Energy Bill [Lords]

Public Bill Committee, 17 June 2004.

Standing Committee B

Clause 118 - Discharge of renewables obligation in Great Britain by payment

Brian White (Labour, North East Milton Keynes)

I beg to move amendment No. 1, in

clause 118, page 94, line 33, after 'day', insert 'within the relevant period'.

Jonathan Sayeed (Conservative, Mid Bedfordshire)

With this it will be convenient to discuss the following:

Amendment No. 2, in

clause 118, page 94, line 33, at end insert—

'(1A) After section 32(8) of that Act, insert—

''(8A) In this section and section 32C 'the relevant period' means the period that—

(a) begins with the passing of the Energy Act 2004, and

(b) ends four years after the coming into force of section 32D.''.'.

Amendment No. 3, in

clause 118, page 94, line 38, after 'obligation', insert 'during the relevant period'.

Amendment No. 4, in

clause 118, page 95, line 2, after 'day', insert

'and ending no later than the last day of the relevant period'.

Amendment No. 5, in

clause 118, page 95, line 22, at end insert

'provided that any such period shall end no later than the last day of the relevant period'.

Clause 118 stand part.

Amendment No. 6, in

schedule 23, page 274, line 11, at end insert—

'Section 32C.'.

New clause 1—Discontinuation of provisions for discharge of renewable obligations by payment—

'(1) In section 32(1) of the 1989 Act (renewables obligation), for ''32C'', substitute ''32D''.

(2) After section 32C of that Act insert—

''32D Replacement of provisions for payment as alternative to complying with order under section 32

(1) The Secretary of State shall, within a year of the passing of the Energy Act 2004, lay before Parliament a report on proposals for methods that promote the objectives of the renewables obligation in circumstances where the provisions of an order under section 32 are not complied with other than the method of payments provided for under section 32C.

(2) Section 32C shall cease to have effect at the end of the period of four years after the coming into force of this section.''.'.

New clause 22—Compliance with sections 32 to 32C of the 1989 Act—

'(1) In section 25 of the 1989 Act (orders for securing compliance), in the definition of ''relevant requirement'' in subsection (8), for ''32C'' substitute ''32D''.

(2) In sections 32A(4) and 32A(7) of that Act (which relate to information powers and other functions of GEMA), at end insert ''or to any obligation arising under section 32D''.

(3) After section 32C of the 1989 Act, insert—

''32D Prevention and remedying of default in compliance with sections 32 to 32C

(1) An order under section 32 may provide that an electricity supplier must pay such a sum to the Authority, corresponding to the supply of a given amount of electricity by the supplier in a particular period, as may be—

(a) necessary to make good in aggregate so much of any unrecovered default in the payments referred to in section 32C(1) by other suppliers in relation to previous periods as may be determined by or under the order; and

(b) determined by the Authority and published at least so long before the start of that period as may be specified in the order.

(2) The supplier shall make the payment to the Authority no later than the specified day in relation to that period (''the payment date'').

(3) Any sums received under subsection (1) shall be paid by the Authority to electricity suppliers in accordance with a system of allocation specified in the order.

(4) The system of allocation specified in the order may provide for payments to specified categories of electricity supplier only.

(5) Where the Secretary of State is satisfied that it would be proportionate to do so, and that competition in the supply of electricity would not in consequence be unduly distorted, the order may also make provision as to the form and extent of any measures which a supplier is to take for the purpose of securing, in whole or in part, its discharge of the renewables obligation.

(6) The order may provide that any figures necessary to make or provide for the derivation of any calculation under this section can be estimated by the Authority or the Secretary of State.

(7) The reference to ''make good'' in subsection (1) may include adjustment of sums upwards to reflect accrual of interest, at a rate determined by or under the order, between the times of the defaults in relation to previous periods and the payment date.

(8) This section is without prejudice to the enforcement powers available to the Authority in relation to any provision of section 32 to 32D that is a relevant requirement within the meaning of section 25(8)''.'.

New clause 23—Supplementary provision relating to the renewables obligation—

'(1) In section 32A of the 1989 Act (orders under section 32: supplementary), after subsection (2) insert—

''(2A) An order may provide, in relation to any specified period—

(a) for anything required to be done at a particular time (''the normal time'') by a supplier or the Authority in relation to that period to be done on an interim or partial basis at one or more times prior to the normal time;

(b) where something is so done, for the position to be reconciled at the normal time by reference to the underlying requirement that would have existed but for this subsection, and for any appropriate adjustment to be made; and

(c) that any figures necessary to make or provide for the derivation of any calculation under this section (other than the assessment at the normal time of the underlying requirement) can be estimated by the supplier, the Authority, or the Secretary of State.

(2B) The order may provide, in relation to an appropriate adjustment, for interest to be included over such periods, at such rates, and in such circumstances as may be determined by or under the order.''

(2) After subsection (6) of that section, insert—

''(6A) Any function of the Authority under the order may be exercised by, or by employees or agents of, such person (if any) as may be authorised in that behalf by the Authority.

(6B) In relation to such exercise of functions—

(a) a function so exercised shall be treated for all purposes as if it had been exercised by the Authority;

(b) the Authority may place such restrictions and limitations on its authorisation as it sees fit;

(c) the Authority may withdraw its authorisation at any time, but without prejudice to any actions taken before that time by a person so authorised or to any contractual obligation it may have to that person;

(d) the order may disapply subsection (6A) in respect of such functions, in such cases and circumstances, as may be specified in the order; and

(e) 'employee', in relation to a body corporate, includes any director or other officer of that body.''.'.

Brian White (Labour, North East Milton Keynes)

In the absence of my hon. Friend the Member for Brighton, Kemptown (Dr. Turner), I shall briefly move the amendment, given that the important debate today will be on clause 120. The amendments are intended to tease out from the Minister how we will progress in the current carbon trading climate, although they are probing and not intended to change the Bill. How will we proceed in an era in which climate change and carbon trading are reality?

Laurence Robertson (Conservative, Tewkesbury)

How nice to see you back in the Chair, Mr. Sayeed. I tabled amendment No. 92, which would strike out subsection (1), as a probing amendment to enable us to discuss the clause, and I hope that the Minister puts my mind at rest on a couple of concerns.

The clause is designed to facilitate the renewables obligation and make it more workable. I am worried that the late buy-out aspect will add to the problem rather than address it. Recently, TXU and Maverick Energy have gone into liquidation owing the renewables obligation buy-out fund £23.6 million. Although the Government have said that they will consult on the issue of shortfalls, they have rightly and understandably said also that the industry must bear the risk. The difficulty is that the company that goes into liquidation does not pay the shortfall; the rest of the industry picks up the bill.

My noble Friends in the House of Lords were concerned about that—an amendment was discussed but not accepted. I am not seeking to reintroduce that amendment, but I ask the Minister to explain how the clause will make the buy-out fund more secure and enable it to work more flexibly and better.

Speaking of BETTA—British electricity trading and transmission arrangements—I also ask the Minister what the logic is, when we move to that from new electricity trading arrangements, in keeping the buy-out funds in England and Scotland separate. I am not seeking to remove the clause or to add to it, but I would appreciate an explanation on the issues I have raised.

Andrew Stunell (Liberal Democrat, Hazel Grove)

I shall speak to new clauses 22 and 23. Like other speakers this morning, I believe that this is not a matter of grave contention, but some serious and potentially deep difficulties arise with the settlement process when operators go out of business. TXU, Maverick and possibly Atlantic have provided examples. The basic problem is that the defaulting company leaves the pool

to be redistributed depleted, which results in losses all round—losses that cannot easily be factored in as a risk by the remaining companies.

New clause 1, which was tabled by the hon. Member for Milton Keynes, North-East (Brian White), would not deal with the problem in any feasible way. I like to think that new clauses 22 and 23 would provide some relief and ways to mitigate the difficulties. Those difficulties take two forms. There can be quite a considerable delay in settling accounts, during which defaults can arise. New clause 23, in particular, is designed to speed up that process by allowing partial and provisional settlements, which would speed up the throughput of payments and minimise the amount outstanding at any one time, and therefore the amount at risk if an operator defaults. New clause 22 would provide a mechanism for a softer landing in the event of a default.

I do not want to detain the Committee by examining the technicalities of how the system works and how the new clauses might improve it, but the Minister has questions to answer. Is he satisfied that, in an active and still maturing industry, the mechanisms are sufficiently robust and provide sufficient protection for existing and potential new players? Are they sufficiently free of the risk of being brought down like a pack of cards by other players going out of business? Can he give a reasonable assurance or guarantee that the mechanisms work?

We have some doubts. Flaws have developed in the market, and although it is perfectly natural that some businesses should flourish and others collapse, the mechanisms were not designed with an eye to what happens when a business collapses. Both our new clauses represent an attempt to provide the Minister and the Secretary of State with additional tools that might help to plug that gap, mitigate losses and therefore reduce the risks to the industry.

We shall be interested to hear what the Minister has to say, either to rebut the arguments behind the new clauses or, we hope, to propose tweaking the system himself to make it more satisfactory for existing players and less risky for new entrants.

Stephen Timms (Labour, East Ham)

I, too, welcome you back to the Chair, Mr. Sayeed. We have discussed in Committee the attractiveness of probing amendments, but this morning my hon. Friend the Member for Milton Keynes, North-East has introduced the concept of a teasing amendment and I am happy to respond to it.

My hon. Friend's amendments are interesting. I agree that we should encourage more suppliers to meet their share of the renewables obligation by supplying electricity generated from eligible renewable sources, rather than by using the buy-out route. We need investment in new renewables capacity to meet the Government's target of 10 per cent. of electricity from renewables by 2010.

However, payments to the buy-out fund promote the objectives of the obligation and therefore should be retained beyond the four-year period envisaged in the amendments. They give suppliers a financial incentive

to purchase renewables obligation certificates. As the proceeds of the buy-out fund are recycled to suppliers that present ROCs, there is an added incentive to obtain them, because the alternative is to subsidise competitors. The recycling payments add to the value of a ROC and so encourage more renewable developments. We should not be closing that option off.

The problem with the amendments is that ending the buy-out route would damage the ROC market and investor confidence in renewables. Investors base their decisions on the expected value of the ROCs, which is inextricably linked to the buy-out price. A move to remove the buy-out price without replacing it straightaway with something else would create substantial uncertainty for investors and lead to new investment being deferred until that uncertainty was removed.

The way that the renewables obligation works is that the amount paid into the buy-out fund each year is recycled to those who presented ROCs during the year. In the first year of the renewables obligation, the amount recycled to holders of ROCs was £15.94 per ROC in England and Wales, and £23.55 per ROC in Scotland. At the latest Scottish auction the price was £49, of which £19 is related to the recycling element.

The buy-out mechanism is key to the value of the certificates. Taken with the level of the obligation, it is the buy-out that enables a market in ROCs and, ultimately, makes the obligation a market-led support scheme that has a flexibility in contrast with the more rigid mechanisms in other countries. That is valuable. I was pleased to see praise in a Financial Times editorial a couple of weeks ago, which stated:

''Such flexibility is precisely the merit of Britain's 'renewable obligation'.''

That is something that we would not want to lose.

