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Grand Committee

Thursday, 12 June 2008.

The Committee met at two o'clock.

[The Deputy Chairman of Committees (Baroness Pitkeathley) in the Chair.]

Energy Bill

(First Day)

Clauses 1 to 3 agreed to.

Baroness Wilcox moved Amendment No. 1:

The noble Baroness said: I am happy to welcome the noble Lord, Lord Davies, to the arena. I understand that he was involved in the Energy Bill the previous time round and therefore brings great experience to our discussion today and throughout the days that we are without the noble Lord, Lord Jones, who is not well. We wish him well and hope to see him soon but, for the mean time, it is very nice to have such a heavyweight team to give in to all our amendments today.

Much of the Second Reading was spent discussing many crucial clauses that are not in the Bill. We seek to address that at the appropriate time. Meanwhile, we must not lose necessary additions or take our eye off what is in the Bill. What is in the Bill is, by and large, welcome and essential. We assure noble Lords that we do not intend to prevent the Bill proceeding through this House in a timely fashion. In order for it to do so we hope that noble Lords will join their open-minded scrutiny efforts with those of Her Majesty’s loyal Opposition to improve the Bill.

No single piece of legislation explicitly provides a framework for offshore gas supplies. We welcome an attempt by the Government to redress this issue. Gas storage is of crucial importance and was not debated comprehensively enough in another place. The UK is the third largest consumer of gas behind the United States and Russia. Recently we have become a net importer of gas and what we import seems likely to constitute half our supply by 2010. This has a substantial impact on our security of supply. As our dependence on foreign supply increases, so does our inability to meet our own demand. With any interruption to the flow in the interconnector, combined with a spike in demand in, say, a particularly cold winter, there is an increasing risk that there will be interruptions in supply. Gas storage is the obvious way to combat this problem.

Thus, it is welcome that the Bill provides for it. Yet what remains unclear is precisely how much is necessary. This amendment does what it says on the tin. It would place a duty on the Secretary of State annually to assess how much gas will need to be stored in order to

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avert such interruptions and make certain that we can provide long-term energy security. This is as self-explanatory as it is necessary. After assessing the appropriate need for storage, this report would outline what is being done to meet the appropriate volume or storage and what still needs to be done to ensure that we have energy security.

The amendment hits right at the heart of what many of the Bill’s provisions are trying to address: the future of the United Kingdom’s energy supply. If we are to understand how we can keep Britain warm and illuminated, we must start with an assessment of the required effort. I beg to move.

Lord Redesdale: I support the spirit of the amendment. I also echo the noble Baroness’s words about the noble Lord, Lord Jones of Birmingham. I wish him a speedy recovery so that he can rejoin the proceedings at a later stage of the Bill.

The report is a good idea, particularly given the present situation with gas storage. Although the country’s ability to store gas and other methods such as those at Milford Haven for the storage of LNG are being increased and we have the storage capacity, it is becoming more apparent that we are not getting the gas to fill it. We talked about the interconnector from Norway. There is a real issue about why the Norwegians are not sending us gas and it is going to the Continent for the moment. I tried to find out why gas is being moved from one part of the Europe to another, but it is very difficult to get information because of contractual law.

Even though we have the capacity to bring gas into the country and are building our storage in this country, whether we actually have the reserves is a major problem. A big problem at the moment is the fact that the cost of gas is rising so dramatically. By the winter, this will have fed through to consumers with the requisite pain and suffering, especially for those who are suffering from fuel poverty at the moment, mainly due to the inability to store gas and we are therefore being dictated to by the spot price of gas on the market—one of the main reasons why we suffered so badly a year and a half ago. A report of this nature would not solve that, but it would help to bring before the House some of the reasoning behind the problems that are being solved in the gas market. There is always the cry that the market will sort them out, but even though we have dealt with some of the physical problems associated with gas storage, we will still have to face the very real problem of not being able to get the gas in the first place and the associated price.

