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Lord Whitty: It is Winsor v Bloom.

Baroness Miller of Hendon: I thank the Minister. I shall look at that case. I thought that this was a good amendment, but we live and learn. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clauses 142 and 143 agreed to.

Lord Jenkin of Roding moved Amendment No. 131:

"Remit for GEMA to regulate environmental markets

(1) In addition to the regulatory powers conferred on GEMA by the 1989 Act (as amended), GEMA or a body authorised by GEMA, or to whom GEMA shall have the right to delegate any of its functions, shall have power to regulate environmental markets so that such markets are recognised and regulated as markets in their own right, and not only as compliance tools in the regulation of gas and electricity markets.
(2) The power conferred on GEMA by this section shall include a power to regulate, so far as it lies within the competence of the United Kingdom government, environmental markets which will be developed under the European Union Emissions Trading Scheme.
(3) Regulations may be made to define the scope of the power conferred on GEMA by this section, including appropriate enforcement powers."

The noble Lord said: The amendment stands in my name and that of my noble friends. It would introduce a new clause headed:

    "Remit for GEMA to regulate environmental markets".

It is interesting to reflect that the UK has taken a lead internationally in developing and establishing environmental markets. The market in renewable obligation certificates has become an effective instrument for enabling people to be certain that they will derive the benefit from their certificates that they had bargained for—and for companies to sell them on and others to buy them. It is a precursor of the European emissions trading scheme, which is another market that has developed in the environmental field.

The financial services industry in this country can be proud that it was the first to develop that kind of market. Of course there have been other emission trading schemes; for example, 20 years ago in Chicago there was a trading scheme in PM10 particulates. Nevertheless, given the way that the market has developed here, its sophistication and the number of participants, it has certainly established itself.

If these markets are to work well, they need sound regulation and effective compliance measures. In the UK, despite the lead we have taken, it is not clear who is regulating these markets. My inquiries reveal that this is a matter of some concern to those operating in them. I should say that these are substantial markets.

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By 2010, the cash flows from renewable energy, if it achieves 10 per cent of the market, could be worth 2 billion, one third of the value of the cash flow from all electricity generation. Much of that will be subject to the buying and selling of certificates. Thus I make the case that such a market needs to be regulated and to work efficiently.

GEMA, the regulator, has no remit to consider how environmental markets work, including for example the renewable energy market and ROCs, and notwithstanding that these affect energy prices and consumers. GEMA is able to take into account only the effect on the environment of the generation, transmission, distribution and supply of energy, and not vice versa.

One example where Ofgem could make a practical difference to the market is to alter its registry for renewable obligation certificates. Currently, the registry works adequately to provide a compliance mechanism for the obligation and, as such, fulfils Ofgem's present responsibility in the area. But it also means that Ofgem cannot spend resources on anything that would improve the market.

As the European emissions trading scheme and the Kyoto-related markets develop, which they assuredly will, it is ever more important that these environmental markets are recognised as markets in their own right, not just as compliance tools for the energy industries. This is important because improving the efficiency of the environmental market will lead to reduced costs.

Perhaps I may cite an example. When the hole in the buy-out fund appeared following TXU going into administration, the next auction of ROCs achieved a significantly lower price than had been the case before. The result was that ROCs became less attractive and, to that extent, impacted adversely on the Government's targets for achieving renewable energy supplies.

I would argue that it is not enough for GEMA and Ofgem to regulate in the sense of managing the energy industries. They are dealing here with a market in its own right, one that needs to be regulated. In addition to Ofgem's increased regulatory powers in this area, improving environmental markets and having a positive effect on consumers, it will also help the authority to achieve the Government's environmental targets as set out in the White Paper. If an environmental market such as that for ROCs—and there will be others—can be made to work more efficiently, it will become more likely that the goals and targets set by the Government will be met. The costs of meeting any goal will decrease, which means that a given amount of money will go further. It also means that it will become more attractive for players to become involved in the market, increasing its financeability, investment, market activity and liquidity, and reducing costs further.