In addition, the buy-out price acts as a ceiling on the cost that may be passed on to consumers, so that the additional costs to them of the renewables obligation remain acceptable. We all want to keep the increased costs to consumers down—not least to avoid increasing fuel poverty—particularly when there are other upward pressures on electricity prices from factors such as rising fossil fuel prices. Those same factors would also encourage renewables development within the existing framework. If the buy-out route were closed down as the amendments envisage, the problem is the likelihood that investment in renewables would decline rather than increase, because less money would go to those who are generating electricity from renewable sources once the recycling of the buy-out fund ceased.

I hope that my hon. Friend the Member for Milton Keynes, North-East recognises that the buy-out mechanism is of value and will also be of value when emissions trading is in place, which will happen, as he rightly said. Those mechanisms will be cumulative in encouraging the investment in renewables that we all want.

Clause 118 performs an important task: reducing the likelihood and impact of a future shortfall in the renewables obligation buy-out fund. That point was

raised by the hon. Members for Tewkesbury (Mr. Robertson) and for Hazel Grove (Mr. Stunell). Subsection (1) provides the power to reduce the obligation periods, which reduces the size of the buy-out fund and consequently the impact of any shortfall. Subsections (2) to (6) introduce a regime whereby suppliers who do not meet their share of the obligation in full, and who are therefore in breach of their obligation, can remedy the breach by making a late payment, to which surcharges would be added.

The provisions go some way towards dealing with the problem, which, as the hon. Member for Tewkesbury said, was fully discussed in the other place. I will not claim that the clause removes all risk of a future shortfall—that is not possible within a market-driven mechanism such as the renewables obligation—but it provides a number of practical steps to reduce the likelihood and impact of future shortfalls, so I certainly think that it should stand part of the Bill.

The hon. Gentleman also asked why we seem to be hanging on to separate funds for England and Wales on the one hand and Scotland on the other. We will consider that in consultation this summer. It is a fair question, and it may be appropriate to bring the two funds together at some point, but we want to proceed carefully through the consultation. We may want to look into the issue during the 2005-06 review of the renewables obligation.

New clause 22, tabled by the hon. Member for Hazel Grove, goes further on reducing the likelihood and impact of a future shortfall in the obligation—an aspiration that I share. I mentioned the full debate held in the other place; we have thought carefully about the arguments made then. I am aware, too, of developments since those discussions. One other supplier, Atlantic Electric and Gas, has gone into receivership, so a further shortfall is likely in the buy-out fund for the year 2003-04.

In light of that discussion in the other place, and in light of further developments, we are prepared to look again at the option of mutualisation, which aims to recover a shortfall after it has occurred. I can tell the hon. Member for Hazel Grove that I am prepared to consider the new clause and come back on the matter on Report. The wording gives rise to problems, however, as proposed new section 32D(5) provides for a securitisation option that involves taking steps to prevent a shortfall from occurring by securing some or all of each supplier's share of the obligation in advance. That would increase the up-front costs for electricity suppliers, whether or not there was a shortfall. There is a strong risk that those extra costs would fall on consumers.

The idea of mutualisation is worth pursuing. I would like to look closely at the legal implications and how such an idea would interact with the measures already in the clause. I shall come back on Report with a Government proposal to take that idea forward.

New Clause 23 presents serious practical difficulties. It provides for powers for interim reconciliations to be calculated on an estimated basis. I see the attraction of that as a means of speeding up the process—that,

rightly, is the aim of the hon. Member for Hazel Grove—but I am not sure that the measures would work in practice. The clause is drafted very widely; it would be better if it were confined to interim payments. It is also far from clear how the interim reconciliation would be carried out.

There are a number of problems with new clause 23, but I hope that, given my willingness to consider new clause 22, the hon. Gentleman feels able to withdraw both and will allow me to come back on Report with further proposals along the lines of those parts of new clause 22 that refer to mutualisation. I also hope that my hon. Friend the Member for Milton Keynes, North-East feels able to withdraw his amendment.

Brian White (Labour, North East Milton Keynes)

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 118 ordered to stand part of the Bill.

Clause 119 ordered to stand part of the Bill.

Clause 120 - Electricity to be exempted when determining electricity supplied

Brian White (Labour, North East Milton Keynes)

I beg to move amendment No. 40, in

clause 120, page 96, line 42, after 'that', insert

'the Secretary of State may by order determine that'.

Jonathan Sayeed (Conservative, Mid Bedfordshire)

With this it will be convenient to discuss the following:

Amendment No. 167, in

clause 120, page 96, line 44, after 'electricity', insert

'with a capacity greater than 50 MW'.

Amendment No. 206, in

clause 120, page 96, line 46, at end add

'and that this shall be introduced with a mechanism to ensure the obligation upon electricity suppliers to purchase electricity from renewable sources shall not be decreased.'.

Clause stand part 120.

New clause 15—Report to Parliament on Combined Heat and Power—

'The Secretary of State shall be required to report annually to Parliament on progress to meeting the Government target of 10GWe of Good Quality Combined Heat and Power by the year 2010.'.

New clause 16—Duty with regard to Combined Heat and Power—

'The Secretary of State shall have a duty to ensure the deployment of 10GWe of Good Quality Combined Heat and Power production in the United Kingdom by 2010.'.

New clause 19—Renewable heat obligation—

'(1) For the purpose of encouraging the generation of renewable heat in order to reduce carbon dioxide emissions, provide employment in UK agriculture and improve energy security, the Secretary of State may, by regulations, introduce a renewable heat obligation.

(2) Regulations made under subsection (1) may—

(a) require relevant parts of the heating fuel supply industry to demonstrate that a specified portion of their product is renewable;

(b) set targets for the proportion of heating fuels to be renewable; and

(c) provide for penalties for failure to meet targets.

(3) For the purposes of the obligation, renewable heat sources shall include solid, liquid or gaseous fuels produced from biomass; passive solar heating systems and geothermal.

(4) The power conferred by this section on the Secretary of State to make regulations is exercisable by statutory instrument subject to affirmative resolution of both Houses of Parliament.

(5) In this section—

''biomass'' means the biodegradable fraction of products, waste and residues from agriculture (including vegetable and animal substances), forestry and related industries, as well as the biodegradable fraction of industrial and municipal waste;

''solar thermal'' means the collection, transfer, storage and use of solar energy for space, water and process heating or cooling;

''geothermal'' means ground source heat pumps collecting stored solar or geothermal energy from ground or water sources.'.

Brian White (Labour, North East Milton Keynes)

This is another clause with a long history, which I shall skate over, from the 1997 manifesto to the CHP strategy. We have had targets, and opportunities to fix the problems, but we have never addressed the barriers that cause those difficulties. Before Conservative Members start crowing, I point out that the problems stem directly from how the market was constructed when the industry was privatised.

In July 1997, the Department of the Environment, Transport and the Regions published an assessment of CHP potential, which set the targets that we all talk about. In 2000, during the passage of the Utilities Bill, Ministers gave assurance after assurance that CHP would be dealt with outside NETA, and the then Minister, my right hon. Friend the Member for Oldham, West and Royton (Mr. Meacher), said that it would be in a manner similar to the renewables obligation, or words to that effect. The implication was that things would be done on the lines of the renewables obligation.

We know what has happened to the CHP industry—in 2002, 11 MW less were produced than the year before and new CHP coming on line was 95 per cent. down. Many major players have withdrawn from the development of CHP, new schemes and research are on hold, and manufacturing in which we should be leading the world is not going ahead.

The Minister should note that the major players in CHP are also the major players in the renewables industry. Their experience of CHP will colour what happens in the renewables debate. When they go to their board asking for investment decisions, will they take note of the aspirations that he rightly expressed or their experiences in CHP? The matter is worrying.

Our earlier discussions had a frighteningly strong echo of debates in the Utilities Bill Committee. Ministers said that CHP would be dealt with outside NETA, and NETA caused the export prices to be 17 per cent. down. Most CHP plants operate at about 50 per cent. of capacity, if that.

The CHP strategy, which was announced recently, admitted that we would not reach the 10 GW target and were likely to achieve only 8.5 GW. Some sections of the market said that even the lower figure was optimistic.

What annoys me most is that £1 billion-worth of schemes have already been consented to, and they are sitting there, mothballed. That is frustrating. We could be doing so much more were it not for hereditary barriers and the attitude of officials in the Department of Trade and Industry, the Department for Environment, Food and Rural Affairs and the Treasury.

The Minister no doubt has a long list of things that the Government will do to help CHP and I will assist him by pointing out what has happened to some initiatives. CHP was exempt from the climate change levy, but that measure had to be fought for. I pay tribute to him, as he was one of the people fighting for it, and I commend his work, but officials fought against the CHP exemption, which is why it took from 1999, when it was announced, to early this year for full implementation.

CHP has started to benefit from the full exemption, but given that time runs out in 2010, and that some schemes can take five years to plan, develop and implement, in effect, some schemes would receive only one year's benefits. Investment decisions are made on such a basis, so it is not surprising that there has been little engagement in CCL agreements.

Not until 2002 could many finance lease CHP schemes use enhanced capital allowances. As they are set against United Kingdom profits and many CHP schemes post-NETA are in the red, they have been of little value. Moreover, large parts of the CHP supply chain are not included in those ECAs. The Carbon Trust questioned whether many CHP schemes receive any benefit from such a measure. The Minister may turn to the community energy grant—an initiative that I welcomed—but if we consider the opportunities that it provides, it is completely underfunded. It is restricted to a two-year period, which means that the number of schemes that can benefit from it is extremely limited.

I know that the Minister has been an advocate of CHP and will look for ways forward, one of which I hope will come through the comprehensive spending review extending the programme and its time scales in the summer. The Government exempt CHP from business rates, but the reality is that only 50 out of about 1,500 schemes qualify for the full exemption. Since April 2001, when the rates came in, there has been little evidence that such a scheme has delivered any substantial benefits. In fact, the Valuation Office Agency is proposing substantial increases.

The prospect of a VAT reduction for domestic CHP was referred to in this year's Budget. The hon. Member for Vale of York (Miss McIntosh) is always going on about our history and how she has a particular interest in something, so perhaps I should confess that, 20-odd years ago, I helped to write VAT accounting programmes, so many businesses may not be particular friends of mine. The prospect of a VAT

reduction is limited to certain schemes. For example, a CHP scheme that relates to a group of houses or a district heating scheme would not qualify for a reduction. I am talking about not the concept of VAT reduction, but the barriers that are put in place that cause CHP not to benefit from it.

The bioenergy capital grant scheme was used to promote biomass for energy, including CHP. However, it finished in 2002 and there has not been a successor. Since 2000, power stations have been required to consider CHP, but how many CHP schemes have been set up as a result? None. The Department promised to revise the guidance on such matters. It was meant to be published last year, but it has yet to be issued. Will the Minister say when the guidance will be published?

The Government said that, whenever planning or sustainable development guidance is being introduced, CHP has to be considered. However, regional assessments for renewable energy do not cover CHP. As the Department of Trade and Industry officials have said to me in the past, that is DEFRA's problem. I have a vested interest in sustainable communities, given that Milton Keynes is one of them—you will be very much aware of that, Mr. Sayeed—so are such schemes being included in the planning? I have to question whether there is sufficient commitment there.

Anne McIntosh (Conservative, Vale of York)

I shall not try not to go on for too long. Is the hon. Gentleman dissatisfied by the disappointing CHP record of the DTI and DEFRA not only in sustainable communities but across the board?