Lord Jenkin of Roding: I support the amendment and very much endorse what my noble friend has said from the Front Bench about the noble Lord, Lord Jones of Birmingham. The amendment gives us an opportunity to reflect a little on some of the problems of increasing the capacity for gas storage. One is very obviously the planning system. No doubt we will be told that this is being addressed in the new Planning Bill. Rather surprisingly, here we are in the middle of June but the Bill has not reached this House yet. Apparently there are delays in another place. I should make it clear, as I have to my colleagues, that something

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along the lines of the Infrastructure Planning Commission is necessary so that Ministers can identify gas storage as a priority, as successive Ministers have already done, that can be fully taken into account in the planning system.

I had experience recently of trying to keep abreast of two onshore gas storage planning applications. I was horrified by the delays, most of which occurred in the local authority and the Department for Communities and Local Government, before a decision could be taken. The second thing that distressed me about both applications was that very clear statements on the priority that should be given to gas storage projects had been made by Alistair Darling when he held the post in the then DTI and since then by Malcolm Wicks. Yet, in both cases, the reference to the priority was only one sentence in the 12-page decision by the Secretary of State at the DCLG. One hopes that that will be changed as a result of the planning legislation, because what is the point of having a government priority for vital infrastructure projects of this sort if when it comes to the planning system no one seems to pay a great deal of attention to it? That is my first point.

Secondly, I draw attention to the charts about gas storage in the winter consultation report, which was published two days ago by the National Grid. It has charts showing the gas storage withdrawals, the amounts from gas storage for 2007-08 and no doubt other noble Lords will have a chance to look at the charts to see what extraordinary peaks there were. That is the purpose of having storage: to be able to deal with peaks of demand that cannot be met by current supply. In the six months from October 2007 to March 2008 there were at least four or five major peaks, each covering a period of a few days when the storage was substantially drawn down, which is what it is for.

As for what it consists of now and the space that is available, by far the biggest storage site is the Rough gas field, which has a capacity of 3.3 thousand million cubic metres of gas. I think that that is right. The others are all very much smaller. There are the medium-range ones at 771 million cubic metres and the LNG storage at about a third of that. Withdrawal rates from all categories are approximately the same, so the difference is that the Rough gas storage provides one with long-term storage, which is extremely valuable, and at the moment the others are short or possibly medium-term storage. A later chart, table B3, shows what the consultation paper suggests may be the capacity and deliverability levels. Again, Rough is by far the biggest, and the deliverability of millions of cubic metres a day, from LNG, from medium-range storage and from Rough are all approximately the same—

Lord O'Neill of Clackmannan: I am grateful to the noble Lord for giving way. I am listening with interest to what he is telling us. Does he envisage the government report that is advocated in the amendment having any more information in it than the report from which he is copiously quoting at present?

Lord Jenkin of Roding: I hope I am not quoting too copiously; I have referred only to two tables, and that is all I am going to do.



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The report shows the huge importance of storage, of which the Government have never made any secret. They want more storage. The question—here I might satisfy the noble Lord—is what the obstacles are to getting more storage. I have already referred to the planning system, and I will not say any more about that. There is the question of the appropriate size of storage. As I said, most onshore storage is only for short and medium-term duration, for the most part in salt caverns. There is in total about 1 billion cubic metres of gas storage capacity—which amounts to only about one-third of the storage at the Rough gas field—installed and operating at present. It is just about sufficient to meet the peak demand which we have at the moment, and it is very necessary that it should be there. Everyone including Ministers—no doubt the Minister will confirm this in his reply—agrees that there is a great need to encourage more offshore long-duration gas storage. There is a range of offshore storage locations, which are mostly available in the southern North Sea and the Irish Sea.

2.15 pm

On the economic issue, it is a paradox that when gas prices are low, no one needs storage, but when gas prices are high, no one can afford to build new storage capacity. The big cost in this is the need to pay for the “cushion gas”; that is, the need to have a certain amount of gas in your storage before you can put any substantial new supplies in, otherwise the system does not work and does not function effectively as a gas storage reservoir. I am told that typical costs would run to between £0.5 billion and £1 billion in the current environment just for the storage of gas on a large offshore facility.

Evidence of that has come to light quite recently. Only yesterday, the Tullow company announced the sale of the Hewett gas field and the onshore gas plant to Eni for £210 million cash. That is a measure of the value of an offshore gas field and of what Eni is prepared to pay for it. It is early days yet but it is thought that Eni might use it to build a new offshore gas storage facility. It is interesting that most of the commentators cannot see that it could be economic and that it could be justified to put the investment in. The announcement is that Eni has bought the gas field and therefore has the reservoir, but it will need to spend a great deal more to turn it into a working offshore gas storage reservoir.

