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Westminster Hall

Thursday 3 November 2011

[Mr Roger Gale in the Chair]

Shale Gas

[Relevant document s : Fifth Report from the Energy and Climate Change Committee , Session 2010-11 , HC 795, and the Government response, HC 1449 .]

Motion made, and Question proposed, That the sitting be now adjourned.—(Charles Hendry.)

2.30 pm

Mr Roger Gale (in the Chair): I will explain the process for the debate this afternoon, which is slightly unusual because we have two reports. We have agreed—I hope that Members present will approve—to split the debate in two, although not necessarily into two equal halves. I understand that the first report may attract more comment than the second, and on that basis I am prepared to let the first debate run for slightly longer than might otherwise have been the case. The second debate will therefore be slightly shorter; I hope that is okay. In such cases, the convention that a Member may speak only once falls by the wayside. As we will treat our proceedings as two debates, I am perfectly content for Members who have participated in the first debate to contribute also to the second, should they choose to do so. I trust that whoever takes the Chair at 4 o’clock will feel the same. If that is not clear, hon. Members should ask and I will clarify the matter further.

Mr Tim Yeo (South Suffolk) (Con): Thank you for that clarification, Mr Gale. I know that it will be welcome to members of the Energy and Climate Change Committee, who regard the reports as separate and would prefer to have two separate debates, and it is helpful of you to accommodate us. I shall begin by drawing attention to my entry in the Register of Members’ Financial Interests regarding a number of businesses that relate to the energy and transport industries.

I am pleased to have this debate; its timing could hardly be better and it is almost prescient in its choice of subject. Since the Committee published its report on shale gas last May, the subject has become even more topical. Potential UK reserves now appear to be much larger than first thought, and the conclusions of the team that investigated the seismic events—what I would think of as earth tremors—were also published this week. This debate gives us the chance to address concerns about the potential impact of shale gas development, and to consider those concerns in the context of the fact that enough shale gas reserves may exist in the UK to make the country self-sufficient in gas supplies once again, possibly for a long time.

Like conventional natural gas, shale gas is mostly methane. In conventional gas exploration, when a well is drilled into the formation in which the gas is held, the gas comes to the surface under pressure. In the case of an unconventional gas such as shale gas, the gas remains trapped in the pores of the rocks. To create a pathway for the gas, the rock is fractured by injecting large

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volumes of high-pressure fluid—mostly water but with sand to keep the fractures open—and chemicals to reduce the friction of the fluid in the well pipe, and prevent anything from growing in the well. That process is known as hydraulic fracturing and has been going on for many decades, particularly in the United States. There are, however, concerns that the chemicals used in hydraulic fracturing, and the methane released from the shale formation, could get into underground water aquifers—those concerns have been well publicised. The Committee’s report addressed that and other issues directly, and made several recommendations.

In particular, we noted that,

“hydraulic fracturing itself does not pose a direct risk to water aquifers, provided that the well-casing is intact before this commences. Rather, any risks that do arise are related to the integrity of the well, and are no different to issues encountered when exploring for hydrocarbons in conventional geological formations. We recommend that the Health and Safety Executive test the integrity of wells before allowing the licensing of drilling activity.”

We also recommended that,

“the Environment Agency should insist that all companies involved in hydraulic fracturing should declare the type, concentration and volume of all chemicals they are using.”

That practice is not universally followed in the United States.

The report continued:

“We recommend that before the Environment Agency permits any chemicals to be used in hydraulic fracturing fluid, they must ensure that they have the capabilities to monitor for, and potentially detect, these chemicals in local water supplies.”

Finally, we recommended that both the Department of Energy and Climate Change and the Department for Environment, Food and Rural Affairs,

“ensure that the Environment Agency monitors randomly the flowback and produced water from unconventional gas operations for potentially hazardous material that has been released from the shale formation. In order to maintain public confidence in the regulators—and in the shale gas industry—we recommend that both water and air be checked for contamination both before and during shale gas operations.”

Yesterday the Environment Agency published a follow-up to its evidence to my Committee, which included data from samples of flowback fluid—the fluid that returns to the surface through the drilled well—that the agency has taken over the past six months at the Preese Hall site operated by Cuadrilla. It stated: “We have found that the flowback fluid contained high levels of substances dissolved from the rocks such as chloride, sodium, iron and dissolved materials. They also contain very low levels of naturally occurring radioactive minerals, principally radium-226, at levels similar to those found in granite rock. At the levels found, we would not anticipate any threat to human health or the environment. The results of this analysis have to be viewed with caution; they are only indicative of the radioactivity present.”

Maintaining the confidence of the public—again, something that has not been universally achieved in the United States—is absolutely essential if UK shale gas reserves are to be exploited. Cuadrilla is sensitive to that, and I urge it to continue its policy of engagement with the local community, and to be as open as it can about its activities, the materials it uses, the practices it follows and so on. Such an approach is even more necessary in light of the seismic events that have occurred since the Committee visited the site earlier this year.

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In connection with those seismic events, members of the Committee also visited Texas and had discussions in Washington DC with regulators, legislators, industry representatives and environmental groups. We discussed the induced seismic events that occurred in Arkansas, which related to the underground injection of waste water generated from shale gas exploration and production elsewhere, rather than from a process of fracking. In evidence from the Geological Society, the Committee was told that induced seismicity is not thought to be a significant risk in the UK. During oral evidence from Professor Richard Selley, a petroleum geologist at Imperial college, we asked whether there is evidence to suggest that mini-earthquakes could happen as a result of fracking. He told us that individual claims often produced what is called the Francis Drake effect; they show something that was already there but the oil company gets the blame.

The tremors near Blackpool on 27 May had a magnitude of 1.5, and those on 1 April a magnitude of 2.3. Cuadrilla responded by postponing any further fracking operations while the British Geological Survey shared seismic data on the events with Keele university and DECC. The British Geological Survey issued a press release and stated that fracking may have been the cause, although it added:

“It is well established that fluid injection can induce small earthquakes…We would not expect earthquakes of these relatively small magnitudes to cause any damage.”

To put that into context, the European microseismic standard classifies a magnitude 1 earthquake as one that is not felt, a magnitude 2 earthquake as scarcely felt, and a magnitude 3 earthquake as weak. A quick inspection of the British Geological Survey’s seismology webpage shows that, in the past month, the following earthquakes have taken place in the United Kingdom: Caernarfon, magnitude 1.2 on 24 October; Shrewsbury, magnitude 1.1 on 22 October; the northern North sea, magnitude 3.5 on 21 October; and Glen Sheil, Highland, magnitude 2.4 on 20 October. There were several others, the details of which I will not bother to read out to the Chamber, but that shows that a range of such events is occurring almost every week.

Small-magnitude earthquakes are by no means uncommon in the British isles. Nevertheless, any potential correlation between one of these events and hydraulic fracturing activity must, of course, be examined carefully. The report published yesterday concluded that Cuadrilla’s activity triggered—the word used was “triggered” rather than “caused”—very low level seismic activity and that that posed no identifiable threat to people or property in the nearby area. The report concluded that it was a unique series of events and circumstances; 850,000 wells have been explored around the world with virtually no similar events recorded.

The seismic activity was caused by a very unusual combination of factors, including the specific geology of the well site, coupled with the pressure exerted by the injection of the hydraulic fracturing fluid. The Preese Hall-1 well encountered a critically stressed fault, requiring just a small energy input to initiate seismic activity. The fault was sufficiently porous to accept a large volume of fluid and brittle enough to be prone to failing seismically. Those conditions existed before the hydraulic fracturing.

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That combination of factors was rare and is therefore unlikely to be repeated. Cuadrilla’s hydraulic fracturing events take place far below the earth’s surface, reducing the likelihood of a seismic event of less than 3 on the Richter scale having any impact on the surface. The report also concluded that the fluid used in the fracking process cannot escape the rock that is deep underground and therefore cannot contaminate the local environment.

The findings of the study have enabled scientists to establish a system to monitor seismic activity at Cuadrilla’s site, and facilitate the creation of an early-warning system that would allow Cuadrilla to detect the first signs of any seismic activity and to take steps to limit its escalation. The study concludes that even without the early-warning system, the largest seismic event that experts suggest is possible is one of magnitude 3, which is unlikely to be noticeable on the surface if it occurs at a depth of 3 km, where the fracking takes place. The proposed system already operates successfully in Germany and in the Netherlands.

Cuadrilla is, of course, in close contact with the Department, the local council and representatives of the local communities. I realise that my hon. Friend the Minister may want a little more time before deciding what the Department’s view is about continuing drilling on the site. For what it’s worth, my judgment is that on the information available at present, there is no need to impose a moratorium. Any decision about a moratorium must recognise that a degree of risk exists in all operations to explore for and exploit mineral resources, whether that is oil, gas or coal. The judgment for Ministers must be whether that risk is acceptable in the light of each set of circumstances. I believe that the regulatory regime in Britain is robust and effective at assessing risks and enforcing any necessary safety measures.

In this context, it is also important to assess potential benefits to the UK of exploiting our shale gas reserves. On that subject, matters have moved on significantly since our report was published in the spring. In our report, we concluded that

“shale gas resources in the UK could be considerable. However, while they could be sufficient to help the UK increase its security of supply, it is unlikely shale gas will be a ‘game changer’ in the UK to the same extent as it has been in the US.”

During our inquiry, the only calculations available were based on analogies to similar shales in the US. The British Geological Survey’s estimate that UK shale gas reserve potential could be as large as 150 billion cubic metres was the most up to date at that time. For comparison purposes, in 2009, UK total demand for natural gas was approximately 100 billion cubic metres and we imported about 10 billion cubic metres of liquefied natural gas.

On 21 September this year, Cuadrilla released its estimates, based on samples from exploratory drilling, of the gas in place in its area of operations in Lancashire. “Gas in place” refers to the estimated total amount of shale gas in the formation. It is not the same as reserves. The actual amount recoverable depends on a range of factors. Cuadrilla’s results from the first two wells suggest that the gas in place equates to 200 trillion cubic feet. That does not translate directly into 56 years-worth of gas for the UK, because it will not be able to recover all that, but it does mean that a significant amount of gas will be recoverable and it will alter the picture.

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During our inquiry, the British Geological Survey told us that the Bowland formation was only part of one of four good plays in the UK, encompassing many areas of the country. On that basis, it seems clear that shale gas has the potential to be a game changer for the UK and to restore the self-sufficiency in gas supplies that we enjoyed in the heyday of the North sea. Of course, the existence of those reserves does not automatically mean that they should be exploited. As our report pointed out,

“in planning to decarbonise the energy sector DECC should generally be cautious in its approach to natural gas”.

That of course includes unconventional gases such as shale. The report continued:

“Although gas emissions are less than coal they are higher than many lower carbon technologies.”

There are five main studies on the greenhouse gas emissions of shale gas. Two say that shale gas emissions could be higher than those of coal, while the three others debunk that analysis and conclude that shale gas is only slightly worse than conventional gas. Either way, the strong probability is that if UK shale gas reserves are exploited, significant new investment in gas-fired power stations will occur. Our report therefore concluded:

“The emergence of shale gas increases the urgency of making carbon capture and storage (CCS) technology work for gas as well as coal.”

Now that negotiations for the first proposed CCS demonstration project at Longannet have failed to reach agreement, the £1 billion set aside in the comprehensive spending review for CCS is available for other projects to be pursued. I strongly urge the Government to apply that to developing CCS for gas.

The decisions taken during this Parliament about energy policy will shape the UK’s energy infrastructure, especially its electricity generating capacity, for decades. The drivers of the policy remain security and independence, lower emissions, and price. Shale gas could help significantly by contributing both to improving our security and independence and to keeping prices down. In the short term, if gas replaced coal, it could also help to lower emissions, although without CCS, gas by itself cannot remain a large component of our energy mix beyond 2030 if we are to achieve the aim set out by the Committee on Climate Change of largely decarbonising the electricity generation industry by then.

I am increasingly sympathetic to the views of Dieter Helm, who suggested that the cost and security advantages, in the short and medium term, of using more gas over the next 15 years are considerable. During that period, the cost of some renewables, such as solar photovoltaics, energy from waste and others, may fall substantially. There is a possibility that new nuclear may also start to make a significant contribution. At a time when consumers are understandably concerned about rising bills, the wisdom of betting the farm on the more expensive and intermittent renewables, such as offshore wind, is increasingly questionable.

It is against that background that decisions about shale gas must be taken. I urge the Government to consider the potential benefits to Britain. There are legitimate concerns, of course, about the environmental impact, and those concerns must not be ignored. However, those who call for fracking to stop completely must produce scientific evidence to justify their demands, and I do not believe that at present such evidence exists.

