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Oil and Gas Supplies
2.30 pm
Dr. Vincent Cable (Twickenham) (LD): I am grateful for the opportunity to discuss a subject that emerged during the summer recess as one of the dominant issues facing us. I have tailored my comments in anticipation of a Department of Trade and Industry Minister responding to the debate, but clearly there are other aspects to the subject, which relate most notably to the Treasury. A set of important issues relate to the DTI, and I shall touch on some of them briefly. They include the question of Government intervention in the oil markets, upstream investment in the North sea, the shortage of gas, if there is such a thing, competitiveness, the conservation agenda and the implications for alternative energy, and fuel poverty. At best, I shall simply tick some of them and ask questions about others.
To put the subject into a personal and an historical context, I first became aware of the potential for oil shocks 30 years ago, when I worked in government as an official, not as a Minister. I was responsible for British foreign policy on Latin America, and on Venezuela in particular. Mr. Perez Alfonso, the Venezuelan Oil Minister and father of OPEC, had coined the term "the Devil's excrement" to describe oil. The point that he was trying to make was that oil was a necessary part of the functioning of society and economies, but that it had all sorts of unpleasant environmental, economic and social side effects.
In the past year, we have encountered some of the predominantly negative effects of an oil shock. It is not of the scale that we endured in the mid-1970s and early 1980s—at least not yet—but it has the potential to be. Oil prices more than doubled between 1998 and 2003, increasing from an average of $13 to $31. They doubled again in the following two years: Brent crude is now just under $60, and at one point it was close to $70. Wholesale gas prices have roughly doubled in the past two years, and they increased very substantially in the two years before that.
I shall start by identifying some of the consequences that we have already experienced. Overall, the consequences might be less severe and dramatic than they were a generation ago, because our economy and that of most other western countries is now less dependent on oil and on energy in general as a share of GDP. That is partly because western societies, including our own, have made an effort to conserve, but mainly it is because of deindustrialisation. None the less, there have been some substantial impacts, as we saw yesterday in the published figures for inflation, which is now more than 3 per cent. annually compared with 1.1 per cent. in September last year. Not all of that is because of energy issues, but a substantial part of it is.
According to the energy watchdog, family gas bills have risen from £327 to £445 in the past two years—an increase of 40 per cent. Inevitably, that has had an impact on fuel poverty. Until quite recently, the reduction in fuel poverty was a great success story: from 1996 to 2001, the number of people defined as fuel poor fell from 4.3 million to 1.7 million—a massive reduction. Two years ago, however, the Minister's predecessor warned that that reduction would not be sustained
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because of the upward movement in gas prices in particular. Basing its estimate on existing price increases the energy watchdog suggests that the number of fuel poor could increase to about 3.5 million in the coming months. There could therefore be a great deal of regression in what was a major social advance. The energy watchdog warns that, even on the basis of current prices, the coming winter could see a big increase in personal debt and, linked to that, fuel poverty and disconnection.
That is how the oil and gas shocks have been experienced at the personal level. However, it is not just households that are affected; we already have figures for the additional cost to the public sector. Public expenditure last year was an estimated £100 million more than it otherwise would have been because of increased fuel consumption bills: hospitals alone spent an extra £40 million and we expect significantly greater increases this year. The figures that have begun to emerge from the industrial federations suggest an increase in energy costs for the chemicals industry of about 70 per cent. over two years and close to 60 per cent. for the plastics industry; those are big industries, each employing about 200,000 people. The paper, glass and construction industries have had similar experiences, with major knock-on effects that will have an impact on their international competitiveness.
Is that all, or is there more to come? I do not know. I was once professionally engaged in the business of forecasting in the energy industry and my experience taught me never to attempt forecasts. Indeed—I may have told this anecdote before—when I was installed in my office at the oil and gas company for which I worked, I was given an Arabic saying, which I pinned to my wall. Roughly translated, it said, "Those who claim to forecast the future are all lying, even if by chance they are later proved right." Forecasting is a dangerous business, but I have looked at some of the consensus forecasts that are currently being made about crude oil prices, and it is worth reviewing the range. Barclays Capital is working with a figure of $50 for the next year, Merrill Lynch with $45, the Deutsche Bank with $40, and BP, which presumably knows a thing or two about the matter, expects roughly $40 over the next three years. In other words, the figures are somewhat down on current levels, but substantially higher than we were used to in the late 1980s and for most of the 1990s. However, some outliers—knowledgeable and well-informed people—are talking about the possibility of something of the order of $100 over the winter if adverse circumstances arise.
I will not ask the Minister to give a Government view about what prices should be—it would be foolish to do so. However, it would be useful to know how the Government approach the big controversy on the future of energy prices, particularly oil prices. There are essentially two views. The optimistic view, which I acquired in the industry, is that oil reserves are always underestimated—there has always been an expectation of a 20-year life—and that over time, prices increase, which increases exploration, and technology advances and all kinds of basins and fields are discovered that we did not know existed. However, there is another plausible view, which I do not discount, which is that there is an oil mountain, the summit of which we have reached, and that we face a long-term future of
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depletion. It is important for the Government to take a view on that controversy, because it affects the way in which one perceives the future of the North sea. It will be interesting to know, for example, what kind of analysis the Government's chief scientific adviser has made of the competing views.
In the time remaining to me today, I shall identify some specific areas on which it would be useful to hear the Minister's views. The first is whether there is anything that the Government could or should do to stabilise oil prices that they have not done. They were right to avoid subsidies and oil caps and some of the other panic measures that have been introduced in other European countries. However, the one major intervention that the Government have made, along with other International Energy Agency countries, has been the use of the strategic stocks. That has probably been a factor in the moderation of prices in the weeks since the hurricane. It would therefore be useful to know whether the Government believe in the domestic market. We should also consider the fact that if the oil companies are left to make a commercial decision, they might run their stocks down to avoid the associated overheads. It can be argued that we should look afresh at the size of our strategic reserves.
In respect of the oil markets, the Government have set out six points at international gatherings such as G7 and the European Council of Ministers that are effectively a series of demands on the OPEC countries. A Conservative spokesman captured the tone rather well by saying it was "a little colonial" to demand that OPEC countries produce more oil. What is the Government's current assessment of the spare capacity of the OPEC countries? I am not terribly close to such matters nowadays, but my impression is that there is very little or even none. The underlying problem over the past few years is that, despite rapidly growing demand from China, India and the United States—all strongly growing countries—OPEC capacity has been pretty fixed. That is understandable, because for a long time low oil prices resulted in there being little investment. The OPEC countries have simply run out of capacity. Urging those countries to produce more is at best rather pointless, and at worst a distraction. Will the Minister tell us the Government's professional assessment of OPEC's current spare capacity?
Mr. Bernard Jenkin (North Essex) (Con): I am listening carefully to the hon. Gentleman, who brings much expertise to the debate. Is he aware that changes in the taxation regime for road fuel stations has resulted in a big reduction in stocks of fuels held at the point of sale? Could it be that the Chancellor, in a rather typical Labour manoeuvre, is trying to distract attention from the perverse incentives caused by his taxation regime, which has made it more likely that filling stations will run out of fuel, and is blaming someone else for problems to which he has contributed?