Brian White (Labour, North East Milton Keynes)

I am sure that the hon. Lady can judge from my comments how much I consider Departments have delivered to date.

The Government rightly said in the sustainable development guidance and in the review of planning policy that CHP is a key issue for development. However, planning policy statement 1 makes only a passing reference to it. I would hope that the Minister can advocate it.

The Minister will say that Ofgem has a key duty to ensure a level playing field for smaller generators under NETA—I am the first to admit that Ofgem has improved immeasurably since the early days of the Utilities Act 2000, although I will not go over past history—but the recent White Paper's ministerial guidelines to Ofgem on social and environmental matters hardly touches on CHP. Unless there is very strong direction from Ministers, I fear that the regulator will continue to ignore and frustrate the Government CHP target, which is worrying. The history of the regulator does not inspire confidence.

When my Bill was debated last year, one of its original clauses would have allowed CHP to be exempt from the renewables obligation. Ministers said, ''Sorry, we cannot accept this clause.'' We compromised by setting targets for the use of CHP in the Government estate. I thought that was a useful way forward, but when the statutory instrument was produced it was surprising that the one exempt area was the NHS estate. I know from my own local

hospital that CHP schemes would be particularly useful for hospitals and the NHS. Again, the issue of CHP has been frustrated.

One would have thought that CHP would be a key factor during the construction of the new Home Office building. Again, an opportunity has been missed. The Government will talk about energy efficiency commitments, and there is the ability to explore that. That was in the White Paper, but now it seems that it is unlikely to move forward. There is a missed opportunity for micro-CHP in the use of energy efficiency commitments.

How do we move forward? There are plenty of opportunities to do so. We mentioned the Government strategy on sustainable communities, and I advocate that the Minister should take that up. There is the EU emissions trading scheme, into which I hope he puts substantial effort, as well as the whole public sector. Why are we so limiting? There is a tremendous opportunity there. There is plenty of regional scope for CHP, and we could change building regulations and use regulatory burdens in regulatory reform.

All those things could be used to promote CHP. My hon. Friend the Member for Southampton, Test (Dr. Whitehead) will pull a rabbit out of his hat that will give the Minister an alternative way forward.

The regulatory impact assessment says that the proposal would cost an additional £80 million to £90 million. Given that the maximum cost agreed between DEFRA and the Combined Heat and Power Association was £66 million, will the Minister explain where that figure came from? Why has there been no mention of the cap of the exemption at 21 TWh? That does not appear in any of the Department's information on clause 120. Given that the Government have accepted the difficulties of meeting the 2010 target, how does that square with their message that developing CHP is a threat to renewables?

I do not accept that it is a threat, although the regulatory impact assessment says that it is, and I have no doubt that the Minister will reiterate that. We must recognise the fact that the two industries are not exclusive, but complementary. They deal primarily with the same companies, and setting one up against the other does nobody any good.

The Government will say that they will review the renewables obligation in 2005-06. However, by not resolving the issue now, we will say to the renewables industry, ''Follow this course with our blessing, and don't worry; we won't do anything in the review that will upset the investment plans that you are putting forward; we will not jeopardise your investment.'' The same companies heard the same words about CHP, and they know what happened there. Unless we resolve the issue now, I fear that we will delay investment in the renewables industry.

Stephen Timms (Labour, East Ham)

I am listening carefully to my hon. Friend's argument. He rightly said that, on current projections, the expectation is that, by 2010, we might have about 8.5 GW of CHP compared with the 10 GW target. Does he have an estimate for how much his proposed measure would contribute to bridging that difference?

Brian White (Labour, North East Milton Keynes)

Not off the top of my head, I have to confess. I apologise to the Minister for not having that information—it demonstrates why he is in the position that he is, and I am stuck back here.

Laurence Robertson (Conservative, Tewkesbury)

There are many other reasons.

Ian Stewart (Labour, Eccles)

That is unfair.

Brian White (Labour, North East Milton Keynes)

But true.

If we do not resolve the issue now and defer it until the review, I fear that we will damage the renewables industry. Without that investment of confidence, we will still have a stable market, but it will be a stagnant stable market. It will not achieve what the Minister wants, but the exact opposite. We have already had this debate under clause 3, but these warnings need to be heeded, in particular in relation to the energy efficiency industry.

I apologise for having gone on at some length, but I want to suggest to the Committee the gravity of the situation that we face, which led to clause 120 being included in the Bill. If there are better ways of getting the CHP industry out of the hole it is in, I am open to suggestions. I have been through the list of issues, and not one of the suggested solutions for CHP has delivered. That is why clause 120 is so important.

I recognise that the issue is causing concern to the renewables industry, and that is why I tabled two amendments as a compromise way forward. Amendment No. 40 is a deliberate compromise that is designed to say, ''If clause 120 is not the right way forward, we will leave the option open to the Minister to introduce an order after consultation with both industries.'' That is a permissive statement that gives some hope to the CHP industry, but does not cause problems to the renewables industry. The amendment is purely permissive, and does not close the door. By closing the door, the Minister will send the wrong signal.

There has been some suggestion that if we do not allow for any mitigating factors, every bit of extra CHP will cause there to be fewer renewables. Amendment No. 206 proposes a mechanism to mitigate the impact on renewables. I am not suggesting that the amendment is the only way forward; the industry and the Minister could come up with a useful compromise. We could increase either the percentage or the base amount. I could go into greater detail about how to do that, but I do not intend to do so because the discussions that the Minister has with the CHP industry can deal with that. I urge him to consider what might work.

I would also like to speak to new clause 19, which relates to a renewable heat obligation. All we have talked about so far is electricity, but we need to talk

about heat. I am the first to admit that new clause 19 could be a potential barrier for CHP, and might negate everything I have said in the debate to date.

Let me set out what I hope new clause 19 will achieve. About a third of the UK's domestic demand for energy is for heat. The Government recognise the contribution that heating systems have to make, including in the climate change programme, but they do not recognise it as part of the renewables obligation. What I am suggesting is that the heating fuels industry should be able to benefit from a similar incentive to that which operates in the electricity industry. The concept is a simple one; the point of the renewable heat obligation is to ensure that heating fuel suppliers are required to supply an increased proportion of their customers demand for heat from non-fossil fuel sources, just as electricity suppliers are.

Again, I will not explain the details because I have already gone on for too long. However, at the risk of alienating the Opposition, I will point out to the Minister that such schemes are working well in France and across Europe. I appreciate that that is a red rag to a bull for Opposition Members.

There are issues about targets—about what percentage to choose and how things will interact with the existing renewables obligation. I will leave them for the Minister to discuss with the industry. I also accept that there are other measures that could achieve the incentivising of renewable heat. If the climate change levy, the energy efficient commitments, or the community energy programme were used, that could help. However, the primary debate on this topic will be about the renewables obligation.

I want to remind the Minister of the original intention with regard to CHP when the Utilities Act 2000 was enacted. I will give him the name of the Department of Trade and Industry official who admitted it, but I will do so in private because I do not want to mention their name in public.

Robert Key (Conservative, Salisbury)

Go on!

Brian White (Labour, North East Milton Keynes)

No, I am not going to.

The original intention was that CHP would be included in the renewables obligation. I am a great believer in the cock-up theory of life, as opposed to the conspiracy theory. A mistake has been admitted, and it was admitted at the time that the Utilities Act 2000 was passing through the House, although when it was too late to do anything about it. At that point, Ministers said that they would deal with the matter outside that Act. Given that under the Electricity Act 1989, CHP benefited from the old non-fossil fuel obligations, I cannot see why we are having this argument year after year, except to protect somebody's back after they had made a mistake in the first place.

I urge the Minister to look at the reality of the situation with regard to CHP. There is a way forward. If using the renewables obligation is not the right way forward, there must be another concrete way to progress, but I have not heard of another way forward. Clause 120 and amendment No. 206 would increase the renewables obligation by less than 1 per cent. a year

or increase the renewable obligation base annually by a fixed amount up to a cap of 66 megawatt-hours. The measures that I am putting forward would benefit CHP.

The DTI economic model is being changed because it was found not to be right. I know that many discussions have been held by the CHP industry and officials. These compromise amendments are meant to help the Government move forward, if they want to do so. If they do not want these amendments, that is fine, and I apologise for having wasted the Committee's time, but the CHP industry is in crisis, and this is a last-resort attempt to kick-start it again.

Andrew Stunell (Liberal Democrat, Hazel Grove)

I want to say a few words briefly, because my hon. Friend the Member for Lewes (Norman Baker) also wants to contribute to this debate.

I strongly support the words of the hon. Member for Milton Keynes, North-East. He has been one of the most diligent advocates of renewables and combined heat and power energy use in this country during his years in the House, and no doubt before, although perhaps not when he was a VAT inspector. I want to hear the Minister's answer, because the reality is that CHP is in a nosedive. Although some say that the CHP industry is in competition with other energy and carbon-saving technologies, it is in its death throes as a result of the application of current policies.

The hon. Member for Milton Keynes, North-East has set out the critique admirably and proposed a solution that we will support. We want to hear what the Government intend to do to get back on track with the targets that they have set on the carbon emission reduction programme, bearing in mind the damage that has been done to the combined heat and power industry.

I could not sit down without mentioning my hon. Friend the Member for Teignbridge (Richard Younger-Ross), who has the Newton Abbot company in his constituency. It has already taken 250 job losses because of the reduction in output and the reduction in orders for combined heat and power. I share the passion of the hon. Member for Milton Keynes, North-East about this matter, and I hope that the Government share his deep concern at the failure of current policies to deliver the targets that they have properly set for this country.

Alan Whitehead (Labour, Southampton, Test)

I want to add a few brief words to the debate, particularly on the amendment to clause 120, which gives the Secretary of State, by order, the power effectively to exempt or place CHP within the renewables obligation system. I endorse and take on board the concerns expressed by other hon. Members about the parlous state of CHP. As I have said previously, the amendment would introduce some measure of certainty into the forward investment prospect for CHP and thereby might, one hope, raise the investment reality of CHP reasonably rapidly, so that the target of 10 GW capacity of good quality CHP is more likely to be achieved. That would bring back to life the existing ailing capacity.

The first argument against that is that CHP is not a renewable source of power in its own right. It is a far more efficient source of providing heat and electricity than most conventional ways, but although the system can be fuelled by renewable sources, it is not necessarily renewable. Therefore, to place CHP within the renewable obligation system might distort the definition of that system.

The second argument relates to amendment No. 206 on the mechanism by which a change might be introduced, which was tabled my hon. Friend the Member for Milton Keynes, North-East. To introduce such a change would alter the nature of the renewables obligation system. The hon. Member for Hazel Grove was talking about the law of unintended consequences. One such consequence might arise whereby a state of uncertainty was introduced within the renewables obligation system, if a certain method of carrying out the process had been determined, and we then changed the extent and the order of the obligation halfway through the process.

Brian White (Labour, North East Milton Keynes)

Is my hon. Friend aware that the proposals put forward by economists working for companies in this field would address the matter in a way that had no impact on the renewables obligation for renewables companies and would ensure that there was a cap through which some certainty was given to the renewables industry?

Alan Whitehead (Labour, Southampton, Test)

Yes, I am, and my hon. Friend makes the point succinctly. I point out the possible objections to the amendments not necessarily because I wholeheartedly endorse those objections, but to indicate possible concerns.