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2.48 pm

Dr Alan Whitehead (Southampton, Test) (Lab): I took part in the Energy and Climate Change Committee inquiry into shale gas, and in the course of that inquiry, I took part in a number of visits, not just to the one site in the UK that is currently being drilled, but to areas where intensive drilling was going on, has been completed, is producing or—in many instances—has been abandoned. What I found particularly useful about those examinations of existing practice was that they not only helped us to consider the overall theoretical picture, but enabled us to see what a shale gas producing economy might look like in the UK, based on what we now know about the in-principle availability of shale gas in the various plays in the UK.

I want to concentrate my remarks on these questions: if we were to proceed with the extraction of a sizeable amount of gas from the reserves that we currently know of, what would be the best, safest and most environmentally prudent way of doing so? If we consider that to be a minimum starting point for extracting shale gas, what will that make the UK’s shale gas market look like? What effect will that have on the overall availability of gas?

Looking at the matter from another end, a number of people have recently made quite wild claims about what the existence of the shale gas reserves means. Some people, in pursuit of particular agendas, have gone so far as to say that all we need to do is extract as much shale gas as possible, run the economy on that gas, and not worry about renewables any more. They say that that would lead to an age of plenty for gas; gas prices would rocket downwards, we would have energy security for the foreseeable future, and we could abandon expensive alternative energy sources forthwith. Some of those statements are partially true; most are not fully true; and some, in my view, are completely off-beam.

On the starting point for shale gas extraction in the UK, the regime under which extraction takes place must be such that the free-for-all drilling taking place in parts of the United States cannot and will not be allowed here. The US’s experience is not comparable, and can never be compared, to what might happen in the UK, for a number of reasons. First, in the areas that the Select Committee looked at, the regulation of mineral rights is entirely separated from the regulation of property rights. One can literally fetch up in a truck outside someone’s front garden and say to them, “I own the mineral rights to the land behind your back garden as far as the eye can see, and I am going to start drilling in your back garden. There is nothing you can do about it. I might give you some money to compensate you, but that will be it.” Consequently, certain plays in the United States, called sweet spots, have gone ahead with intensive drilling. In certain parts of the US, areas literally look like Swiss cheeses, with lots of drilling sites pockmarking the surrounding area. They even extend to urban areas and literally to people’s back gardens.

There is not only intensive drilling, but intensive drilling that goes horizontally out from the pads, which are the size of two football pitches; those are the typical starting points for shale gas drilling. There can perhaps be 16 to 20 wells per pad—intensive drilling indeed. As a result, a large amount of shale gas is produced, but wells continuously deplete, which means that each well is not producing an enormous amount of shale gas.

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The issue of depletion rates for shale gas wells is addressed in the Select Committee’s report. It is the cumulative effect of a large amount of drilling for multiple wells in particular places that produces the overall volume.

Plays in Texas, Pennsylvania and other parts of the US are infinitely easier—perhaps twice as easy—to extract from than is ever likely to be the case in the UK. We therefore need to treat the reports of overall reserves under the soil in the UK with some caution, because in practice, perhaps not more than 10% to 15% of the gas that is theoretically there will be extractable, even over a long time and with repeated fracking in particular wells.

I completely concur with the caution expressed—caution is the watchword in the Select Committee’s report—regarding the conditions under which drilling may take place. Under a regime with conditions, I think that a substantial amount of shale gas can be extracted over a long time, but probably not a volume that will be the price-reducing game changer that some people talk about. A recent report by Bloomberg looking at, among other things, the likely future effects of shale gas on UK prices suggested that there would not be a significant effect on prices. There may well be a significant effect on energy security; we would replace at least a proportion of the nearly 40% of gas that is imported with gas produced in the UK. That is potentially important, but it seems unlikely to be a price-reducing game changer.

The conditions are important because in the UK it will be necessary to obtain proper licences, maintain the right safety procedures in all wells, and ensure that wells are correctly sheathed, so that there is no danger of the contents of particular geological levels permeating and contaminating other levels. It will also be necessary to be careful about the use, disposal and—I hope—recycling of the large volumes of water that are used in shale gas extraction. That subject is another feature of the Select Committee’s report. There is considerable tension about water in certain parts of the country, so even the use of 1%, 2% or 3% of the water supply could put substantial and increasing pressure on the amount of water available. Keeping a close monitoring eye on the use of water will be important.

David Mowat (Warrington South) (Con): I am listening carefully to the thrust of the hon. Gentleman’s remarks. I think he will concede that there has been a significant price differential in the US on the Henry hub, for whatever reason. Gas prices have fallen by about 50%, and that has been attributed to shale. I have listened to the logic of his remarks, but I have not heard the specific reason why he does not think that that will happen, not in the UK—the UK is not where the issue is—but in Europe; that is where the issue is.

Dr Whitehead: I think that the reason why that will probably not happen is that the US, as recently as five or six years ago, was in the process of building substantial quantities of liquefied natural gas delivery depots, which were anticipated to take up a substantial shortfall in gas in the US; that shortfall was even greater in the US than in the UK. The US economy was therefore in a position where, as a result of the anticipated introduction of that large amount of LNG, prices reflected the situation regarding indigenous gas in the US, imported gas,

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investment prospects, and the likely prospect of a need to procure further large amounts of LNG for the US, at a time when there was increased worldwide demand for LNG in various other economies.

Since five or six years ago, that particular metric has been entirely flipped over. The United States is now exporting, rather than importing, LNG. That has had a substantial flip-over effect on prices in the USA. I am not an expert in these matters, but that is my understanding of the situation. The position is not comparable with that in Europe or the United Kingdom. As I say, the production of shale gas will perhaps have some effect on the stabilisation of prices over a period of time, and some effect on the requirement for a secure gas supply within the UK, rather than us importing it through interconnectors or through LNG. We have, of course, fairly efficient gas interconnectors between the UK and the rest of Europe, although whether gas flows down them is another matter. However, the two propositions are entirely different in their likely effect on prices.

The two propositions are similar, however, to the extent that there will be a significant effect on what one might term the energy security front—on what would otherwise be the question of where the UK will source its gas supplies from in future—although the UK interconnectors are pretty secure; they mainly go to Norway and other European destinations. Sourcing that gas from within Europe arguably brings us close to the energy security that we would have if we had an entirely indigenous supply. That is my take on why the price effect will not take off in the way that some people think it will.

I want to emphasise and underline that point, as the Committee’s conclusion is that there is not a case for banning or stopping the exploitation of that shale gas resource through drilling, but that there is a case for ensuring that there are careful, secure environmental guidelines to ensure that it is done in the best way for the protection of the environment. There is also a case for ensuring that, unlike the USA, we have careful continued regulation of not only the drilling but the capture of the gas, and regulation covering the fate of wells as they deplete and go out of commission.

The point about multiple wells is that they do not have long productive lives compared with more conventional forms of drilling. One of the issues in the United States has been that in a number of areas, because wells have often been drilled in a speculative and unorganised way, there are large numbers of abandoned wells scattered across the landscape, some of them well capped, some not capped and some not very well capped. Indeed, the magnificently named Texas Railroad Commission, which regulates the whole business in Texas, is in the process of finding where those abandoned wells are and putting in place a programme for capping them. That is a regime that we cannot afford to have in the UK, because of the implications of gas leakage and the danger of those uncapped and untreated wells from an environmental point of view.

The overall picture is that, with careful regulation, a reasonable contribution can be made to UK energy supplies from shale gas over the next period. We should not, however, run away with the idea that it will solve everything or that it should not be properly and fully environmentally regulated, to ensure that some of the things that we have heard about elsewhere in the world

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do not, by accident or by negligence, take place in a UK energy environment. I believe that that is a balanced view, and that the Committee has taken a balanced view on the future of shale gas. It is important for future debates on the energy economy that we keep that balanced view of what various elements of the UK energy mix can contribute to the overall welfare of our future energy supplies.

3.6 pm

John Pugh (Southport) (LD): My constituency is right on the edge of the latest find. I have to declare a sort of interest, because when I originally bought my house, under a 999-year lease, I found the local feudal landlords had mineral rights over my front garden. When I bought the freehold, I obviously took over those rights. My house suffers from tremors, but that is only because eight trains an hour from the Northern line go past my front door. None the less, there is a genuine concern in the area about the exploitation and extraction of shale gas. I will be visiting Cuadrilla tomorrow, coincidentally, to put to it some of the questions that will no doubt come up in this debate.

When I read the report, I was delighted by its excellence and balance. It may surprise you to hear this, Mr Gale, but I do not know much about geology and oil exploration. I was extraordinarily well educated by the report. What I understand, however, is politics, which I have been in for a long time. The two motives that move people in politics are greed and fear, and both greed and fear are in play in this particular issue.

On one side, pictures are sketched of a shale bonanza. The Lancashire find is put at 200 trillion cubic feet. I am reliably informed—well, informed—by a Cabinet Minister that that is almost equivalent to half the entire reserves in the USA. One ponders, I guess, why that has not dramatically affected the share value of Cuadrilla in the way that one might expect, but, none the less, it is by all acknowledgment an appreciable find. That offers the possibilities of making the UK energy-secure, of lowering energy prices and of generating wealth, although there could be an argument about how that wealth will be spread and who will benefit the most. There is no doubt that with energy comes wealth. The people buying up our premier league football teams, by and large, tend to be energy barons. That is one side of the equation.

On the other side, there is not the hype, but the fear. There is the fear of environmental destruction, the fear of wells being aborted over a period of time or rather more rapidly and there is the fear of poisoned water supplies. [ Interruption. ] I am sure that hon. Members have seen the flaming house taps in the USA, although I wonder what the American water authorities are doing in allowing gas to contaminate—

Mr Roger Gale (in the Chair): Order. I am sorry to interrupt the hon. Gentleman, but someone’s mobile phone is switched on. Can everyone check their phone, including those sitting in the Public Gallery?

John Pugh: I suspect that it was my phone, unfortunately. I am interrupting myself.

There are also arguments about water depletion, tremors, geological instability and so on. Given the degree of hype on one side and of panic on the other,

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the report is most timely and helpful. I genuinely think it is a good report, which enables us to form a judgment about how and whether to extract. There is, however, one view that the report perhaps does not deal with sufficiently. It is at one extreme of the debate and it goes something like this: even if extraction is safe and profitable, it should not be done, either because it produces a carbon fuel, and we should not get more carbon fuels out of the ground, or because it augments and influences the use of carbon fuels and the carbon fuel market elsewhere. Organisations such as the Tyndall Centre have put that argument very seriously and would still oppose the extraction of shale gas in the UK for the same reasons, even if they found out tomorrow that it was perfectly safe.

People who argue like that believe a range of different things. They might believe that renewables can plug the UK energy gap quickly, that the British public will dramatically and quickly reduce their energy consumption through energy conservation or energy efficiency or that nuclear energy can easily plug the gap and step up to the plate. When we go through those alternative assumptions and the general argument for doing nothing about shale gas, however, it becomes clear that none of them has general support from informed opinion, and I share none of them myself. I do not think renewables will plug the energy gap as quickly as we would like, that the British public will dramatically or rapidly alter their behaviour in the next decade or that nuclear energy can easily fill the gap.

Given that most people believe and accept that gas is part of the mix, the debate can then centre on whether we should have UK gas or imported gas. People can be against natural gas extraction full stop or shale gas extraction full stop, or they can simply be against shale gas extraction in the UK. As I understand it, most people’s anxieties are not about shale gas per se, but about particular propositions in the UK and about whether the process followed here might emulate bad practice elsewhere in the world. Most people are concerned about safety, either because they are not convinced that shale gas extraction is safe or because they are not convinced that all companies can be trusted to make it safe—even where it has the potential to be safe, they think one should be suspicious of oil companies.

Eric Ollerenshaw (Lancaster and Fleetwood) (Con): On safety, does the hon. Gentleman think that it was perhaps a mistake for the report on the seismic activity to have been commissioned by Cuadrilla, given that many residents in the area already have questions about the report’s true independence? There have been press reports today that although the report refers to a few seismic activities, Cuadrilla has now admitted to there having been 50 in just eight months, which undermines the confidence of people in the area.

John Pugh: If one were extraordinarily suspicious, one would expect Cuadrilla simply to produce a whitewash report, because there is no advantage to the company, in the current circumstances, in admitting liability for the tremor—it has not helped Cuadrilla and, in terms of its public relations operation, it has been a disaster. I guess that that leads one to believe that Cuadrilla is prepared, in certain contexts, to admit to some of the flaws that might arise during drilling.

