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Westminster Hall
Wednesday 19 January 2005
[Mr. David Taylor in the Chair]
Gas (Integrated Energy Policy)
Motion made, and Question proposed, That the sitting be now adjourned.—[Mr. Ainger.]
9.30 am
Mr. David Stewart (Inverness, East, Nairn and Lochaber) (Lab): I welcome the opportunity to initiate this debate about the future of gas in an integrated energy policy.
As I looked back over the past 40 years, I was struck by a series of images, in all of which energy was a factor. They included Ted Heath and the three-day week; the winter of discontent, when oil prices boomed, reaching four times their previous level; and, more recently, the fuel protestors of 2000. In the few moments that I have this morning, I want to ask a few questions and, I hope, get a few answers.
The key issue is how important gas is for the United Kingdom's energy needs. Are the tabloid headlines correct when they say that lights will go out all over Britain? Is that fantasy or foresight? How secure are our sources of imported gas? How much gas is left in the UK continental shelf?
Is European market liberalisation the answer, or should we be building our indigenous energy market? Perhaps both objectives are right, and we should be aiming to achieving both. What will be the impact of the change in the UK's status from being a net exporter to a net importer of gas, perhaps even this year? How important are our gas interconnectors to Europe?
What about storage? What about LNG—liquefied natural gas—which will be a much more attractive prospect over the next decade?
What is the view of industry, particularly that of the United Kingdom Offshore Operators Association? What is the view of the Office of Gas and Electricity Markets, which was set up to regulate the industry?
The UK's natural gas reserves come mostly from indigenous supplies in the North sea and the Irish sea. There is a debate about when we shall become a net importer of gas, although the fluctuating balance between imports and exports already means that we are a net importer of some months. In answer to a parliamentary question, my hon. Friend the Minister for Energy and E-Commerce told me that the UK would become a net importer in about 2005.
Another factor comes into play, however, because previously uneconomic reserves in the UK continental shelf may now be recoverable as the price of gas increases. Much the same argument applies to oil, as hon. Members who heard my Adjournment debate on oil last year will appreciate. A recent Library brief tells me that between 70 and 90 per cent. of UK gas will be imported from 2020; that is obviously a very high level of importation, and it will grow as UK reserves dwindle and—there are, of course, two sides to the equation—demand increases.
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There is a variety of risks to domestic and imported gas supplies. At the most general level, there is political instability in exporting regions and the possibility of terrorist attacks on pipelines; there is a lack of peak-demand storage in emergencies; there are economic pressures during price spikes and levels of peak demand in cold weather. Let me be clear, however: I am not for a second suggesting that all those factors will come about, and I would certainly be very surprised if they all came about at once.
What we need is a rational, cool and calculated debate about this country's future energy needs. We must assess future demand and supply trends so that we can plan now. Although my emphasis is on gas, right hon. and hon. Members may wish to throw into the equation the other important energy sources, such as nuclear, oil and renewables.
The Government have made security of supply a key plank of their energy White Paper and energy policy. They propose a variety of means, such as the diversification of energy resources, particularly renewables. They also envisage demand reduction and energy efficiency, which we must never forget: it is not enough to produce more; we must also consider how efficiently we use these scarce resources.
Action on fuel poverty is a subject dear to my heart. I represent a highland seat, and, of course, the temperatures there can be very severe, as I experienced at first hand yesterday. Our fuel consumption is therefore higher and, arguably, we are not that strong on conservation issues such as house insulation.
It is important to consider how well our market is regulated, particularly through Ofgem, and that is an issue that the Government have pushed. However, what about gas, specifically? The key point, as I mentioned earlier, is that we have to consider this debate through the lens of becoming a net importer. A series of factors not so relevant to exporters comes into play for importers. For example, the reason why we do not have such a well developed LNG industry is that we had so much gas offshore that it was not economically useful to start tankering it round the world. There is a different argument about balance now that we are importing gas.
A mixture of inputs is needed in relation to gas. First, we must examine the important issue of adequate storage. What is adequate now—we have 4 per cent. storage—will not be adequate for an importer, but we can perhaps come back to that later. We have to consider demand modulation at peak times and a variety of secure sources of gas for importation. At present, with natural gas, there are two natural not barriers but choke points, and those are our interconnectors, which are crucial to the future development of natural gas.
Importation is complicated because it is about negotiation—part commercial, part political. A mix of issues to do with location and technical matters has to be considered. When I was undertaking research for the debate, I was surprised to find that there is an issue about quality of gas. From an outside perspective, we might think that gas is gas is gas, but that is not quite right; we have to consider the quality of what we are importing.
Of course, we cannot have only two interconnectors. A number more are planned, and of course I support that, but let us throw one statistic into this argument: the
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input capacity through our interconnectors is 8.5 billion cu m per year. That sounds all well and good, but we must consider the other side of the equation: what are our gas needs? Current gas demand in the UK is 100 billion cu m per year. I am sure that hon. Members' mathematics is better than mine, and that they can work out that there is a choke point, in terms of reliability of importation. New interconnectors are coming on-stream, but they will not be available tomorrow. There is a lead-in time, and that is crucial.
Sometimes there is too much tabloid chat about instability in imports. Norway and the Netherlands are our main sources at present, and I would not argue that either of those countries was particularly politically unstable. We have fairly secure agreements with them, and I do not have particular worries about that. It is perhaps countries further afield that we need to consider.
A key point is our 2003 energy pact, signed with the Norwegian Government, and the agreement to develop the Brit pipe. That is an excellent development that I warmly support. The capacity of the Brit pipe, when it is on-stream, will be 25 billion cu m a year, which is a quarter of current UK gas demand. That will be an effective new interconnector when it comes on stream in 2007.
Further interconnectors are planned, and there will be upgrading of our current interconnectors, which will give us greater capacity. That is useful for increasing security of supply. There are future proposals, which include a Russian pipeline, although the press had questions about how viable that would be in the short term. Increasing the number of pipeline entry points for imports is important. It would make the UK less vulnerable at a critical time when we are changing the import-export balance.
As we all know, Russia is the world's largest gas exporter, but reserves are often in remote, isolated locations, and that makes them more vulnerable to disruption. There are arguments about terrorist attacks in Russia that I would not want to overstate, but that worry certainly makes Russia a higher risk than Norway and the Netherlands. Further afield, African countries with exportable gas include Algeria, Egypt, Libya and Nigeria. In the middle east, the biggest player is certainly Iran, followed by Saudi Arabia, Qatar and Abu Dhabi.
What about storage, an issue that I touched on earlier? On one level—arguably a naive level—storage is relatively low in the UK. We have about 4 per cent. of storage of annual consumption. That compares with 20 per cent. in some European countries, but we have to consider the context. Four per cent. is fine. We have large reserves in the United Kingdom continental shelf and are exporting. We could argue strongly that part of our storage is the UK continental shelf itself, particularly the Rough field in the southern North sea. It could be argued that storage is effectively in pipelines going to the St. Fergus or Bacton terminals.