However, as many hon. Members have stated this morning, we still face questions as to how the CHP industry can play its part in providing good-quality efficient electricity, and how the target that we have laid down, which seems likely to be missed as things stand at present, can be achieved. I suggest to the Minister that if one wishes to take the process of kick-starting the CHP industry outside the renewables obligation process, we need to concentrate on the exports from CHP, which are just under 30 per cent. of the total of the current capacity of CHP. CHP capacity is approximately 24,000 GW of electricity, but most of that is consumed on site in the process of providing a supply for the site on which the CHP plant sits. Only 30 per cent. of that capacity is exported, and that is the issue in terms of the uncertainty of investment in future CHP.

The low and fluctuating price of electricity causes uncertainty in relation to what that export capacity is likely to be sold at, and consequent uncertainty in relation to that element of investment in CHP. One way of dealing with that, in terms of bringing CHP to a long-term market—not protecting it from the market, but introducing it into and sustaining it within the market system over a period of time, and taking it outside the renewables obligation—would be to

provide what one might call a fixed-rate mortgage system for electricity exports from CHP. By agreement, a zero-effect price would be established, a price that would sustain a return on investment over a period of time.

If the market external to that zero-effect price fell below that price, a system could be established by which money could be underwritten to the CHP plant by application, perhaps by a monthly statement, in order to get back to that zero-effect price. The money would come from what one might call a CHP export fund, which would be guaranteed by the Government. Conversely, if the price of electricity rose above that zero-effect price, the CHP plant—also by a monthly device—would give money back to the Government fund.

Over a period of, perhaps, five years up to 2010, the establishment of an agreed zero-effect price for that exported electricity would mean that there was greater certainty in the investment environment. The financial risk to the Government might be of the order of £60 million, but they could also make quite a lot of money out of the system. The risk would be fairly low, because the price would fluctuate. The risk would probably also be lower than if the Government were, for example, to go down the capital grants route.

It is a device that works with the market rather than separates CHP from it and by 2010 has both the capacity and the ability to deliver good quality CHP, which will secure those targets in the long term. That is my modest proposal for this morning. I hope that if my hon. Friend the Minister is unable to go along with the idea that either clause 120 should be amended or remain as it in the Bill, other methods of resolving the issue will be earnestly pursued.

Laurence Robertson (Conservative, Tewkesbury)

I want to speak in support of clause 120 and its retention in the Bill, partly for reasons that have already been given and so I hope not to detain the Committee too long. The main reason for including the clause in the Bill is to assist the reduction of CO2 emissions. If we imagine a situation where we had a nuclear industry, an increased contribution from renewables and a considerable contribution from CHP, we would be going a long way towards reducing our CO2 emissions. I thought that was our aim.

If we are to achieve that reduction in emissions, we must think a little more radically. If we allow the nuclear industry to wane, and if we attempt to bring up the percentage of electricity from renewables, kicking and screaming, we will go nowhere on emissions. We have to do more than that if we are serious about reducing them. That is what the clause is about.

As the hon. Member for Southampton, Test said, electricity generated from CHP is not a renewable as such, but it contributes to the reduction in emissions. By rejecting the clause we are saying that because we cannot reduce emissions completely, we will not reduce them at all. That is how opposition to the clause comes across. It is a different technology and does not necessarily compete with renewables. As the Combined Heat and Power Association said, wind

farms cannot produce industrial steam. It is a completely different concept; a different contribution to the generation of power.

Obviously the Government have recognised the role and value of CHP to some extent by not subjecting it to the climate change levy. It is curious that an industry that contributes to some extent to emissions is excluded from that, whereas the nuclear industry, which does not contribute, is not excluded. It is rather convoluted thinking. Nevertheless, I do not want my remarks to be misinterpreted. I welcome that little bit of encouragement that is given to combined heat and power. Yet it is obviously not enough because the target of 10 GW by 2010 is looking extremely ambitious. Indeed, it is unlikely to be achieved as we have not even reached the 2000 target of 5 GW. As the hon. Member for Milton Keynes, North-East said, the capacity fell with combined heat and power in 2002.

It is obviously not working so far. There was clearly a point when the people involved in CHP plants were quite encouraged because they went in for planning permission for some of these plants. I understand that some 2,700 MW of combined heat and power capacity has received planning permission but is on hold or has been scrapped. That loses a potential investment of around £1 billion. Those are the figures that I have been given. I have no way of verifying the figures, but if I am wrong or the Minister disagrees, I am sure that he will challenge them. That 2,700 MW would be a significant contribution to the target of 10,000 MW if it could be activated.

The other problem is that combined heat and power plants often run at only 50 per cent. capacity. There is insufficient incentive for CHP plants to be used as much as they should be, and that concerns me. I shall again quote from a letter that all hon. Members may have received from the Combined Heat and Power Association, which contains a few disturbing facts. It states that the Government

''has repeatedly asked the CHP industry for suggestions of what can be done to get the UK back on track to its CHP target. We have done this, only to find each suggestion has been blocked by other parts of Government.''

I am sure that the Minister was not one of those who blocked those suggestions, but will he explain why the Combined Heat and Power Association says that its suggestions have been blocked. There may be good reasons for blocking those suggestions, but I would appreciate an explanation.

The letter goes on to state that

''senior DTI officials have gone out of their way to whip up opposition''.

That is a serious charge. Alarmingly, it continues:

''Leading UK CHP companies, who have invested many millions of pounds in enhancing the competitiveness of the UK business and boosting the UK's security of supply, have so far been denied the opportunity to discuss face to face with Ministers how matters could be progressed. Apparently, only when Clause 120 is removed from the Bill will a meeting be considered.''

I find that surprising. It does not chime with my experience of dealing with the Minister, so I am sure that there is a simple explanation, which we must receive.

I have sympathy with amendment No. 40, tabled by the hon. Member for Milton Keynes, North-East, but it weakens clause 120.

Brian White (Labour, North East Milton Keynes)

If Ministers were not prepared to leave clause 120 in the Bill, the amendment would retain that proposal as a future option when the concerns of the renewables industry and of CHP have been resolved.

Laurence Robertson (Conservative, Tewkesbury)

I accept the hon. Gentleman's explanation. It is a matter of real politics and the art of the possible. I seek to retain clause 120, but I wait to hear the Minister's response to my points and those of other hon. Members before advising my colleagues whether to support the amendment. The amendment would slightly weaken the clause, but it might be better than nothing, depending on the Minister's response. For now, I would vote to retain clause 120 and I will ask my hon. Friends to do the same.

Joan Walley (Labour, Stoke-on-Trent North)

I wish to speak briefly to this group of amendments and I congratulate my hon. Friend the Member for Milton Keynes, North-East. Now that we have reached the stage of discussing how to achieve sustainable development, the question is whether we have people with the right expertise to ensure that the Government can deliver. I pay tribute to the work done by my hon. Friend in respect of the various Bills that he has proposed, because in the process he has achieved a real grasp of the detail of what is needed. He speaks with such authority on the amendments that the whole Committee has to take his comments seriously.

That is why I urge our capable Minister to see whether we can, in this debate, do something similar to what we did on Tuesday. Might there be an opportunity between now and consideration on Report to reconsider the detail of the proposals and to have detailed talks with the various organisations that have a key interest and are stakeholders in the debate? Every member of the Committee has received a copy of the briefing that the hon. Member for Tewkesbury has. There are serious concerns about whether DTI officials have been engaging 100 per cent. in the debate.

One matter that I am concerned about, which has been raised by the Environmental Audit Committee, is whether we have a joined-up approach across government. I am concerned that the lead Department in this case is DEFRA. What detailed discussions have there been between the Minister's Department and DEFRA to join up the approach to renewables and the way to make progress?

In preparing for the debate, I read again a report by the Sustainable Development Commission, which was set up by the Government. It is entitled ''Shows Promise: But Must Try Harder'', and it may be appropriate to apply that title to the amendments. The report considers greenhouse gas emissions and gives the good news, which is:

''The Government appears to be on course to achieve its Kyoto target reductions. However, the reductions already achieved are largely byproducts of the 'dash for gas'''.

I hold Conservative Members responsible for that policy. The report goes on:

''There is no clear pathway to the much larger 60 per cent. reduction which the Government accepts is needed by 2050 to avert catastrophic climate change.''

The heart of the debate for the Committee is the fact that, with the Bill, we have a real opportunity to engage with all stakeholders and to set ourselves on a course that will deliver the greenhouse gas emission reductions that the planet urgently needs. That is why I ask the Minister to engage constructively with all partners to see whether, by the time of consideration on Report, we can reconsider how to make progress on the issue.

On new clause 19, I accept that there may be contradictions, but a way to make progress must be found. There is a great deal of support for the sentiments behind the new clause. If the Minister could see it as an enabling new clause, which would not necessarily commit the Government to action immediately, but would maximise the use of the legislative opportunity presented by the Bill, we could find a way to take the debate forward. The results of a consultation on renewable heat could then be quickly enacted, possibly using secondary legislation.

I stress that it is important to get this right when we come to consideration on Report. We must remember that energy policy is imbalanced, in that it supports only renewable electricity. Energy for heat accounts for approximately a third of our emissions, but there is no dedicated support mechanism for renewable forms of heat, including biomass, biogas, solar thermal and ground source heat.

The Committee needs to remember that renewable heat is a low-cost form of carbon abatement. That is shown in the climate change levy, where heating fuels are taxed at a third of the rate in respect of electricity. That implies that the buy-out price of a unit of renewable heat would be only a third of that for renewable electricity. The Committee needs to consider those issues.

Enabling legislation for a renewable transport fuel support mechanism has already been incorporated in the Bill, so support for renewable heat would complement it. Conservative Members mentioned the importance of bio-refineries. That does not affect my constituency, but I consider it important that we maximise what we can so that we do not displace more emissions. Whenever possible, bio-refineries should be designed so that they can use renewable heat sources.

I remind the Committee that the recent Royal Commission for Environmental Pollution report recommended introducing a renewable heat obligation. These are all important issues. DEFRA is the sponsoring, lead Department, but the detailed work is being done by the DTI. The devil is always in the detail, and the question is how we take the issue forward.

As I said earlier, especially in relation to our debate on clause 3, time is running out. We are already experiencing the effects of climate change as we sit in

this Room in the heat. I say to the Minister that many members of the Committee care passionately about finding a way forward, taking the advice of the Sustainable Development Commission and doing as well as we possibly can. He has a wonderful opportunity to do exactly that and I hope he takes our views into account when he replies to this most important debate.

Norman Baker (Liberal Democrat, Lewes)

We are in the extraordinary position of every member of the Committee so far—I am confident that the hon. Member for Angus (Mr. Weir) will follow suit—recognising the value of CHP and its contribution to tackling climate change and reducing greenhouse gas emissions. They recognise, too, that it is right to have targets and to try to achieve them. No one disputes that. There is even a Government policy to that effect, but as hon. Members have said, their target for 2010 will not be met by any stretch of the imagination. Even the target for 2000 will not be met and we are now going backwards—CHP is in freefall.

I hope the Minister can explain the Alice-in-Wonderland situation we are in now. How is that the entire political establishment including, presumably, the Minister, supports what the Government are doing, yet we are going backwards and he cannot bring forward a way of tackling that conundrum? That is extraordinary, but there must be a reason for it, although we have not heard it yet. The reason for CHP being allowed to wither on the vine is either the Government's complete incompetence—I do not believe that is so in this case, although they may be entirely incompetent on occasions—or something different.