Dr. Cable : I do not know the motives but I think that the hon. Gentleman may be correct. I understand that, over time, the oil industry has been running smaller stocks in the distribution sector and at the refining stage. I had not realised that it was being done for tax reasons; I thought that it was being done to reduce the cost of maintaining stocks.
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My second set of questions relates to the first. Are the Government doing all they can to maximise our oil production in the North sea? I note that the Minister had a successful round of licence bidding during the summer—the best for 30 or 40 years, I believe. He must be rather pleased about that, given that only two or three years ago we had the worst round. I do not know whether that was because of the oil price environment or the sudden changes in taxation, but during the past few months there has clearly been a positive response, and that bodes well. I have a slightly technical question for the Minister. Is he satisfied that the larger number of bidders that have emerged as a result of the licensing are capable of carrying through the exploration and production to which they have committed themselves? I understand that many of the companies are extremely small and have little capital; they will depend on secondary equity markets to raise money. It is potentially an internet bubble, in that their commitments might not be carried through into production. It will be interesting to know how the Department regards the bidders and whether it screens them for competence and ability to deliver.
My third question—probably the most topical—is about gas supplies and is indirectly related to the upstream issue. A few weeks ago, Digby Jones warned of the real danger of "the switch being pulled" on British industry because of a shortage of gas. The engineering employers have given a similar warning. To be fair, the Minister said in response to such comments that he is not complacent, and the problem is referred to in the July paper published by the Department for Trade and Industry. The controversy centres on what is a sensible storage capacity. At present, our long-term storage of gas is approximately 11 days, compared with a European average of just over 50 and, in some European countries, just over 80 days. Although the Government do not maintain a strategic stock of gas as they do for oil, the question arises what is the optimum and who decides it? Should there be a stock and, if so, should a figure be set? Have the Government decided whether, in broad security of supply terms, it would be sensible to define a minimum stock level? If so, what should it be?
How did we get to a position in which storage is so tight? Was it a failure of regulation by Ofgem or a failure of policy? Was it, as Energywatch suggests, a rather subtle problem caused by the lack of trading in the futures markets leading to destabilising speculation? If that has been the problem, what can be done at Government level to influence it and to improve the workings of the market?
Mr. John Grogan (Selby) (Lab): Does the hon. Gentleman share Energywatch's concern that the completion dates for three of the storage facilities have been delayed and that storage capacity has been reduced for two of them? Does he also share its concern about the workings of the market? It contends that much more real-time information about gas flows should be provided to buyers and that it would be a good idea if regulation of the gas market were not split between the DTI and Ofgem, but unified.
Dr. Cable : The last point is a good one and the hon. Gentleman expressed it better and more fully than I did.
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Essentially, there is not a properly functioning market and because of that there is a tendency for speculation to bid up prices very quickly. I asked how the lack of transparency and liquidity in the markets that gives rise to the relevant criticism can be rectified. The hon. Gentleman is also right to point out the frustration about how slowly the storage is forthcoming—although the other side of the argument is that it is on the way, so that there will be substantially enhanced storage capacity within a year. The problem is this coming winter, which leads back to the question I posed about what the minimum should be and who should determine it.
One of the implications of that question follows from the problem that the hon. Gentleman has just raised. How much of the problem is due to the lack of liberalisation of EU energy markets? Because the British have liberalised their gas markets and, by and large, most EU countries have not, we are now net importers—we are importing gas, the price of which is arbitrarily linked to the price of oil rather than to supply and demand on a short and medium-term basis. As a result, we are importing substantial extra costs. The question for the Minister to answer, which is at the top of his agenda, I am sure, is how high the issue sits among the Government's priorities for decision-making in the European Union, now that we hold the EU presidency. What is the prospect of achieving any significant improvement in the liberalisation objectives of the Union? It is, as the Minister knows, a long-standing problem. I was involved the energy industry 10 years ago when liberalisation was discussed as an imminent breakthrough, but it never happened.
Mr. Jenkin : We are all for the liberalisation of EU energy markets, but it is not going to happen this year, next year, or in five or 10 years, and that is probably an insurmountable obstacle in the medium term, if not the long term. Is that a legitimate excuse for the Government's failure to act in the national interest on other policy areas that they have under their direct control?
Dr. Cable : I shall give the Government the benefit of the doubt and assume that the problem probably is surmountable. I am asking for the Minister's political judgment about the prospects of achieving substantial improvements. As the hon. Gentleman implies, it will probably involve pressing on other issues to get concessions.
Linked to that matter is my fourth set of questions about competitiveness in general. Gas supply is important not only because of insecurity but because of price impact and the effect that that has had on manufacturing. I do not think that anyone realistically expects manufacturing to be subsidised to offset the disadvantage that it carries. However, it is not simply an academic issue; it is necessary to the survival of many manufacturing companies that they operate on a level playing field with the rest of the European Union on gas costs.
I shall touch on other aspects of the competitiveness debate. One issue has opened up because of the large cash reserves that OPEC countries now have. I believe that about $300 billion additional income is being generated, most of which is sitting in the form of US
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Treasury bonds and not being spent. There is a cash mountain that the OPEC countries will want to spend over the next few years. During the last two oil shocks, the Government played a major role through the Foreign and Commonwealth Office and the Department of Trade and Industry in helping British industry to deal with its often difficult commercial relationships with OPEC countries, which do not necessarily function in the same way as western European or American countries, or even developing countries in Asia. In such countries there is much centralisation, and many procurement decisions are highly politicised. To what extent have the Government taken account in their trade promotion work of the enormous bulge in OPEC spending that is likely to occur in the next few years as those balances are drawn down?
I have a fifth set of questions about conservation. Clearly, the most effective solution to the problem of oil and gas shocks is for our economy to be more efficient in conserving energy. That is broadly recognised, and there has been a move toward the British economy becoming more energy efficient, but there are problems with specific Government decisions. One troubling area is that of building regulations—I do not know if the Minister is involved with this issue. It has been known for some time that the regulations allow substantial energy inefficiency—indeed, a study a few years ago suggested that about 65 per cent. of new homes are not airtight. As a result, earlier this summer, the Government embarked on a consultation with industry—the building industry and others—about tightening regulations on the building of conservatories and extensions. There was a broad consensus that the regulations needed to be tightened in respect of energy conservation, and there was a broadly supportive regulatory impact assessment that found that such regulation would be useful and would not just be red tape. However, when the new building regulations appeared a few weeks ago, the organisations that follow the issue closely were deeply alarmed to discover that almost all the energy-conserving aspects had effectively been removed. I do not know whether the DTI was involved with that, but it certainly should have been because if that is the case, much of the Government's strategy has been seriously undermined. I believe that the Office of the Deputy Prime Minister took the lead on that matter. Can the Minister report on that?