The Government have kept security of supply under review. Through the Department of Trade and Industry, the Ofgem Joint Energy Security of Supply working group—the JESS group—warned in 2002 that peak demand could exceed peak gas supply by 2004–05
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if investment in gas storage or infrastructure is delayed.
What about LNG? That is a vital prospect for the future. LNG—this is where my chemistry and physics are sorely tested—is, as the name suggests, natural gas refrigerated as a liquid, reducing it to one 600th of the volume of gas vapour. Here my chemistry really struggles, but this suggests that an LNG tanker contains 600 times more energy than a tanker of the same size filled with natural gas. I would appreciate it if there were no questions on this, Mr. Taylor—I would be sorely tested.
The first LNG tanker came to the UK way back in 1964, to Canvey Island, from Algeria, the leading LNG supplier. Algeria has spare capacity to supply the UK, which is encouraging, looking at the global resources available to us, and creates a great advantage for LNG—that is, ease of supply via tankers. As I understand, it is not economically productive to tanker natural gas, because the sums do not add up. It is worth while tankering LNG.
I predict a major growth in this sector, through tanker links with global reserves, which are easier than the costly and more vulnerable pipelines. I am not arguing for a second that these things are mutually exclusive. We need to see a development of importation of natural gas and of LNG. I just wish to make a point about the security risks.
New markets in LNG may well be stimulated by pioneering new gas-to-liquid technology. Again, I do not feel comfortable about advancing such an argument, but I understand that the new process is the Fischer-Tropsch process, which develops LNG for the future.
New LNG importation facilities are planned and I warmly welcome them. There are at least three different proposals to develop terminals—for example at Milford Haven and the Isle of Grain. They will not come on stream immediately, but will make a huge difference to our LNG market in future.
What is the European perspective on this? That is important. The first gas directive was in 1998, and the Lisbon council of 2000 urged rapid liberalisation of gas as part of a drive to complete the single market and improve EU competitiveness.
As we become a net importer, access to a liberalised and competitive market is important. The Commission gave evidence to the House of Lords Select Committee on the European Union—House of Lords paper No. 105—which said that 80 per cent. of the world gas reserves were in economic reach of the European market. That is good news. The key is diversification and security of supply. What that Committee recommended, as I understand it, is that more strategic stocks should be held from when we stop becoming a net exporter. Perhaps my hon. Friend the Minister might comment on the change in status, as we become a net importer. Will there be any change and will the Government have to increase the immediate strategic gas reserves held in the event of an emergency?
Demand is also changing. There is going to be a growth of about 3 to 4 per cent. per year, boosted by the new gas-fired electricity-generating power stations. To make a quick constituency point, I can suggest to the gas
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industry how it can increase demand in the highlands and islands, particularly on the mainland. That is by providing for more remote and rural communities to have access to mains gas. Giving remote communities access to the mains transmissions lines is a real problem, although I would give honourable mention to Transco, which has been helpful in my campaigns in efforts to link communities such as Ardersier in my constituency.
The issue in future is not so much the availability of gas so much as the ability to move it from place to place, from where it is produced to markets. As I suggested earlier, by 2010 the statisticians suggest that we will be importing 50 per cent. and that by 2020 we will be importing between 70 and 90 per cent., which is a tremendously high statistic. There is then a higher risk regime of power cuts, vulnerability and so on. As I said earlier, I would not over-stress those risks, but we must have a cool and rational discussion about what the security threats are.
So, in the jargon, what happens is a low-probability, high-impact event. We understand that the Government have an emergency committee and incident response plans which are geared-up to consider these matters. Yet, as Dr. Robert Skinner, Director of the Oxford Institute for Energy Studies, said in The Parliamentary Monitor, page 8, in December 2004:
"Absolute security of supply is an illusion, its pursuit unacceptably expensive. Energy security is a concept based on meeting likely risks at acceptable cost."
The United Kingdom Offshore Operators Association, UKOOA, also recently produced a helpful paper entitled "Security of gas supplies", arguing that although UK gas production has reached maturity, there are still considerable reserves. It argues that there are four issues that we should consider: first, maximisation of the exportation of our current gas reserves; secondly, diverse and secure gas supplies; thirdly, availability of transmission infrastructure; fourthly, tools to meet short-term demand peaks. The first issue I welcome warmly. As a member of the all-party group on gas safety, I have looked very closely at this and am a particular fan of the "fallow fields" initiative, where we can exploit fields which might not be worth developing by some larger companies, but which have worked well for some of the smaller companies. I know PILOT has particularly pushed that. I am keen to see our reserves on the UK continental shelf fully exploited. Clearly that goes for oil as well.
I have already touched on secure and diverse gas supplies in LNG, looking at Russia via long-distance pipelines and developing more interconnectors. Thirdly, in looking at the availability of transmission infrastructure, the main argument is to bring in a stream of new interconnectors. The final issue is about tools to meet short-term demand, and issues about supply swing, looking at cutting supply to key industrial customers when there is peak demand, and looking at storage. With LNG, that will be above-ground storage.
"is the ability of producers to exploit their gas reserves fully and deliver that gas at minimum cost to the market, rather than the availability of those gas supplies per se."
Ofgem has also examined this issue and commented on the assessment by the National Grid Transco that security of supply in gas can be maintained this winter
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under average and severe winter conditions. In case of very severe winter conditions, NGT says that security of supply can be maintained by large users reducing gas demand. I thought it lovely that they are called "interruptible customers". It is a new part of our argument that those large industrial users have a deal where they will cut off at peak times.
Ofgem says that UK gas supplies are declining faster than expected. Though there is no immediate threat, more expensive options might have to be used in the long term. Clearly gas is a key player in the UK's energy mix. We know that demand will double by 2030, because gas will be the fuel of choice for electrical power generation. Global reserves, particularly in Russia and the middle east, are more than large enough to meet the likely increase in demand. There is an argument that gas is a different market from oil, where with OPEC there is more of a cartel operating than in gas production. Of course, until construction of our new interconnectors, and upgrading of one of our two existing interconnectors, the House of Lords Select Committee on Gas may have a point that there will be a tightness of supply in the short term—perhaps over the next two or three years.
LNG, although first seen in the UK in the 1960s, offers greater portability than conventional gas. The three UK developments planned provide a greater security of supply of gas. The maximisation of gas on the UK continental shelf, through the "fallow fields" initiative and others, is vital. It is key that we have security of supply, which means that we have a wide and diverse range of suppliers.
What are the key issues for Government? I am sure that my hon. Friend the Minister will comment. It is a complex mix. We must say that is it not only about Government or industry, it is also about Government, industry and the consumer. We must maximise security of supply of natural gas through, as I said, a wide and diverse range of suppliers, through as many interconnectors as are practical and affordable. We obviously cannot build entirely as many as we need, because there are such huge costs involved. We need to build up and develop the liquefied natural gas business—because we have less vulnerability in terms of tankering—while emphasising energy conservation and supporting poor or vulnerable consumers, as well as keeping a watch on price, product and emissions levels. That is a heady mix indeed, not an easy series of points to sort out. Gas will continue to play a vital role, however, in meeting Britain's energy needs in partnership, of course, with oil, coal, nuclear and renewables. The dash for gas may well be past, but natural gas, in my view, will be the fuel of the future.
