Energy Bill

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Clause 4

Question proposed, That the clause stand part of the Bill.
Malcolm Wicks: On the Government side of the Committee there is probably a hackneyed new clause 4 quip, but I will not make it. The clause makes provision for the Secretary of State to make regulations under the negative procedure, which will set out who can apply for a licence, requirements that must be satisfied by or in relation to the licence applicant, how the application for a licence must be made and the information that an application must contain any accompanying documents. Additionally the regulations under the clause may require the payment of an application fee, which will be assessed in line with the Treasury’s fees and charges guidance. That is in line with our other licensing regimes such as for oil and gas licensing under the Petroleum Act 1998.
1.15 pm
Charles Hendry: It is a pleasure to serve under your chairmanship this afternoon, Mr. Amess. The Minister will be delighted to know that new clause 4 is in my name, but he will have to wait a little longer for the chance to discuss that. I imagine that it will cause the Labour party as much consternation and debate as the original clause 4.
Also, what about making stipulations with regard to who is responsible for the maintenance of the facility? This would seem to be a good point in the Bill at which to set those out. I should be grateful if the Minister would respond to those two points.
Martin Horwood (Cheltenham) (LD): It is very good to be serving under your chairmanship once again, Mr. Amess, at this clause 4 moment. Perhaps you will permit me to rephrase a question that I asked a little earlier, which is also directly relevant to the clause that we are now considering, about a risk identified in the impact assessment. That is the possibility that the time scale for introduction of the licensing regime might act, in the words of the risk assessment, as a disincentive to developers in the short term. The impact assessment also raises again the possibility that the narrowness of the licences will discourage innovation in storage technology.
Perhaps, bearing those two matters in mind, the Minister will suggest the time scale on which the licensing regime is expected to come into force, and reassure us that there will not be a slow grinding of the wheels of Government, to the point at which the industry becomes disenchanted and frustrated with the current, less adequate regime.
Malcolm Wicks: The hon. Member for Wealden raised the question of an appropriate duration for the licence. I imagine that that could vary to an extent, but I am advised that we are talking about quite a long time scale. Licences might possibly typically last for 40 years, or something of that kind. There will be different issues perhaps for carbon capture and storage, which we shall come to. I am hoping to give the hon. Member for Cheltenham some advice on the question that he raised this morning.
I was asked who would monitor the regime, and the answer is that it would be one of our departmental inspectors.
Mr. Hugo Swire (East Devon) (Con): The Minister has just informed the Committee that licences may be granted for up to 40 years. Presumably the value of that licence will depend largely on what is being licensed. For that period it might vary enormously, in terms of supply, and so forth. What mechanism has been built into the licensing, or indeed the Bill, that would allow the value of the licence to be readdressed at any point while it was in force?
Malcolm Wicks: I think that on that one I may need to come back to the hon. Gentleman. There may be an opportunity later to consider that matter.
Our general approach is that once a licence is granted, although certain things may change, we do not want to change existing licences retrospectively. I have heard the question about the possibility that values may change, and I will try to find an opportunity to return to the matter for the hon. Gentleman. I think that I had also better find another opportunity to return to the matter raised by my Liberal Democrat colleague.
Charles Hendry: I wonder if the Minister will also provide greater clarity on another matter. Is it his expectation that the licences will be tradeable? If, for example, Exxon decides to apply for a licence to store gas in one of these facilities, and then wishes to sell it on to Conoco, could that happen in a straightforward way or would the licence have to be returned to the Government and a new licence issued?
Malcolm Wicks: Yes, they will be tradeable in that sense. From my experience of this, through the pilot partnership with the industry, we can see that some of the bigger players are phasing down their operation in the North sea and some of the smaller more enterprising companies are taking over the licences. The hon. Gentleman raises an important point about the regulatory regime that we need to put in place in practice as well as in principle. There is the idea of “use it or lose it”. We need gas storage and it is important that these facilities stay in operation.
Mr. Swire: The Minister has gone some way towards answering my original question. By definition, if these licences are tradeable, we will need to establish a value at the time of trade. Will that be up to the free market, or do the Government see themselves as having a role at that time?
Malcolm Wicks: It has to be up to the market within the regulatory framework. If the hon. Gentleman is asking whether we would put forward certain ideas about costs and prices, I would say that those are not things for us to decide. Such things are always best left to the market.
The hon. Member for Cheltenham asked what the risks and disincentives were in delaying the legislation. We expect the first application for licences to take place in January. We understand that on the back of our proposals, potential developers are already preparing their applications. I hope that those words reassure the Liberal Democrats that we intend to move very quickly.