I cannot explain this. Perhaps it is a misplaced judgment whereby to ensure that renewables survive—have enough oxygen—any alternative that would be seen as a threat must be strangled at birth. That does not seem very likely, but I cannot think of another reason that would explain the current situation.

Brian White (Labour, North East Milton Keynes)

The hon. Gentleman was on the Utilities Bill Committee and he will remember the discussions about NETA. There is a systemic problem when regulatory objectives are set in silos.

Norman Baker (Liberal Democrat, Lewes)

Yes. There is an element of truth in that, but it is up to the Minister, not his Department, to sort it out. I did not hear all the hon. Gentleman's contribution as I was a bit late this morning, but I am confident that I would have agreed with it had I heard it in its entirety.

I do not need to go into the benefits of CHP, as we have heard about them from Members on both sides of the Committee. We need to hear how the Government will reverse the freefall and meet their target. The clause seems to be an attempt to do that, but the Minister, rather than embracing it, seems to want to remove it and make the situation worse.

My judgment is that, if the clause is removed and nothing put in its place, CHP is finished for the foreseeable future in this country as anything other than a pilot project to which Ministers can point to say that something is happening. In practical terms, CHP

would be finished, the targets busted and one element through which we can tackle Kyoto abandoned. Jobs would be lost, credibility wrecked and industrial confidence destroyed. The Government and the Minister cannot want that, but that is the direction in which we are heading. Why are we in that situation?

The Minister and his Department seem to be articulating two different policy positions, one overtly and one implicitly. I put it in those terms because there is a Labour party policy, which I support, to promote CHP, recognise its value in tackling climate change and put in place measures to encourage it. That policy is supported not just by the Labour party, but by members of the Committee, who have eloquently argued the case this morning. We support the CHP aim, as do the Tories. However, there is a DTI policy, which is rather different. It appears to be entirely separate not just from the Minister, but from DEFRA.

The hon. Member for Stoke-on-Trent, North (Ms Walley) said that the devil is in the detail, but from what I have heard this morning the devil is in the DTI, which appears to have its own energy policy. Earlier, I drew to the Minister's attention to how his policy on nuclear power is different from both that in the Bill and the policy that the DTI is creating behind the scenes. The outcome for nuclear in three or four years' time, under the DTI's policy, will be different from the one he wants. The same is happening with CHP. It is time for him to articulate Labour party policy and stand up for what he believes in, instead of trying to represent his Department and the officials, who are putting forward policies that are out of line with his manifesto commitments.

We need to hear from the Minister why CHP has been allowed to go into reverse. What steps he will take to get it going back in the direction that we all want it to take? Why he is opposed to the clause and, if he does not like it, what does he intend to put in its place? We would also like to hear an honest recognition of the fact that, if the Minister puts nothing in its place, CHP will become a theoretical rather than a practical way to tackle climate change.

Paddy Tipping (Labour, Sherwood)

This is an important debate, and I am pleased to follow the hon. Gentleman and my hon. Friend the Member for Stoke-on-Trent, North.

There is no doubt that the CHP industry is in real difficulties. The 2000 target of 5 GW has not been met. The chances are that the 10 GW target will not be met by 2010. Indeed, the DTI says so itself and is projecting a target of, at best, 8.5 GW. More importantly, the CHP industry is on its knees. Plant is running at roughly 50 per cent. capacity and CHP manufacturers face real difficulties. They are putting people out of work.

We have a more environmentally sensitive means of generation, and we need to get behind it, but we are talking about a real problem to which there does not seem to be any easy solution. I am not convinced that clause 120 is the solution. There is certainly a problem—I know that from private discussions with DTI Ministers and officials—but I am not convinced that clause 120 would do the job, even if amended.

I look forward to the Minister's response, because he faces a difficulty. He is committed—the DTI is committed—to CHP and he has to make proposals, because we cannot live with this uncertainty. My real objection to clause 120 is that it brings uncertainty to the wider energy market. I was with people from Scottish Power last night and I have talked a lot to Centrica. When I meet people from the generators, they speak strongly of the importance of, and argue for stability for, the renewable obligation, which has been increased by pitching the target forward to 2015.

It is necessary to have some long-term investment in the energy sector. All our assets come from the past. Apart from some limited gas generation, there is no new investment in the electricity sector. That is a recipe for disaster. Generators and power companies will invest, but they make multi-million pound investments over a long period. The worst thing for them is to see the policy instruments—the renewables obligations—changed when there are difficulties. They need long-term stability to make investments.

I do not support clause 120, but I do support the CHP industry. It is interesting that the White Paper said that we have a problem with CHP, and the first annual review of the White Paper said the same thing. There are measures that may work through and help CHP. Climate-change exemption and emissions trading ought, conceptually, to help the industry, but they may be too long in coming. I know the Minister listens carefully to voices of people in the industry and from all political parties.

There is a problem. The industry will go out of business if we are not careful. If we do not back clause 120, and I believe strongly that we should not, there is a real imperative on the Minister and his colleagues to have urgent talks with the industry and bring forward proposals very quickly.

Michael Weir (Scottish National Party, Angus)

The hon. Member for—

Norman Baker (Liberal Democrat, Lewes)

Lewes.

Michael Weir (Scottish National Party, Angus)

I keep thinking of the hon. Member for Western Isles (Mr. MacDonald) as the Member for Lewis. I was rather alarmed when the hon. Member for Lewes included me in the political establishment of the House. I will try to develop a rebel streak as soon as possible.

I support what the hon. Members for Lewes and for Milton Keynes, North-East said about CHP, and I was particularly taken by the contribution by the hon. Member for Southampton, Test, because he put his finger on one of the great problems of CHP. I was intrigued by speculating on electricity prices, but there is a problem with CHP and investment in it.

In preparing for this Committee, I spoke to the chairman of one of the major electricity companies in Scotland and raised with him the problem of CHP. He confirmed that there was no way that the CHP target was going to be met and said that his company was not prepared to invest further in CHP in the current circumstances, because it was getting nothing out of it.

The hon. Member for Southampton, Test was right. Only 30 per cent. of the electricity is exported from the schemes; the bulk is used within them. The chairman I spoke to confirmed that there was no great benefit from CHP.

Several manufacturers that were using the bulk energy had gone bust, leaving his company with a scheme that was of little use. His company was not prepared to invest in that market, which is a serious problem. The solution proposed by the hon. Member for Southampton, Test was ingenious. I should like to see more thought given to it, because it is a potential way forward to give help to CHP schemes.

I should like to talk briefly about new clause 19, to which I give my support. I agree with the points raised by the hon. Member for Stoke-on-Trent, North, which are all very valid. I am practical guy, however, and represent an area that is largely small town and rural. There is growing interest among those small villages and rural areas in small-plant micro-generation to heat housing developments and in new ways of dealing with energy and heat in rural economies, especially given the recent oil price shocks. Many homes in rural areas are still heated by oil generation, which is becoming increasingly expensive as well as it being environmentally unfriendly. The renewable heating obligation would be an important step in encouraging new developments, especially in rural areas, to consider alternatives to oil-based heating schemes.

Encouraging biogas and similar energy sources would be a boon to the rural economy in general. Many farmers are becoming interested in biogas, but before they commit themselves in any great number, they will have to be sure that there is a market for that produce. So many times great plans for new crops for farmers have come to nought at the end of the day. Years ago in my constituency, flax was the great hope of the farming community. A big flax processing plant was built, and many farmers went into producing flax. The plant went bust before the first crop came in and lots of money was lost. Unless there is a clear market and clear encouragement for biogas, it will not get off the ground.

New clause 19 is not perfect, but it goes some way towards introducing a renewable heat obligation. I want to encourage the Minister to think about that as a way not only of reducing carbon emissions but of encouraging diversity in energy and heat supply in the rural economy.

Anne McIntosh (Conservative, Vale of York)

I rise to support clause 120 and I am delighted to see you securely in your place this morning, Mr. Sayeed. I shall follow the rather stinging strictures of the hon. Member for Milton Keynes, North-East, and not go on too long.

I want to tease the Minister a little—the Committee appears to be in teasing mode—by inviting him to tell the Committee what commitment his Department has made to CHP. I was rather disappointed by the response given on 8 March to a question that I asked about DEFRA's commitment to CHP and how many units it had put in place. It was disappointing to learn

that DEFRA operates only one CHP system, the capacity of which to date, and since March, is only 1 MW; it was installed in 2000. Since March, no environmental audit had been conducted on it, which is rather disappointing.

I refer the Minister and the Committee to the regulatory impact assessment conducted by DEFRA, which clearly sets out the cause and purpose of clause 120. Disappointingly, in paragraph 4.92 the Department refers to the fact that removing CHP electricity from the renewables obligation base would

''give CHP electricity an advantage over renewables electricity.''

It goes on to say:

''It would amount to moving the goalposts, prior to the review of the Obligation due in 2005/6, when fundamental issues are to be considered.''

We have heard from a number of hon. Members—in particular the hon. Member for Milton Keynes, North-East, my hon. Friend the Member for Tewkesbury and the hon. Member for Lewes—how important combined heat and power is. I am very fortunate in that I have the opportunity in the lunchtime break to question the Chancellor of the Exchequer on that, and in particular on why he has seen fit to remove the fiscal incentives.

It is extraordinary that the Combined Heat and Power Association has sought a meeting with the Department and it has been told that that meeting cannot take place until such time as clause 120 is removed. I pay tribute to the work and the contribution to date of the various CHP systems. My hon. Friend the Member for Tewkesbury has been to see the proposed new power station in Immingham, which is about to be commissioned. The industry is making a commitment. However, the Government are flatly refusing to push through incentives—particularly those in clause 120—in spite of the fact that, as we have heard this morning from a number of hon. Members, the CHP industry wishes that commitment to be in place.

I also pay tribute to the work of my noble Friends in the other place, particularly Baroness Miller of Hendon. I hope that in view of the excellent debate that we have had, clause 120 will be kept.

Stephen Timms (Labour, East Ham)

I begin by paying tribute to my hon. Friends the Members for Milton Keynes, North-East and for Southampton, Test, who put their names to these amendments, for the consistency and vigour with which they have advocated the cause of CHP. They have done that again this morning.

I will ask the Committee to agree that clause 120 should not stand part of the Bill. My hon. Friend the Member for Sherwood (Paddy Tipping) provided some telling arguments why it should not, and I want to go through a number of them.

The clause would have the effect of enabling the Secretary of State to remove CHP from the supply base on which the renewables obligation is calculated. The great danger in doing that is of reducing the size of the renewables market and undermining the prospect for the delivery of our renewables target.

In the energy White Paper, we made the point that we would undertake a review of the obligation in 2005-06. I frequently discuss these matters with my noble Friend Lord Whitty; I did so yesterday. He gave a commitment in the other place that we will look at how CHP is handled within the context of the renewables obligation. We will do that. This debate is not the end of this discussion.

Norman Baker (Liberal Democrat, Lewes)

Will the Minister give way?

Stephen Timms (Labour, East Ham)

Let me make my point.