The case for the proper regulation of the environmental market is strong and now needs to be firmly addressed by the Government. If GEMA is not to regulate it, then who shall it be? Someone will have to take on the regulatory role. Would it be the

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Financial Services Authority? However, it is not familiar with this area of national policy, whereas GEMA is deeply involved and could perfectly well take on the role.

The case for GEMA to do it is that it would be a form of joined-up regulation. As it is involved in the energy market, it could be involved in these environmental markets. The case is now being addressed. And, if I may say to the noble Lord, Lord Triesman, it was addressed by an outside body which is a substantial operator in the market. It is looking for clearer and firmer regulation so as to make the market better. Efficient markets are more attractive to more players. As more players become involved, all the other advantages will flow.

There is much to be said for this amendment. I have discussed it at some length with those who are involved and I have been convinced that something of this kind is necessary. I beg to move.

Lord Whitty: I share the sentiments of the noble Lord, Lord Jenkin, as regards the important and positive role that environment markets can play in meeting environmental objectives, and the need to ensure that the markets operate properly and efficiently and are authentic.

The amendment give GEMA the power to regulate markets and to give environmental credits and certificates—which, as the noble Lord said, means ROCs—the European emissions trading scheme and other trading schemes which may come out of the large combustion plants directive and so forth. There are two issues. First, the amendment would hugely widen Ofgem/GEMA's powers, which are at present based on gas and electricity. The players in these markets cover a wider range of industries and would therefore change the nature of Ofgem/GEMA considerably. Although Ofgem administers a number of environmental programmes and covers an environmental action plan, its main remit is on competition and consumer protection. The participants in trading schemes have a different relationship with consumers and there is a different structure of industry from the gas and electricity industries.

Once the emissions trading scheme is set up, there will also be other structures to regulate those markets. There are two aspects. First, there is the management of the environmental outcome of the market—setting the targets and authenticating the achievements in environmental terms, which in the UK is the Environment Agency—and the propriety of the market and its functioning, which will be the responsibility of the FSA as with other markets. It is true that while the FSA does not have the experience of these markets, which are just developing, it has huge experience of markets as a whole. It would bring that experience to bear.

There are a number of aspects which it would not be immediately appropriate for Ofgem to run or would end up with it clashing with other and more appropriate regulators. There is an underlying question, too: that is, what is the basic remit of Ofgem?

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The noble Lord will know that there have been a number of discussions on whether Ofgem should have more explicit environmental objectives than the current legislation gives it.

There have been many arguments discussing that in the context of the energy White Paper, but the decision was that it should not be broadened into those environmental objectives and that it should be a matter for the government departments and the appropriate environmental regulators. Whether one agrees with that decision or not, that is the legislative position. Therefore, to give Ofgem powers in an area for which it does not have mainstreams in its objectives would seem to me a mismatch of function and role.

The other point on the amendments is that there is a power for Ofgem to delegate its powers to a new body set up specifically for this purpose. It seems to me that if we are considering setting up a new body, specifically in relation to the renewables obligations market, that should be considered in the round rather than tacked on to Ofgem's responsibilities, which run into a number of conflicts in any case.

There may be a case for having a different body regulating the totality of the market. The Committee will know that a review of the obligation is scheduled for 2005–06. Any decisions relating to the regulation of that market are perhaps best left for that, rather than establish it as a knock-on to Ofgem/GEMA's responsibilities under the Bill.

I return to the main point. It would bring the Ofgem/GEMA set-up into an area of industry for which it currently has no wider responsibility. That seems to me to lead to some difficult areas of conflict and lack of clarity. I do not disagree that the Government need to think carefully about the regulation of those markets, particularly as there will be growth in a number of them. However, I do not believe that we should jump to this conclusion and impose the obligation on Ofgem.

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