brighton, Kemptown) (Lab): I beg to move amendment No. 189, in
clause 84, page 64, line 31, leave out from 'Authority)' to end of line 35 and add 'for subsections (1) and (2) substitute
''(1) The principal objective of the Secretary of State and the Gas and Electricity Markets Authority (in this Act referred to as 'the Authority') in carrying out their respective functions under this Part is the promotion of renewable energy, having due regard to
(a) the duties set out in subsection (2), and
(b) the achievement of sustainable development.
(2) The duties set out in this subsection are
(a) to protect the interests of consumers in relation to electricity conveyed by distribution systems, wherever appropriate by promoting effective competition between persons engaged in, or in commercial activities connected with, the generation, transmission, distribution or supply of electricity or the provision or use of electricity interconnectors; and
(b) to carry out their respective functions under this Part in the manner which he or it considers is best calculated to further the principal objective and the duty set out in paragraph (a), having regard to
(i) the need to secure that all reasonable demands for electricity are met, and
(ii) the need to secure that licence holders are able to finance the activities which are the subject of obligations imposed by or under this Part, the Utilities Act 2000 or Part 3 or 4 of the Energy Act 2004.'','.
The Chairman: With this it will be convenient to discuss the following: Clause 84 stand part.
Amendment No. 190, in
clause 144, page 109, line 31, leave out paragraph (a).
Amendment No. 191, in
clause 186, page 144, line 10, leave out subsection (3).
Dr. Turner: Good morning, Mr. Sayeed. If one has to spend a beautiful summer morning indoors, at least it is a pleasure to do so under your chairmanship. I shall endeavour to keep within the bounds of debate
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that you have set, although I am sure that you will appreciate that we have reached a point during consideration of the Bill at which fundamental principles come into play. I shall try to limit my remarks as much as I can, but I trust that you will allow me a little gracious latitude should I stray.
Those of us who listened to my right hon. Friend the Prime Minister recently will have heard him enunciate the importance of climate change and the fact that Britain will make its contribution through renewable energy by achieving its 10 per cent. target by 2010 and so on. The amendment is designed to provide part of the legislative means to turn those objectives into reality. We can have the most marvellous objectives in the world, but if we do not will the means to achieve them we shall not do so. There is little evidence to suggest that we will achieve these aims unless we do something extra, and we are now talking about the something extra.
The regulator is one of the key players, if not the key player, in the scenario. We know from the brief history of the regulator's existence what can go wrong if the regulator does things that are unfavourable to renewable energy. That is why the brief to which the regulator is working is so important. The terms of reference and statutory obligations of the regulator are set down in the Electricity Act. A document issued only last month by the regulator sets out the statutory framework as seen by the regulator. It refers to
''the need to secure that all reasonable demands for electricity are met'',
which relates to security of supply. I can assure people that that factor is uppermost in the regulator's mind. The document also refers to
''the need to secure that licence holders are able to finance their licensable activities''
as well as protecting consumers. That is fine.
''the interests of the disabled, chronically sick, those of pensionable age, those with low incomes and those residing in rural areas''
The document continues:
''Subject to the above, the Authority is also required to carry out its functions in a manner which is best calculated to . . . promote efficiency and economy on the part of persons authorised by licences or exemptions to carry out licensable activities . . . protect the public from dangers arising from licensable activities, and secure a diverse and viable long-term energy supply''.
As an afterthought, it states:
''The Authority is also required to have regard to the effect on the environment of licensable activities and to any social and environmental guidance issued by the Secretary of State.''
It is my contention, which is wholeheartedly backed by those I have spoken to who are involved in any way with the renewables business, that, although the terms of reference may have been appropriate 15 years ago, they no longer are.
The amendment does not disregard the need to maintain security of supply or to retain a fair, competitive market, but sets those needs in the context of achieving environmental objectives through the deployment of renewable energy. Therefore, we would no longer have a situation such as when new electricity trading arrangements were introduced, and renewable generators were greatly disadvantaged because of their
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stochastic nature and were liable for penalties. Market conditions that were extremely unfavourable for combined heat and power were set. Since the introduction of NETA, the growth of CHP has stopped dead. That is an example of how important an effect the regulator can have.
Brian White (Milton Keynes, North-East) (Lab): I was a member of the Committee that considered the Utilities Bill. Similar assurances were sought at that time and similar amendments were tabled, but we were told that they were unnecessary. Does my hon. Friend agree that they were necessary?