My point about the amendment, and in response to the noble Lord, Lord O’Neill, is that this is what the report has to address. It must not be just the tables of figures that we get from the National Grid and to which I referred a few minutes ago—it may seem like years but it is only minutes. We would expect the report that my noble friend’s amendment calls for to highlight, deal with and discuss the problems and to indicate what the solutions to those problems might be.

The Government will now be able to say, “Look, Eni has paid over £200 million to buy the Hewett gas field and the appropriate onshore facilities, so that shows that the market is working”. This morning, the general view of people in the industry with whom I have been discussing this announcement, which was

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made only yesterday, is that they do not see how it can be economic. There are real problems if one is to get new large storage facilities offshore which are comparable to the Rough gas field. That is the only big gas field and the question is whether there will be more. At the present price of gas, the cost of providing the cushion to turn it into a working reservoir is very steep, to the point where some commentators say that it cannot be economic.

I hope the Minister may be able to give us some answers on that today, but my main point is that this is the kind of thing that the report that my noble friend’s amendment is calling for has to deal with. Without that information, it just becomes another table of figures, as the noble Lord, Lord O’Neill, rightly said. That is not what we are looking for. We are looking for a serious discussion of the problems of getting more gas storage, which is in accordance with the Government’s wishes. I warmly support my noble friend’s amendment.

Lord O'Neill of Clackmannan: I oppose the amendment, not because I do not want information but because the information is already available from a recognised source. Okay, it is a heavily regulated private monopoly—a natural monopoly in a number of respects—but the National Grid’s information is normally regarded as extremely accurate and reliable. It is unlikely that the Government would necessarily be any more accurate or reliable in producing something roughly the same.

The amendment has fundamental flaws arising from certain assumptions. The first is that the Government can give an assessment. I mean no offence to the beleaguered forces of the Civil Service and the various departments responsible for gathering that sort of evidence, but, regardless of political complexion, Governments’ assessments of energy need and demand over the past 50 years have been consistently wrong. They have never been effective in doing so. It was best when we had supplies of coal literally standing outside power stations in good weather and bad. In the event of the industrial dispute in 1984, they were used, as it were, to fight the miners.

The idea that Governments can understand the nature of the level of demand leaves a lot to be desired. I do not see that there much worth in that, particularly when one of the virtues of having a flexible energy portfolio is that if gas is too expensive and you can get clean coal technology, you would switch to coal. You would have to ask why we do not have a report for coal or uranium, or for the reprocessing of spent nuclear fuel.

Lord Jenkin of Roding: The noble Lord will of course recognise that there is a government-imposed minimum storage requirement on petroleum products.

Lord O'Neill of Clackmannan: Yes, there is. It is not all that helpful because when there is a crisis the country just about runs out. The only time that high storage levels—levels such as those in the United States—are any use is when petrol prices are so high that stores are raided to moderate the price levels. My point is that this is guesstimating. Government

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guesstimates dressed up as “the assessment of the appropriate volume”, no matter how pompous the language, are not necessarily more accurate. We may get nothing worth while.

I have long argued that we have not given sufficient weight to the need for gas storage in this country. For many years it was unnecessary; you only needed to turn the tap that much harder so that more gas could come from the North Sea. We no longer have that luxury, which means that we must be more inventive in addressing the issue referred to by the noble Lord, Lord Jenkin. We might have to look at something like capacity payments, as we have in the past, or for coal-fired power stations to be used at specific times of the year, for example. However, that is a rather different issue, an issue of such complexity and seriousness that it will not be resolved by a tuppence ha’penny report coming out once a year and bearing the imprimatur of BERR or whatever government department has the unfortunate responsibility of trying to get the information together. I hope the Government will oppose the amendment.

Lord Woolmer of Leeds: I also convey my best wishes to the noble Lord, Lord Jones of Birmingham, and hope that he can join us fairly soon. I shall touch on the last topic—the question of capacity payments, forecasts and so on. I remember a few years ago, even when we still had 100 per cent North Sea gas supplies, which were clearly running out, one of our energy reviews under Brian Wilson was very dismissive of the need for storage and intervention. That is not that many years ago.