Question put and agreed to.
Clause 4 ordered to stand part of the Bill.

Clause 5

Terms and conditions
Question proposed, That the clause stand part of the Bill.
Mr. Brian Binley (Northampton, South) (Con): May I say what a pleasure it is to serve under your direction, Mr. Amess?
Although I welcomed the support of the hon. Member for Glasgow, North-West on an earlier occasion, I took some exception to the fact that he was happy that companies could afford a bob or two with regard to the provisions on licensing. The truth of the matter is that the Committee would be doing a disservice if it did not take into account the need to preserve good cash flow in companies. That means that they do not want to tuck away resources when it is unnecessary to do so. Companies need to use all their resources to the best possible advantage. Those two considerations alone—and there are many others—overtake the comment about this being just a bob or two. I hope the hon. Gentleman will forgive me, but I felt that I needed to get that on record.
I understand the need for a financial security test with regard to the financial standing of certain licensees when that test suggests that their ability to meet their obligation may be at risk. However, we need to temper that with an understanding that this should not be an automatic presumption to ensure that companies do not make unnecessary financial provision over a sizeable period of time. That would tie up financial resources that I believe are necessary to develop what is a relatively new industry. I know the Minister would not want that to happen.
We know that industry is going to have to pay a sizeable investment price if we are to crack the question of global climate warming. We know that we have to make several changes with regard to infrastructure, how we run our businesses and transportation—the list is endless. I do not want to tie up money unnecessarily in a Government holding somewhere that detracts from the ability to move on to make the investment necessary to deal with climate warming. I hope that the Minister will agree that it should not be an automatic presumption that, during CO2 storage operations, there should be financial provision whereby money is lodged and held right across the piece as a matter of ongoing procedure.
I ask that there is not such an automatic presumption. It would place a massively onerous obligation on the balance sheets of companies and take up significant capital. More importantly, it would be immensely damaging to medium and smaller companies that might wish to be involved. We need to get all the resources we can involved in this procedure. The presumption would place a proportionally greater disadvantage on those people than on the very big operators. I am sure the Minister would want to be aware of that concern. I hope that he will give me the reassurances that I want.
There is considerable concern about the amounts that we might be talking about to allay the risk, from the Government’s perspective. I know from people to whom I have talked that if they do not know what that financial implication might be, it might stop plans proceeding. We need to know the amounts and the timings, so perhaps the Minister can give us some thoughts in that regard.
Finally, there is a question of when it might become necessary to make some financial stand-by to alleviate the risk from the Minister’s perspective, which I understand. I have spoken about the considerable financial cost involved and that will be particularly grave if it has to be made at the time of the permit application. There is some leeway to allow that provision to be made either before construction starts, or before the storage operation itself starts. I ask the Minister for guidance because this impacts on a number of organisations that might wish to be a part of the infrastructure that the Minister is trying to create, but could be put off by that lack of knowledge.
Martin Horwood: Following on from what the hon. Gentleman has raised, particularly in terms of the impact on smaller companies that might wish to engage in this business, there is mention in the impact assessment of Petroleum Act 1998 costs. I am not familiar with the Petroleum Act, so perhaps the Minister could expand on what that is based on. There is talk of a price for the licence of £3,000, but a potential cost to the companies developing it of £31,000 a project. I think that that underlines some of the concerns that the hon. Gentleman might have had, although I remember raising earlier the possibility of perhaps extracting a little more money from those companies that are enjoying windfall profits.
The other points I was going to make were regarding some of the conditions that might be attached to licences.
1.30 pm
Mr. Swire: I think that it is the hon. Gentleman’s party’s policy to do something about what he sees as levying a windfall tax on the profits of the existing companies. He has just stated that perhaps some of that money could be used towards helping other companies to get into the business. Would not that be a strange precedent, and is that really what he is trying to say?
Martin Horwood: I was asking questions, not setting out party policy—I should make that very clear. I was seeking a response from the Minister on the potential funds available in the energy companies for various purposes.
The issue that I wanted to address regarding this particular clause relates to the conditions that are attached to licences, particularly those relating to the environment. I was rather reassured by the Minister’s promise of full consultation on the conditions, which is a very positive commitment, and I hope that there will be engagement with many organisations that are concerned about the environment.