9.51 am
Mr. Bill Tynan (Hamilton, South) (Lab): I thank you, Mr. Taylor, for the opportunity to participate in a very important debate this morning. I congratulate my hon. Friend the Member for Inverness, East, Nairn and Lochaber (Mr. Stewart) on securing the debate. I know that he has been deeply involved in the energy markets, especially gas and oil. That is recognised by the business community in his constituency, by the trade unions and, in particular, by his constituents.
For my part, I would obviously like to associate myself with an integrated energy policy. We should have a debate on that and examine it in depth. Security of
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supply is a major issue, which we have to continue looking at to ensure that the lights in this country do not go out. We can talk about the impact of their doing so.
I should first declare an interest as chairman of the all-party nuclear energy group. I feel strongly that any integrated energy policy should include a nuclear component. My concern is that the Government are promoting not an integrated energy policy, but a policy where most of the energy of this country will be dependent on imported gas. It would be a monumental blunder to continue along that line. It may be that we are in the run-up to a general election, and maybe we shall look at the policy in depth after that. We have had the Energy Bill, with much discussion in the House of Lords and the House of Commons. Those discussions have led us to believe that it is necessary to look seriously at the energy mix.
My hon. Friend made a point regarding the three-day week. I am old enough to have experienced the three-day week, when I worked at a small engineering company. I went to work from 7am to 7pm, and we were only allowed Monday, Friday and Saturday. I know the impact that that had on the business. Without the workers in that company working long hours—for bare time, by the way, not overtime—the company might have gone out of business. My view at that time was that it was necessary to accommodate businesses. However, we have now moved into a new age. We live in a highly technical age. We have computers, laptops, control of traffic lights and aircraft. If the lights went out in this country, the effect on its infrastructure would be devastating—we had such a situation last year when London had a short blackout. The impact on traffic, air and transport would be enormous. It is important that we look at just what the effects would be if we got the energy mix wrong.
People take it for granted that when they walk into their home, they can switch on the light and leave it on. With fridges, freezers and televisions, they have come to expect that that will happen. Energy efficiency is one of the issues that has been pressed very hard, to safeguard future energy supplies. Unless the population of this country realise the major problems that exist—realise that unless we get the energy mix right we could have energy problems—I do not think they will move towards energy efficiency. No matter how much we preach energy efficiency, they will ignore it to a degree. It is only when they find themselves with a major problem that they will move towards it. This country could be facing a frightening prospect unless we get the energy mix right. I am not against renewable energy and I want to make that clear.
The UK has targets. By 2010 we want 10 per cent. of our energy to come from renewable energy. I understand that at present some 3 per cent. does. I am sure that the Minister will correct me if that figure is wrong. The feeling is that we shall not make the 10 per cent. by 2010. There is also an ambitious target for 20 per cent. of our energy to come from renewables by 2020. That is fine; it is part of an energy mix and I would be delighted if it were to happen in the UK. Scotland is even more ambitious. At present, 12 per cent. of its electricity comes from renewable energy; its target is 18 per cent. by 2010 and it is believed that that is
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achievable. It also has an aspirational target of 40 per cent. of its energy from renewables by 2020. I do not know whether it will make that or not.
The renewable obligation has made it very attractive for energy companies to pursue wind farms. I understand that there are some 270 applications in Scotland this year for them. There has been some opposition, not only in Scotland but throughout the UK, to wind farms on that scale. An enormous amount of turbines, all over Scotland, would be involved in 270 wind farms. We must consider the matter carefully.
Within the Scottish Parliament, the Environment and Rural Development Committee has examined the growth of wind farms. I understand that it came to the conclusion that without looking at wave, tidal, solar and alternative sources, not to be dependent on wind farms would be the best way forward. The Committee is encouraging the Scottish Executive to move in that direction.
The rush for renewables by the power companies is generated by the fact that that there are substantial financial incentives for British Energy and Scottish Power to seek planning permission for wind farms. It is possible that we will achieve the targets that we have set ourselves. Even in an integrated energy policy and even if 40 per cent. of our energy was coming from renewable energy, we would still have to examine the mix and where the other 60 per cent. would come from.
There seems to be a determination to move to gas. I understand that 35 per cent. of energy in this country comes from gas. As my hon. Friend the Member for Inverness, East, Nairn and Lochaber said, the intention is that that would move to some 70 or 75 per cent. being imported.
Last week, the Financial Times had an article about energy. Its headline was, "Fear that gas supply gives Russia too much power over Europe". Leaders are concerned that over-reliance on Moscow could be an economic and political hazard. The article stated:
"'Schroeder never speaks out on Putin's human rights abuses in Chechnya or his interference in Ukraine's affairs,' . . . Mr. Putin's increased authoritarian style at home and with neighbours has raised concern and prompted a re-examination of Europe's links with Russia. The French and British Governments are particularly worried"
I am sure that the Minister will correct me if that is wrong.
We shall be in the same situation. We shall be depending on imports from Russia and the middle east for our gas supply. We shall be at the end of the pipeline. China, India, the United States and Germany will all be competing with us for the same gas from the same supplier. Does the Minister believe that that is the best option as regards stability of prices? Is he convinced that security of supply can be done on that basis?
Recently, there has been the announcement that the AP 1000 has received certification. I would promote that nuclear module in an integrated energy policy. At present, 23 per cent. of our energy comes from nuclear plants. If we are to close the nuclear power stations—I understand that there will be one left by
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2025—the alternative at present is to move to gas, but gas is not the cleanest source of energy that we know of.
I attended a conference with Professor James Lovelock, who said that his green credentials were impeccable; he has planted 20,000 trees in his time. He said that the Earth was in a profoundly dangerous state and that the Government listened more to the green lobby than to scientific evidence. He said that the green lobbies had intervened, that they understood better than the Government how people worked and that they had convinced the Government that green energy through renewables was the way forward. Consequently, he said, such lobbies were recommending inappropriate remedies and the outcome was nearly as bad as if a mediaeval plague had returned in a deadly form and we had been advised to stop it with alternative medicine instead of scientific medicine. He said that the Earth was sick and could not be cured by green solutions alone; it needed a dose of nuclear energy. When someone with Professor Lovelock's credentials feels as strongly as that, Governments have to take notice.
I should like the Minister to consider seriously the energy mix that we shall have in the future. Coal-fired power stations will close unless there is investment in clean coal technology. I know that the Babcocks plant in Renfrew has the capability and the methods to convert coal-fired power stations to clean coal burning. I have spoken to people there; they are looking for investment from the Department of Trade and Industry. That would be costly, but we have to consider it. Using coal is the most flexible method that we have of generating electricity. I attended Longannet last year and watched people bringing up the boilers to heat during the peak load.