Dr. Turner: Well, the proof of the pudding is in the eating. Those assurances were necessary; they should have been not only given, but backed up. There has been a setback in the growth of renewable energy as a result of NETA; it has only slightly improved. Now we are proposing to extend the benefits of NETA to the whole UK through the British electricity trading and transmission arrangements. It is perfectly logical and sensible to have one electricity market, run according to the same rules and covering the whole of England, Wales and Scotland, but only if the rules are right. I have no confidence that the rules will necessarily be right.
Lest anybody should think that I am trying to pillory the regulator, I assure the Committee that I am not. However, the regulator is acting against his statutory responsibilities, and everything that he does follows from that. To illustrate the point, I cite the proposals for changes in the transmission charge regime that would accompany BETTA. In England and Wales, the National Grid Company charges according to location: the further the generator is from the point of consumption, the higher the transmission charge. However, Scotland operates on the basis of a standard charge, so, irrespective of a generator's distance from a notional site of consumption, the transmission charge is the same. The change will mean that a Scottish generator paying about 0.5p per kWh will pay 2p per kWh.
Think about the impact on renewable generation. Our renewable energy resources that are waiting to be tapped are primarily located off the west coast of Scotland. A renewable generator setting up off the coast of Scotland therefore has not only to face the considerable current problems, but under this system will carry a penalty of 1.5p per kWh, which could kill it stone dead commercially.
Mr. Robert Key (Salisbury) (Con): Does the hon. Gentleman recall that a couple of years ago the then Energy Minister proposed the construction of the west coast interconnector from the outer islands? The estimated cost was about £700 million. Research showed that it would be closer to £2 billion, which really knocked on the head any hopes of introducing wind farming on a grand scale that could supply the market in Glasgow and round to Liverpool.
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The Chairman: Before Dr. Turner responds to that intervention, may I remind him that this debate is about regulatory objectives?
Dr. Turner: Thank you, Mr. Sayeed. I have been trying to keep on track. The hon. Gentleman is quite right. That plan was unfortunately a no-hoper because the cost of submarine cable is so high. The carrying capacity of the proposed cable was not going to be that great, so it would not have been good value, which is sad as it was a nice idea.
These proposals, which come from the regulator and are made against the statutory background to which the regulator works, would have an extremely damaging effect on renewable energy. The Government are aware of that. Clauses 180 to 184 set out a protective mechanism to prevent that from happening to renewable generators, but there are two points here. This will apply only to renewable generators. No one will build a gas-fired power station in Stornoway, but there might well be wave and tidal machines just off the coast. The only generation that will be affected by these proposals is renewable generation.
Having looked at the best efforts of the parliamentary counsel in clauses 180 onwards, I am not convinced that they are drafted in a way that would give anyone confidence. As we are trying to promote renewable energy against the background of a liberalised energy market, a regime that enables investors to invest with confidence in the long-term future of the enterprise is vital. At present, there is no investor confidence in renewable energy. It does not exist even for it to be frightened away. One of the prime reasons why there is no confidence is the current terms of referencethe legal framework to which the regulator worksand the implications for what follows in the structure of the market.
To put it bluntly, we have to be able not necessarily to distort but to angle the market in such a way that renewable energy is favoured. Otherwise, it cannot happen in a liberalised market economy. As it is, the Ofgem proposals for transmission charges carry a perverse incentive to non-renewable energy. If someone was simply looking to make money by generating electricity, they would set up a fossil fuel station in the midlandssomewhere just north of Birmingham, where the notional centre point of consumption is and where they would probably pay negative transmission charges. That perverse incentive also exists in the proposed system.
My hon. Friend the Minister also has responsibility for the Post Office, and we all know that it makes standard charges wherever a letter is posted from or to in the United Kingdom. A letter posted in Stornoway costs exactly the same to deliver to Westminster as one posted in Golders Green. I am sure that if, perish the thought, we were in a Committee debating a proposition to change the postal charging system from standard to locational, he would produce robust arguments to rebut it. He would be absolutely right to do so.
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What is the difference with electricity? A letter posted in Stornoway is still identifiable as having been posted in Stornoway when it arrives in Westminster. However, a kilowatt-hour of electricity supplied to the system at Stornoway is not recognisable at all. It is just a stream of electrons. Energy is a national commodity and something that we need to consume on a national basis.