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The great thing about the Committee’s report—this is a considerable reassurance—is that it indicates that the process is not, as in America, taking place in the wild west. A series of robust arrangements are in place, and the report refers to

“a suite of environmental legislation”.

There are controls at various stages, and they seem—at first blush, at any rate—to be relatively robust. There is licensing, which is subject to conditions in the first place, and there is drilling permission, which is subject to planning regulations. There are also environmental effects, which are subject to impact assessments and monitoring by the Environment Agency. Similarly, the site is covered by health and safety legislation. Finally, people in the UK—unlike the people with methane in their taps in the USA—presumably have the advantage of water companies that test their water before sending it through the system.

The might, and should, offer a degree of reassurance, although there is an argument about how much reassurance it offers. However, there is a point at which reassurance runs out, because none of these things can totally get rid of the known unknowns, to use Donald Rumsfeld’s splendid expression. I did not realise this before, but there is talk about the effect of extraction or any sort of mining on the mobility of other sorts of gases and minerals that are not directly investigated or extracted from the strata affected. People cannot always say what will happen to those, but, then, they cannot say what putting Crossrail under London will do. Similarly, I have spoken to people in my constituency, and some of them have said, “That reassurance is all very well, but there might be things wrong with the process that we don’t currently know about. There might be some dangers out there we can’t identify.” This is where we get on to Donald Rumsfeld’s unknown unknowns.

There is a rational view of all these things, which goes something like this: if we are to have any conventional extraction, unconventional extraction or even large-scale development, we should do everything reasonable and necessary to ensure that it is as risk free as it can be, but we cannot eliminate risks that we cannot anticipate. There is, therefore, a strong case—particularly where there is genuine public concern—for taking a proactive approach towards monitoring any shale gas extraction process. Such an approach would mean having an open, transparent process, with frequent monitoring, genuinely hard and enforceable regulations and a body that is resourced to enforce those regulations. The Committee’s report makes it clear that the Environment Agency will have more work to do if shale gas takes off in the UK, and it will need to be resourced appropriately, subject to current Government restraints.

Importantly, we also need to be assured that whoever promotes large-scale developments has the public indemnity to act if something goes wrong, and that includes dealing with the unknown unknowns. They should also be in a position to clear up. As the hon. Member for Southampton, Test (Dr Whitehead) has said, wells are simply abandoned in the USA, and people leave their detritus behind them. That simply cannot take place in the UK, where it would be wholly unacceptable.

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There is a lot of good advice along those lines in the Committee’s report. Recommendation 14 states:

“We recommend that the Government consider the future funding for the Environment Agency”.

Recommendation 15 states:

“We recommend that the Health and Safety Executive test the integrity of wells before allowing the licensing of drilling activity.”

Recommendation 16 states that

“the Environment Agency should insist that all companies involved in hydraulic fracturing should declare the type, concentration and volume of all chemicals they are using.”

And recommendation 17 states that:

“before the Environment Agency permits any chemicals to be used in hydraulic fracturing fluid, they must ensure that they have the capabilities to monitor for, and potentially detect, these chemicals in local water supplies.”

In other words, the Committee is making a plea for a robust regime to govern what is a new process for many people in the UK. In many of its technological aspects, fracking or shale gas exploitation is not that new, but it is certainly a new concern for many people in my part of the world.

My concern about the Committee’s report relates not to the report itself, but to the fact that the Government’s responses to some of our clear-cut recommendations allow a little more wriggle room than I am comfortable with. There are too many “mays” and “cans”, too many expectations and too many statements to the effect that things might be done, could be done or, optimally, would be done, but there is no assurance that they always will be done. If we are to get any benefit from shale gas in the UK, we must be able to guarantee safety at every stage. Therefore we must have appropriate and effective monitoring and enforcement. Without those things, there will not be public support for shale gas, and there will be much anxiety about it, and we will have to accept that we have an asset perhaps to bequeath but not necessarily to use. The ball is in the Government’s court. If they and the agencies that want to exploit shale gas can show to all and sundry that they will hold the various companies concerned to the fire until they agree to what is appropriate, safe and satisfactory and that it passes all reasonable scientific tests, there may be an answer in shale gas for British energy supplies. If not, the issue will be coupled to an unnecessary degree of anxiety.

3.20 pm

Ian Lavery (Wansbeck) (Lab): As a member of the Select Committee I have been involved in the report and all the stages leading up to it. I am sure that my colleagues agree that the investigation into shale gas has been enlightening.

Shale gas has been declared to be an energy revolution and a game changer in the US, and heralded as a game changer for policy and for energy security. The real question here is whether it can be a game changer in the UK. It is an unconventional gas, and is classified as a fossil fuel. The three main types of unconventional gases are shale gas, tight gas and coal bed methane gas. The reserves of shale gas are known, as has been explained this afternoon, as plays, not fields. They cover a larger geographical area than a field and, because of the way in which the gas is exploited, need many more wells to be drilled than conventional gas, which will present a problem for communities in itself.

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Cuadrilla has been the subject of everyone’s discussions this afternoon. It describes itself as an English independent company, and it has completed phase 1 of its exploration at Preese Hall, five miles east of Blackpool. Phase 2 of the exploration commenced in 2011, and on its completion Cuadrilla plans to equip one of its other four approved sites in Lancashire. As has been explained by the hon. Member for South Suffolk (Mr Yeo), the Chair of the Select Committee, the results were divulged today or possibly yesterday, and unfortunately I have not seen them. However, it is alarming that the hydraulic fracking process was paused because of seismic events in Poulton-le-Fylde last year.

We must understand, as politicians on both sides of the House, that people have the right to be frightened of seismic events in their area. Someone may say, “Don’t worry; it’s only a seismic event,” but when people hear things like that they go to the council or their representatives, or they go on the internet, and eventually they go to their MPs’ surgeries wanting answers. We must understand that. What the hon. Member for Southport (John Pugh) has said about fear and greed is right, and it is probably what the issue is all about.

The seventh special report of Session 2010-12 outlines the work of the Select Committee on Energy and Climate Change and the Government’s response. The whole issue of shale gas needs much more detail and clarification on a range of fronts: there are the cost implications; there is the impact of exploration and production on the environment, which is an essential issue; there are the advantages and disadvantages of shale gas production and exploration; there is the carbon footprint; and there are the possible hazards. Having sat in Committee while witness after witness gave very good statements, we heard wide and varied views before we took the view outlined in the report.

The cost of shale gas exploration and production, and the cost to the consumer, are at present relatively unknown. My hon. Friend the Member for Southampton, Test (Dr Whitehead), has explained his view of different costing elements and the potential future costs.

Of the environmental issues, fracking, which leads to seismic events, is the one that people are talking about, and it is one of the most important. In a nutshell, fractures or fissures are created in underground formations to allow natural gas to flow. Water, sand and other chemicals are pumped under high pressure into the shale formation to create such fractures and fissures, and the sand then props them open to allow the gas to flow to the surface and be collected. Interestingly, giving evidence to the Committee, Professor Selley of Imperial college London observed—I would be the first to accept that this is an example of the fear factor, but it was put to the Committee—that hydraulic fracking had been blamed in the United States for the contamination of shallow water aquifers, microseisms, which are faint earth tremors, and flocks of dead blackbirds falling from the sky.

Christopher Pincher (Tamworth) (Con): The hon. Gentleman has discussed the pollution dangers from fracking. Does he accept that because fracking happens thousands of metres underground, whereas aquifers are probably only a couple of hundred metres below ground, with thick layers of rock between the two, the likely reason for pollution is not seepage of dirty water upwards, but failures in the well head or the bore itself?

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Ian Lavery: That was the view of many experts, as well. I am merely highlighting points raised by experts who appeared in Committee. I understand what the hon. Gentleman has said, and it was the view of probably the majority of those experts, but it is important to look at other aspects of the matter. I have read about blackbirds falling from the sky three or four times, and I think it is the fear factor. When that point was raised in America, the response was that blackbirds were falling from the sky long before fracking. I probably agree with that response, but, again, the point was put before the Committee.

The report makes a number of recommendations on the environmental issues. There are still major concerns about the environmental impact of shale gas exploration and production.

We must listen to the general public because we need them onside if we are to succeed in making shale gas a major contributor to the energy requirements of the UK for many years, as people believe can be the case. There is no doubt that we must take the general public with us. If they are not with us, it will be terribly difficult to do anything.

Eric Ollerenshaw: My hon. Friend the Member for Southport (John Pugh) has referred to “fear and greed”, but is there not another concept that relates to what the hon. Gentleman has just said, which is, “What is in it for us?” Many of the people in my local area are too used now to wind farms being built on hills, which are owned by financiers miles away and the local people see no benefit from them, and wind farms being built out at sea, which are driving the fishing fleets away and, again, they are yet to see any benefit themselves. Local people’s fear about shale gas—or their view about, “What’s in it for us?”—is that suddenly these companies will come along, that they will extract the shale gas and that there will be very few job opportunities for the local area. Potentially, millions will be made out of shale gas production, but not for the local area.

Ian Lavery: I think that the hon. Gentleman is right, which is why it is imperative that we try, at all stages, to take the general public in the areas affected along with us.

I think that it was the hon. Member for Southport who said that, whatever new types of energy we come up with, people will automatically oppose them. It does not help when certain people say that they are in love with these new wind turbines and that they are beautiful to watch. Wind turbines are probably beautiful to watch from somebody’s back garden but perhaps not from other people’s back gardens.

The hon. Member for Lancaster and Fleetwood (Eric Ollerenshaw) is right that these industries are not labour-intensive. Local people think that there is employment coming to the area with the new energy industries, but it does not really happen, and it has not happened so far. Generally, these new technologies do not create much new employment, but people can see them and wonder why they are being developed. I agree with that point.

The fracking process has been the focus of much consternation. Could the gas from fracking make its way into the general water supply? Could the fracking fluids leak into the shallow water aquifers, an issue which we have already discussed? What type of fluids

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would be used? The Tyndall Centre has said that, of the 260 substances used in fracking, 58 could be carcinogenic or mutagenic, while other organisations have suggested that all the substances used in fracking are also used in everyday household goods. Those are the varied views that the Committee heard from industry experts, some of whom said that the fluids are carcinogenic, and some of whom said that they are just fluids used in ordinary household goods. We must get much more detail on that subject. Also, could fracking lead to the groundwater contamination that has been experienced elsewhere?

The Energy and Climate Change Committee report tackles all those issues, as has been outlined already this afternoon. However, the World Wide Fund for Nature has clearly stated that shale gas is a fossil fuel and that

“world fossil fuels should stay in the ground and shale gas is likely to increase the net carbon emissions.”

The Campaign to Protect Rural England has drawn on evidence from Canada, which shows that the majority of wells in Quebec leak large doses of methane.

Another issue is the carbon footprint of shale gas production, which is very much unknown, although there are some very interesting and varied views about it. The British Geological Survey has stated:

“The overall greenhouse footprint of shale gas, including direct and indirect emissions of both CO2 and methane is not yet fully understood.”

Representatives from the Select Committee visited Texas in the United States at the end of last year, or possibly at the beginning of this year. One of the first presentations that they saw began by noting that, over a 20-year period, the global warming potential, or GWP, of methane is 72 times that of carbon dioxide, while over a 100-year period the GWP of methane is 21 to 25 times that of CO2. That is because methane and CO2 have different lifetimes in the atmosphere. If the short-term GWP measure of methane, which is 72 times that of CO2, is used, coal emissions would come to 1,154 kg of CO2 per megawatt-hour, while gas emissions would come to 781 kg of CO2 per megawatt-hour. The figure that is usually bandied around as being accurate in most cases is that gas production produces 50% fewer CO2 emissions than coal production, but these figures that I have just cited take the figure for CO2 emissions from gas production up to something like 70% of the figure for CO2 emissions from coal production. Again, we need to consider gas production in terms of the environment.

There is also carbon capture and storage, which has been mentioned. If we are to succeed with shale gas production, because of the problems with the environment and the emission levels, CCS must be pushed forward. We have a massive problem after the cancellation of the Longannet plant just two weeks ago. It has taken about six or seven years for that project to be ready to be signed, but it was cancelled at the eleventh hour. It is important that CCS is put back on the table. We have had excellent discussions with the Minister about CCS, and those discussions are continuing. In addition, experts say that the way in which shale gas is extracted largely depends on the emission levels. We did not get into too much detail on what that actually means, but it was certainly something that the experts said to the Committee.