The flexibility of coal power should be involved in the energy mix. European emissions targets mean that coal-fired power stations in this country will close. Clean coal technology is one solution to move us towards an integrated energy policy. Nuclear power is essential; it is the cleanest power of them all and does not produce CO 2 emissions. The Committee on Radioactive Waste Management has started its consultation, and I hope that it reports back sooner rather than later. With the solutions that it finds for dealing with nuclear waste, we could change public perception and reaction against nuclear power.
I ask the Minister to consider seriously an integrated energy policy, which would include gas, clean coal technology, nuclear power and renewable energies. It is important that there is the proper mix in the energy portfolio. If we have that, there will be security of supply. Without it, we would depend on gas for 70 per cent. of our energy needs into the future, and that would be a mistake on a monumental level. I ask the Minister to consider seriously my contribution today.
10.4 am
Mr. John Grogan (Selby) (Lab): I congratulate my hon. Friend the Member for Inverness, East, Nairn and Lochaber (Mr. Stewart) on securing this debate. I am grateful to him for two reasons. First, he spoke with great thoroughness and insight; he made light of his knowledge of engineering and physics, but I certainly learned a great deal. Secondly, I drew Question 9 in
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Prime Minister's Question Time last week and was going to ask about gas prices. The problem was that the Prime Minister got only to Question 8. This debate will allow me to go on longer than I would have in the main Chamber.
In his concluding remarks, my hon. Friend said that there were at least three main interests in the gas industry: the Government, the industry itself and the consumer. During my brief remarks, I shall turn my attention to the industrial and domestic consumers of gas.
According to the best estimates that I have seen, the consumer is facing considerable increases in the price of gas: Energywatch suggests an 18 per cent. increase over the winter period. British Gas had a significant price hike in September and lost many customers and EDF, which owns a lot of companies in the south of England, raised its gas prices in January. The best estimates over the past 18 months are that industrial consumers have suffered a 40 per cent. price increase, which the CBI is beginning to emphasise and which is being reflected in hon. Members' postbags. The price of gas for manufacturing industry is probably the major issue raised with Members of Parliament, and that is reflected in two early-day motions that are before the House.
I shall quote briefly from two letters that I have received from local companies—one from Mr. Slater, managing director of Plasmor, a concrete products company with factories in Knottingley and Great Heck in my constituency. He says that his production director has calculated that
He alleges that the market is somehow being manipulated by speculators making prices unnecessarily high.
Dr. McLenaghan, the site director of Saint Gorbain Glass UK, a French glass factory that has invested at Eggborough in my constituency, says that the price increases are putting it at a competitive disadvantage. He points out that UK prices are now
"some 25 per cent. higher than our competitors in other parts of the EU . . . these energy price increases jeopardise not only future investment, but employment as well."
The price increases are a concern for industry. Looking back at gas prices over the past two or three years, we see that in October 2003 there was a particularly large hike of 40 per cent. in just a couple of days. My hon. Friend the Member for Inverness, East Nairn and Lochaber mentioned the regulator, Ofgem, which has produced a report on the price hike and another on the large price rises during the past two or three years. Ofgem identified four different reason for the price rises: 30 per cent. was due to the connection of gas and oil prices in Europe, 19 per cent. was due to the fall-off in yields from North sea fields, which was more rapid than expected—although as my hon. Friend said, it is worth noting that we still produce 105 per cent. of what we consume at this stage—5 per cent. was due to increased storage costs, and the remaining 46 per cent. was down to market sentiment and risk.
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It is worth putting on the record that at the time of the main price spike in October 2003 there was no shortage of gas, no spike in demand and no problems with any of the pipelines. The main pipeline—the Bacton to Zeebrugge interconnector—was opened in 1998 and will almost have doubled capacity by 2006. If people looked at what happened in that period, they would imagine that if wholesale prices were rising rapidly in Britain and were higher than on the continent, gas would flow from the continent into Britain through the interconnector.
I have half a degree in economics, although I hasten to add that I did not fail the other half, rather it was in history. I have a basic knowledge of economics and find the situation a little strange. It also seems strange to Energywatch, which has championed the consumer and is good at that. It is a model consumer body; it has a certain edginess, it champions the consumer unashamedly, puts a bit of creative tension into the industry and is, perhaps, a little less supine than bodies like Postwatch. It is to be commended for that.
What could be done? Energywatch makes various recommendations. First, it points out that, basically, Ofgem has no purchase at the moment.
Mr. Alex Salmond (Banff and Buchan) (SNP): I was unavoidably detained and missed the start of the interesting debate secured by the hon. Member for Inverness, East, Nairn and Lochaber (Mr. Stewart).
The hon. Member for Selby (Mr. Grogan) has laid out the problem of the direction in which gas was flowing through the interconnector, but he did not use his half-degree in economics to tell us what he thought the reasons were. Will he do so?
Mr. Grogan : I thank the hon. Gentleman for his intervention. I was going to deal with that. The wholesale gas market is now a European market, not just a British one, although it is not as liberalised in the rest of Europe as it is in Britain. Energywatch and other experts wonder whether the market is being manipulated in other parts of Europe. They also question whether the regulator has the powers to obtain the necessary information to ascertain how the market is being manipulated. It seems strange that Ofgem does not oversee the offshore industry. As I understand it, that is the responsibility of the DTI. I would have thought that the entire industry should be regulated under one regulator, Ofgem, so that it would have a better picture.
Mr. Salmond : Unfortunately, Ofgem normally has no problems with what happens offshore, but it ignores price differentials offshore. Hence, pipelines go offshore for 600 miles, which would normally be an uneconomic thing to do, and avoid the regulation of Ofgem to go to land at points such as Bacton.
Mr. Grogan : I thank the hon. Gentleman for developing that argument for me. Are there any plans to change the situation and to give Ofgem greater powers?
As I understand it with my basic economics, information is crucial to a market and how it operates. In the electricity market, anyone can look at the
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National Grid Transco database, see the likely state of the market in the days ahead and modify their purchase behaviour accordingly. In the gas market, purchasers know of price increases only when prices increase. That fuels panic buying, as buyers do not know whether the price is the best that they are likely to get in the near future or whether prices might fall. The inclination, especially with the price rise curve over the past 18 months, is to buy immediately, whatever the price. For a market to function properly, it needs information and informed market participants. It is worth noting that producers have to provide information on exactly how much gas is being produced and will be produced to both Transco and the DTI. That information is already known, and should be publicised to market participants.
On behalf of British manufacturing industry, the Government should be much more aggressive in Europe. They should make it one of the priorities of our presidency to try to persuade the competition authorities in Europe to mount an investigation into wholesale gas prices across the continent. That is the only way that we will get to the bottom of what exactly is happening.