I agree with my noble friend Lord O’Neill that government forecasts of demand have never been right. The very first conference that I attended as a young economist was one forecasting the demand on the supply of coal. The amount of coal that the UK was forecast to need to produce turned out to be massively wrong—and it did every time that the coal industry was reviewed. However, the issue of capacity payment is a real one, and the value of these coal amendments is that they enable us to discuss important questions, rather than the particular wording itself. Are the Government of the view that the marketplace and the market mechanism will be adequate to provide enough storage or do they, given the experience of recent years, feel that some kind of non-market mechanism, such as a capacity payment, might be needed? Is that at all under consideration or review? That would be helpful to know.

Lord Davies of Oldham: I am grateful to all noble Lords who have spoken to the amendment. I am particularly grateful for the kind remarks about my noble friend the Minister. I cannot think of a greater stimulus to his recovery than for him to discover that he has been substituted by me and that I am in his place in dealing with these energy matters. The noble Baroness was kind enough to refer to my experience on the previous Energy Bill, an experience which I think that all those who spoke on the Bill regarded as an unalloyed pleasure throughout its long duration. That was a little while back. I am even worse at history

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than I am at energy and therefore have difficulty recalling that time. Consequently, I apologise for the fact that at fairly short notice I am substituting for what would have been the expert contributions of my noble friend. I, for one, will send him noble Lords’ good wishes, and mine in extenso, that he should return as soon as possible.

The noble Baroness has raised an interesting issue, as shown by the contributions of all noble Lords who have spoken to the amendment. This is clearly an important matter. The amendment seeks to define the volume of onshore gas storage—and I emphasise onshore, although I heard what the noble Lord, Lord Jenkin, said about the offshore position and will talk about that in a moment. But the amendment is about the report on onshore gas storage that will be needed to secure our long-term energy security and ensuring that Government report annually on progress towards achieving it.

The amendment establishes a target. I know that my noble friend Lord O’Neill said it graphically, and I am sure that every Member of the Committee shares with him some doubts about the capacity to establish effective and active targets on this. The Government present an annual report already, which presents the energy markets outlook that gives guidance to the industry. That is rather different from this amendment, which would identify a target. In a sense, it envisages a different principal position from the one that the Government adopt. We believe that the role of government is to establish a regulatory framework and create the right conditions for investment in a fully competitive and transparent market. Well functioning markets are the best way in which to deliver security of energy supplies and to diversify sources, supply routes and import points for energy. That also obtains to gas, which certainly involves the issue of onshore and offshore storage.

2.30 pm

The amendment, however, concentrates on a target for onshore storage. That would interfere with the developing gas market by specifying the appropriate volume of gas to be stored. Within the UK’s energy market, it is not for the Government to specify how much one particular form of gas market flexibility might be appropriate to help secure energy supplies. I hear what the noble Lord, Lord Redesdale, says about anxiety regarding security of supply. We all share that anxiety, particularly in circumstances where our own indigenous sources of energy supply, both gas and oil, are clearly reducing. Of course Governments must be concerned about the issues of security of supply. The question is whether the amendment and the substantial change to the Government’s strategy that it envisages in target-setting for one aspect of the gas market would aid the situation.

In considering which investments to make, companies have to take account of a range of different uncertainties. We all recognise that every provision of energy has a range of expectation to it, some of it very long term as has been indicated. That includes uncertainties about relatively current prices and long-term prices especially

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for fossil fuels. The whole issue of energy demand is subject to great fluctuations. We also have the additional factor of carbon prices.

I believe that this amendment would send the wrong signal to industry that the Government have a clear concept that there is an ideal amount of gas to be stored and that this gas should be stored onshore. That looks like a very partial intrusion into the market without bringing any of the benefits suggested by the noble Baroness in moving the amendment. The noble Lord, Lord Jenkin, concentrated a great deal of his extremely interesting contribution on the problems of gas storage offshore, a very important and costly investment issue. I recognise exactly the points he makes. However, I am not sure whether he was suggesting that the position offshore would be improved by onshore targets in the way suggested by the amendment.


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