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The report clearly outlines that there are now extensive explorations for shale gas taking place in Poland and it recommends that the UK closely monitors the progress of those explorations, which is the right course of action.

In conclusion, shale gas might be the partial answer to future energy supply problems in the UK, but there are so many imponderables at this point that I think that time will tell. Shale gas production has huge potential, and future development and exploration are imperative. We need to continue with that development and exploration, albeit in an extremely safe fashion, stage by stage, and taking the public with us. However, before the UK ploughs ahead with shale gas production, much more clarification is required, particularly in respect of the fracking issue and of the environmental issues.

Mr Roger Gale (in the Chair): Order. I propose to call Mr Mowat next. I shall then call the two Front-Bench spokesmen. If other Members wish to participate in the debate after that, there will be an opportunity for them to do so.

3.37 pm

David Mowat (Warrington South) (Con): Thank you, Mr Gale, for calling me to speak.

In several contributions, the term “balanced” has been used, both about the Select Committee’s report and the tone of the speeches. My remarks might be a little less balanced, because I think that shale gas production is a very positive development and that we could be on the verge of something significant.

I apologise in advance for using the term “shale gas” interchangeably with “unconventional gas”. The report does that and several Members have also done it in their contributions. In my constituency, we have a fair bit of coal gas. IGas has found coal gas in Warrington.

I will not talk further about the environmental issues around shale gas production; they are genuine and they need to be sorted out. A number of Members have already spoken well about them. I will just say that there is no form of energy—and no choice that we have for sorting out energy—that does not have some kind of environmental issue. We have to make choices.

I want to talk for a minute or so about gas in general, before I get into shale gas in particular. I want to put into context where we are in our decarbonisation targets. In 2010, 2.5% of the UK’s energy came from renewables and 90% came from fossil fuels. Of that 90%, the majority is still coming from what we would call the “dirty” fossil fuels, which are coal and oil. We have a long way to go. There was a debate on this subject recently and it was pointed out that the UK is 25th out of 27 countries in the EU in uptake of renewables. It is my judgment that gas has a role to play in decarbonising the economy. We may debate the matter later, but I believe that we have wrongly placed some efforts by confusing “decarbonisation” with “renewables”. Decarbonisation is necessary and it is a legal requirement. Some of the renewables targets might not always lead to us making the right decisions about how we decarbonise, and at what rate.

Right now, 50% of the UK’s energy still comes from oil and coal, and although it would not be easy to replace them with gas because that would mean transport

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being sorted out, if we did so we would have a carbon reduction of 30% or 40%, depending on the precise ratio used.

I have mentioned the decarbonisation of transport, and there is a lot of emphasis on electrification and the need for electric cars. That market is moving ahead in a way that this country might not have noticed, with well in excess of 10 million gas-powered cars in the world. Interestingly, the leading countries are some of the developing ones, such as Pakistan, which is making a big effort to decarbonise.

Probably the single most important observation about shale gas—unconventional gas—is that we do not have much of it in the UK compared with other types of energy. I heard the remarks of my hon. Friend the Member for South Suffolk (Mr Yeo), and I agree that it is a fluid thing. I have here a report by the United States Energy Information Administration, which states that the UK has something like one tenth of 1% of the total technically recoverable reserves of unconventional gas. Although the UK might have a lot—the numbers are significant—it is the impact on the gas market in the world around us that will affect us.

We have talked a little about the US experience. The hon. Member for Southampton, Test (Dr Whitehead) said that five or 10 years ago the US was building liquefied natural gas terminals to import the gas, and it is now talking about applying for licences to change them into export terminals. That is because of shale gas; we have already mentioned that unconventional gas prices in the US are now 50% of gas prices in Europe. There is a great phrase in the Select Committee report: “The tyranny of distance”. Gas prices are regionally based, and what happens in the US does not have to happen in Europe or Asia.

It is worth my giving my perspective on what really drives gas prices. I worked in the industry for a large part of my life and I never wholly understood how gas got priced. Gas used to just come off when the oil came off and was then burnt and sold. The truth is that gas has historically been priced under long-term contracts as a percentage of oil price, which is why the gas and the oil prices are linked in the various regions. Oil has gone up and therefore gas has gone up with it. That relationship needs to be decoupled and, notwithstanding the comments that we heard earlier, I postulate that shale gas provides the opportunity for that to occur, whether or not we exploit the gas in the UK. If such decoupling does occur, there will be a set of impacts. We are at the end of the Russian gas pipeline. Poland and France are the big places for shale gas in Europe, apparently with many times the reserves that we have.

Dr Whitehead: Does the hon. Gentleman accept that notwithstanding what he properly identifies as the relationship between gas and oil prices, and the possibility of decoupling, shale gas—unconventional gas—is a relatively expensive part of the gas extraction spectrum, and will remain so regardless of what its plentifulness suggests? Therefore, if gas prices decouple and go below a certain point, the gas becomes uneconomical to extract and regulates itself to some extent on the basis of its unconventionality.

David Mowat: I certainly accept that the market will determine gas prices and that if the price drops to a point at which it is not viable to take the gas out, it

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cannot be done. It appears possible, however, for the US to exploit and develop shale gas for $4 per million cubic feet, compared with $10 here. That is the market price, because people are obviously making a profit at that level. I can see absolutely no reason why that would not happen in France and Poland, and indeed in Russia. The report interestingly misses out South Africa—it might just be that things are moving very quickly. The Department of Energy and Climate Change figures for worldwide unconventional gas show that South Africa has one of the larger residues.

The thrust of what I am saying is that we have to be careful with all these environmental issues, and we must, of course, bring people with us. The market will happen anyway, and it could be a significant game changer and a big assistance to the decarbonisation effort that we must make in the shorter—and potentially the longer—term. One reason why unconventional gas has perhaps had a slightly weaker profile than it might otherwise have done is that it has a lot of natural enemies. The green lobby does not like it because it is a fossil fuel, and it is worried that it will take our attention away from renewables, and big oil does not like it because it is not at the forefront of this as it has been west of Shetland, for example. I used to work in the industry, but had not heard of Cuadrilla until a couple of years ago—Cuadrilla and IGas are new companies.

Shale gas is not a panacea—nothing is. But it could make a bigger contribution than is perhaps implied by the tone of the Select Committee report and the remarks that we have heard today. I was taken by a line in paragraph 76 of the report, which sums things up rather well:

“we can’t make the perfect the enemy of the good”.

3.47 pm

Tom Greatrex (Rutherglen and Hamilton West) (Lab/Co-op): It is a pleasure to serve under your chairmanship, Mr Gale, and to take part in this important debate after some excellent contributions from members of the Select Committee and other Members with a local or professional interest. I commend the introduction to the debate by the Chair of the Committee, the hon. Member for South Suffolk (Mr Yeo). From the few short months at the start of this Parliament when I was a member of his Committee, I know that he is an excellent Chair and does very good work.

As Members have said, the debate is important and timely, given the shale gas issues that are high profile following the publication yesterday of the Cuadrilla report. In the three weeks since I was appointed shadow Energy Minister, I have heard Lord Lawson describe shale gas as the biggest energy bonanza since the discovery of North sea oil, the hon. Member for Brighton, Pavilion (Caroline Lucas)—I am surprised that she is not here today—say, “So what?” to the estimate of 200 trillion cubic feet of reserves under the Lancashire coast, and others say that we are in danger of encountering an environmental disaster. We are, therefore, not short of opinions on the matter, but there are some fundamental issues raised in the report and the Government’s response that I want briefly to address.

The Chair of the Committee has set out that the report is generally favourable towards onshore shale gas exploration and does not accept the case for a moratorium.

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Since the publication of the Committee’s report, the report on the unusual seismic activity in the early summer has been published, and I wonder whether the tone of the Committee’s report might have been more cautious had it been published subsequent to that. The conclusion of the Cuadrilla report, that it was highly probably that the tremors were triggered by fracking but that somehow that is unlikely to be repeated with further exploration, was interesting. Those two statements appear, on first examination, to be incompatible at the very least, and it is important that the Government look carefully at that when they take that report and the work by the British Geological Survey into account. During the past 24 hours, I have heard from geologists who take a different view. It is important that we look into it. However, I also accept that, due to their scale, the tremors were not significant and had no structural impact.

[Mr Dai Havard in the Chair]

I know that additional work will be undertaken and reported to the Minister. I broadly support that approach. As the Select Committee report highlights, public confidence is needed in the safety regime attached to the exploration of shale and other unconventional gases. Public confidence is important. Given the scale of the concerns expressed by groups, individuals and people who live in that part of Lancashire, it is important that the Government’s response takes account of those anxieties.

The other, equally valid side of the issue is that the public rightly expect that new developments, technologies and techniques should be used if they can help balance our energy mix, increase a potential indigenous energy source, reduce carbon emissions and address security of supply. The public also have an interest in getting a better energy mix, as it could affect the rate of increase in the prices that they pay.

Many claims have been made that shale gas can make a huge difference to all those issues, although some seem to be the result of a crude extrapolation of the American experience to the UK, which I do not think is valid. My hon. Friend the Member for Southampton, Test (Dr Whitehead) alluded to that in his remarks. The Chair of the Select Committee repeated today something that I have heard him say before: shale is a game changer whose significance has yet to be fully understood. He might be right, but estimates differ as to the amount of shale gas available on and offshore. That requires significant investigation.

As technology develops and techniques become more practised, the economics might also become more attractive. There are plenty of examples of North sea oilfields that have exceeded their claimed lifetime by several years. One particular field has almost doubled its lifetime and is still going strong due to the dual impact of technological and drilling advances and the fact that complex extraction is more economically viable than it was 20 or 25 years ago.

Shale gas involves many unknowns, which is why robust and effective environmental protection and monitoring are important, as the Select Committee report makes clear. I would like reassurance after reading the Minister’s oral evidence in the report. I hesitate to use the word “complacent”, but I am not sure that he demonstrated enough of the urgency required about

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providing public confidence and ensuring that we can exploit the technology more fully as we learn more about it.

The Select Committee report makes the point that many aspects of protection and monitoring need clarifying. The offshore regime for the North sea is widely accepted as world-leading. That is due at least in part to Piper Alpha. Many improvements in offshore health and safety and environmental protection were introduced as direct results of that tragedy or, indirectly, through inspections and monitoring by the Health and Safety Executive, the Environment Agency and, in Scottish waters, by the Scottish Environment Protection Agency.

I understand the industry’s reluctance to move towards European regulation of offshore activity, particularly when the need is questionable, but onshore fracking involves factors that must be taken into account, such as water use, recycling, the effect on the water table, the toxicity of the chemical mix, the potential for leaching into drinking water supplies and disruption to the landscape. People have concerns about a range of issues, as the Minister will know. That is why public confidence requires detailed work, as well as investor certainty and environmental standards. Those three aspects can be joined to provide reassurance.

Even if shale gas from onshore sites in the UK does not become more significant in the months and years ahead—my hunch is that it probably will—it is likely to do so in other parts of mainland Europe, most notably Poland. Given those concerns and the present moratorium in France, it would be useful to understand whether the Minister has had discussions with his European counterparts about those issues. Also, what progress has he made in discussions with the HSE, the Environment Agency and his counterparts in the Department for Communities and Local Government, which is responsible for planning policy, to discuss how those agencies can work together to provide the right level of reassurance for those with environmental and community concerns? It would also be useful to hear more about the expected time scale for the Government’s response to the report that they received yesterday and the additional geological survey work that I understand will follow from that.

In addition to regulation, I will mention a couple of issues regarding the potential impact of shale gas on other aspects of energy policy. Other Members have referred to its impact on renewable investment in coal-fired power and on the future of carbon capture and storage. It has been argued that shale gas will precipitate a further dash for gas, and that gas with lower levels of carbon emissions than coal will be at the forefront as a bridging energy, as renewable tidal, wave and other technologies develop. However, there are concerns that that might affect renewable developments and disincentivise the necessary continuing investment.

To risk moving into the subject of our second debate, that would have an impact on the Government’s electricity market reform proposals and some of the assumptions underpinning the various features of that policy. Gas emissions might be lower than those of other fossil fuels, but they will always be higher than those of renewables, and the fracking process is energy intensive. If, as the Select Committee report anticipates, the emergence of shale gas leads to a switch from coal to gas for

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electricity generation, and to new gas power stations being built close to source, the development of CCS for gas will become increasingly urgent.