Energywatch is well led by Allan Asher, and he and his staff, Ed Wilson and Richard Bates, who have been to the House and have briefed Members, recently held a seminar for 60 people from across the gas industry: producers, regulators, and industrial and domestic consumer representatives. When the basic question was asked of how many people thought that the wholesale gas market was working properly—the room was rather more full than the Chamber—only two hands went up. One belonged to a representative of the offshore industry, and the other to the chief executive of Ofgem. Everyone else disagreed, which tells us something.
That is a political issue, which is ticking away in the background. However, it is the No. 1 issue for manufacturing industry. I hope that the Government do not listen only to the operators who have produced a report. Allan Asher said that the UKOOA report is
"little more than gas producers voting themselves a £5 billion windfall each year, at the expense of consumers . . . Consumers are paying the price for the lack of transparency in the market. If industry can't provide the information that the market needs to work properly, then it must be imposed."
10.14 am
Mr. Andrew Stunell (Hazel Grove) (LD): I am delighted to be able to contribute to this well informed debate. I thank the hon. Member for Inverness, East, Nairn and Lochaber (Mr. Stewart), who probably has the second longest constituency name in the House, for his obviously thorough and well researched overview of the gas industry and its prospects nationally and internationally. I shall not comment on that in detail, but he left two questions hanging in the air to which I very much hope the Minister will respond. One related to the provision for storing gas in the coming years. The hon. Gentleman rightly pointed out that the UK has less storage capacity than other European Union nations, and given that we are importing rather than exporting, perhaps the Minister should turn his attention to that matter.The hon. Gentleman's second question, which is of some importance, is whether there will be a time lag
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in connecting up the necessary interconnectors. If there is such a time lag, the supplies will not be accessible to us in this country even though they are on the other side of the sea.
The hon. Member for Hamilton, South (Mr. Tynan) made a passionate pro-nuclear case, which I have heard before. He knows that I do not agree with him, but I hope that the Minister will respond to his plea for investment in clean coal technology. There is no doubt that there will be a continuing demand for coal not only in this country but overseas, and bearing in mind coal's very high carbon emission potential, investment in clean coal technology is not simply an economic benefit to the coal industry in this country, but potentially a major export industry.
The hon. Member for Selby (Mr. Grogan) drew attention to the paradox of gas from a high-price market being exported to a lower-price market, which may be accelerating the price spike in the UK that is hitting domestic consumers and the manufacturing industry hard. So there are already quite a few questions for the Minister to answer before I make any contribution to the debate. I hope that the Minister will have effective answers.
One issue that I wanted to discuss but which has not yet been raised in this debate is the fact that the UK's consumption of energy is not as strongly connected to its economic growth as commentators suggest. Figures for UK energy consumption show that between 1993 and 2003, which is the last year for which complete figures have been published, there was a rise of only 3 per cent.—that is, 3 per cent. in 10 years. Over the same period, the UK's gross domestic product rose by 33 per cent. So we have to some extent managed to decouple economic growth and prosperity from energy growth. That is important to remember when we consider some of the doom-and-gloom scenarios described by the most alarmist commentators.
Interestingly, the German economy has grown by an almost equal amount and has reduced the gross consumption of energy in the same 10-year period, so we should not completely dismiss the possibility in future decades of continuing growth, wealth and prosperity and a reduction in energy consumption leading to a significant reduction in carbon dioxide emissions.
In 2003, gas was 38 per cent. of total energy consumption—a very large slice and the largest contributor to our energy mix. What happens next is clearly of great importance, and the hon. Member for Inverness, East, Nairn and Lochaber was right to bring it to our attention today. We need to know the future cost of gas and its future availability and environmental impact on the UK.
The hon. Gentleman gave a very good overview of the wide range of sources of gas. His analysis was at least as good as any that I could provide, but I have a striking anecdote to relay. Members of the energy industry select committee of the Nigerian Parliament visited Westminster and the UK last summer, and I discussed with them the state of their industry in Nigeria. They confirmed what I already understood to be true, which is that they cannot find a market for the country's gas and are burning off huge volumes each year.
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Subsequently, I saw a night-time, satellite photograph of the globe provided by the National Geographic Magazine of America and one of the brightest spots was the sea off the west African coast where the gas is being burned off. Some of the hysteria that we hear about gas running out and so on needs to be tempered by a realisation that, throughout the world, many sellers are eager—indeed, desperate—to get rid of their product as there are many buyers who are equally eager to purchase it. Future investment needs to go in the direction of making sure that the connection is made between the two. The hon. Gentleman referred to liquid natural gas as being a means of transporting that.
We must maintain the objective of future growth in wealth and prosperity, a direction in which I am sure that a future Government would go. Moreover, we must ensure a lower energy intensity and we must ensure that conservation, efficiency and substitution of fossil fuels by other fuels receive high priority. We must remember that it should be not only transport fuel use that is a common target, but that buildings and the built environment use 50 per cent. of the energy that we consume and I hope that my Sustainable and Secure Buildings Act 2004, which received Royal Assent last September, will play a part in moving us towards that end.
Given that background, it is absolutely essential that we focus a great deal of Government attention on reducing the energy intensity with which we will have a future growth in wealth and prosperity. That means that conservation and efficiency must play a much bigger part in the strategy of any future Government. Furthermore, we must maintain investment in renewables. The hon. Member for Hamilton, South was a little dismissive of what might be happening with renewables, but rightly drew attention to the uneven focus that there has been on the development of wind energy as the sole renewable source. I say to the Minister and to him that we do not need a huge surge in the investment in renewables to achieve the Government's targets by 2050. A 1 per cent. per year growth in renewables during the next 50 years would provide us with 50 per cent. of our energy coming from renewable sources and not all from wind—we must fully accept that that would be impractical.
The hon. Member for Hamilton, South mentioned several other technologies and no doubt there will be further technologies in 50 years' time of which we are not aware at the moment. If we reached a position in 2050 when about half of our energy was coming from renewable sources of one sort or another and were successful in turning the current energy growth of 0.3 per cent. per year into a reduction in energy of 0.7 per cent. per year—a 1 per cent. per year change in our energy use in a downward direction—that would reduce our overall energy demand by 2050 to 70 per cent. of what it is now. It would leave 20 per cent. of our current energy demand to be filled by a fossil fuel or, if the hon. Gentleman had his way, by nuclear.
Even if gas provided all the 20 per cent. of energy demand, it would mean that our demand for gas in 2050 would only be half of what it is now and that we had comfortably met the Government's current targets and those of the Royal Commission on Environmental Pollution of a 60 per cent. reduction in fossil fuel. I ask the Government to listen to the points that have been
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made and to focus on a longer game, tackling conservation and efficiency to a much greater extent than at present.
There may even be a misconception in the original title of the debate. "The future for gas in an integrated energy policy" assumes that there is an integrated energy policy now. As the Minister knows, I have been a critic over the years of what I see as the disjointed and fluctuating range of policies that the Government have talked about. I have been critical of the slow implementation even of those on which they have passed legislation. It is extremely disappointing that whenever a target, such as carbon emission reductions or the achievement of any energy policy, is missed it is simply dropped. It seems to the Opposition that they are often blown about more by lobbyists and market forces than by any real vision or determination to get to the end of the job.
