The hon. Member for Brent North (Barry Gardiner) made an interesting comparison to a Rubik’s cube, but I think of the issue as more of a complicated jigsaw. With a Rubik’s cube one makes a move and moves everything else out of place, whereas with a jigsaw, one gradually puts in place the elements that build up the whole picture. One has to do that in a structured and sensible
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way, because some parts are more complicated than others. Nevertheless, we are keen to take forward the challenge.
What we are about here is securing £110 billion of investment over this decade. The £200 billion includes investment in gas infrastructure, the wires and the pipes, but it is still an enormous investment. It is twice the rate of investment every year of this decade than has happened in the past decade. We need to recognise that the old market structure did not bring forward the necessary investment—it sweated assets to try to keep costs down—and could not price in the cost of carbon, which is one of the big issues that we have had to address. Therefore, I do not see market reform as being about subsidising nuclear, but about how we make all forms of low carbon feasible, affordable and economically attractive.
The Chair of the Select Committee on Energy and Climate Change, my hon. Friend the Member for South Suffolk (Mr Yeo), asked a number of questions when introducing the debate—it was like a bullet train going through the energy terrain. A comprehensive range of issues and questions were raised. He asked how much investment we have seen in the past year. Just in the renewables sector, in six weeks between 1 September and early October, we saw £800 million of new investment, offering nearly 2,000 new jobs, and we expect that to pick up. However, he has had to accept that much of the investment is lumpy—a nuclear power station needs £5 billion or £6 billion of investment, and an offshore wind farm needs billions of pounds of investment. Therefore, there will not be a straightforward progression to 2020, but we will have big steps up over time. We are quite clear that without the measures we are putting in place, it will not be achievable.
My hon. Friend also asked why we had not gone for a target such as 50 grams per kilowatt-hour for the electricity sector by 2030. We will set out our formal response to the Energy and Climate Change Committee later in the year. We recognise, through the work that we have done, that there are a number of ways to reach our 2050 requirement, which is that we need to have reduced our carbon emissions by 80%. There is not just one way to do that, and we need to look at what is the best way. At the end of the day, we need to do it in a way that is cheapest for consumers. A common theme in this brief debate has been to ask how we deliver that in a way that will protect consumers, both industrial consumers and people in their own homes.
We have covered a number of measures regarding market reform, and I want to address each of them briefly. We have adopted a system of feed-in tariffs with contracts for difference, because we believe that that is the best way of getting the best deal for consumers and giving the greatest certainty to investors. By clawing back when the wholesale price is high and paying more when it is low, the system is more predictable, and it is easier to bring in investors from outside.
One of the things that Mr Atherton from Citi, who has been referred to, has not fully taken account of is that we are trying to take the system closer to a regulated rate of return. Many institutional investors, such as sovereign wealth funds around the world, are now looking at the opportunities to invest in the UK energy sector precisely because of the structure that is being put in place and the fact that we think that the CFD mechanism delivers the policy more securely than any other mechanism.
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My hon. Friend the Member for South Suffolk asked us not to tinker with the policy as it progresses. The history of previous Energy Ministers suggests that I will most certainly be long gone by the time anyone gets a chance to tinker, but if I am still in the position at the time, I guarantee to him that the whole system is designed to stop tinkering. It is not just an agreement or Government policy, but a long-term contract that tells investors over 20, 30 and more years how much they will be paid for each unit of electricity generated by a certain technology. That means that we need to build a system that is as close to automatic as possible in order to recognise how the costs are coming down, so that new entrants coming in beyond a certain point understand how they will be remunerated in the process. The policy will also deliver investment, particularly in renewable energy, at a cost lower than that of the existing renewable obligation. As the policy supports all low-carbon technologies, it will make a greater contribution to our decarbonisation targets than is otherwise possible.
The discussions, particularly my hon. Friend’s remarks, also focused on the emissions performance standard. My intention with such a standard will be to give a long-term signal for what we believe is acceptable and to start to set out how that degression might take place when it is considered. Above all, it has to be a driver for investment. It is easy to set it in place in a way that kills off investment decisions. How we have done it, which is to say that it will not be reconsidered before 2015 and that investments happening before that will have perhaps 20 years of assured production on a certain emissions level, will strike the right balance.
I was intrigued by the comments my hon. Friend the Member for South Suffolk made in the earlier part of the debate. He sees the role for shale gas as having been underestimated. He said that we should be having much more shale gas and gas in general in the mix, with perhaps less energy from renewables, offset by the structure that he was calling for in the second part of the debate, which would be subject to an emissions performance standard. We will not get the investment that he wants to see in new gas generation if there is a much tighter emissions performance standard biting at an earlier stage on gas generation.
We have also said that the capacity mechanism should be part of this process, because we recognise that we need to know exactly how we will keep the lights on at all times of the year, as well as ensuring that there is back-up capacity and, critically, building in that demand-side response, to see whether we can find cleverer ways of dealing with this than building new power stations that will only be used for a small part of the year. If we can find ways of taking demand out of the system during times of particular demand, it will be a big gain for the consumer and save £1 billion on new plant. Clearly, whether that is a new plant or an old plant going for a few hours a day will depend on how that capacity mechanism is structured. We are determined, however, that that demand-side response element should be part of the structure as well.
The final element of the package is the carbon floor price. The carbon floor price is important for giving investors confidence. Currently, if one looks at the history of the European emissions trading scheme, it
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has been impossible to guess where it will be in a few months’ time, let alone in nine years’ time. The people who are making investment decisions that will not come to fruition until the end of the decade need greater clarity. Putting in place a carbon floor price is all part of that process.