However, that should not rule out or relegate the importance of CCS for coal following the Longannet decision a couple of weeks ago. Both are important, and there is a pressing need for urgency in Government progress on alternative demonstration projects in both coal and gas. As BP pulled out from the earlier iteration of a potential CCS project in Peterhead, I hope that the amended project, with SSE leading the consortium, will be considered as a viable option for that technology, given its proximity to deep storage sites in the North sea. What impact do the Government anticipate that the move to shale gas will have on the coal industry and the potential for clean coal? That would be interesting to know.

The hon. Member for Lancaster and Fleetwood (Eric Ollerenshaw) mentioned community benefit. On offshore wind licensing, I note that, particularly in parts of Scotland, moves are being made towards direct community benefit. Perhaps that could go alongside the potential benefits in terms of jobs. As he or an hon. Member intervening on him remarked, sometimes job figures are projected that are not necessarily matched in reality.

Several other countries around the world are more advanced in their experience and understanding of onshore shale gas and the horizontal drilling techniques required to release its energy. They are still learning, as are we. The small tremors in Lancashire in early summer were a signal to the Government and regulators that there are still unknown environmental consequences from fracking, just as there are still potential wider implications for energy policies developed in the past couple of years, which might become redundant or less relevant as a result. It is important for the Government to take on board those concerns, examine the evidence carefully and perhaps press for additional scientific evidence if initial investigations are not conclusive. A cautious approach is right.

The Select Committee report sets out the potential but balances it with the need for effective regulatory oversight to ensure public confidence. I implore the Government to take those wise messages on board and work quickly to put protections in place, so that if the game is to change, to borrow a phrase, the right kit is laid out by the captain in the changing rooms before taking the wicket. Without that confidence, shale gas might become an opportunity missed rather than realised.

3.59 pm

The Minister of State, Department of Energy and Climate Change (Charles Hendry): It is a pleasure to serve under your chairmanship, Mr Havard, and to respond to what has been an excellent debate. It has been extremely balanced, thoughtful and constructive—words that are also applicable to the Chairman of the Energy and Climate Change Committee, my hon. Friend the Member for South Suffolk (Mr Yeo). The way in which he introduced the debate was helpful. As he said, the issue could not be more topical. It is very much in the news this week, and the way in which it has been debated in this House shows that we are all keen to understand the technology’s potential, but to also ensure

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that it is developed in a way that takes account of the highest standards in both environmental and safety legislation.

I shall begin by explaining how we as a Government believe that shale gas fits into the potential energy mix in the United Kingdom. Even as we move towards a less carbon-intensive future, oil and gas will undoubtedly remain a vital part of our energy system for many years to come. In that context, the Government are committed to ensuring that we maximise economic recovery of UK hydrocarbon resources, both offshore and onshore. I should say in response to my hon. Friend the Member for Southport (John Pugh) that we see it as in our national interest to maximise returns on our indigenous resources. We are moving to a situation where we are net importers of gas, and there is a multi-billion-pound benefit to the UK economy from optimising our resources. We are keen for that to happen.

We have taken a careful approach to unconventional gas resources. We support industry’s endeavours in pursuing such energy sources, as long as they are technically and economically viable, and have regard to the full protection of the environment. The hon. Member for Rutherglen and Hamilton West (Tom Greatrex) implied that the Government have been verging on the complacent and have not shown urgency, before going on to say that we have one of the best regimes in the world in terms of offshore regulation. It is that exact same regime that will apply to onshore developments and shale gas developments. There will be no difference between the standards that will have to be met by any company wishing to have a licence to explore onshore for shale gas, and those that would have to be met if they were looking for oil and gas resources elsewhere in our territorial waters. That consistency and absoluteness in standards is important.

The hon. Gentleman also asked about our discussions with European Ministers. It is clear that there are different views across the European Union about the role that shale gas can play. Moratoriums have been introduced in France and in other countries, and Poland is actively looking at how shale gas can be explored, but we are in no doubt about the importance of having national regulation rather than EU regulation, because we believe that our standards would only be diminished—this has been shown to be the case in relation to North sea regulation—if we changed to an international approach to regulation.

All onshore oil and gas projects, including shale gas exploration, require planning permission from the appropriate planning authority. The hon. Gentleman listed a number of issues about which he has concerns, but they are all already taken into account by the environmental consents that are necessary. He also asked about our contact with the Health and Safety Executive. The most important thing of all about the relationship with the HSE is that it is not accountable to me. The Department of Energy and Climate Change and I issue the licences, but we do not control the health and safety legislation; that is independent. It is a core part of our safety approach in the United Kingdom, and it comes under a different Department. We have a good working relationship with the HSE and need to understand its concerns, but I am not in a position to put any pressure on it—nor would I seek to—to meet other objectives.

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Any applications are subject to environmental regulation by the relevant environmental agency—the Environment Agency in England and Wales, or the equivalent bodies in Scotland and Northern Ireland—and are subject to safety regulation by the HSE or its Northern Ireland equivalent. They also require specific consent from the Department of Energy and Climate Change before drilling activities can commence. My hon. Friend the Member for Southport expressed concern about the use in our response of the words “may” or “might”. The reason for that is that we do not take a cast-iron approach to every single application. Every single application will be judged on its merits, and if there are issues that require us to go further, we will of course do so. For every single licence application, we will be certain that the most stringent environmental applications and measures can be put in place.

The hon. Member for Southampton, Test (Dr Whitehead) and my hon. Friend the Member for Southport have asked about the abandonment of wells. In the granting of a licence, the local authority, which is also involved in the process, can require a provision to be made for restoration if a project is abandoned.

Grahame M. Morris (Easington) (Lab): The Minister is always generous in giving way, and I appreciate that. Will he offer a clarification on environmental controls? The hon. Member for Tamworth (Christopher Pincher) raised a point about the depth of the fracking compared with the depth of the water table, and said that there was no prospect of contamination. I understand the point that the hon. Member for South Suffolk (Mr Yeo) made about the integrity of the wells, but in the north-east we have had huge problems with mine water pollution and contamination. Will that be a consideration for the Environment Agency in determining licences?

Charles Hendry: The hon. Gentleman raises an important point. One thing that struck both the Select Committee and me when we visited Cuadrilla’s site in Lancashire was the immense separation distance—it is thousands of feet—between the water table and the area where the shale gas was being sought. The company drills below the level of the water table, and then encases it in concrete. Only then, when it has been sealed, do they drill further down to where the shale gas is. The point has been made clearly that, as long as the well retains its integrity, it is very difficult to see how there can be any contamination of the water supplies. The way in which the operation will be carried out and the standards that will be used will be an absolutely integral part of deciding whether a licence should be issued. We do not just look at the application in itself; the company must have the technical and economic expertise to carry out the work to the required standards. There is no question of cutting corners. We are adamant that the highest environmental standards must be applied as the technology progresses.

These are early days for shale gas in the United Kingdom. The pattern of development in a new basin in the US has shown that there are roughly three phases. The first is the initial discovery and the appraisal wells to prove the presence of the gas and the size of the resource. The second is an experimental phase, in which explorers work out the best techniques for obtaining

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production from the particular shale, which may take some time. The third is the production phase, in which an efficient pattern of production wells can be drilled to extract the gas on a commercial basis. Clearly, we in the United Kingdom are right at the beginning of the process. Only a handful of wells have been drilled, and their production potential has yet to be quantified.

Although it is encouraging that Cuadrilla believes that it has good quantities of shale gas in the rocks underlying its licence area in Lancashire, it is, as I have said, still very early days for shale gas in the UK, and I think that it is too early to know how significant shale gas may prove to be as a contributor to future UK energy supplies.

When he opened the debate, my hon. Friend the Member for South Suffolk talked about the reserves in place. At this stage, we should recognise that these are not reserves but gas in place. The recoverable amount is a small proportion—often about 10%—of the total reserves. Nevertheless, even with a large estimate of gas in place, the reserves could still be significant.

Comparisons have been made with the United States. It is right to recognise that there are significant differences in the United Kingdom that will determine the pace at which things progress here. As the hon. Member for Southampton, Test, has said, there are differences in the ownership of mineral rights, which is a critical issue for development. There are some 30,000 operational shale gas wells in the United States, so the scale is of an entirely different magnitude from anything that we can foresee happening in the United Kingdom.

That leads us to the issue of price separation, to which my hon. Friend the Member for Warrington South (David Mowat) referred. We have seen the separation of gas and oil prices in the United States. My assessment is that that will happen gradually over time in Europe, probably in the middle of this decade. Shale gas in the UK will not be a driver of that. We will look at developments with great interest, but at the moment we should be cautious. We are in no doubt that gas and shale gas can be part of the mix as we progress.

We are aware of reports from the United States of issues linked to some shale gas projects. There have been reports of contamination of water supplies with either methane or fracking fluids, and of explosions, and there is dramatic footage of householders setting light to their kitchen taps, as has been mentioned. I had not heard about the blackbirds tumbling from the sky, but we will, of course, set up a taskforce immediately to assess whether that needs further consideration—actually, we will not. If there is clear evidence that that is a problem—

Mr Dai Havard (in the Chair): Joy and disappointment for the Royal Society for the Protection of Birds, all in one sentence.

Charles Hendry: All in one sentence. There is certainly joy for the Treasury at the end of that sentence, when I did not commit to setting up a massive taskforce to investigate something that is as yet unproven.

Where those reports have been investigated by the relevant US regulators, the evidence so far is that no incident of water contamination by methane has been attributed to fracking operations, and that the few

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incidents of contamination of water resources with fracking fluids were caused by accidents on the surface, rather than underground leaks of any kind. Also, some incidents of methane contamination of water were not attributable to oil or gas operations at all; they were caused by methane of recent biological origin.

However, there were cases in which gas leaks had occurred. That was attributed to unsatisfactory well construction or cementing. That confirms, if any confirmation were needed, that drilling for shale gas—like drilling for any other kind of oil or gas—is a hazardous operation that requires careful and consistent regulation. However, that also supports the Committee’s conclusions that there is no evidence that the fracking process itself poses a direct risk to underground water resources, and that the risks are related to the integrity of the well and are not different from those encountered in conventional oil and gas extraction.

The Government and their regulatory agencies will continue to study the experience already gained in north America and its relevance to shale gas activities in the UK. It is, of course, necessary to make the point that UK conditions, including its geology and its regulatory framework, are different, and there will not necessarily be any straightforward read-across. However, it is clearly important that we learn from the US experience, as the Committee recommended.

The UK has a long history of onshore gas exploration, and the range of techniques employed in shale gas drilling and testing operations are broadly similar to those used for orthodox gas production. We have a strong regulatory safety and environmental regime in place, administered by the HSE, the relevant environmental agencies and my Department, to ensure that potential risks to safety or the environment are properly managed. There is scrutiny by the regulators, and that is why we believe that shale operations, as permitted in the UK, are safe, and that there is currently no justification for a moratorium. Again, we welcome the support of the Committee on that point.

I can confirm that, as the Committee recommended, current shale gas operations in the UK are being carefully monitored by the HSE, the Environment Agency and my Department. The three regulators are regularly in touch to exchange information and to ensure effective co-ordination. According to present information, the Environment Agency does not consider that current operations pose a risk to the environment, including water resources. Of course, that has been an important theme of the debate. Some 99.7% of the fluid used in fracking operations is water. If anyone wished to use additives in that process, they would need to be absolutely clear about what those additives were. They would also have to satisfy us on how those water resources will be handled when they are brought back up to the surface. Stringent measures are in place to ensure that they cannot be disposed of without being taken through a proper process. If there is any spillage, a plastic membrane is on the ground to ensure that the fluid cannot leak back into the ground.

The debate has also focused on the seismic tremors experienced near Blackpool in April and May. Following those tremors, DECC had discussions with Cuadrilla and agreed that a pause in hydraulic fracture operations would be appropriate, so that a better understanding can be gained of the cause of the seismic events.

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The hon. Member for Wansbeck (Ian Lavery) is an absolute expert when it comes to understanding the nature of the issues. He has spent his entire career in an industry that is involved in underground development. There is much expertise that we can transfer from the coal industry in order to understand the impact of different underground activities. However, I assure the hon. Gentleman that there is often a strong connection between coal mining and seismic activity—much greater than there is in relation to fracking. Of course, those processes take place at different levels. Shale gas development normally takes place thousands of feet further below the surface than coal mining, so there are additional reasons for believing that such operations can be done in a safe and proper way.