My final set of questions relates to alternative fuels. This whole debate has triggered discussion over alternatives to oil and gas for environmental and economic reasons, much of which centred on the long-term question about the role of the nuclear industry, which I do not want to reopen now. We have had the energy White Paper and are promised further papers on that issue. I want to switch attention to an equally important issue, which receives little attention. In the long term, the transport sector is almost certainly responsible for generating as much CO 2 as the power sector, but speeding up the introduction of alternative technologies in the vehicle sector receives relatively little attention. Some excellent work has been done in the industry on establishing a hierarchy of costs to show the most cost-effective way of changing the vehicle stock. On that basis, hybrids are almost certainly the best way of substantially reducing emissions. Will the Minister tell us about the Government's evaluation of that issue,
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and about infrastructure development and the incentive structure faced by car producers and motorists in relation to the process of substituting alternative fuels?
Malcolm Bruce (Gordon) (LD): My hon. Friend is on to an important point. Over the past 40 or 50 years, oil and gas have come mostly from quarters of the Earth that, geopolitically, are not inherently stable, yet we have not made progress in providing alternatives that are more secure. Does he share my puzzlement about that? To illustrate, Russia is a major provider of oil and gas; Russia is rebuilding a one-party state that controls all its assets. If it became unfriendly, that could be a problem. One could say the same of Saudi Arabia, Iran, and Iraq. My hon. Friend is absolutely right: we surely need to develop a wider range of alternatives that would leave us less vulnerable to geopolitics.
Dr. Cable : Yes, the emphasis on a range of alternatives is absolutely right. I do not lose too much sleep over supplies from Russia; throughout the cold war the Russians supplied gas unfailingly. I think that President Reagan tried to stop the British Government contributing to a pipeline from Russia—the liberty pipeline—but the pipeline was built and supplied gas. None the less, my hon. Friend is right; security of supply is important. One of the ways to ensure that is through diversity of gas suppliers, which will come about when we get liquefied natural gas as well as piped gas, and different types of road fuels and so on. However, I entirely agree with my hon. Friend's emphasis.
On that note, I bring my thoughts to a conclusion. We have had an oil shock with potentially severe impacts, particularly on poor people, and the energy poverty data are very worrying. I am not predicting the future, but there is potential for the position to deteriorate. I have touched on a variety of subjects in which the Government, even when working with the grain of the markets, have a relevant role. I would be grateful to learn what the Minister feels about the Government's positioning on those issues.
2.57 pm
Jo Swinson (East Dunbartonshire) (LD): I congratulate my hon. Friend the Member for Twickenham (Dr. Cable) on securing this debate on gas and oil prices and supply. It is particularly timely given the huge hikes in oil prices over the summer months. The impact of the hurricanes in the US, coupled with uncertainty in the middle east, has inflated the price of fuel. I would like to focus on what that means for people in our constituencies across the country and, let me put it bluntly, on fuel poverty.
For some people, a change in fuel prices makes the difference between heating their home properly or not. It is particularly fitting that, today, there are members of the National Pensioners Convention lobby just outside this Room, because many of those worst hit by rising fuel prices are pensioners. Figures from the Office for National Statistics suggest that each winter there is an increase of between 20,000 and 50,000—depending on how cold it is—in the number of pensioner deaths. Not all of those deaths can be directly related to cold homes, but fuel poverty is certainly a contributing factor in the increasing number of deaths in the winter.
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It is estimated that there are approximately 1.2 million households living in fuel poverty across the UK. Of those, 1 million are considered vulnerable households. The Government's 2003 energy White Paper set targets on reducing fuel poverty. They included ending fuel poverty in vulnerable households in the UK by 2010 and eradicating it in England and Scotland by 2016, and in Wales by 2018. I appreciate that fuel poverty is not solely under the jurisdiction of the DTI—it obviously has an impact on the Department for Environment, Food and Rural Affairs and the Department of Health, too—but part of the problem when dealing with the issue is that no one Department is solely responsible for it. I would welcome the Minister's comments on that.
Competition between energy companies has actually lowered prices since 2001. The period since then has been good for consumers, and that has enabled many households to escape the fuel poverty trap. However, recent double-figure percentage rises in energy costs mean that those households that escaped the fuel poverty trap may be plunged back into fuel poverty this winter. National Energy Action suggests that, since 2003, gas prices have gone up by 20 per cent. and electricity prices by 15 per cent. Of course, that means that many households that were not previously considered fuel-poor will run into this problem.
I would also like to give examples of good news in tackling fuel poverty. Hon. Members may be aware that, in Scotland, there was a drop of 50 per cent. in fuel poverty between 1998 and 2002. That was achieved partly through two key initiatives: the central heating programme launched in 2001 and the warm deal scheme, which dates back to 1999. Those schemes were implemented for all pensioner households, regardless of the benefits that they received. Without being means-tested, they were entitled to have central heating installed in their homes.
Furthermore, properties were insulated and subjected to energy efficiency measures, which helps people to save money on their fuel bills year in, year out. Almost 40,000 households in Scotland have benefited from the installation of central heating. That obviously has an impact on fuel poverty. Using less energy costs less, so any measures that can be taken to help homeowners and tenants increase the efficiency of the energy used in their homes will certainly help fuel poverty. Such methods conserve scarce resources, too.
My hon. Friend the Member for Twickenham looked to the future and talked about alternative technologies. It is important to remember that it is much cheaper to conserve 1 GW of electricity than to create the capacity to generate an extra gigawatt. We must therefore make more efforts to encourage people to save energy in their homes and throughout business and industry. We must also pursue renewable sources of energy. They will be a huge part of the solution to the problem in the future. In time, such action will reduce our dependence on gas and oil and, of course, renewable sources of energy are cleaner and more sustainable.
The target throughout England and Wales is to increase the production of renewable sources of energy to meet 20 per cent. of energy needs by 2020. In Scotland, an even more ambitious approach has been
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taken; the target has been set at 40 per cent. We need to be ambitious about such issues and support industries that are developing those technologies. Their costs may be higher in the interim, but with the Government's support we should be able to ensure that, in future, not only will companies develop technologies that can help to meet our energy needs, but there will be huge economic advantages to the country. We need only to consider countries such as Denmark: it has become a world leader in wind farm technology, which will clearly become increasingly important in the future. I hope that the Minister will address such matters in his response.
3.2 pm
Malcolm Bruce (Gordon) (LD): I congratulate my hon. Friend the Member for Twickenham (Dr. Cable) on introducing the debate. I apologise for missing the first couple of minutes of his speech. He is an acknowledged expert on this subject, and his speech demonstrated how deeply he thinks about it. I freely admit that I have been engaged in energy debates for longer than I care to remember—long before I entered the House. Indeed, you and I, Mr. Cook, have shared the platform on such issues on more than one occasion. My constituency is heavily engaged in North sea oil and gas, so such matters are of particular interest to me.