It is always a pleasure to be in a debate with the current Minister, but he knows that he is the sixth holder of his portfolio in seven years. Although he is a good and well briefed Minister, and a hard worker, that underlines the fact that we are still some way from an integrated energy policy. I hope that the Minister will tell the Secretary of State that we must try harder in future.
10.27 am
Mr. Laurence Robertson (Tewkesbury) (Con): I congratulate the hon. Member for Inverness, East, Nairn and Lochaber (Mr. Stewart) on securing this important debate and on having the foresight to do so at a time when energy is being widely discussed. There are unfortunate reasons for its being talked about—the power cuts in London and the midlands a while ago. Those cuts were not caused by a shortage of supply, but they focused people's minds on what might happen, and prompted a television programme that caused a little concern.
Although the cuts were to do with infrastructure rather than supply, we should take note of them. The hon. Member for Inverness, East, Nairn and Lochaber and, more particularly, the hon. Member for Hamilton, South (Mr. Tynan), talked about the dangers and difficulties of bringing gas from as far away as Russia. That is of course a problem of infrastructure, and if infrastructure went wrong in our own country, it has the potential to go wrong again if we bring gas from across the world. The hon. Member for Hamilton, South made a good and wide-ranging speech, which covered many of the issues that I intended to raise, so I shall keep my comments fairly brief, to allow the Minister time for his reply.
The hon. Member for Selby (Mr. Grogan) made some good points about gas prices. He will know as well as anyone about the decline of the coal industry. Three mines in Selby have, I think, closed recently. He will have first-hand experience relevant to what the hon. Member for Hamilton, South was saying on the subject. I regret the industry's decline; my father was a miner and I have natural sympathy for the mining industry. However, we must recognise that there are environmental pressures on the coal industry. It may be
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possible to deal with those to some extent through clean coal technology, although that will require a great deal of financial input at a time when there is not as much investment in the energy sector as we might want—something that we should be concerned about.
As coal and nuclear power decline and as renewables come along—but slowly; they are at slightly less than 3 per cent. now—we must consider where our energy supplies will come from. At present, nuclear energy provides about 22 or 23 per cent. of our electricity needs. In 20 years, that will be down to only 2 per cent. unless there is further investment in the nuclear industry. We cannot predict exactly what the production from coal will be, other than that it was 66 per cent. in 1990 and it is now about 33 per cent. We do not know what it will be in 20 years, but even if it reduces considerably, and even if renewables come along as we hope that they will, somewhere between two thirds and three quarters of our energy needs will come from gas. I have made a few assumptions, but they are not outrageous assumptions; what I have described could well come to pass.
Over the past 30 years—perhaps not quite that long in terms of gas—we have had a lot of reserves from the North sea. They are starting to decline, although there are still a lot of gas and oil reserves there. We are having to look further afield for our gas supplies. I do not think that that is necessarily a terrible problem. I read in the Financial Times this morning that the Minister is going to Norway next month to finalise the treaty for the pipeline from that country, which is welcome. However, it will supply only about 20 per cent. of our gas needs at most. There is also the interconnector with Holland, which will come on line in 2006–07. I do not know exactly how much gas will come from that.
As we increase our dependency on gas, we will have to go further afield to get it. Russia is the obvious place to go. There is the theory that it needs the money, and therefore it will not cut off gas supplies, but tell that to Belarus, which had an interruption in its supply because of a political dispute. I do not claim to be an expert in what is happening in Yukos, the giant oil company in Russia, but I cannot persuade myself that there is not some political manoeuvring going on. I will not put it any stronger than that, but I think there is enough concern about that to give me some concern about becoming over-dependent on supplies from Russia, or any other country that does not have a stable political history.
There is also concern about the infrastructure that brings the gas to our country from so far away. The Government are right to focus on the threat of terrorism in its many forms. We cannot exclude the possibility of some terrorist-inspired interruption to our gas supply if it comes all the way from Russia. How could we get the gas here? We could bring it in a liquefied form, but we might be looking to bring it here by pipeline, in which case we would be at the end of a very long pipeline.
Just over a year ago, I visited Finland to see its new nuclear reactor plans and the way that it deals with nuclear waste. The public were persuaded to go for a fifth reactor by the Finnish Government saying, "It is up to you, Mr. And Mrs. Elector; you have a choice. We either build a fifth nuclear reactor or we depend on gas from the Russians." Unsurprisingly, they chose to have a fifth nuclear reactor.
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It is interesting that 23 countries are building or planning to build new nuclear reactors. That will increase the civil nuclear capacity of the world by 33 per cent. We need to ask whether those countries are all wrong and that we are right to allow our nuclear industry to decline to just 2 per cent. and to virtually nothing in 20 years. With regard to security of supply, we must have a balanced energy policy. That has been described in previous contributions as an integrated policy; I do not think there is much difference between those phrases.
The hon. Member for Hamilton, South is not the only Member present who is old enough to remember the three-day week. Sadly, I also remember it. I think that the slogan at the time was, "Vote for Ted and stay in bed." As I am a Conservative, I should not have said that, but I remember all the slogans that were going around at the time. In our industrialised country, we had a three-day week. The television was compulsorily turned off at 10 pm. We sat in the dark for many nights—although, as I was a teenager with a girlfriend at the time, I do not think that I was too perturbed by that. However, from an industrial point of view, it was a disaster That was only 30 years ago, within our living and working memory. My point is that we were in that situation because of an over-dependence on one source of energy. We should not put ourselves in that position again in relation to coal or gas or any other single form of energy.
Mr. Salmond : While we all want to hear more about the darkness and his girlfriend, is the hon. Gentleman working his way round to saying that he and the Conservative party are as enthusiastic about a new nuclear building programme as the hon. Member for Hamilton, South (Mr. Tynan)?
Mr. Robertson : Hon. Members will be glad to hear that I am moving off the previous topic. However, I am very sympathetic to that idea. The Government are in a difficult position with regard to the nuclear industry. Any Government will be, because the most likely builder of a new nuclear plant is British Energy, and it is in severe financial difficulties. It is also constrained by the European Union judgment on its aid package—the Minister will interrupt me if I am wrong—in that it cannot run a new nuclear plant for, I think, six years. That is a further difficulty. Therefore, I am sympathetic to the idea of a new generation of nuclear plant, not because I have a greater regard for that industry than I have for any other, but because I cannot see how, without a nuclear industry, we are to secure supply or cut emissions.