A geo-mechanical study undertaken by the company was delivered to my Department yesterday. The implications of that report will be reviewed very carefully in consultation with the British Geological Survey, independent experts and the other key regulators before any decision on the resumption of hydraulic fracture operations is made. I reassure the Committee and others that the highest environmental standards and measures, which we believe will carry public support, will be part of that process. I pay tribute to my Parliamentary Private Secretary, my hon. Friend the Member for Fylde (Mark Menzies), who has been assiduous in understanding the issues. The approach that he has called for—the close monitoring of operations and a gradual progression of shale development—is the right way forward.

In conclusion, this has been a very useful discussion of the issues raised by the Committee’s report. I stress that we have a robust system in place in the United Kingdom to ensure that shale gas activities—and other oil and gas activities—are conducted safely and with proper protection of the environment. When significant new issues such as seismic tremors arise, we must ensure that we have the capacity to deal with them effectively. I assure hon. Members that we will continue to maintain that rigorous approach.

Mr Dai Havard (in the Chair): Before I call Mr Yeo, I should explain that Mr Gale and I have taken an innovative approach today. The reports under consideration come from the same Select Committee, and there is clearly an interrelationship between them, so Mr Yeo will now be asked to do a very interesting thing: make his summary remarks on the last debate and coincidentally introduce the next subject. I call Mr Yeo.

4.16 pm

Mr Yeo: I welcome you to the Chair, Mr Havard. I am grateful for the flexibility that Mr Gale and you have shown in guiding us on how to proceed with the debate. If those hon. Members who were unable to speak during the shale gas debate catch your eye later, they might be able to mention shale gas in relation to electricity market reform.

This debate has shown Parliament absolutely at its best, which is probably why not a single word will be reported in the press or by the electronic media. Hon. Members of all parties have made a genuine effort, and have come to the issue from very different standpoints. Some have a long professional background in the industries, some have a constituency interest, and others are Committee members. Everyone has been trying to find the right

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solution to a new and interesting but complex issue. If we get the right outcome, it could be very beneficial for Britain. I hope that it might also be economically beneficial to areas where shale gas can be recovered. There could be some benefits in terms of employment, although it is easy for those to be exaggerated. That is all extremely good news.

I pay tribute to my Select Committee colleagues, who are a hard-working bunch. They have taken a thoughtful approach, and I am pleased that we have mostly managed to achieve a bipartisan outcome. We have shown that a bipartisan approach can be achieved on such very important issues—even between colleagues who have slightly different views. The issues have long-term consequences, which makes that approach particularly valuable.

On shale gas, the differences of opinion are more of emphasis than of principle. This is very much a work in progress for the Government, the industry and probably the Committee. I am sure that we will want to return to the matter. I am grateful to colleagues who have praised the Committee’s work and the report. I hope that those comments will be noted by the staff who have assisted us in our endeavours.

I welcome the Minister’s reference to the fact that seismic events also occur as a result of coal-mining operations, and not just because of fracking. We must consider the issues in a general context. I am grateful to him for reminding me of the difference between gas in place and actual reserves. I may have loosely confused the terms when I was speaking. I did not mean to; I understand the difference, which is very important.

I am grateful to my hon. Friend the Member for Warrington South (David Mowat) for rightly distinguishing between the low-carbon and renewables objectives, which also, rather unhelpfully, sometimes get confused. I would like more emphasis on low-carbon targets, and perhaps less emphasis on renewables, because we must focus on emissions reduction.

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Electricity Market Reform

[Relevant documents: Fourth Report from the Ener gy and Climate Change Committee, Session 2010-11, HC 742, and the Government r esponse, HC 1448.]

4.18 pm

Mr Tim Yeo (South Suffolk) (Con): I remind hon. Members of my entry in the Register of Members’ Financial Interests, which relates to a number of businesses in the energy and transport industry.

This debate is also timely. Electricity market reform is very much on the agenda of policy makers, industries, non-governmental organisations and even consumers. We are in a crucial period for energy policy decisions. As I mentioned in the previous debate, the three drivers—independence and security, emissions reductions and price—will be uppermost in our minds. In addition, the consequences of the decisions taken during this Parliament will be far-reaching and long-lasting. With that in mind, I believe that the principles of EMR are right, and I congratulate the Government on moving substantially in the right direction after a period when energy policy was at a bit of a standstill in the UK and time was lost unnecessarily.

With a quarter of our electricity-generating capacity shutting down in the next decade as old coal and nuclear power stations close, more than £100 billion of investment will be needed to build the equivalent of 20 large power stations and to create a new low-carbon energy infrastructure. In the longer term, by 2050, electricity demand is likely to double as more transport and heating is shifted on to the electricity grid.

Let me straight away address emissions reductions, which are the second driver of policy. A clear target for decarbonisation would increase certainty. The Government’s goal to largely decarbonise the power sector by 2030 is a bit too vague for my liking. The Energy and Climate Change Committee’s report recommends that the Government should set a specific target of 50 grams of carbon dioxide emissions per kilowatt-hour by 2030, and should also set out a clear trajectory on how Britain should reach that target. I regret that the Government have so far not accepted those recommendations, but merely reiterated their intention that the sector be largely decarbonised by 2030.

As important as a clear target for decarbonisation is the need for a stable policy framework. Another priority for Government must now be to create confidence for investors quickly, but without setting the level of renewables obligation certificates, feed-in tariffs and other incentives for low-carbon energy at levels that are so generous that the subsidies become unaffordable. The huge spend of more than £100 billion may be beyond the resources of the big six energy companies, so Britain must compete for energy investment in a global financial market at a time when many other countries are also seeking huge funds to increase their electricity-generating capacity. For many years, the major utilities have financed renewable projects as well, but their balance sheets are now being loaded up with increasing levels of debt at a time when there are competing investment opportunities and when prices are under pressure. The challenges of financing the new investment that is needed, especially in low-carbon technologies, are formidable.

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The main mechanism for creating certain returns for low-carbon electricity generators in the long term will be feed-in tariffs. The White Paper has improved the proposals for feed-in tariffs, again reflecting the recommendations from the Committee:

“different levels of Feed-in Tariff…are required to support technologies at different levels of maturity and with different financing needs.”

We also said that the Government

“should set out conditions under which it would shift to an auction-based process in the future.”

The White Paper suggests a move to an auction-based approach. It accepts the need to begin with technology-specific auctions before moving to a general low-carbon option in the longer term. It suggests that technology-specific auctions or tenders will start by 2017, and that greater competition between the technologies will be introduced in the 2020s. Again, I support that approach and look forward to learning more details in due course. I invite the Minister to set out the thinking behind those dates if he can. For flexible and base load carbon generation, feed-in tariffs with contracts for difference will be used on a reference price, such as the annual electricity price.

Detail about how that reference price will be calculated is very important and eagerly awaited. For intermittent low-carbon generation, average prices are generally a problem, because when they are generating wholesale prices tend to be low. The best prices are clearly likely to be when the wind is not blowing. Basing the top-up for intermittent generators on the market price they actually receive, rather than an average, would give more certainty, although that might also have cost implications. In the meantime, against the background of rising concern about consumer prices, I invite the Minister to explain how he hopes to ensure that the levels of support offered by the feed-in tariffs will also be economically efficient and affordable.

It is important that lessons are learned from recent experience with ROCs and small scale feed-in tariffs. The Committee’s report recommends that the process of setting subsidies should be transparent. Levels must be set for a defined period, with clear triggers that would activate a review if levels need to be reassessed so that investors are not taken by surprise. The report also states that there must be a clear mechanism to allow levels of subsidy to shift automatically in response to changes in the cost of low-carbon technologies. The contracts for difference regime provides an umbrella mechanism, under which the levels of support for each technology can be set. This makes it possible to stimulate the deployment of different low-carbon technologies by adjusting the strike price. However, I hope that Ministers avoid the temptation to tinker with the regime too often early in the process through too many early reviews of support levels. The regime is open to that, but I hope that that temptation will be avoided. I therefore invite the Minister to put in place an automatic mechanism for feed-in tariff strike prices to respond to changes in cost and thus avoid the problems seen recently with the solar PV feed-in tariffs.

Will the Minister set out in advance the dates when the Government will review the feed-in tariff levels and make a commitment to avoid early reviews? We also need the right kind of institution to implement the feed-in tariffs. The report concludes that the Department of Energy and Climate Change must identify which

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institution will be given the power to create appropriate contracts and set this up as quickly as possible. If that role is not taken on by Ofgem, a shadow body should be set up in advance of legislation. The agency must be totally independent and not susceptible to political influence.

The Government appear to have agreed to this recommendation, however the details of the kind of institution that will be counterparty for the feed-in tariffs are still rather scarce. Will the Minister shed more light on the details of this institution, and on how responsibility will be divided between the feed-in tariffs institution and the Government? Who will actually decide the levels of support for different low-carbon technologies and the overall energy mix?

On the assumption that substantial investment in low-carbon generation will take place, the problem of intermittency must also be addressed. New capacity is required to fill the gap when generation shuts down, but the capacity mechanism proposed may not be available soon enough to achieve that. In future, however, we are likely to have more inflexible and intermittent generation. Some premium payment may be needed to ensure that enough flexible generation is available to meet demand. The White Paper does not present a finished design for a capacity mechanism, but it sets out two options: a “targeted mechanism” in which a central body would procure a strategic reserve that would not participate in the electricity market and would only be used under “exceptional circumstances”; and the introduction of a “reliability market” to operate alongside the electricity market, in which generators would receive a payment for the availability of capacity, as well as for the actual electricity that they generate. Prices would effectively be capped so that generators receive a predictable but low-level payment from the capacity market in exchange for forgoing very high prices in the electricity market at times of peak demand. Both the targeted mechanism and the capacity market would also be open to demand-side response.

Will the Minister clarify what kind of plant will fill the capacity gap, which could influence the kind of capacity mechanism that is needed? If an existing high-emission plant is expected to run for very short periods—for example, oil-fired generators—an early signal will be needed before these plants shut down. Otherwise, there is a danger that some serviceable plants that could run for a few hours a year will close down and leave us needing new reserve capacity.

I have previously expressed my support for the principle of emissions performance standards. However, the EPS proposed in the White Paper will not have any material impact. An EPS set at 450 grams of carbon dioxide per kilowatt-hour, with exemptions for carbon capture and storage demonstration plants, does not provide any additional environmental benefits beyond existing planning requirements. I note that the Government plan to review the EPS level and the grandfathering arrangements in 2015. I hope that the Minister will recognise the advantages of setting out well in advance how the EPS may become much tighter. Unexpected changes are obviously potentially harmful and a deterrent to investment.

The Government have proposed that the EPS would be grandfathered for a predetermined period—for example, 20 years—rather than for the economic lifetime of a particular plant, as previously suggested. However, even

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a 20-year period would allow gas-fired power stations built before the 2015 review to operate unabated into the 2030s, which could make achieving our long-term climate goals much more difficult. Some of what was said in the previous debate is also relevant to that point. Will the Minister say how often he expects the EPS level to be reviewed, and whether he would consider setting a long-term trajectory based on the carbon targets set in the fourth carbon budget?

Let me turn briefly to the carbon price floor. In Brussels last week, Commission officials seemed rather baffled by this. They felt that it would do nothing to reduce EU emissions, because any reductions would be soaked up under the cap in the trading sector. In effect, there is a danger that it will mean that the UK pays more for its emissions reductions, provides a subsidy to other member states and reduces the economic efficiency of the emissions trading system. Our report recommends that the Government should explain how they plan to deal with the problem of potential windfall profits arising from the introduction of the carbon price support, as set out in the White Paper. We suggest that the White Paper should set out in what circumstances the Government would take action to address any resulting windfall profits. If such measures were to involve a tax, what would happen to the revenues? Would it be matched by an increase in the support for a green investment bank?

In the event, the White Paper left the issue of windfall profits arising from carbon price support untouched, but the Committee believes that such profits could accrue from the increase in electricity prices resulting from the price floor and that they will be enjoyed by current low-carbon generators without any effect on the proportion of low-carbon generation in the short term. Can the Minister comment on the possibility that the carbon price floor would raise electricity bills until the 2020s without stimulating additional emissions reductions?

The dominance of the big six is another topic much in people’s minds. Reform of the wholesale electricity market is now widely regarded as essential. The big six generate around 80% of the electricity in the UK and supply 99% of electricity to retail customers. Does the Minister agree that real competition is needed in the wholesale and supply markets, so that consumers can be confident that the path to a low-carbon economy is being followed in the most efficient way possible? Does he agree that competition is vital to ensure that consumers get a fair deal? The big six are almost unchallenged in the sector, as they dominate both generation and supply, and little room is left for independent or decentralised generation.