CHP will not be looked at in isolation, and should we decide as a result of that review that changes to the obligation should be made, that would be the time to make them. The key consideration in reviewing the obligation is that we must ensure that delivery of the 2010 target is secured. Maintaining investor confidence in renewables is vital, and a shift in the goal posts would undermine that confidence at the very point that we are at today, where momentum is building behind investment in renewables. Any proposed changes would need to represent value for money for the consumers that fund the renewables obligation.

Norman Baker (Liberal Democrat, Lewes)

Is it not the case that if the Minister waits until 2005-06 for any review, CHP capacity will have diminished further, and he will be looking at a theoretical rather than a practical problem?

Stephen Timms (Labour, East Ham)

No, I do not think that it will be a theoretical problem. We are talking about what is going to happen by 2010. I make no bones about the fact that we are in difficulty with CHP—although the reasons for that are rather different from what the hon. Gentleman said—and I will come on to that.

Brian White (Labour, North East Milton Keynes)

If the Minister is proposing that there could be changes in 2006, will not the message that then goes out to the renewables companies be that they should wait for that review before they put in their investment? Will it not delay investment in renewables until that point, unless there is no point in having that review?

Stephen Timms (Labour, East Ham)

No, I do no think that it would, and I will explain why.

If we were to make the change that is envisaged in those amendments there would have to be one of three consequences. The first is that there would be less renewables. The second is that the Treasury would provide extra funding to make up the shortfall, which could be as much as £80 million to £90 million. Those were the figures that were mentioned in the regulatory impact assessment, although others have been talked about; a figure of £66 million has been suggested. However, it would be of that order of magnitude, which is a substantial sum, and the Government would provide it per year. The third is that electricity consumers would have to make up that shortfall.

Against that, I do not believe that the impact on CHP would be a big one. I asked my hon. Friend the Member for Milton Keynes, North-East whether he

had a figure for what he thought it would be. I did not do that with the aim of embarrassing him; I genuinely wanted to know what he thought. The figure that I have seen is rather less than 0.3 GW. Therefore, in terms of the difficulty that has happened in CHP the contribution from the measure that we are discussing would be quite modest. It would not, in the words of my hon. Friend, resolve the issue. It would make a contribution, but it would not solve the problem. The suggestion has been made a number of times in the debate that, ''If only we could do this, it would be fine. Everything would be back on track.'' It would not, and there would seem to be a high price to pay.

Laurence Robertson (Conservative, Tewkesbury)

We could dispute how much extra capacity the clause would bring on board for evermore. There are theoretical figures, but 2.7 GW of plant with planning permission is a real figure. That already exists.

Stephen Timms (Labour, East Ham)

I have not seen that figure yet, and I have no reason to doubt it. Of course, there is quite a lot of renewable plant that has also been consented and also has not yet been built. We do not want to undermine the prospects for that either. Altogether, 4.6 GW of renewable capacity has either been consented or is being considered. That is a considerably greater amount.

I will spare my hon. Friend the Member for Milton Keynes, North-East the lengthy list that he anticipated of virtuous things that the Government have done in support of CHP, a number of which he mentioned. However, I want to say to him and to the Committee that we genuinely want to identify further measures that can support CHP, beyond those that have already been identified and those that he and others have listed. We need to do that in a way that does not undermine renewables, as my hon. Friend the Member for Sherwood rightly said, and does not impose unreasonable costs on consumers or on the Government.

I thought that some unkind and unfair comments were made about officials during the debate, and I reject them. We will all be working hard in the months ahead to identify such measures, including, as my hon. Friend said, working with the industry, the CHPA. Some of the ideas that are around have been referred to this morning. My hon. Friend the Member for Southampton, Test came forward with an idea that was entirely new to me; I had not considered it or been aware of it before. I would want to examine carefully his suggestion and whether it—or some variation of it—would assist us in providing support for CHP in a way that does not cause other problems that none of us would want to see.

It is important to make the point that the problem for CHP, in particular, has been what has happened on gas prices. That is the real difficulty. It was said a couple of times in the debate that CHP has been held back simply by regulatory obstacles. That is not the case. There were some problems in the original formulation of NETA. As far as I am aware, those have largely been fixed. Certainly, I have not recently seen any cause for changes in the rules to benefit CHP

since the changes made following the introduction of NETA. The problem is the differential between the relative levels of current gas and electricity prices. That is why the CHP industry is having such a hard time. That is the difficulty that we need address. It is not a question of regulatory barriers; it is not the result of current policy.

My hon. Friend the Member for Milton Keynes, North-East made the fair point that the interests of the CHP industry, which we all want to support, should not be set against the interests of the renewables industry. I agree, but the Committee needs to know what the renewables industry is saying about clause 120, not what the Government are saying. The main renewables trade associations have expressed concern during the past few weeks over the effect of clause 120 on investor confidence, and they support the case that I am putting to the Committee that it should be removed from the Bill.

Laurence Robertson (Conservative, Tewkesbury)

On the concern that if CHP were to be removed from the calculation, I presume that the argument will be that, as there is less electricity, the renewables target of 4.9 per cent. will be 4.9 per cent. of a smaller amount. That, I think, is the industry's argument. The Minister listed three options to counter that, but there is a fourth; the 4.9 per cent. could become 5.9 per cent. That would directly address the point.

Stephen Timms (Labour, East Ham)

The target is 10 per cent. by 2010. Indeed, it would be possible to do that, but that is my option three. It would mean that electricity customers paid the extra; bills would go up by rather more than the current amount of the renewables obligation.

Paddy Tipping (Labour, Sherwood)

Does not my hon. Friend feel that there is a difficulty with the argument? It is not an argument about the amount of CHP, or whether it will displace renewables. It is an argument about principles. We have set up a regulatory framework, we have set up the renewables obligation and people are investing heavily in renewables. They will not invest if they feel that, after the slightest squall, we would change the rules. It is an argument about principle, not about 0.3 GW.

Stephen Timms (Labour, East Ham)

My hon. Friend is absolutely right to speak of a principle. We have a mechanism that is starting to deliver for renewables; let us now wrench it to do another, different job. The reality, however, is that it would fail to achieve both.

I was telling the Committee what the industry is saying. The Renewable Power Association, the British Wind Energy Association and the Association of Electricity Producers—the latter is an even broader group—have all expressed those concerns. Centrica, which has interests on both sides of the debate, has written to us saying that it thinks that the clause should be removed. Centrica plans to invest up to £750 million on renewables projects, and it sees clause 120 as

''undermining the ROC market which is still in its infancy''.

Brian White (Labour, North East Milton Keynes)

Does the Minister accept that all those comments were made about an unmitigated renewables obligation, and that if amendment No. 206 were to be accepted, those arguments would not be valid? The mitigation would address those concerns.

Stephen Timms (Labour, East Ham)

To some extent, it would, but the fundamental problem when shifting the goalposts is that the numbers will change. It would lead to a degree of uncertainty and would depend precisely how much CHP was installed over the next six years, and nobody would know the answer. The fundamental problem would remain. The Committee needs to pay attention to what the industry is saying.

Andrew Stunell (Liberal Democrat, Hazel Grove)

The Minister has referred several times to the dangers of shifting the goalposts. Some of us are more concerned about getting extra time for CHP. Will he say how he will save CHP?

Stephen Timms (Labour, East Ham)

As I said, my noble Friend Lord Whitty has already made a commitment that we will consider CHP and what I hope will be some new ideas—my hon. Friend the Member for Southampton, Test suggested one this morning—in the context of next year's review of the renewables obligation. We will then see what we can do. I am sure that the hon. Gentleman accepts that we need to proceed in a way that does not rob Peter to pay Paul and that does not undermine what all of us, not least his party, want to happen in other parts of the energy market.

Joan Walley (Labour, Stoke-on-Trent North)

Will my hon. Friend consider the EU emissions trading scheme and how it can help CHP at this stage?

Stephen Timms (Labour, East Ham)

I am happy to give that assurance. I very much agree with my hon. Friend about the potential for emissions trading to help. We will need to ensure that the precise way in which it is implemented supports CHP and does not inadvertently damage it. CHP generates significantly lower carbon dioxide emissions for a given amount of energy. It is significantly more efficient, so it should benefit from emissions trading in principle. I will certainly want to examine very carefully the way in which the scheme is implemented to ensure that that happens.

Norman Baker (Liberal Democrat, Lewes)

I return to a point made by the hon. Member for Tewkesbury and to the letter that the CHPA sent to hon. Members. Is it true, as the letter alleges, that

''CHP companies . . . have so far been denied the opportunity to discuss face to face with Ministers how matters could be progressed'',

until the clause is removed? If so, what is the rationale?

Stephen Timms (Labour, East Ham)

I was not aware that that had been said, although I presume that that impression may have been given. I meet the director of the CHPA quite regularly, as I am sure do other hon. Members. I do not believe that he has any difficulty with access, but I should make it clear that I would have no difficulty in having a meeting along those lines.

My right hon. Friend the Chancellor powerfully underlined our commitment to CHP when he announced a possible VAT reduction for micro-CHP

from 2005. My hon. Friend the Member for Milton Keynes, North-East made the point that that does not extend to certain other areas. That is true, but micro-CHP—central heating boilers that also generate electricity—can make a very large contribution to our aims. Announcing a likely reduction in VAT on that equipment is the Government's very powerful recognition of the scale of that potential and of our determination that it should be realised.

We have spent less time discussing new clause 19, although it is a very interesting idea that merits a good deal of attention from the Committee and others. We have been thinking about how such a heat obligation might work in practice. So far, at least, we have found it very difficult to define exactly how it would work. My hon. Friend the Member for Milton Keynes, North-East has done us a service by starting to formulate the way it might look. However, he proposes, in subsection (2)(a) of his new clause it should be possible to

''require relevant parts of the heating fuel supply industry to demonstrate that a specified portion of their product is renewable''

including such renewable heat sources as passive solar heating systems.

I cannot think of a way in which one could quantify that in relation to solar heating systems, for which there is no fuel. How can one set an amount of coal, gas or liquid fuel being sold against a solar panel or other equipment—how can one set the proportions of the one against the other? That is a fundamental difficulty to which we do not have an answer. The problem is defining the heat market on which an obligation would be placed. Heat is different from electricity in that respect. Under the renewables obligation, licensed electricity suppliers are obliged to provide a certain percentage of electricity from renewable sources. Unlike the supply of electricity, the supply of heat is not a licensed activity and it is therefore difficult to identify a market for heat as such.

Brian White (Labour, North East Milton Keynes)

Does my hon. Friend accept that many of the relevant suppliers are subject to the climate change levy and that there are mechanisms associated with that? I accept that there are difficulties, but there are existing mechanisms that could be built on to overcome the problems that he has identified.

Stephen Timms (Labour, East Ham)

I do not think that that directly addresses the question of how a shop that was selling camping gas, for example, would compute the notional value in fuel terms of selling a solar panel. That is the problem in making a reality of what is an important idea. I have no doubt that we shall have to deal with it, but some basic work still needs to be done before we can proceed in the direction that my hon. Friend suggests.

Joan Walley (Labour, Stoke-on-Trent North)

I should be interested if the Minister could tell us what time scale he has in mind for the work that needs to be done.

Stephen Timms (Labour, East Ham)

That depends on how rapidly we can provide answers to the questions. At the moment I do not know that. My noble Friend Lord Whitty gave a

commitment that when we review the renewables obligation in 2005-06 the question of heat and the possibility of including it will be considered. That is the next mile-post in the process. I do not know whether by then we will have been able satisfactorily to resolve the kind of questions that I have been raising.