Earlier today, the Minister talked about the environmental impact being “paramount”—I think that that was the word that was used. Is he able to expand on that? Does that mean that environmental considerations will, in effect, supersede all commercial considerations? Will considerations be attached particularly to public health? The gases set out in the earlier part of this chapter of the Bill make a rather explosive list. Presumably public health considerations—in terms of leakage and so on—might be a major consideration. Will those be the kind of things that might attach to conditions?
What is the type of time scale over which these conditions might apply, and how flexible will they be if evidence of a public health risk or, indeed, environmental damage, emerges? As we have established, we are talking about time scales of possibly as long as 40 years for the operation of these licences. If such evidence emerges, will the conditions attached to the licences be flexible enough instruments to allow for action to be taken to mitigate or eliminate those risks?
Charles Hendry : This clause seems very straightforward and sensible, but the Minister’s opening remarks raise a couple of questions in my mind, which I would be grateful if he could answer.
In setting out the sort of terms and conditions that might be relevant here, I think that the Minister said that the installation should not interfere with other users of the sea bed. I am not quite sure what he means by that, so could he expand on it further? How will that be achieved?
By definition, I would have thought that putting hundreds of millions of tonnes of concrete into the sea bed is going to interfere with what goes on there. Who does the Minister have in mind? Other users of the sea bed? Are these fishermen, trawlermen or other people who earn their living in that respect? Otherwise, the thought going through my mind that an assortment of crustaceans might be affected—crabs and lobsters and so on—as users of the seabed.
Malcolm Wicks: We will consult them.
Charles Hendry: If the Minister intends to consult them, which they will be incredibly relieved about, they will be able to go back and say, “Well, on 21 February 2008, the Minister gave us an assurance that we would not be interfered with.” Judicial review has happened too often with energy issues already.
Will the Minister expand a little more on what he has in mind? Is this something that he sees as being a permanent structure because there are risks of things going calamitously wrong with some of these installations? We are talking about combustible gases. Clearly, in the event of an emergency, the lobsters would come out ready to eat. The point here is that the Minister has flagged up an issue, but exactly what he has in mind is far from clear.
The Minister has spoken about “use it or lose it”. Is that one of the terms and conditions that he might have in mind? Is he saying that if someone applies for a licence but does not actually use it, it would be revoked? Perhaps the Minister will expand on his thinking.
Will the Minister talk a little more about the implications of clause 5 for decommissioning and, in particular, whether he would use this as an opportunity to set out how a facility should be left at the end of its operating life, and how it should be decommissioned? What will happen about ensuring that necessary funds are available to carry out that decommissioning work at particular installations?
Malcolm Wicks: This has been a useful discussion. Let me try to cover some of the points that have been made. My response will probably not be as coherent as I would like, if I had more time.
The terms and conditions that are likely to be in the licences include placing an obligation to retain the gas within defined geological boundaries, placing the operator under a general obligation to protect the marine environment from pollution, requiring a licensee to obtain a lease from the Crown Estate, and placing an obligation on the licensee to undertake licensed activities in a way that does not interfere with other users of the sea or sea bed—the hon. Member for Wealden noted that remark in particular. What does that mean? There is a duty to consult and to maintain effective communication with fishing interests—not necessarily fishes themselves, I suppose, although I had better be careful—to refrain from activities that unjustifiably interfere with navigation or fishing interests, to deal promptly with compensation claims, to give the Ministry of Defence notice of installation movement and seismic surveys, and to maintain and install underwater beacons to MOD specifications. Those are some of the things that we have in mind.
Mr. Swire: On the question of settling any insurance claim, and if one subscribes to the enduring principle of the polluter pays, will it be incumbent on companies applying for a licence—and indeed being awarded an operating licence—to prove that they have sufficient insurance to meet any claim for compensation that might be made against them?
Malcolm Wicks: Subject to further consideration, that would seem eminently sensible. We will try to clarify that, and there is ongoing discussion about the nature of the licences. I have indicated some of the criteria and some of our objectives, but that was a useful point.
In terms of the point about use it or lose it, I made the comparison with the UK continental shelf—the North sea—where we have brought this in. I would guess that the matter is ultimately for the Crown Estate, but we will be consulting on this issue, among others, in due course. My judgment would be that on gas storage, for example, if a company decided after 10 years that it wanted to enter another market, it would seem sensible to ensure that where there was commercial interest, another company would take that over, not least because of national security considerations.
I was asked about the costs of licences and I think the hon. Member for Cheltenham recognises that the difference is that the figure of £3,000 or thereabouts could be for submitting the licence, which covers the administrative costs to our Department. The larger fee mentioned is just an estimate of the internal cost to the company of preparing their application, and that needs to be weighed against the potential benefits of up to £400 million to companies and the economy from such a proposal.