The lack of liquidity in the market makes it hard for potential investors to have confidence in the prices that they will receive. Currently, our electricity market—for GB day ahead—trades volumes of around 40 GWh per day, with a further 200 GWh traded through the brokered markets, compared with markets such as Germany and Nordpool, which clear between 500 GWh and 750 GWh each day. An illiquid and opaque wholesale market poses difficulties for new entrants and can weaken the effectiveness of the feed-in tariffs proposed by the Government. Is the Minister

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contemplating a more thorough plan for reform of the wholesale and balancing markets—in other words, real electricity market reform?

In that context, the Committee recommended that the Government incorporate a review of the present trading arrangements and of liquidity in their White Paper, but the Government largely delegated the responsibility to Ofgem, which has subsequently proposed that utilities must auction 20% of their electricity by 2013 in a range of products including near-term supply. It is not clear, however, that the 20% will make a sufficiently big difference. Scottish and Southern’s pledge to sell 100% of its electricity in the spot market is welcome, but the details about how SSE will deal with its futures contracts still need to be spelled out if we are to see what benefit will be achieved.

I entirely share the Government’s reluctance to consider a reference to the Competition Commission because of the delay involved in a report and any conclusions. Ofgem has for a long time been responsible for tackling the problem, but we need to do more to ensure real competition by the time that the EMR proposals are finally implemented in two or three years. The White Paper acknowledged:

“To the extent that there are continued barriers to entry that are not addressed through Ofgem’s actions, the Government will work with all stakeholders to identify appropriate solutions.”

That seems to emphasise the option of more Government intervention if Ofgem’s liquidity reforms are insufficient.

My Committee also argued that the EMR proposals could be jeopardised by the lack of competition. A liquid market with clear price transparency is particularly important for small suppliers and generators, and we argued that a strong reference price would need to be given by the market to give confidence to small suppliers wishing to invest, and to give a credible strike price for the contracts for difference. We were glad to hear that the Secretary of State has taken up our call to break up the dominance of the big six. However, leaving the responsibility for improving the sector to Ofgem does not guarantee that that will happen. The Government’s response stated:

“To the extent that there are continued barriers to entry that are not addressed through Ofgem’s actions, the Government will work with all stakeholders to identify appropriate solutions.”

Can Ministers explain when they will judge whether Ofgem has been successful in addressing the barriers to entry, and on what basis they will make that judgment?

Recently, the energy sector has been delivering investment of only £6 billion or £7 billion each year, according to Ernst and Young, and uncertainty about or delays in implementing EMR might even reduce that figure. Will the Minister tell us how much investment there has been in the past year, since the EMR proposals were first mooted? Does he believe that we are on track to achieve the £200 billion figure widely quoted as necessary? If we continue to attract less than £10 billion a year through till 2014, that will leave quite a big burden for the remainder of the 2010s.

Time is short and several of my colleagues wish to contribute to the debate, so I shall conclude. I hope that the Government recognise the urgency of reaching conclusions in the EMR debate, because we are in danger of creating a period of hiatus for investment. I am disappointed that the timetable for publishing the

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new energy Bill, on which my Committee has been invited to conduct pre-legislative scrutiny, appears to be slipping a bit, and important chunks of the Bill might not even be available in time to scrutinise. However, I look forward to what my colleagues and the Minister have to say.

Mr Dai Havard (in the Chair): In my estimation, we probably have about 25 minutes for a general debate to leave enough time for the Opposition spokesman and the Minister to speak and for Mr Yeo to reply, should he wish to have a few minutes at the end. Perhaps hon. Members will take that into consideration.

4.36 pm

Barry Gardiner (Brent North) (Lab): My pleasure at speaking under you as Chair, Mr Havard, is exceeded only by my awe at having to follow my own Chairman of the Select Committee, the hon. Member for South Suffolk (Mr Yeo), who in his 16 or 17 minutes did not canter but gallop through the entire report in the most comprehensive fashion.

I often think of the Minister, for whom I have the greatest respect, as sitting in his Department twiddling a Rubik’s cube. The trouble is that someone has peeled one of the colours off this particular Rubik’s cube and put the wrong colour in its place. No matter how hard he tries to get the six sides all looking as they should, the task is pretty impossible. I do not underestimate the challenge faced by the Minister.

We need to replace 25% of our existing generating plant by 2020 merely to keep the lights on—that is one side of the Rubik’s cube. We are obliged by the European Union to have 30% of our electricity come from renewable sources by 2020—currently it is only 7%—and that is another side of the cube, as is energy consumption in the UK being set to double by 2050 if we continue with business as usual. We also need to tackle fuel poverty and to keep prices low, and that is a big side of the Rubik’s cube. We need to decarbonise our economy to combat climate change—yet another side. The sixth side is that we need to incentivise £200 billion of investment in new capacity and infrastructure in the space of only nine years. The puzzle is intractable indeed.

Take any two of those sides at random, such as the renewables obligation and low fuel prices. Professor Dieter Helm, in his evidence to the Committee, dismissed the Government’s projection of only minimal rises in customers’ bills by 2020. He told the Select Committee that to think that energy efficiency and other demand reduction measures could balance the increased costs of low-carbon supply to the extent that the effect on consumers’ bills would be only 2%,

“is again really stretching one’s imagination.”

Let us pick another two sides of the cube: what of delivering £200 billion-worth of infrastructure and of decarbonising our economy? Investment analyst Peter Atherton told the Committee that

“it is going to be extraordinarily difficult to get non-recourse debt into new nuclear in the UK. That basically means that it all has to be done on balance sheet.”

The Government’s strategy is market driven. It is predicated on getting the right incentives and believing that the market will then arrive at the correct solutions.

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There are four pillars. Feed-in tariffs will incentivise at two levels. First, by encouraging microgeneration and paying people for the energy they feed into the grid through their solar panels and domestic wind turbines. No doubt we will come back to solar panels later. Secondly, by giving a long-term contract to large-scale low-carbon generators like offshore wind farms. This will guarantee a better price to them in comparison with carbon-intensive generators such as coal or gas-fired power stations. Those are the “FITs”.

Carbon price support is like a tax on carbon, as the Chairman of the Energy and Climate Change Committee said. It simply makes the cost of generating electricity from fossil fuels more expensive, and that means that carbon-free generation like wind becomes relatively more attractive the higher the Government set the carbon price.

Capacity payments, the third of the four pillars, are the price the Government are willing to pay to ensure that back-up is always available. The system needs flexible generation that can respond to the peaks of demand and any gaps in supply. They propose payments to generators that will give them increased certainty of revenues if they guarantee to be available when other supply is not—for instance, when the wind does not blow.

Emissions performance standards is the fourth of the pillars: the final tool in the Government’s incentives box. In reality, the EPS is more a disincentive, because it simply proposes a ban on any generator emitting more than a certain level of CO2 per kWh. The Government want to set that limit at 600 grams of CO2 per kWh. In practice, this would stop only unabated coal—the coal-fired power stations that did not have CCS fitted to reduce their emissions. It would still be enough to allow gas-fired stations. That is not good enough, given the Committee Chairman’s earlier remarks about adopting the Committee’s fourth carbon budget with targets of between 40 grams and 60 grams per kWh.

If the banking crisis should have told politicians anything, it is this: a strategy of “incentivise and then sit back” ignores the fact that markets need more than incentives. Markets need certainty, capacity and regulation. Peter Atherton put it nicely when he told the Committee:

“I warn you that it is not a question of making the rewards more and more, because the more you make the rewards, the less trust investors will have that those rewards are going to be sustainable.”

He went on:

“There are really five big risks: planning, construction, power price, operation and decommissioning.”

The mistake that the Government appear to be making is to think that by putting greater and greater incentives on power price, they can resolve all the problems that need to come within electricity market reform.

The EMR set out three high-level objectives: decarbonisation of the electricity sector, energy security and affordability. I wish to focus for a moment on affordability, because it is becoming—certainly for my colleagues—one of the biggest issues that we find on the doorstep. One in every four households in the UK is now classed as fuel-poor. A fuel-poor household is defined as one where the expenditure required to maintain adequate warmth exceeds 10% of household income.

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It is a measure of the number of households needing to make impossible decisions on expenditure just to meet their basic human needs.

If we look across Europe, there is no pan-European definition of fuel poverty. In other countries, fuel poverty might fall within general poverty alleviation programmes, or it may simply not be recognised as a major problem. Cross-country comparisons therefore are difficult and they need to employ indicators such as the winter variation in mortality levels or the number of people in arrears with their utility bill payments.

The Labour Government brought in winter fuel payments for the elderly to tackle fuel poverty, and no doubt my colleagues will point to figures that show that excess winter deaths plummeted from almost 50,000 in 1999-2000 to 25,000 in 2009-10. The truth is that while Labour can claim real success by acting to increase household income, if we look at the figures over an extended period, it becomes evident that the net effect of our winter payments strategy was only to hold winter deaths broadly static when otherwise they might have increased. If one goes back to 1993-94, one sees that excess winter deaths were again 28,630. In 1994-95, the figure was 29,720. It rose to a peak in 1999-2000, but in 2007-08 it came down to 27,480. That shows the danger of focusing on just one aspect of a problem.

Winter mortality in other European countries reveals some surprising trends. The countries with the highest winter death rate are Portugal and Spain. That is counter-intuitive, but easy to explain when one considers the low level of home insulation. What emerges clearly from such comparisons is that there is a strong correlation between thermal standards in housing and excess winter deaths. That excess winter mortality is almost twice as high in England as in Finland or Germany cannot be directly attributed to weather. However, precisely because of its cold climate, Finland already has very demanding thermal insulation requirements.

By contrast, the coalition Government have just introduced their warm home discount scheme where energy suppliers will be obliged to give rebates of £250 million in 2011-12, rising to £310 million in 2014-15, to vulnerable customers. It is astonishing that the UK continues to focus on financial solutions to what is essentially a technical problem of building standards. On the Minister’s overview of the industry, I urge him not to repeat the mistake of which I have already accused him once this afternoon by adopting a single focus solution to a problem. I fear that is what happens.

The Government have also failed to control the soaring costs of energy charged by the big six utility companies. Again, the Chairman of the Committee made strong reference to this in his remarks, because it is a major focus of our report. Household bills have increased on average by 71% in just five years. The latest attempts by Government to reform the electricity market once again let those companies off the hook by failing to break up the vertical integration of the companies.

Vertical integration allows a utility company to generate the electricity under one arm of the company, which it sells through an intermediary—often offshore—which they also own, and then on-sells to another arm of the corporation, which supplies it to us as the consumer. The result is a total lack of transparency in the true cost

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of electricity. All the big six operate similar structures, which prevent real competition and stop new entrants coming into the market.

When the Committee Chairman mentioned the big six and the break-up of the vertical integration of the market, he alluded to the announcement by Scottish and Southern. It is important to try to appreciate why what sounded like a major announcement from Scottish and Southern to auction all its electricity to household suppliers on a wholesale market is perhaps not the concession or big move that might have at first been perceived. One small supplier that it was supposed to help said that the move was “cosmetic” and will do little to help small suppliers gain market share. That is because the Scottish and Southern Energy Group is freeing up only short-term energy and not the long-term market on which small suppliers rely.

The big six gas and electricity firms buy and sell energy on the wholesale market, but energy is traded in two ways—first on the day-ahead price, which is where SSE said it will auction all its energy, and secondly, by smaller energy firms that trade with a longer view, buying up enough energy for up to two years so that they can guarantee a price for customers. The markets are complex and subject to many external factors that can affect price. First Utility, a small company, says that it buys less than 1% of its wholesale energy on the day-ahead market, and claims that smaller, newer suppliers buy wholesale energy on a much longer-term basis. That is why the move from SSE that the Chairman of the Committee mentioned will not free up the market and help liquidity in the way suggested.

Lack of skills is a problem in driving the investment that we need in industry. It is one thing to get £200 billion of investment, but providing the skills to deliver that is a much greater challenge. The Minister must respond clearly and tell the Chamber how he proposes to make skills available to meet the demand should such investment be obtained.

Mr Dai Havard (in the Chair): Order. I would like to start the winding-up speeches at about five past five and other hon. Members wish to speak. I appreciate that it is a complex report and that huge areas need to be discussed, but I appeal to the hon. Gentleman’s internal discipline.