The trajectory that we have taken is to show them that we are serious. If we had said, “Yes, there will be a carbon floor price, and it will be introduced by the next Government after the next election, at a level to be established,” nobody would have taken that seriously. The way in which that has been done shows a much greater commitment to giving the industry the clarity that is necessary. A measure of success in this will be whether we can bring new entrants into the market. Improved liquidity will be one of the benchmarks by which we can test whether market reform is working. Undoubtedly, we want to see more liquidity and more players. That is primarily the responsibility of Ofgem, and we know that Ofgem will look at this further if that proves to be necessary. The Government have said that they will act, if necessary, to address those structural barriers.
My final point is on fuel poverty and feed-in tariffs. One cannot, on the one hand, talk about concern for those suffering from higher fuel bills and, on the other, baulk at every measure that is designed to take pressure off their bills. The cost of solar technology has come down by around half since 2008. Degression was always built into it, from the very first brochure, signed off by the right hon. Member for Doncaster North (Edward Miliband), who is now the leader of the Labour party. He said that degression should be part of that process. As the prices have gone down much faster than anyone anticipated, it was right to do that. We know that a domestic installation can be done in a few weeks and had we not acted quickly—if it had been announced that it will come into place in the spring—there would have been a complete explosion in demand and installations, which would have completely destroyed the budget that has been set for this and led to the complete collapse of the industry, because anything after that would have been much more draconian.
Charles Hendry: I fear that this is not an integral part of the debate on market reform and, while I want to respond to the hon. Member for Brent North, we owe it to the Chair of the Select Committee to give him time to come back.
I do not think that, on the one hand, someone can argue on fuel poverty that they want to take pressure off consumers while, on the other hand, opposing the decisions we take to help consumers, such as the billions of pounds taken off the feed-in tariff costs out to 2020. It is not possible to do both.
Barry Gardiner: Will the Minister give way?
Charles Hendry:
I am not going to give way, because I want to give time to the Select Committee Chair. I have spoken for less time than the hon. Member for Brent North, so I hope that he will understand if I do not give way. I am grateful for the advice and input of the Select Committee, and I hope that we can put in place a
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structure that recognises the scale of the challenge, the need to decarbonise and the need to rebuild our energy infrastructure, while doing it at the lowest cost to consumers.
5.24 pm
Mr Yeo: With your permission, Mr Havard, I will comment briefly on what has been said. As the Minister has said, it has been another debate that could easily have gone on for longer, which is a tribute to the well-informed contributions. I want to thank my Select Committee colleagues, the hon. Members for Southampton, Test (Dr Whitehead) and for Brent North (Barry Gardiner), who have made useful comments this afternoon. They are also both exceptionally knowledgeable and experienced in these issues. As far as I am concerned, it makes the work of the Committee a pleasure, as well as often being intellectually stimulating. I think that we can continue to prosper together in addressing these issues.
I was also grateful to my hon. Friend the Member for Warrington South (David Mowat) for mentioning the position of energy-intensive industries, which is a real issue. I know that Ministers have confirmed on this and other occasions that it is very much in their minds. One of the things that we do not want to do in our determination to make Britain one of the leaders in moving towards a lower carbon economy is to destroy the competitive position of successful British businesses. That is a tricky balance to strike, and it will need continued attention.
Many points have been raised, and I will not comment on them all. I fully accept what the Minister has said about the potential conflict between a long-term tightening emissions performance standard and my suggestion that we might see significant investment in gas-fired capacity in the short term. We have to find a way of doing that. Obviously, emissions performance standards, which are applied on a per plant basis, would run into that conflict. If the emissions performance standard was applied to a country’s whole portfolio of generating capacity, that might offer the chance for a mix. It might also be an incentive for some companies that wanted to expand their gas-fired capacity to invest in some low-carbon alternatives. There needs to be a bit of imagination
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applied to how the EPSs could operate in this way, without ruling out the prospect in the near term of some new investment in gas. Of course, the pre-2015 investments will, in any case, be grandfathered for a sufficiently long period for investors to have a return.
I was glad that the Minister confirmed that the Government are keen to see barriers to entry in the market minimised. That is a work in progress. We have to see how Ofgem’s measures apply and whether they are successful. If they are not, we will have to return to that issue urgently, because it is one of the real difficulties, which has blind consequences for consumers as well.
I accept the Minister’s concern about the impact on consumer prices of the cost of various forms of incentive for low-carbon energy. Again, there is a trade-off that we have to reach the right judgment about. We all want to see a substantial, rapid increase in low-carbon electricity generation, but many of those low-carbon technologies require an incentive, which will be either at the cost of taxpayers or, in the present situation, consumers. Those categories are ones that in any case largely overlap.
I want to congratulate the Minister. He has displayed a remarkable grasp of very complex issues in his period as Minister. It is a pleasure to have him before the Select Committee and to hear him on other occasions in the House. He has a real grip, and we get thoughtful and well-informed responses to the questions that we put to him. For that reason, I hope that he will remain in his job for much longer than most of his predecessors, perhaps indeed for the rest of this Parliament. That will enable the Committee to go on engaging with him and means that we can hold him to account for some of the things that he is telling us now in three and a half years’ time.
I am grateful to everyone who has taken part this afternoon. I hope that we have a chance to return to these issues either on the Floor of the House or in another debate in Westminster Hall.