If, in 20 years, we replace our entire nuclear production with renewables—that is a very big "if"—we will have got nowhere with cutting carbon emissions. We will have only replaced one carbon-free industry with another. We will not have affected emissions. If we are reducing emissions, we have to have three things: renewables, the generation of nuclear power and a reduction in electricity use—it is not a case of "either/or". If the hon. Member for Banff and Buchan (Mr. Salmond) is asking me whether, as Energy Minister on 6 May, I would sign a cheque for the nuclear industry, the answer is that no, I would not. It is a matter of getting the industry together, and asking, "What is the
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position? How do you see the future?", and, "Are there things that Government can do apart from signing a cheque that might encourage you to address the imbalance of supply that will happen in the near future—in our lifetime?" I hope that that is a reasonably clear answer to the very sensible question that the hon. Gentleman asked. We have to move towards a balanced energy policy if we are not to be over-dependent on one source of energy.
Nothing that I have said should be taken as an attack on the gas industry. Gas has provided a great deal of security of supply over many years. It has provided a great deal of money to the Exchequer and I congratulate those who operate the industry. They have a bright future, and they will continue to play a significant role in the supply of energy to this country. However, I would not want us to be dependent to the extent of, say, three quarters of our energy coming from gas if much of that gas were to come from countries that do not have proven records of political stability.
The difficulty is, how can a Government control that? I am not an interventionist politician. I came into Parliament to try to persuade Governments of all colours to withdraw from many areas of life—the Government are involved in too many of those. So how does one get the country to move towards the balance of energy supply that we need without being interventionist? I sympathise with the Minister, and that is not an easy thing to do. Our energy market is not a free market. It has many environmental constraints and a regulator, and a demand on it to persuade its customers not to use as much of its product as they do. I do not know whether that is a unique situation, but it is very unusual. We do not have a completely free market; we have a situation in which the Government have to keep their hand on the tiller, while at the same time not interfering to the point that makes matters worse.
As we look to the future, the Government need to give an idea to the energy industries—particularly to the coal industry—about how they think that things will go. That is not to interfere beyond where it is right for Governments to interfere, but so that we have some confidence about the medium-term future.
I do not think that we are facing electricity cuts this winter or next, unless an absolutely terrible winter coincides with a number of breakdowns in power generation across the country, events which are beyond anything that we can ordinarily control. We do not have a short-term problem. However, the hon. Members for Inverness, East, Nairn and Lochaber and for Hamilton, South have said that the medium term does not look quite so secure. I do not want to be alarmist, and no one here today has been, but we are right to raise the issues and say, "Let's not wait until the last minute and then panic."
Let us think five or 10 years ahead. Where do we see electricity supplies coming from? Is it right that we should be burning gas to produce electricity when gas itself can be used, and when there are other ways of producing electricity, including renewables and nuclear? As well as the Government indicating what sort of future they see for nuclear and coal—and therefore, by implication, for gas—we need more of a steer on the subject of renewables. The hon. Member for Hazel Grove (Mr. Stunell) said that to get half of our electricity from renewables, we need only to increase
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renewable usage by one percentage point each year. That is sound mathematics, and achieving it does not sound very difficult, but 1 per cent. of our electricity production is quite a lot. In round figures, it is about half what a nuclear power station would produce. It is quite a challenge to bring on renewable production to that extent.
Our party's policy is to retain the renewables obligation and the targets within it. It is also our policy to examine the internal workings of that obligation to ascertain whether it is actually producing what we want, and I know that the Government have already set about doing that. At present, the obligation is not producing what we want. There is an over-emphasis on wind power. Anyone who thinks that we can solve this country's energy problems simply with wind is living in cloud cuckoo land. I am well aware of the opposition to wind power, certainly in some areas of Scotland. We need a mixed policy, and we need to know where we are going with renewables, nuclear power and coal, which would enable us to know where we are going with gas. Once again, I congratulate the hon. Member for Inverness, East Nairn and Lochaber on initiating this important debate.
10.43 am
The Minister for Energy and E-Commerce (Mr. Mike O'Brien) : I begin by congratulating my hon. Friend the Member for Inverness, East, Nairn and Lochaber (Mr. Stewart) on securing this important debate, which has been useful for the House. I apologise for arriving somewhat late due to traffic jams in south-east London, but I did receive full notes from my hon. Friend the Minister for Small Business and Enterprise and heard most of the contribution of my hon. Friend the Member for Inverness, East Nairn and Lochaber.
I thought that the contribution of the hon. Member for Tewkesbury (Mr. Robertson) was thoughtful, and I sympathised with much of what he said. He also reminded us of the importance of energy supplies by referring to the three-day week, his activities in the dark and the slogan "Vote for Ted and stay in bed." Now we know why he joined the Conservative party.
The White Paper set out our plans to ensure sustainable, secure and affordable energy delivered through competitive markets. By 2020, we envisage a more diverse energy system. It is important to stress that wind provides about a third of our renewables today, and we want that extended, but we want to see investment in a range of other renewables that is not focused on wind alone. For the next decade, however, wind will be an enormously important source of energy. Scotland, in particular, will play a substantial part in providing much of that electricity. I will return to renewables in due course.
Gas is set to remain the most significant part of the energy mix. Our estimates are that during 2004 the UK was, overall, a net importer of gas on an annual basis for the first time since, I think, 1996. Although there are variations from month to month, the long-term trend, by which we shall become a net importer of energy as a whole, is obvious. It is clearly important to reflect on the challenges for security of supply that will result from
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becoming a net importer again, as well as some other challenges—notably the need to update our energy infrastructure.
In today's global markets, secure and diverse sources of energy are essential for producers and customers. Ultimate responsibility for security of supply rests with my right hon. Friend the Secretary of State, and we firmly believe that that responsibility is being discharged by leaving key functions with those who have the expertise to carry them out, such as Ofgem, the national grid, and other market participants.
Mr. Salmond : I just wonder whether Ofgem's expertise is something that the Minister should rely on. Does he accept that some of the problems in the gas market identified by the hon. Member for Selby (Mr. Grogan) are a direct result of Ofgem's decisions on locational pricing in the early to mid-90s, which have been revised, sensibly, in the past couple of years? Does that not suggest that a close examination would be wise before rushing headlong to the introduction into the electricity market, by the same people, of a similar system or philosophy, which would create a heavy disincentive to the sort of expansion of electricity production from renewable sources in the north of Scotland that the Minister just welcomed and anticipated?
Mr. O'Brien : As the hon. Gentleman knows, whatever phrase can be used about the consideration that Ofgem is currently giving to the issues, "rushing headlong" is not an appropriate one. Arguably, there has recently been something of a delay in re-examining some of the suggestions. Perhaps the hon. Gentleman should revise his phraseology, whatever his views about Ofgem. It is important that the Government should have a regulator that can obtain the best information and make judgments based on the need for the market to operate effectively and efficiently. In due course, we shall receive the results of Ofgem's current consideration of the issues.
Mr. O'Brien : I see that the hon. Gentleman rising, and will give way to him once more, because he has been present for much of the debate, and I know that he is interested in the issue.
Mr. Salmond : I am meeting the Minister later today, of course.