Barry Gardiner: I apologise, Mr Havard; I thought that we were working to a slightly different time scale than that outlined, so I will rapidly bring my remarks to a close. I must, however, focus on this week’s events and the change in regulation. I do not suggest that the Government are wrong to change the tariff structure and bring it in line with the levy, but they should do it at the end of March next year when the review was originally planned. By bringing the move forward by a meagre four months, the Government have reinforced a perception in the markets and business that they cannot be trusted to deliver a stable regulatory framework. The Minister shakes his head but he knows that to be true. He also knows that he will be subject to judicial review. Some companies are losing up to 45,000 workers, and many will “JR” the Government’s decision because there is a consultation period that extends 11 days beyond the deadline at which the change of tariffs will come into effect. That is dishonest and the Government are wrong to go down that route.

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4.53 pm

David Mowat (Warrington South) (Con): I have already spoken this afternoon, so I will be brief to let the hon. Member for Southampton, Test (Dr Whitehead) contribute to the debate. I liked the Rubik’s cube analogy that we have just heard; I will not add to that although I want to raise a couple of points that have not yet been discussed. We have spoken a little about fuel poverty, but we have not specifically mentioned energy-intensive industries. I know that proposals on that are to be published and I await them with interest. It is a major problem. I was recently told that INEOS in Runcorn uses about as much electricity as Liverpool. That is a continuum; it is not a discrete industry, and to a greater or lesser extent, all industry uses electricity. At a time when we are rebalancing our economy, it is worth noting that a unit of GDP obtained from manufacturing will always require more energy than one obtained from services.

I have two specific points. First, paragraph 37 on page 15 of the report states:

“It is important that the Electricity Market Reform package is geared to deliver our renewables targets as well as our decarbonisation objectives.”

The Government agreed with that conclusion and although I looked carefully at the logic behind it to try to find evidence for it, I could not. Cutting 80% of our carbon emissions by 2050 is a difficult challenge, and I am concerned that we are introducing subsidiary targets that will make it harder. Of course renewables are part of the solution, and nothing in my remarks should imply otherwise, but if we elevate renewables over and above other methods of reducing carbon, including nuclear power and a little bit of gas, we could be driven to make wrong decisions. I think that to an extent we are doing just that.

We have just heard an exchange about the cost of solar power, which is still high. A finding by the Parliamentary Office of Science and Technology and Cambridge university suggested that, over its lifecycle, solar power uses three times as much carbon as nuclear power, including the manufacturing cost of PV cells. I support the objectives of decarbonisation, but I wonder whether some of the renewables objectives could be a distraction.

My second comment on the report links to the previous point about fuel poverty. We have a problem with cost, which we are ducking. The danger of doing that is that it could become a cumulative issue, meaning that we will never address head-on the question of why the costs involved may be a price worth paying. We have heard in previous debates about the numbers of people who are dying in our country from fuel-related issues such as hypothermia—I think I heard the figure of 2,500 a year. Page 61 of the report implies that the EMR reforms, which I broadly support as a sensible way of achieving our objective, will have a maximum impact on energy prices over three decades of 7%—that is the highest number on the chart. That figure is based on a set of assumptions that I could not find and that I am not sure have been published. Unless we take seriously the extra costs associated with some of our actions in terms of interfering with the market, we will lose popular support for some of the things we are rightly trying to do.

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4.57 pm

Dr Alan Whitehead (Southampton, Test) (Lab): I will limit my remarks to one or two points. One disadvantage of having such a knowledgeable, far-sighted and competent Committee Chair is that after he has spoken there are few sensible contributions left to make. I will, therefore, confine my remarks to one or two less sensible points, which I hope will add something to the debate.

In the Green Paper, and certainly in the subsequent White Paper published after the Committee’s report, one must look a long way to find comments on electricity market reform. Although the White Paper addresses a range of topics, such as capacity, the carbon floor price and energy performance standards, its central oddity is that it leaves the electricity markets as they were designed 10 years ago under NETA—the new electricity trading arrangements. It leaves the electricity markets in pretty much the same place, with the same assumptions and mechanisms. However, it countenances a very different landscape as far as electricity trading is concerned.

When NETA was set up, there was a substantial number of wholesalers selling and retailers buying. That is no longer remotely the case—not by conspiracy, but through the accretion of suppliers, generators and retailers into the big six. By accident, what has come about is, in effect, a cartel—we have to say that—that essentially hedges, using the strategies that my hon. Friend the Member for Brent North (Barry Gardiner) mentioned: it buys on the futures market and sells to itself, using the same market mechanisms, and therefore pretty much bypasses most of the things that NETA was originally set up to do.

When NETA was set up 10 years ago, it was carbon-blind. Its purpose was to secure, among other things, the cheapest price between wholesale and retail. In the early stages, it looked as though it was substantially succeeding in doing that, until other factors took over. However, there was the emergence of what one might call the other things that are central to the electricity market reform White Paper. To some extent, they were mechanisms that mediated that central electricity market. The renewables obligation, for example, was a mechanism attached to the original NETA/BETTA system to bring renewables to market; to underpin emerging technologies; and, in an echo of the recent debate on feed-in tariffs for solar photovoltaics, to recognise that over time the obligations may change as the technologies come to market. Nevertheless, the aim was to underpin those technologies in the first place.

Now, as hon. Members have said, we need to decarbonise our electricity market rapidly and invest substantially, not just in replacing capacity but in providing additional capacity, because of the nature of the capacity that we are bringing on board as far as the low-carbon market is concerned. We are talking about perhaps £200 billion in investment. All but two of the big six companies have pretty much borrowed up to the limit of their balance sheets, so we need important mechanisms to secure not just the good running of the market, but low-carbon investment on the basis of good value for customers. I do not underestimate at all the breadth of the challenge implied by the electricity market reforms.

There are various things in the reform. The central electricity market remaining must have a substantial question mark against it, with regard to whether it is fit

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for purpose as one of the central mechanisms driving all the demands forward. I think—evidence was submitted to the Select Committee on this—that a single purchaser pool of some description is a necessary way of dealing with the issues of cartelisation and the lack of transparency in the wholesale market that has emerged. There must also be a question mark against the contract for difference as set out in the White Paper.

Barry Gardiner: I absolutely agree with what my hon. Friend is saying. Will he say something about liquidity and the ability of smaller companies to enter the market with regard to the changes that he is discussing?

Dr Whitehead: My hon. Friend has just stressed that point. Given that I have about one minute left, expatiating on liquidity to any great extent is probably beyond my abilities. However, he is absolutely right to raise the question of liquidity in the market and the fact that as a result of the lack of liquidity, small companies are pretty much shut out from gaining a foothold in the market. Whatever is done about the big six, that is a very important issue.

Finally, I want to emphasise two things. First, the contract for difference as currently proposed conflates mature technology, the overall costs of which will not change, with emerging technology, where costs may well change. That is to say, it rewards, and particularly in the future will reward, old nuclear technology, as well as new nuclear power stations, for their output. That seems—the Committee alluded to this—a considerable concern, given the pronouncements that continue to be made that the Government are in favour of new nuclear but with no public subsidy. It is necessary at this stage to say either that there will be no public subsidy—that nuclear will not be rewarded for being a mature technology in the way that emerging technologies are, but will take its chance in the market—or that we need to do something about public subsidies for nuclear, for reasons that may be perfectly honourable to consider, and we must be up front and deal with that. Electricity market reform continues to fudge that essential choice that we have to make.

Secondly, we have to enter into capacity payments with a clear understanding of demand-side analysis, which is substantially missing from the proposals in the electricity market reform White Paper. We need to consider capacity payments for energy efficiency and reduction in output, and in relation to things such as interconnectors and electricity storage, which will be an essential part of a balanced, very low carbon economy that takes serious account of the demand side as well as the supply side.

Trying to deal with the entire landscape of electricity market reform in eight minutes flat was a difficult challenge. I hope that I have contributed a few thoughts to the debate, and I look forward to the Minister’s response to a number of issues that hon. Members and I have raised.

Mr Dai Havard (in the Chair): I hope that we can give the Minister and Mr Yeo sufficient time to respond to the debate.

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5.7 pm

Tom Greatrex (Rutherglen and Hamilton West) (Lab/Co-op): I will endeavour to be brief to provide that time, but I want to say a few things. I welcome the report and the clarity that it brings, because it puts very technical issues into relatively plain English. I congratulate the Select Committee on doing that. I am conscious that in coming months, when the energy Bill is published, the Minister and I will have plenty of opportunities to get into the weeds of these issues, so I do not intend to speak for long.

My hon. Friend the Member for Brent North (Barry Gardiner) outlined a number of the issues arising from the EMR process, as well as some of the omissions from the EMR proposals. I will touch on a couple of issues. I want to re-emphasise the most glaring issue, which has been referred to by the Chair of the Committee, the hon. Member for South Suffolk (Mr Yeo), and by other hon. Members—the omission from the EMR proposals of reform of the wholesale electricity market. I hope that between the White Paper and the Bill, the Government will look to deal with that, or others may well do so, because it is a pressing issue. It has come to the fore in recent weeks, and we know the reasons why. Those reasons have been acknowledged by some of the energy companies themselves. In particular, Ian Marchant of SSE has been candid in acknowledging that there is a trust issue. They have a trust issue because the market in which they are operating and the behaviours that go alongside it bear the hallmarks, in some respects, of a cartel. That is unsatisfactory and needs to be dealt with. The Committee report rightly highlights the proposals from Ofgem in relation to the 20% figure as relatively timid, and much more substantial work can be done on that. I am sure that the Minister will appreciate the support from the Opposition if he attempts to deal with some of those issues or, if not, we will find a way of giving him the opportunity to address those issues in the next few weeks.

I want briefly to touch on carbon price support, which the report is critical of. As my hon. Friend the Member for Southampton, Test (Dr Whitehead) has noted, the report reflects on the issues regarding the encouragement of new as opposed to older development. The report states that carbon price support

“will not influence investment decisions until 2018 at the earliest…Until then, the Carbon Price Support represents little more than an additional energy tax, which will be passed on to consumers.”

The hon. Member for Warrington South (David Mowat) has referred to energy-intensive industries. That is an important issue, particularly with the impact that the carbon floor price could have on some of those industries. I have a constituency interest in the issue, as do many other hon. Members. It is important to ensure, as the Select Committee warns, that UK companies are not disadvantaged in the long term compared with their counterparts in the EU and more widely across the world. I know that the Chancellor is seeking to address that issue in his growth statement at the end of the month, and I implore the Government to look seriously at the impact. I know of energy-intensive companies in my constituency that contribute to other objectives set out in the report and in the EMR process—for example, manufacturers of offshore wind turbine parts—and those companies might end up going to other parts of the world, causing the UK to lose growth and jobs.

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Other aspects of energy policy will need to change and feed into the time scale of the reform. The Minister touched on one of them when we debated the potential changes regarding shale gas, and I want to refer to another, transmission charging. I know that the Minister now knows the arguments well. The Select Committee report points out that the TransmiT review will have an impact on the development of renewables, the siting of such developments and their attraction in association with the ROCs regime.

I know that the Minister is aware of the way in which such arguments are sometimes used to support a particular political agenda. The issue is not necessarily about discriminating against one part of the country, but it is a fact that the transmission charging regime was established in a pre-renewables world. That needs to change. I hope that if the outcome of Ofgem’s review is too timid, the Minister will use his powers to ensure that that is addressed to provide the right signals and basis for the market.

Finally, the Select Committee report notes:

“‘Affordable’ electricity in the short term cannot be achieved at the expense of meeting the other objectives of Electricity Market Reform. Lower prices cannot be a primary driver of energy policy, but developing greener and more secure sources of electricity needs to be accompanied by sound social policy to protect vulnerable consumers.”

We have seen a change in recent months that perhaps calls some of the sentiments behind that statement into question. While it is important to consider the security of supply and decarbonisation, we must always keep the people across the country who are struggling to meet energy bills at the forefront of our minds. The issue is not about a small number of people in fuel poverty, because it affects families and businesses up and down the country. Too often, in some of our discussions, we overlook the impact on consumers. We must ensure that we do not do that when reforming the electricity market and as the Bill progresses in the next Session.

5.13 pm

The Minister of State, Department of Energy and Climate Change (Charles Hendry): We have had an interesting debate. This is one of the rare occasions where one can say that we should have had more time to have a debate on energy; we would happily fill a much longer time scale. That says a great deal about the complexity of the issues, the knowledge of many Members on both sides of the House and our joint determination to try to reach the right conclusions.

Mr Dai Havard (in the Chair): At one point, Minister, I seemed to have managed to stop time, but I cannot stretch time. Carry on.

Charles Hendry: I know that you, Mr Havard, are capable of so many miracles and magical things that we thought that nothing was beyond your capabilities.