My intervention in my hon. Friend's speech was not supposed to be alarmist. I take his point about Russia, but it is a matter of reflection—it was debated at the time of the previous oil shock in the 1970s—that we are heavily dependent for our oil and gas supplies on resources sourced in parts of the world that, if put together, have less-than-guaranteed political stability. Two responses are needed to the problem. We must first ensure that we maximise exploration, development and production of the areas that are more accessible and less vulnerable. Clearly, the North sea is paramount to the United Kingdom. Secondly, we must promote a wider range of alternatives to oil and gas that will cause less damage to the planet and extend the useful life of our oil and gas reserves by broadening the mix of fuels that we can use.
As for geopolitics, the oil price is a two-edged sword. A high oil price clearly brings into prospect supplies that have previously been uneconomic. I recently talked to several Canadian politicians and economists who were quite excited at the forecast oil prices that put a completely different prospect on the viability of the Athabasca tar sands in western Canada. At a price of $100 a barrel—or even $50 a barrel—the sands start to become interesting. They could have the resource that Saudi has produced at much lower prices. We will have to see whether that will be sustained and whether the investment will be forthcoming. However, I know where my judgment would lie if I had a choice between being dependent on Saudi Arabia or being dependent on Canada.
My hon. Friend the Member for East Dunbartonshire (Jo Swinson) alluded to my second point. In Scotland, we are promoting conservation and diversity of supply, particularly through renewables. I, and I am sure some other Members, have had experience of current developments in wind farms and wind technology. I hasten to stress unequivocally that wind technology and wind farms have a worthwhile
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contribution to make. I have supported them in my constituency, where they have not always been popular; I have stood up and said that they are right.
I am pleased to say that I was at the opening of a wind farm just four weeks ago. It has proved economically successful and, interestingly, quite a local talking point and tourist attraction. That does not mean that every wind energy development everywhere is right, but it seems to me that such technology has a contribution to make.
I shall tweak the Minister a little, although I suspect that he may not entirely disagree. In Scotland, to achieve our 40 per cent. target, we recognise that the bluntness of the renewables obligation is what drives the investment in wind technology. We need to diversify. Oil and gas supplies are made more secure the more diverse the fuel mix is, because we become less heavily dependent on them; that diversity is also more environmentally beneficial. The Scottish Executive have added an incentive for those investing in wave or wind power, to spread the mix. I suggest to the Minister that his Department might want to consider that as it adapts south of the border.
I have probably heard too much about the threat to security of supply. Digby Jones always likes to attract attention and the easiest way to do that is to make dramatic suggestions such as, "The switch is about to be thrown on the British industry". Most of the people I talk to in the gas industry are confident that the investments being made to bring liquefied natural gas and other contracts on board will lead to a secure and reduced gas supply. However, I agree that we should not be complacent about that.
To my mind, it has always been important that we have a good relationship with our friends in Norway. Of course Norway wants to sell its gas at a high price. However, not to find a basis on which we can accommodate Norway would not be in its interest or ours. My conclusion is that we should look at the whole of the North sea. My hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith) will concur with me when I say that when he and I were in Norway last year, at an offshore North sea exhibition, there were some interesting discussions about the potential for joint development—particularly of fields that straddle the median line. The infrastructure certainly requires a partnership that involves Norwegian and British ownership and investment, even for fields that do not straddle the line.
This debate is timely. This country needs oil and gas and produces both. We still have a long-term stake in the production of oil and gas from our own resources, partly by diversifying the fuel mix and partly—this is my final, direct last plea to the Minister—by ensuring a regime that stimulates and encourages exploration and does not drive investment away by unexpected and abrupt changes in the tax regime. I assure the Minister that that has happened.
My hon. Friend the Member for Twickenham made a particular point about the smaller investors that the Minister has welcomed into this last round; they are the most vulnerable to such changes. If the Minister and the Government have made a pact—or an agreement or accommodation—to bring in small operators, I will not object; they are often innovative
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and can provide new techniques. However, it is also important to understand that they of all people need to know that there is a long-term stable regime that will enable them to bid for and secure investment funds, instead of them fearing that the regime could undermine their long-term viability. That has not always been the case, and I hope that the Government will learn from some of the past mistakes.
3.10 pm
Sir Robert Smith (West Aberdeenshire and Kincardine) (LD): As was said this morning while we were discussing a similar matter to do with the coal industry, we have an opportunity to make progress on some issues. I congratulate my hon. Friend the Member for Twickenham (Dr. Cable) on securing this debate. It enables us to focus on something that has been high profile and of great concern over the summer, and it provides the Minister with an opportunity to address on the record, in the House, the concerns that have been raised.
Before I go any further, I should declare an entry of mine in the Register of Members' Interests: I am a shareholder in Shell, an oil and gas integrated company.
I shall begin by addressing a subject that was tackled by my hon. Friends the Members for Twickenham and for East Dunbartonshire (Jo Swinson). It is clear that the most immediate and pressing problem with oil and gas prices relates to domestic users this winter and, potentially, next winter. The gas market in the UK is tight almost, but not completely, regardless of the world situation. Therefore, in the winter months when not enough gas supplies come to the UK to meet all the demand, the price will go up; and if the price goes up, that will affect both our constituents and industrial users.
We had many good years of competition, which gave us cheap energy, and I think that although Digby Jones is worried about this winter, he does not want to throw away all those years when we had the competitive advantage of a market in energy supply. However, perhaps the Government need to address how and why the market signals did not work well enough to take us into this winter in a better state than we are in.
When the Trade and Industry Committee looked into fuel prices, one of the things we were concerned about was gas storage and the delay in some of the schemes. In its response to the Committee, Ofgem said:
"We agree with the Committee that planning regulations are a key reason for the delaying of several storage projects which could have eased the situation last winter. However, planning regulations are a matter for Government."
The Government pointed out that planning is a balancing act because various issues have to be weighed up.
Do the Government have a view on what was wrong in the signals to the market that led to investors not getting into the process early enough to get over the planning hurdles? Should the planning hurdles be changed so that investors can get the storage in place? If we had more storage in place in the run-up to this winter, the market would not be so worried about the potential peaks of a downside—of a very cold winter—and therefore the forward price of gas would not have hit quite such extremes when people were trying to get secure contracts.
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Another issue for the coming winter is power cuts. The Minister did not have time to address that this morning, but I hope that he will have time to do so this afternoon. How does he see this winter in terms of security and stability of supply? Is it just the interruptible supplies that are likely to be hit in a one in 50 winter, or might there be a wider problem that could affect our constituents?
My hon. Friend the Member for East Dunbartonshire made an important point about energy conservation. In the long run, energy conservation is a permanent victory because, regardless of what happens to the price of the energy, we will be consuming less, helping our environmental goals and helping to ensure security of supply because we will need less supply.
With regard to tackling fuel poverty, there are three pillars: the price of the energy, the quality of the housing stock and the income of the person living in the house. If the quality of the housing stock can be tackled, there is a good chance that when people move—and a lot of people do—they will still be in good housing, and that will help to deal with fuel poverty.