Let me add to my earlier comments about the meeting between DTI senior officials and the CHPA. I understand that there was a meeting with one of the senior officials in my Department last week to consider the issues in question. I am hopeful that the allegation in that context is not correct.

I understand the difficulties and I share the desire for much more rapid progress towards meeting our CHP target than is evident now. However, I hope that, for the reasons that I have given, the Committee will not agree to include clause 120 in the Bill. I hope, too, that my hon. Friend the Member for Milton Keynes, North-East will not press his amendments.

I have a final point to make about heat. An obligation may in the end prove not to be the best mechanism to support heat. In our discussions and work, we will need to consider how we can promote renewable heat generation. It is currently not clear whether that will be achieved through an obligation or through some other method.

Brian White (Labour, North East Milton Keynes)

The point of tabling new clause 19 was to raise the issues. I am encouraged by what the Minister said. Although it may not signal the way forward, how we deal with and promote heat is often forgotten when we talk about electricity generation. We should not forget that because about a third of the electricity generation in this country is required for heat. We should bear that in mind when considering different policies.

I thank members of the Committee for their support. The debate has clearly asked how we got into the present position. I seem to have spent my entire time in Parliament asking that question—unintentionally, I hasten to add. I got stuck in a statutory instrument Committee early on, and the question has haunted me ever since. Key issues remain unresolved. First, how we are to make progress on CHP? I welcome what my hon. Friend the Minister said about meeting the CHP industry. I assume that that includes major companies such as ConocoPhillips, as well as the CHPA.

I deliberately did not go into detail about how the mitigating circumstances could work, because I would have detained the Committee much longer, but there are mechanisms that would make the renewables obligation work in a way that avoided some of the pitfalls that the Minister highlighted. I accept some of his arguments that clause 120 as it stands will cause problems, and that is why I tabled my amendments. However, we are still assuming that there is a choice—a false choice—or a battle between the CHP industry and the renewables industry. I regret that we are setting them up against each other, which is not right.

I hope that the Minister will take from the debate that there is a way forward for both industries. Many of the players are the same in both industries and they are very concerned. I appreciate the fixed mortgage

idea made my hon. Friend the Member for Southampton, Test: given that I wrote several mortgage systems in my time, I think that it is a noble idea. However, I am concerned that without a renewables obligation exemption for CHP the industry will lose to an even larger extent its opportunity to improve competitiveness. There have been criticisms of the economic model used by the DTI and I urge the Minister to take a strong look at the way in which the modelling is carried out. The economic models used not being in line with what is happening in the marketplace lies at the heart of the problems that the CHP industry has had over the years

My concern remains that rejecting a mitigated renewables obligation now will lead to a lack of investment in the renewables industry until 2006. I hope that I am wrong and that the Minister is right, but I fear that it is the other way round. The opportunities for the CHP industry are at a critical point: if we do not take action sooner rather than later, it will continue its downward slide. I will withdraw the amendment because it is important that we have the debate on Report. I shall consider what the Minister has said and carefully review his points about costs, because there is dispute about that. We must return to the issue on Report, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Motion made, and Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 6, Noes 12.

Clause 128 - Renewable transport fuel obligation

Laurence Robertson (Conservative, Tewkesbury)

I beg to move amendment No. 194, in

clause 128, page 101, line 19, leave out 'may' and insert 'shall'.

Jonathan Sayeed (Conservative, Mid Bedfordshire)

With this it will be convenient to discuss the following:

Amendment No. 195, in

clause 128, page 101, line 21, leave out 'may' and insert 'shall'.

Amendment No. 196, in

clause 128, page 101, line 26, after 'meet', insert 'those'.

Amendment No. 197, in

clause 128, page 101, line 26, at end insert 'set under subsection (2)(b)'.

Clause 128 stand part.

Laurence Robertson (Conservative, Tewkesbury)

The amendments are designed to strengthen clause 128, which introduces a renewable transport fuel obligation. The background is the EU biofuels directive 2003/30/EC, which was adopted on 8 May 2003 and which set a target of 2 per cent. of the market being accounted for by alternative fuels by 2005, and 5.75 per cent. by 2010. Climate change and security of supply are cited as key drivers. The Government must report their plan for targets to the European Union by July 2004. Whether one approves of things coming from Europe—some people do and some do not—the Government must respond to the directive. They also have to indicate how they will increase the targets for biofuel use.

Everybody is aware of the case for biofuels. It is important in terms of security of supply that we develop them as an alternative, as the last few weeks have demonstrated. Those members of the Committee with longer memories—that probably includes everybody—can remember the problems of the early 1970s that were caused by being over-reliant on one fuel. In electricity production, just as in fuel, we need a balanced energy policy that does not cause us to be over-dependent on any one source.

The clause provides that

''the Secretary of State may, by regulations, introduce a renewable transport fuel obligation.''

My amendments would change it slightly, providing that the Secretary of State ''shall'' introduce that obligation. The clause is strengthened by making the obligation a requirement rather than a possibility.

I have given the Committee the reasons why adopting such an approach is important in terms of security of supply and helping the environment. In addition, it would help farmers, who may be involved in providing the raw material. Given how things are, I am not so naive as to think that our own farmers would be the primary source. A lead time would be required, so quite a bit of the raw material could come from abroad, but takes no great leap of imagination to see an opportunity for our farmers while they continue to be paid not to produce on land.

In the age of joined-up government—I do not think we actually have it, but we were promised it and we all aspire to it—I am sure that the relevant Departments could arrange between themselves to ensure that the common agricultural policy was amended in a way that would help our farmers to benefit from the clause. I support the retention of clause 128, but think it would be strengthened by the obligation being made a requirement rather than an option.

Paddy Tipping (Labour, Sherwood)

The hon. Gentleman is right to say that the clause needs to be amended. My recollection—perhaps the Minister will help us when he replies—is that the clause was inserted in the other place. The Government accepted the principle of the new clause, but our noble Friend Lord Whitty said that he would table tidying-up amendments. I agree that some work needs to be done on the clause.

I am not sure whether a change from a permissive power to a mandatory one is needed now, but we do need to make some progress. The EU's biofuel directive was published in April last year, and the Department for Transport is consulting on implementing it. It is interesting to note that that consultation has taken more than a year. The Department has to give the Commission indicative targets on how to meet the directive's requirements to by 1 July, but the consultation does not finish until 30 July. That is neither good policy making nor good management practice.

There is a strong view throughout both Houses and a partnership with industry that says that biofuels are the way forward. Carbon reductions are being made, but in the transport sector carbon emissions are increasing. It is possible to reduce emissions through better engine design, and there might be a prospect of hydrogen vehicles in future, but in the short to mid term biofuels are the only show in town. The technology is not new—it is used to a large extent in Brazil, and our partner countries in the EU, such as Germany and Spain, are developing biofuels. There is a real danger that we will be left out of the equation, so it is important that we make progress quickly.

Brian White (Labour, North East Milton Keynes)

Is my hon. Friend aware that existing oil refineries could use biofuels if an agreement were reached with Customs and Excise on the amount of duty to be paid?

Paddy Tipping (Labour, Sherwood)

That is correct. The Treasury has been helpful in reducing the rate of duty to 20p, but there is an argument about how much further it should be reduced. The interesting thing about the clause is that it is not dependent on duty reductions. It calls for a biofuels obligation—an idea that I first heard in a more refined version from my hon. Friend the Member for Southampton, Test. We need a biofuels escalator, because if we were to move to a 5 per cent. mix, most of the biofuel would come from Brazil. If the mandatory mix escalated from 1 to 5 to 10 per cent. over a number of years, the industry would have time to prepare. It is important that we produce biofuels in the UK using UK feed stock. The hon. Member for Tewkesbury made the point that that could help with the problems in farming and the agriculture sector.

I ask my hon. Friend the Minister when we might see more signs that the Government are considering a revised draft of the new clause. If we accept the principle of the clause, as I believe we should, some secondary legislation will be required. I have heard alarming stories about that not being introduced for two or three years, and I cannot understand why that should be. We have agreed the principle, albeit we have been very slow about it. Now is the time to make haste,

because an indigenous biofuels industry is good for the UK economy and environment. We must see the matter in a European context. I understand that the Prime Minister is battling for Britain at the moment. The Chancellor was battling for Britain earlier this week. Can we all not battle for Britain and ensure that progress is made on this important policy instrument?

Andrew Stunell (Liberal Democrat, Hazel Grove)

I am pleased to follow the hon. Gentleman. I support the argument that he has deployed this time, although I did not support his previous one. Unfortunately, when the Chancellor and the Prime Minister are ''battling for Britain'' in Europe, in reality that usually means that they are trying to slow things down, at which they are quite successful. I hope that if they accept the challenge thrown down by the hon. Gentleman they find a forward gear and urge their European colleagues to go further and faster on that aspect of energy policy.

I look forward to hearing what the Minister says and finding out whether he is as positive as the hon. Gentleman suggests he might be. The Bill has 180 or so clauses, yet only one deals with the quarter of carbon emissions that the transport sector puts into the atmosphere each year. That seems like far too little to deal with the problem. If the Minister insists on his Back Benchers voting like sheep to take that out, I will want to hear solid assurances from him that something will come back in its place and that the pressure for speed that has been so eloquently put forward by the hon. Gentleman is picked up on.

If we have a renewable transport fuel obligation, there will be obvious benefits for the environment and for security of supply—as the hon. Member for Tewkesbury said—and potential benefits for our domestic agricultural sector. I just put in a word of caution. I do not think that we should hold such an obligation out as something that will work exceptionally well for UK farmers. The truth is that, if a substantial requirement for a renewables obligation is introduced, most biomass will come from overseas sources, largely from tropical and subtropical countries where costs are comparatively low and production can be rapid.

Indeed, the best way of getting such fuel to this country is not to bring the biomass over for it to be processed, but for the biomass to be processed in the producing country and the resulting fuel imported to this country directly for use. One of the paradoxes is that such an obligation may not benefit our own agricultural sector, but it might be a way of promoting development and prosperity in some of the third world and developing countries.

I pick up a point made by the hon. Member for Sherwood. He said that we must make sure that we keep pace with our EU partners. Of course, in this House we sometimes regard them as partners and sometimes as competitors. We need to recognise that if we get behind the pace on the issue, the technology, the investment and, hence, the profitability and jobs that go with a biofuels industry will be based elsewhere in Europe rather than in the United Kingdom. That is another important reason to proceed rapidly on the issue.

Having an obligation such as that may fit better into the UK regulatory system than a system that relies excessively on duty rebates and fiscal measures. About those the public tend to be somewhat suspicious, detecting that—were there to be a large uptake in biofuel usage by members of the public—those fiscal rebates would almost certainly start to evaporate. So, a regulatory system based on obligations on manufacturers and suppliers is far more likely to drive forward the take-up of biofuels than is one based entirely on the fiscal route.

I believe that the principle of clause 128 is a good one. I have no difficulty in supporting the amendment proposed by the hon. Member for Tewkesbury, although I suspect that that is, in reality, a step too soon. Much more importantly, I want to hear from the Minister how he intends to implement the assurances that were given in the other place about taking the matter forward as Government policy in the shortest time possible.

