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Lord Ezra: My Lords, I was really, I thought, supporting what the noble Lord, Lord Jenkin, said. All of us were saying that we want a clearly defined framework and look forward to seeing it in the White Paper.
Lord Sainsbury of Turville: My Lords, if that is the case I take back my comments. I thought that the noble Lord was harking back. He seemed to say constantly that he wanted governments to take decisions about which energy sources should have priority, where decisions should be made about investment, and so on. That is not the role of government. As the noble Lord, Lord Jenkin, rightly pointed out, the role of government is to provide a co-ordinated and coherent policy framework in which the decisions are made by private industry.
I say to the noble Lord, Lord Tombs, that it is not an answer to have an expert commission to decide what the body should be. We have debated the matter a great deal over the past 50 years. We have a system now: the question is whether it provides the right strategic mechanisms or whether we should seek to change it. If the noble Lords, Lord Patten and Lord Tombs, are looking to the chairmanship of an expert body to resolve that question, it will probably be in vain. However, what I say will not come as any surprise to them.
Privatisation released electricity companies to invest and to innovate in ways that were previously impossible. Companies, not government, now made key investment decisions. That allowed managements to make many good decisions and savings, which regulation passed on to consumers. They also made some mistakes. The key difference is that in this situation the private sector takes the risk, makes the returns when things go well, and makes losses when things go wrong.
The electricity industry now operates in a market environment, but also, it must be stressed, within a framework designed by the Government to ensure that our policy objectives are delivered. We see four such objectives, which, until this debate, I thought were uncontroversial. The objectives are those that the noble Baroness, Lady Miller, stated clearly. They are competitive prices, security of supply, a low-carbon future, and addressing the problems of the fuel poor.
I was surprised that the noble Lord, Lord Jenkin, did not mention competitive prices in his three objectives. He seemed to start by giving approval to market forces, and then complained about prices coming down, which I would have thought it was hoped competitive market forces would produce. He was concerned about the closure of redundant capacity. If one wants a quiet life and no change, the thing to do is to have a planned economy and accept all the inefficiencies that go with it. However, if one brings market forces into areas such as energy policy, one will get changes. One will get situations such as that involving British Energy. One will get changes such as those that have happened on combined heat and power because electricity prices have come down. One will get situationsI say this to the noble Lord, Lord Stoddartwhere the value of a company changes. That is the nature of market forces.
Lord Jenkin of Roding: My Lords, I thank the noble Lord for giving way. Inevitably we are constrained by time, but on a previous occasion I warned the Government of the dangers of running the electricity market on the basis of short-run marginal cost. As the noble Lord will know from his own experience, to run a business by pricing based on short-run marginal costs is the surest way to bankruptcy. That is what I am concerned about. I hope that either the Minister today or the White Paper will address that. Prices have fallen by 40 per cent. Look at the damage that has been caused.
Lord Sainsbury of Turville: My Lords, I accept that there will be momentsanyone who has worked in industry will know thiswhen prices in the marketplace do not give good returns. One has to ask the question whether the prices we had before were the right prices. Of course they were if one wanted to keep large amounts of redundant capacity in place. But if one accepts the principle of a market economy, one has to accept that prices will reflect supply and demand and there will be periods when prices fall and one does not make highly desirable levels of profitability. That is the nature of the market. Frankly, the market will respond with people taking action on capacity to bring it into line with the supply. If one does not want that, one must go back to some kind of planned economy.
The point I want to make was that as well as the electricity market now being part of the market, it is also co-ordinated, both on a day-to-day basis and more strategically by a number of bodies. First, the DTI is the ministry responsible for policy towards the electricity industry and is the sponsor department of Ofgem.
Ofgem of course is the major body responsible for economic regulation of the gas and electricity industry in Great Britain. It operates under the direction and governance of the Gas and Electricity Markets Authority, which sets all major decisions and policy priorities. There is also the National Grid Company, Transco plc, which, as the owner of the licensed electricity transmission company in England and Wales and the main licensed gas transporter in Britain, co-ordinates the electricityand now also the gasmarket under the rules set up by Ofgem and the DTI.
So strategic decisions are not left only to the market. The Government maintain responsibility for the overall framework. We have put in place measures to shape the strategic framework and to keep that framework under review.
On coming to power we rebalanced the regulatory system in favour of the consumer and established Ofgem to better co-ordinate gas and electricity regulation. We created the network operating companies, which have been much under the spotlight in recent months, to underpin competition and to focus management on their core responsibility. We have also underpinned the fledgling retail market with new wholesale electricity trading arrangements (NETA) and made other changes to reduce market power.
A number of noble Lords, including the noble Lord, Lord Tombs, believe that NETA has been causing what I think the noble Lord referred to as a situation of "chaos", although I felt that the only evidence he produced was that prices had fallen sharply. I do not regard that as necessarily a sign of chaos. The fact that companies had to adjust their strategies does not seem to be a chaotic situation but one that is highly desirable in the circumstances.
The noble Lords, Lord Tombs and Lord Stoddart, were concerned about foreign ownership. Foreign owned utilities are subject to exactly the same level and scope of regulation as those owned by their UK parents. They pay tax to the UK Treasury and must compete in our market. This situation of acquisitions is not one way. British utility companies own assets abroad; the most obvious being National Grid Transco itself, which is now one of the largest operators in New England. Our utilities, like our economy at large, are rapidly beginning to operate as part of a European and indeed global economy in which we are all interdependent.
I agree very much with the noble Lord, Lord Patten, that we need to keep open options on energy sources. I further agree that we simply do not know which energy sources or which combination of energy sources will best meet our four objectives in the future. Therefore, I believe that the key thing is to keep those options open, to put in the right framework and, in particular, to give the incentives for areas such as renewables and then to leave the matter to the market to choose which option within that framework, with its social obligations, provides the right targets.
I say to the noble Earl, Lord Mar and Kellie, that it must be clear from our policies that we are wholly supportive of renewables. Again, they have to compete in the marketplace. But we have given them huge incentives in terms of the climate change levy and the renewables obligation, which is a very strict and important obligation on electricity companies. As to hydro schemes, the problem is that we are simply using all the hydro power that there is in Scotland. There is very little scope to have more.
The noble Lord, Lord Jenkin, and the noble Baroness, Lady Miller, raised the question of nuclear waste. I agree with them: this is an issue that we must get on with. On the other hand, we must face up to the fact that the previous policy failed in 1997 because it did not have a broad level of support. Therefore, having a consultation period to try and get support is a critical part of the whole process.
The security of electricity supply was raised by a number of noble Lords. As I have said previously in the House, the situation for this coming winter is that we have a reasonable level of capacity. We have about 17.5 per cent spare capacity. There is also mothballed capacity, but I accept that that takes some time to be recovered. The longer-term issues have been assessed in the White Paper. Also last year we set up the joint energy security of supply working group so that officials from the DTI, Ofgem and National Grid Transco could carefully monitor developments affecting security of gas and electricity supplies.