I ask again for more guidance from the Government. How will they take that next step in getting our housing stock right? If we do not do that through the building regulations, and if we do not press it strongly enough, will we not miss out? Even with the current high prices, televisions are often left on standby. People do not realise how the energy costs in their home add up. All the little things—such as filling the kettle up instead of just putting in a mug-full of water when they want a mug of coffee—add up to extra costs. People need more information.
On fuel poverty, we looked at debt and disconnections and the Government's response. One of the things we examined was trying to get more information to consumers about the priority services register. We are again going into a winter with much higher prices and there is a greater risk of people not being able to pay their bills, getting into trouble and getting behind. It is crucial that the elderly, disabled and those with health problems are on the priority services register, so that the energy companies know that they are dealing with someone who is at risk.
In July, the Government said in their response:
"Through DTI and DEFRA, the Government has also agreed to examine how other departments such as DWP and DoH can support companies' efforts to identify vulnerable customers and promote a range of relevant services, including the Priority Services Register."
Perhaps the Minister will say how, over the summer, the Departments have got together to take that forward, because the winter is nearly upon us. Here in London it is still quite warm, but back home it is already getting that much colder. It would be helpful if the Minister tackled that issue.
EU liberalisation has also been raised. There are two more months of the UK presidency of the EU, and the issue affects the UK directly. It would be helpful to know what the Government have done so far to advance what, I think, the Commission wants: the opening up and liberalisation of the markets in mainland Europe. While the UK, a liberalised market, is connected physically to a market that is not liberalised, there will be distortions in our price system.
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As my hon. Friend the Member for Twickenham said, the link with oil is particularly distorting for us at the moment. There are historic reasons why customers wanted the link with oil, but now that there is a much more fluid gas market, such reasons are in the past. It is time to break the link. I hope that the Minister will give us an update on how far the Government are getting with liberalisation or—if they are very pessimistic of how far they will get—what alternative strategy they have to deal with the disconnection of liberalised and unliberalised markets.
Other colleagues, in particular my hon. Friend the Member for Gordon (Malcolm Bruce), have raised the vital role that the upstream sector in the UK—our own oil and gas—can play in a situation such as this and the importance of ensuring good investment. One of the triggers for this winter and the need for more storage is the fact that a lot more of our gas comes from fields that are produced with oil. Therefore, the flow of gas cannot be varied; it comes as fast or slow as the oil can be got out of the ground. We have lost the flexibility of having as much of our gas as we used to coming from plain gas fields. It is much easier to turn the tap off and on with them. That is another driver for the need for more storage.
It is also another driver for ensuring that the Government have a regime in place that maximises the investment in the next generation of exploration and production. There was a successful licensing round. The Minister may answer my colleagues' questions about some of the smaller entrants. Some of them are generating or working up potential prospects for larger investors to tempt them forward. The fallow field initiative aims to persuade people who have sat on old investments to liberate them, and that is to be welcomed.
The working of industry with Government through pilot programmes has made a big difference to the climate in the North sea and the understanding between Government and investors. When it comes down to it, the oil and gas in the ground is ours; it belongs to citizens of the United Kingdom. We license it to operators to take it out of the ground, so there will always have to be a close partnership between Government and industry in that sector.
The Chancellor is the one player who does not pull his weight and who has done a lot of damage. He lectures Saudi Arabia on maximising its production and investment yet, three years ago, he frightened away people from investing in the North sea. It is a little rich for a major oil and gas producer that has not been careful about shepherding its own resources to lecture abroad. In the long run, we all benefit if he gets it right, because the more investment there is in the North sea, the more gas and oil will be produced, the more tax he will raise and the more money will come into the UK economy.
The Minister needs to reassure us that the Government are on board in terms of getting the next phase of the North sea development done. The Minister is a regular visitor to Aberdeen. As he has said, the glass is half full and not half empty. We need to get that optimism across to help recruit the next generation of engineers, who we need to make that a vital industry.
Finally, I want to touch on the potential of renewables. Those with transferable skills in the North sea, wearing the badge of AREG—the Aberdeen
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renewable energy group, which I am sure the Minister has already met—are trying to take the skills of the north-east of Scotland as an oil and gas expertise area, such as offshore engineering, and diversify into the renewables sector. A wave power machine has already been developed by Portugal, but has sadly not yet been bought in this country. Such an industry has the potential to be a major export industry. We missed the onshore wind industry—we let the Danes get there first—and we must not give up the slot to others when we have such potential, with our coastline, tides and waves. Recognition from the Government on the roles of diversification would be most welcome.
To reiterate, will the Minister answer the points about fuel poverty and the priority service register, will he give his view on the power cuts? Will he respond to the concern expressed this morning about accelerating the carbon capture and storage programme? A lot of heads around the Chamber are nodding when we talk about the pace of progress. We may just have missed the connection between getting the technology established and losing the easy route of disposing of the CO 2 into the North sea. If the Minister will address ways in which the Government can see the demonstration plant get up and running soon, that would recognise the issues raised this morning in the debate on the coal industry.
Will the Minister update us on the liberalisation of the EU market and what efforts have been made to date? How does he see gas storage being incentivised: by improving the planning process or by getting the signals into the market sooner so that the planning process can be got through at the pace it now takes? Finally, will he reiterate the commitment to the North sea? If we invest effectively in the North sea, we all win.
3.22 pm
Mr. Bernard Jenkin (North Essex) (Con): I congratulate the hon. Member for Twickenham (Dr. Cable) on obtaining the debate and on the comprehensive set of questions that he has tabled for the Minister. The scale of the task set for him makes me wonder how the Minister will manage.
As the hon. Gentleman pointed out, the energy agenda has suddenly become very big, but the Government have only one Minister for Energy—a Minister of State, not a Secretary of State. I say with the greatest of respect to all those present, that one hears that some officials are demoralised and fed up that energy does not carry more clout throughout Whitehall. That is no personal criticism of the Minister; it is a matter of the way in which the boss runs things. Many Cabinet figures have responsibilities that cross boundaries with the Minister's, but he is probably frequently not present to make his pitch on the issues that matter.
I reiterate what I said this morning: the proof of the pudding is in the eating. The Government have been in power for eight and a half years. A fair measure of success of a Government's energy regime is that they deliver on three crucial areas: prices that are fair and competitive, albeit not necessarily low; environmental outputs that meet the Government's targets; and security of supply. One does not need to be a rocket scientist to see that we have some of the highest wholesale energy prices in Europe, if not the highest, so
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the Government are failing on price. Our carbon emissions are increasing and the Government's failure in respect of electricity generation is ensuring that the carbon emissions from that source are increasing. The 2003 White Paper showed a heavier reliance on fossil fuel generation, so the Government are failing on that, as well as on security of supply. When the director general of the CBI—in his usual florid style—says,
"it's an absolute disgrace that we risk running out of fuel because of something that was entirely avoidable",
the Government have a bare-knuckle fight on their hands, as one might have said in the early 1980s.