On environmental considerations, when I use the word “paramount”, I am simply saying we are not going to play fast and loose with the environment—that is crucial. We have to comply with EU legislation on environmental matters, but on other matters raised regarding terms and conditions, we intend to consult with industry before any of these regimes come into place. There will be plenty of time for discussion on these matters.
Martin Horwood: I am beginning to sense that the Committee does not seem to have a great consensus on exactly what these terms and conditions might be and where they might be directed, although there is a broad sense that they might have a strong environmental focus. We do not really have a sense of the price levels, although the impact assessment had those numbers that the Minister quoted, which were based on the Petroleum Act 1998. It might be helpful if he could explain where those costs come from. Would it not have been better to have some sense of the conditions in the Bill rather than leaving all this to secondary legislation? For instance, should the primacy of environmental considerations be set out? Would he consider that suggestion as a possible amendment at a later stage?
Malcolm Wicks: I always consider suggestions from Liberal Members most carefully before reaching a judgment, and that would apply in this case.
I have done my best to outline some of the key points that would be covered by a licence. To be fair—the hon. Gentleman is a fair man and I always like to be fair to myself on these occasions—we have not passed this Bill yet, although I hope that Parliament will enact it. We are working hard on some of these details. I do not think—this is a general issue around the law—that being ultimately specific in the Bill is sensible, if only because this is a fairly fast-moving technology and sometimes one can be over-specific.
The hon. Member for Northampton, South made some interesting remarks, much of which were about carbon capture and storage. He made some important points to which I will return when we consider the clauses concerning carbon capture and storage. I hope that that will be sensible.
As for terms and conditions, I am reminded that we will be consulting on this in due course and publishing a consultation document in June. One would probably get into trouble with parliamentary colleagues if one consulted before a Bill had received its Second Reading. One has to do these things in the appropriate order.
The hon. Member for Cheltenham talked about a worry that we could be too narrow in terms of licences, given the technological developments that will take place. For that reason, we are setting out enabling powers for the licensing regime. We want to encourage innovative new technologies in relation to offshore technology to come forward under this regime. We feel confident that in a fast-moving territory—in terms of liquefied natural gas, gas storage, and later CCS—it is important to put in place a regulatory framework that we think will be fit for purpose in the long term.
Martin Horwood: I also raised the issue of whether public health considerations, such as evidence of public health risk, over time might be included in the conditions. Does he have that as a possible objective?
Malcolm Wicks: Yes, I do. Again, drawing on the helpful though not exact comparison with the UK continental shelf—the development of North sea oil and gas into the mid-sixties—the Government and relevant agencies, such as the Health and Safety Executive, and the companies themselves have always put a huge premium on the safety and mainly the safety of the workers. We saw an incident the other day when people took no chances in evacuating an oil rig.
I understand the public concerns about gas storage and CCS. We need to ensure that we are protecting the public health through the appropriate agencies such as the HSE. That is a very significant point, not least when some of these technologies are fairly new to most of us, let alone our constituents. We need to reassure people and make sure that these issues are covered in the appropriate regulations.
1.45 pm
Charles Hendry: I am very grateful to the Minister. He has given us a much greater understanding of the way his mind is working on this. I understand why he cannot set out a prescriptive list of the conditions in the Bill.
One thought on competition rules occurs to me. Can the Minister clarify how competition rules will apply to the people who set up and operate such facilities? Would there be the normal ability to refer a matter to the Competition Commission if there were concerns about vertical integration in terms of who owns different aspects of the supply chain? If the starting point is to provide greater security of supply, there would be concerns if people could own a gas storage facility and chose not to use it so as to pump up prices of gas elsewhere in the supply chain. I do not expect that to happen, but I will be grateful for reassurance from the Minister that it will not be able to happen.
Malcolm Wicks: That raises an important point. My off-the-cuff response would be that Ofgem, the regulator, would be able to look at those aspects. Ofgem is not the regulator for offshore installations and all that—not the ones that we are discussing here—but we have a regulator of the market and its effective operation is in place. The regulator will need to be mindful of the changing territory, both literally and metaphorically, in relation to this matter. I understand the hon. Gentleman’s example of gas storage. Effectively, although it is new territory, normal competition rules would apply, which is what I said in a less prĂ(c)cised way a few moments ago.
Question put and agreed to.
Clause 5 ordered to stand part of the Bill.
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