What the Minister says would be right if Ofgem recognised the Government's renewable energy targets, but, as he knows, I and colleagues asked its representatives three times, during a meeting with them, whether they acknowledged and were abiding by the Government's targets on renewable energy; each time they refused to answer, saying that they were bound by different criteria.
Mr. O'Brien : Ofgem is set up under statute and is bound by the statute that set it up. The Government have renewable energy supplies targets to be reached by 2010 and 2020, and we are pursuing them. No doubt Ofgem conducts its regulatory activities with awareness of those targets, because its objectives are clearly set out
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in its statute, and no doubt its representatives were merely communicating the fact that Ofgem is governed by Parliament, which has legislated to decide the basis on which it operates.
The hon. Gentleman should not read too much into his brief discussions at Ofgem. I meet its representatives regularly and am satisfied that they will consider all the issues seriously and try to ensure that the market operates effectively. We need a policy framework for energy that provides appropriate incentives, and that is one of the issues that Ofgem will continue to examine. The White Paper recognises that competitive markets can provide suppliers with incentives for reliability and the diversifying of sources. That, we believe, is the strength of our regulatory system; and, since liberalisation in 1990, the market has begun to deliver more secure energy supplies. We have made some changes to the way in which it operates, and we seek to ensure that it continues to deliver secure supplies. The national grid is forecasting that Britain's plant margin will rise over the next few years, reaching more than 30 per cent. in 2007–08, and remaining at that level to the end of the decade. In the longer term, market signals will show when new build is both needed and economically viable.
After a difficult period, there are signs of growing optimism in the power generation sector. New capacity has come on line at Immingham and Spalding, and earlier this year Centrica bought an option to build another power station at Langage in Devon.
E-ON UK, formerly Powergen, recently announced that it was to convert its Isle of Grain power station into one of the world's largest gas-fired plants at a cost of £80 million. The station is currently oil-fired, and runs only part time. Running full time on gas, the power station should produce enough electricity to power as many as 2 million homes. RWE Npower recently confirmed that it had made an application for consent to build a 2,000 MW gas-fired power station on its former oil-fired power station at Pembroke in south Wales. Those two projects alone represent more than £1 billion of investment in the future of UK energy supplies, which shows that the market is capable of anticipating and responding to future needs. We will continue to watch such issues with a great deal of care. We cannot be complacent, and we need to ensure that we have broad, diverse energy sources.
For markets to work, firms need to be confident that the Government will allow them to operate. That is why we made the commitment in the White Paper that the Government would not intervene unnecessarily, but only in difficult circumstances such as a potentially serious risk to safety. That does not mean that we are less than active. The Government have an important role in monitoring developments and creating an informed and competitive market both at home and abroad. If barriers arise, such as difficulties with planning permission or inadequate price signals, we aim to address them in partnership with business. The Government will ensure that the legal duties of the market regulators are clear and appropriate in relation to security of supply.
What particular challenges does a greater dependence on gas imports imply? First, being a gas importer is not at all unusual—either internationally or, historically, for the UK. All G7 countries except Canada are energy
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importers. Moreover, the UK imported more than 25 per cent. of its gas in the 1980s—we spoke earlier about the 1970s, but the 1980s is certainly within most people's recollection.
Some commentators have raised the spectre of UK gas imports being held to ransom for reasons related to political factors in other countries. Indeed, reference was made to Russia as a source of energy. We do not buy gas from Russia now, although a number of EU member states do so. They have found over the past 20 years that it is a reliable source of gas; and, despite various issues at different stages, gas supplies have not been interrupted. Indeed, as far as I am aware, the Russians have not sought to use gas supplies as a negotiating card in political discussions. They obviously want to secure a commercial advantage from the sale of their gas, and no one can blame them for that. After discussion with EU member states, we understand that that has not extended beyond the commercial operation into politics; they would be very concerned should that happen.
I understand the concerns expressed by my hon. Friend the Member for Inverness, East, Nairn and Lochaber, but so far we have had no indication that the Russians are playing that sort of political game. In any event, we are not at the moment buying from Russia; we may do so in future, but we have no plans for a direct connection between Russia and the UK.
We deal with other countries that have political and stability issues. We must buy energy from a range of sources, so that if a problem arises with one of them we can switch to the other sources and ensure that our security of supply is maintained. Several hon. Members have referred to that diversity; it is the source of our security. Diversity equals security.
It is always possible that there will be stability issues in some countries, but a move to a more globalised market does not necessarily increase the likelihood of that. On the contrary, it becomes less likely as more countries move away from state-controlled monopoly towards systems in which they deal with other countries. That means that their wealth depends on them being able to deal on a commercial basis with other countries, rather than a political basis. The broader global market in energy can be a source of increased stability, rather than instability.
Given the inevitable decline of indigenous gas supplies in the UK, new infrastructure developments are required to ensure that we continue to meet high winter energy demand. A number of projects are currently under review or under active construction, as the market responds to that opportunity. One example of that is additional import connections to Norway. I hope to visit there shortly, and to discuss with my opposite number the conclusion of treaty negotiations with the Norwegians to ensure that we have strong supplies of gas from the country. The details of those negotiations are being completed. We have almost agreed the treaty; all that we are looking at now are some issues around translation and some administrative issues. We have almost got there; I hope that we can get the treaty signed in the not too distant future. That will provide us with a good source of supply from a country with which we have an extremely friendly relationship, and which is very stable.
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LNG terminals are also necessary to import gas from other worldwide sources, and they are being built. We need more interconnection with the European Union. We need pipeline upgrades to increase interconnector import capacity, and we need both onshore and offshore gas storage facilities, as well as access to EU supplies.
Before all of these projects are completed, gas supplies might be tight if demand rises to high levels in the coming winter or the one after that. In such circumstances, we would look to the market to provide the appropriate response through demand management. The ability of the market to deliver large-scale demand response has to be tested, but we have already seen some small-scale examples of large customers choosing to curtail their demand in response to high gas prices. National Grid Transco has calculated that large amounts of demand-side reduction could be delivered by the electricity generating sector itself, without threatening any security of electricity supply.
The electricity generating capacity position is another crucial issue. There has been some wild talk in the newspapers about lights going out and so forth. Some things are possible but unlikely, and the prospect of that happening is extremely unlikely. However, I cannot give a 100 per cent. guarantee that that will never happen; we have just seen how storms have produced problems in the north of England and in Scotland, where thousands of people have been cut off, so such situations arise from time to time.
Last year's experience provides an interesting example of how the market responded. The March 2003 update to the seven-year national grid statement showed the projected plant margin for the winter as being only 16.2 per cent. That seemed low compared with the actual margin in previous years, which had been about 20 per cent. We signalled our concern, and by October the margin had risen to 19.3 per cent. Therefore, the forward price signals, coupled with the summer of power cuts which has been referred to, appear to have worked.
Mr. David Taylor (In the Chair) : Order. I confirm that in the light of the conditions in the Chamber it is acceptable for hon. Members to remove their jackets.
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