High gas prices in this country have been caused by the failure of Labour's energy policy. In 2003, the Government should have been smoothing the transition to this country becoming a net importer of gas. As the hon. Member for Twickenham suggested, the Government should have been making a risk assessment of what gas supplies were likely to be, given different scenarios and given that the industry's forecasts might be out by a margin one way or another. Instead, the Government's energy White Paper ignored any possible approach to gas shortage and gave no incentive to invest in anything except wind power stations. We are all in favour of promoting renewables, but planning to spend nearly £1 billion in subsidy by 2010 on renewables—and, incidentally, failing to reach that target as well as everything else—and neglecting other failures in the oil, gas and electricity markets shows a degree of complacency or blindness that is breathtaking in terms of the Government's responsibility.
The Government were asleep at the switch and failed in their duty to provide adequate energy supplies. British industry is now paying a heavy price, if not in terms of interruptions, certainly in respect of what it is actually having to pay. A fortnight ago, I visited Amcor, a polyethylene terephthalate bottling plant in Wrexham, which operates in a heavily energy dependent industry. The plant is a subsidiary of an American company with plants elsewhere in the world, particularly in France, where it is able to make long-term contracts with cheap electricity suppliers, the result of which is that the British plant is woefully uncompetitive against its French counterpart. As we went around this state-of-the-art bottle manufacturing plant in Wrexham, someone commented that there comes a point at which investment in the UK becomes fruitless and investment elsewhere becomes much more fruitful. It is not impossible to imagine that high technology manufacturing equipment could simply be transported from Wrexham to Dunkirk, where the parent company has alternative facilities and would make much more money; in fact, it might make a profit there, rather than a loss on its UK activities.
This is the Government's responsibility; it is not something that they can give over to the markets. The Government are responsible for the market regulators and for ensuring that regulators are acting in the national interest. Markets were never a religion. The Minister looks astonished at my saying that, but he treats the markets as more of a religion than any Conservative. The present Administration inherited the regulation of energy markets from their Conservative predecessors but, extraordinarily, they treat competitiveness as a higher objective than almost any other. Their dogmatic adherence to internal
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competitiveness ignores the fact that we have moved from big surpluses into possible deficits, that raw material prices have changed, and that we have gone from a cheap energy world to a high-price energy world. The Government have also ignored the fact that to achieve environmental objectives, they have bolted one policy after another on to the framework that they inherited. They have not had a proper review of energy policy in eight and a half years, and British industry and British consumers are now paying the price.
Opening the debate, the hon. Member for Twickenham referred to fuel poverty and the very big increases in electricity and gas prices that domestic consumers are having to accept. That knocks into a cocked hat all the Labour party's wailing and gnashing of teeth about VAT on fuel and the great fanfare with which they lopped 3 per cent. off the VAT on domestic fuel when they came to office. Consumers are now paying far more than that token cut in tax that the Government produced then. Is it right that consumers should bear the cost of diversification into renewables, particularly when energy prices have risen so much?
The system of renewables obligation certificates simply piggybacks on energy prices. At a time of high energy prices, certain questions arise. When the system was set up the ROC system was going to pay out £30 per kW and the consumer was paying £11 per kW in the market. What is the wholesale price of electricity going to be this winter—£35 or £40 per kW? The ROC system is still going to pay an extra £30 per kW. Should not the level of subsidy be sensitive to the price? Nobody talks about windfall profits tax on wind power generators, but everybody is ready to talk about it when the oil companies make money. If the wind generators are making huge extra profits, why not clobber them with a windfall profits tax? I do not advocate windfall profits taxes, I am merely trying to tease out the lack of internal logic in the Government's policy.
The Government are there to oversee the operation of energy markets and to ensure that any regulation and intervention that they make will work in the public interest. The Government have failed in that respect. They have failed on prices, on security of supply and on environmental outputs. They should have made a much more sober and longer-term assessment of the likelihood of an unexpected decline in the production of the United Kingdom's continental shelf production of gas. That is the Minister's job. Why bother to have a Minister for Energy or a Department responsible for energy policy unless they are going to look over the horizon and think up some scenarios in which things go wrong and have to be put right? The Government manfully resisted any obligation to oversee security of supply when we were debating energy legislation, but we all know the truth. When the lights start to go out, a Minister will have to make a statement about it at the Dispatch Box. When the lights went out under previous Governments—of both colours, I hasten to add—the domestic consumer took the hit in order to keep industry going. Under this Government, the big
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industrial users will be cut off in order to save the Government's face with the public. I do not advocate the alternative—
The Minister for Energy (Malcolm Wicks) : What are you advocating?
Mr. Jenkin : I am just pointing out that the Government are doing everything to save face as they contemplate possible shortages of supply this winter. We all know from conversations that we have had with those in the industry that the Minister likes to present a calm and reassuring face in public, but when he speaks to people in private, his chief concern is about what will happen this winter. I commend him for that concern—it is the right concern for him to have, and nobody in this Chamber will seek to make life more difficult for him this winter or next.
The United Kingdom needs a long-term energy strategy that includes a complete review of how the energy markets are operating in this country, otherwise we will have other problems further down the line. The large combustion plant directive, for example, will cut in in 2008 and create more strain on the gas market as more coal generation is forced out of business and more gas plants come on-stream as a result. All that must be addressed by a Department that takes a strategic view of what is required for the regulation and operation of gas, electricity and oil markets.
Comments about maximising the life of the UK continental shelf by providing a stable tax regime are absolutely right. The Chancellor obviously gave the industry a horrible shock three years ago when he pounced on it for taxation. The difficulty that we now face is that public expenditure, which is astonishingly unreported and uncommented on in British politics, has increased by 8 per cent. of GDP in only five years and at a time of relatively strong economic growth. That is not sustainable growth in public spending. We all know that the Government should be repaying debt over a period of the economic cycle, but they have instead been increasing their borrowings. Sooner or later, the chickens will come home to roost unless the Chancellor is luckier than we can possibly imagine. He has had some luck, but there are those who believe that it will start to run out. No doubt the Prime Minister will have departed the scene by then, but the question arises: where will the Government get the money from? With high oil and gas prices, the industry is absolutely right to warn very sternly that an attack on the oil industry for windfall profit taxes, or any other kind of raid, will be a very serious setback for the industry.
I should just warn about one little panacea that we are all tempted to indulge at this particular juncture, which is that somehow all the problems in our oil and particularly gas markets are not the UK's fault at all, but the fault of those naughty Europeans, the French and the Germans, who have failed to liberalise their markets as they agreed to do in principle. We should be realistic. What are we actually asking France and Germany to do? We have liberalised gas markets, but we have the highest wholesale gas prices in Europe by a very long way. If France and Germany liberalised their gas markets, their gas prices would increase to reflect the increase in the oil price, just as ours have to a degree. We are basically asking France and Germany to increase
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their electricity and gas prices for their industrial consumers. Do we really believe that they will do that? Is that realistic? We should be more realistic and recognise that liberalising the gas and electricity markets in the EU will take 10 or more years. That is not a solution to the problems that we face at the moment. By failing to invest in gas storage capacity, the Government feel asleep at the switch.
Sir Robert Smith : Does the hon. Gentleman disagree with Digby Jones that in the past eight years we have benefited from the liberalised market in terms of competitive prices for industry? Would not that be an attraction to those in other markets, who would be taken away from being reliant on state monopolies?
Mr. Jenkin : I do not disagree with the liberalisation of gas markets, but we should be realistic. The French have a long record of providing their industry with hidden subsidies and they will not suddenly take them away. That is how they operate in global capitalism. The same is true of the vertically integrated energy markets in Germany: the Germans will not take away the competitive advantages that are maintaining them at the moment. I am in favour of market liberalisation; I am in favour of a common market and I am in favour of the directive that is designed to bring it about. However, that is not going to fix the problem this year, or next year or in the next 18 months or anywhere near that.
As for alternative fuels, we are pushing for a much earlier energy review than the Prime Minister seems able to contemplate. I suspect that he is trying to avoid an energy review that clashes with the tenure of the present Secretary of State for Environment, Food and Rural Affairs, because she is a bit of a road block to what he wants to do about energy policy—which is to explore the possibilities of relaunching a nuclear new build programme. Perhaps the Prime Minister wants to delay his energy review until a change in personnel has taken place in that Department and elsewhere. Perhaps at that point the Minister for Energy will be propelled up the system and we shall be able to expect more clout on the energy portfolio.
Some other issues are being missed, such as biomass and biofuels. At a time when the Department for Environment, Food and Rural Affairs is effectively running down the production capacity of British agriculture because of the changes in agricultural policy, and when the sugar regime has changed so that sugar beet ceases to be an economically viable crop for the production of sugar, where is the Government's strategy for maintaining the viability of agricultural production and giving a little boost to the environment by promoting the growing of oilseed rape and sugar beet for the production of biofuels in the UK? It is not realistic simply to lop some duty off biofuels at the filling station; that will attract biofuels from other countries with perhaps less environmentally benign policies. I am not in favour of buying subsidised biofuels from, say, Brazil, where they cut down rainforest to plant sugar cane. That is not the answer. I want the Government to take the same kind of strategic approach to biofuels that they have shown themselves capable of taking to, for example, wind generation. There is a huge mismatch between the Government's obsession with wind, which will not deliver what they want, and all the other issues that need to be tackled.
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At Trade and Industry questions just before the recess the Secretary of State promised a debate about security of supply this autumn. It is now the autumn. When will we have the debate about security of supply? It might be a good idea from the Minister's point of view and in terms of the Government's credibility if we had it before the cold snap.
3.42 pm
The Minister for Energy (Malcolm Wicks) : I thank the hon. Member for Twickenham (Dr. Cable) for requesting the debate and for the sober and calm way in which he introduced it. That tone has been a feature of the debate: hon. Members have sought not to scaremonger but to raise serious issues on an important theme. Some might think that that tone went off a little in the last few minutes, but I do not want to be too churlish about the somewhat alarmist speech that we just heard.
In explaining my approach the matter, I am reminded of this morning's debate about coal, whereas we are now primarily discussing gas and oil. Perfectly reasonably, those subjects raise the general context of energy policy and its interface with climate change and social policy issues connected with fuel poverty. I shall try to remain fairly focused on gas and oil, although towards the end of my response I shall try to range a little more widely. I hope that that is acceptable.
Gas is, of course, the fuel of choice for household consumers and it now accounts for more than 30 per cent. of our electricity generation. It is a major source of fuel—indeed, it is a source of feedstock for industry. Oil literally lubricates the machinery of UK industry and ensures that our transport system runs efficiently. However, there is no denying—no one is complacent—that some significant challenges are ahead, particularly in relation to gas. As Great Britain moves towards increasing its gas imports—we became a net importer last year—we will need a new gas import and storage infrastructure. Developments in the oil market over the past few years also present a challenge.
Providing supply to meet demand is a commercial matter. The Government, the Department for Trade and Industry and Ofgem will establish a regulatory and commercial environment conducive to major new ventures and will work on individual projects to identify and help remove avoidable non-commercial obstacles. I am pleased to say that that approach has yielded excellent results. Three important new facilities to increase the amount of gas available to the UK market will be ready for this winter. The new liquefied natural gas import terminal at the Isle of Grain is already commissioned; a new gas storage project at Humbly Grove in Hampshire will shortly be commissioned; and a large increase in the import capacity of the interconnector from Belgium is due to be commissioned in November, which I am advised is a month early. Several other major projects are planned for the next winter or so, including further LNG import terminals under development at Milford Haven, Canvey island and, potentially, in north Wales. In other words, the Government's approach to security of supply is working well. At least £10 billion-worth of private sector investment will be made in providing gas to the UK market in the next few years.
Sir Robert Smith : In the Minister's long-term big picture, there will be new pipelines and new storage, but
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will not a mismatch hit our large energy users, in that it will be a year or two years too late to achieve a smooth flow from the previous regime to the new one?
Malcolm Wicks : That is not altogether unfair. As Minister for Energy I would have hoped that some developments had come on line a year or two earlier. That is partly the result of the fact that the decline in oil and gas from the North sea happened at a faster rate than many in the market and in Government anticipated. I take the hon. Gentleman's point, but the developments that I have mentioned will help in part this winter, and over the next year or two they will make a considerable difference.
Mr. Jenkin : Will the Minister give way?
Malcolm Wicks : I shall, even though the hon. Gentleman spoke for quite a while. I shall take one intervention, then make progress on my speech.
Mr. Jenkin : My question is about the operation of gas markets. Representations have been made to me, and, I expect, to the Minister, that there is not enough transparency in the market. Large buyers cannot see into the supply chain—I might not be using the right expression—to discover the likely forecast of gas supplies month by month, perhaps over the next six months. We are getting what the market calls anxiety spikes in the price, but they might not reflect the true position. It obviously suits certain people that there should be anxiety spikes, but if information was available to the market, people could see that there would be enough gas and the big spikes would therefore not occur. Will the Minister consider that point?
Malcolm Wicks : Yes. I believe that Ofgem and the industry are looking at that, but some commercial sensitivities are involved. If I have more to say, I shall write to the hon. Gentleman.
I shall now make progress on covering the issues raised in the debate and answering some of the questions. Access to reliable and affordable supplies of oil is vital for the UK and the global economy. In real terms, current price levels are lower than the peaks seen in the late 1970s and early 1980s. A strong and unexpected growth in global oil demand, rather than a supply shock, has been the driving force behind the recent higher prices. Because of that increased demand, global production and refining capacity has become very tight.
In that context, I should say something about the response to the impact of Hurricane Katrina on the oil market. The International Energy Agency called on its member states to release 2 million barrels of oil a day over 30 days. The organisation was able very quickly to reach a view that the disruption to the world markets was large enough to justify releasing stocks. That was a remarkable achievement. It demonstrates the merits of the IEA's multilateral approach and the need for such an approach when dealing with the global oil market.
The release of stocks has improved the supply situation, and it has had a calming effect on the market and on prices. It was clearly the right thing to do and the
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timetable was right. Indeed, when I saw him in Washington a few weeks ago, the United States Energy Secretary, Mr. Bodman, said how grateful he was for the international response at a difficult time for our friends in the USA. The United Kingdom industry, as well as taking part in the release of stocks, was able to increase gasoline exports to the United States while ensuring that the UK remained supplied without domestic shortages.
Both oil-producing and consuming nations have shared interests and responsibilities in delivering more stable oil prices that enable sustainable economic growth. Our response was well summarised at the meeting on 23 September of the G7 Finance Ministers and central bank governors, who agreed on the key steps that need to be taken. Among the most important decisions that were made was to call for significant investment in exploration, production, energy, infrastructure and refinery capacity. The G7 also called for oil-producing countries to ensure a favourable investment climate, open markets with transparent business practices and stable regulatory frameworks. It said that subsidies and artificial price caps that constrain the price of oil and oil products have an adverse effect on the global market and should be avoided. We shall pursue such policies domestically and through the International Energy Agency.
I have been asked perfectly properly about the outlook for winter. Looking forward to the winter—it says here, although that is not the phraseology that I would have used—there are concerns about gas prices and gas supplies. The Government are taking those worries seriously. The Secretary of State for Trade and Industry and I regularly meet representatives from both the supply side and the demand side, so we have a clear view of the impact that such concerns have on business confidence. It is no secret that the gas market is likely to be tighter than in recent winters. Given normal weather conditions, however, there are sufficient gas supplies and electricity generation to meet demand, and even in the severest of winters, analysis shows that the market can maintain supplies by a combination of actions to reduce demand for gas. In all credible scenarios, the energy market will be able to deliver supplies to domestic consumers. Given the vulnerability of some of our constituents—not least the very elderly—that has to be the right priority.
For many years, our gas market has provided internationally competitive prices to Great Britain gas consumers—for example, our prices to domestic customers have ranked the lowest within the 15 EU countries since 2001 and are still 40 per cent. below EU median prices—but gas prices have been rising steadily since the summer of 2004. That is especially true in the wholesale market, where UK prices have been driven by continental prices that are linked contractually to oil. However, based on official statistics UK retail gas and electricity prices to industrial consumers remain 5 to 10 per cent. below EU median prices. I recognise that there may be a special problem for UK super-large industrial consumers, and I have spent much time meeting their representatives. They pay close to wholesale market prices, and their competitors on the continent do the same. Our analysis for the coming year suggests that UK forward prices will be roughly 15 per cent. above those on the continent. However, forward prices are already showing an expectation of narrowing
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differentials between the UK and the continent, with UK prices only about 10 per cent. above continental prices for gas year 2006.
I have been asked about EU liberalisation. Prices on the continent are not fully market reflective, as so few of the energy markets in the EU are functioning properly. That is why making European energy markets work properly is a key priority for the UK presidency. A key element in our strategy is to push for proper implementation of existing legislation. We expect the Commission to ensure full compliance by all member states. That is why we are looking forward to the report that the Commission will be publishing later this year, which will evaluate progress made towards the development of the an internal energy market. However, full implementation of the liberalisation legislation may not deliver the competition that consumers need, so the Commission has launched a sectoral review of gas and electricity markets, with initial findings to be published later this year and a final report to be issued at the end of 2006. Those two reports should illuminate the state of the EU's energy market and identify what steps may be necessary to ensure its proper functioning. They also present an important opportunity for market participants and stakeholders to bring to the Commission's attention any problems that they have encountered when trying to do business in Europe.
Meanwhile, to try to address the problems already being caused to large users in the UK, my Department has set up a gas prices working group with industry and Ofgem. The group has now agreed a list of short to medium-term action points, such as taking measures to maximise gas supplies; encouraging demand-side response; and pursuing energy market liberalisation in the EU. It has also discussed ways for industrial consumers to adapt their purchasing strategies in the light of the changed situation.
A number of issues were raised in the debate and I might not address them in the right order. The hon. Member for East Dunbartonshire (Jo Swinson), in an important speech on the social aspects of energy, mentioned what we now call fuel poverty. I wish I had time to go into it in more detail. I am immensely interested in the subject and could write a book about it—indeed, in 1978, I did. After years of progress on the indicator to which she referred, there are now difficulties with rising energy prices. We need to marshal the resources that we now have through the warm front programme in England and its equivalents in Wales and Scotland, and through the obligation on suppliers to take energy efficiency seriously in the homes of people on low incomes. I also think that we should use the resources of other Departments, not least my former Department, the Department for Work and Pensions. Locally, the Pension Service now works closely with
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other agencies, social services departments and social work departments in Scotland. Such an approach will enable better targeting. We should remember the winter fuel payments—£300 for the over-80s and £200 for other elderly people—which have made a considerable difference. I take the hon. Lady's comments on the issues seriously.
Wider issues relating to renewables were raised. Again, I wish I could debate them at some length. The 10 per cent. target by 2010 is in place. and it should be achieved mainly through wind—hon. Members should not tilt at windmills. Wind energy will be an important source of renewable energy but we also need to develop other technologies. Britain—Scotland in particular—could become a world leader in some of them. There is an agenda involving energy efficiency, which we need to discuss more, not least because 27 per cent. of our CO 2 emissions come from our own homes. We need to focus on that.
I cannot say much more about the transport aspects today because I am not the Secretary of State for Transport. However, my Toyota Prius is waiting for me outside so I am making a small contribution in that respect. I had the opportunity of driving one of the first hydrogen cars when I was in Washington. I am, at least, aware of that important agenda.
It has been acknowledged that we are actively engaged with the industry in exploiting the UK continental shelf and the North sea as effectively as possible. I chair the partnership known as PILOT, whereby my Department meets with industry with the aim of establishing a dynamic relationship with the industry. In essence, the message is, "If we have given you a licence, use it or lose it. Exploit fallow fields and brownfields in the North sea." I think it that is effective, given our present situation. The fact that 20 or more new companies were given licences is exciting. We need to ensure that they deliver and get the investment they need, but I am excited about the entrepreneurship of smaller companies in the North sea.
There are now regular summit meetings between the EU and OPEC on energy issues. I am sorry that I have not had much time to address the remarks by the official Opposition spokesman. He made some derogatory remarks about my boss, which I will not follow up. I would say that at least it has not taken us five months to choose a boss. That is one of the differences between our parties. I found his views on the market fascinating. He seemed to be calling for far greater state intervention in the market. I always thought he was a true believer in the market, but he seems to be becoming a bit of an agnostic, which is a wonder to behold.
4 pm
Sitting suspended for a Division in the House.
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