Anne McIntosh (Conservative, Vale of York)

I shall not detain the Committee long. I do not wish to disappoint the hon. Member for Milton Keynes, North-East by not declaring any interests. The only interest that I declare is that I represent a deeply rural constituency in the Vale of York, where I see great potential for biofuels. I make a personal plea to the Minister to hear the arguments eloquently put by my hon. Friend the Member for Tewkesbury, which have gained a degree of support in the Committee, and keep clause 128.

In Selby, north Yorkshire, just across the border from the Vale of York, there was a plant that was proceeding apace, taking a lot of willow coppice, which grows quite quickly and has become a staple alternative crop for many cereal and arable growers. Regrettably, that plant ran into difficulties.

The Government have a commitment to renewables, under the EU directive and generally, and I believe that the Minister will see that clause 128 and amendments Nos. 194 to 197 will be helpful in that regard. I hope that the Minister will comply with the wish of the Committee, which is to ensure that clause 128 stands part of the Bill.

Stephen Timms (Labour, East Ham)

I listened with interest to the hon. Lady. I visited the Arbre plant in Selby, to which she referred. She may be aware of a recent announcement that Drax power station will use some of that coppice willow in its co-firing activities. That has given the farmers in difficulties when Arbre hit its problems a way forward. We hope, of course, that the Arbre plant will start up again.

I will not, as the hon. Member for Hazel Grove suggested, ask the Committee to exclude the clause from the Bill; that would be the last thing that I would propose. My hon. Friend the Member for Sherwood has taken a very close interest in this matter over a long period and has worked with the British Association for Bio Fuels and Oils, which has been promoting biofuels. He made some important points. It is the case

that biofuels offer one of the relatively few options to save carbon in the transport sector in the short to medium term. It is important that we take up that opportunity.

My hon. Friend referred to action already taken, such as the duty reduction on biodiesel, and a similar reduction for bioethanol that is to be applied from January next year. A renewable transport fuel obligation is a serious possibility among the policy options for promoting renewable fuels in the longer term, using the renewables obligation, about which we have talked a good deal today, as the model.

The original clause, moved in the other place, sought to impose a duty on the Government to implement an obligation. There was a lot of constructive discussion and debate in the other place, and there was negotiation with BABFO and all the parties in the House. The outcome of all that was this permissive clause in the Bill, giving a power rather than a duty. That was agreed with cross-party support. I hope that the hon. Member for Tewkesbury will feel that it would be inappropriate to push his amendments to a Division. That would undermine the cross-party agreement secured on this matter in the other place.

Laurence Robertson (Conservative, Tewkesbury)

I do not think that the Minister's argument should be that my amendments might go against the House of Lords. His argument should be based on why he may not proceed with the obligation.

Stephen Timms (Labour, East Ham)

We need to consult industry, to weigh the merits of an obligation against the other options and to work through all sorts of practical measures that the policy would require. Who, for example, would administer that obligation? That is not clear at the moment. We also need to address EU issues such as state aid clearance and trade rules. All that needs to be worked through before we are in a position to commit the Government to introducing an obligation, as the hon. Gentleman's amendments would achieve. An obligation might be the right way forward, but I do not believe that we are yet in a position to make such a judgment.

Laurence Robertson (Conservative, Tewkesbury)

Can the Minister help the Committee by giving us an approximate time scale for the consultation?

Stephen Timms (Labour, East Ham)

As my hon. Friend the Member for Sherwood said, we are currently consulting on our biofuel policy, as part of the implementation of the EU biofuels directive. We are consulting on appropriate targets for the United Kingdom for 2005 and 2010 and we are asking for views on appropriate mechanisms, including the idea of an obligation. The consultation document was launched on 26 April and the process is due to conclude at the end of July.

As my hon. Friend rightly said, some work needs to be done on the wording and some practical issues need to be covered. I intend to come forward on Report with a revised wording to deal with such problems and to achieve the intended effect of clause 128. I would have liked to introduce such wording in Committee, but hon. Members will be aware that such a form of words has appeared only in another place so there has

not been time to introduce it here. I will be tabling on Report an amended version of the measure and one that is fully in keeping with the principle of the clause. I regret that I cannot do so today.

The principle under the clause is potentially an important step forward on the path towards achieving a low carbon transport sector in the United Kingdom. We all share such a goal. I hope that the consensual approach that has been achieved so far will be maintained in Committee and the House.

Laurence Robertson (Conservative, Tewkesbury)

I am grateful to the Minister for his explanation. I do not necessarily hold him entirely responsible for such action, but I would have expected such an amendment to be tabled in Committee. While discussing other clauses during the past few days, the Minister said that he would table amendments on Report. That is not out of order as such, but it would have been better if the amendments had been tabled in Committee so that we could consider them in detail and perhaps consider them further on Report. I am rather disappointed with that aspect of his response. That said, he agreed than an obligation might be a way forward and he recognised the current problems, as well as the fact that transport contributes a huge

amount of emissions. That must be tackled. The Minister said that taking action was the only way to solve the problem. However, a tax incentive could be more attractive, which could be one way of dealing with the problem.

We frequently criticise the United States for its approach to emissions. About six years ago, I visited Detroit—I think that you were on the same trip, Mr. Sayeed—when we considered how the USA was developing clean car technology. Frankly, it left us standing still. To my knowledge, there is nothing comparable in this country to what we saw then. I notice that you are seeking to bring me back to order, Mr. Sayeed. Although I am a little disappointed that the Minister has not tabled such an amendment in Committee, I am encouraged in general by his words, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 128 ordered to stand part of the Bill.

It being twenty-five minutes past Eleven o'clock, the chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Two o'clock.

Standing Committee B

Clause 129 - Strategy for microgeneration

Brian White (Labour, North East Milton Keynes)

I beg to move amendment No. 200, in

clause 129, page 102, line 6, after 'microgeneration', insert 'and dynamic demand control.'.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss the following:

Amendment No. 201, in

clause 129, page 102, line 12, at end insert—

'(2A) In drawing up the strategy or any revision of the strategy, the Secretary of State shall consider the role of dynamic demand control in—

(a) reducing fluctuations in demand for electricity, and so increasing stability and security of supply,

(b) creating a smoothing effect in electricity demand that facilitates the connection of high proportions of intermittent renewable generation,

(c) reducing the need for reinforcement of electricity networks, and

(d) reducing the cost of balancing the electricity system.'.

Amendment No. 202, in

clause 129, page 102, line 15, at end insert

'or produce products that would facilitate dynamic demand control'.

Amendment No. 212, in

clause 129, page 102, line 16, leave out subsection (4).

Amendment No. 203, in

clause 129, page 102, line 17, after 'microgeneration', insert

'and the installation of dynamic demand control measures'.

Amendment No. 213, in

clause 129, page 102, line 20, leave out from 'strategy' to end of line 21.

Amendment No. 214, in

clause 129, page 102, line 23, leave out 'new'.

Amendment No. 204, in

clause 129, page 102, line 24, after 'microgeneration', insert

'and the installation of dynamic demand control measures'.

Amendment No. 205, in

clause 129, page 102, line 28, at end insert—

'''dynamic demand control'' means the ability of a load or a microgeneration device to adjust its electricity consumption or output according to instantaneous power imbalances on the electricity grid, in order that the variability of demand is reduced;'.

Clause 129 stand part.

New clause 2——Requirement for net metering for premises with microgenerating installations—

'After paragraph 1 of Schedule 7 to the 1984 Act, insert—

''Net metering for premises with microgenerating installations

1A (1) Electricity suppliers shall provide net metering facilities upon request to domestic or business premises which have microgenerating installations.

(2) The electricity meters shall be charged at the same tariff in both directions.''.'.

Brian White (Labour, North East Milton Keynes)

I welcome you to our proceedings, Mr. Gale. When this Committee started its deliberations, which seems an eternity ago, we talked about security of supply. I made the point that we needed to look at the demand side as well as the supply side. It should come as no surprise to the Committee that I am going to bang on the same drum again. In the debate on clause 120, the Minister described micro combined heat and power as an important contributing factor to achieving our goals. I echo that. [Interruption.]

Roger Gale (Conservative, North Thanet)

Order. Settle down please.

Brian White (Labour, North East Milton Keynes)

I also fully accept that clause 129 as currently drafted is flawed. I therefore welcome the draft Government amendment, which has been circulated and which addresses some of those flaws. We have to recognise the benefits of microgeneration. It can help not only in CO2 reduction, where it can displace 60 per cent. of efficient central generation, but with the introduction of new technologies in our manufacturing base. It is highly carbon efficient. I have already mentioned security of supply.

Microgeneration is also helpful for affordable housing, which we have talked about in relation to the renewable heat obligation. It helps our competitiveness. Most importantly, it engages people in the debate where it matters—in their own homes. It therefore has a far more symbolic effect than many of the policy issues that we have debated in Committee. Microgeneration has a key role to play, so this is one of the key clauses in the Bill. That is why I am pleased that the Government have accepted that there is a role for microgeneration in the Bill.

I tabled amendments Nos. 200 to 205, and I assure my hon. Friend the Minister that they are probing amendments. I will not push them to a vote. My aim is to get the Government to look at dynamic demand technologies. They are the technologies of the future. Part of the microgeneration strategy should be to look at ways to use these technologies.

I did my fellowship with the Industry and Parliament Trust and with the now defunct Electricity Association. That involved going round the national grid looking at how it operates, how it balances electricity demand at any one time and how it deals with surges in electricity such as will occur at 5 pm today. The national grid has to deal with constant variations in demand every day. Much is done by prediction and by planning ahead. There is variability from minute to minute and even second to second that is not predicted and is balanced by running a few power stations at variable rates. They go up and down as the demand rises and falls.

There is a potential problem as we add more renewable capacity to the grid, which is not as constant as some other forms, and we introduce more variability into the system. That increases costs. Power stations that are balancing the grid at the moment by

turning up and down run well below capacity. It is estimated that around £80 million a year is spent on balancing the grid in that way.

There are an awful lot of power-hungry devices in our homes. The classic one is the fridge. Typically, a fridge will switch on its motor for about 15 minutes and then stay static for about three quarters of an hour. As it gradually warms up again, it will hit the trigger and then cool air will come in. If we could adapt that technology by detecting changes in the way in which the mains frequency varied, we could save power. One fridge would not make any difference, but a million fridges operating at the same time would start to do so.

A number of small measures such as that—which involve people making decisions, contributing and having ownership of the way in which they affect climate change—would make a major difference and get people on board to support the policies that we are advocating.

Robert Key (Conservative, Salisbury)

I am delighted to see you in the Chair, Mr. Gale. I do not know whether the hon. Gentleman is an electrical engineer. I am not, but electrical engineers have told me that changing our traditional system of running electric motors at free speed could make a dramatic difference to energy consumption. There is no limiter for the speed. Generally speaking, every electric motor that does anything runs at top speed all the time. Am I correct?

Brian White (Labour, North East Milton Keynes)

That is my understanding, too. That is why I am saying that if, collectively, we put limiters on our domestic machinery, we could make a major difference. Each individual one would not make much difference, but across the whole country, dynamic demand management would make a major difference. The hon. Gentleman makes the point clearly. I am not an electrical engineer, but one of those people who used electricity, but did not manage it. The price of putting these controllers into an item such as a fridge is between £3 and £5, so for a very cheap investment, which would presumably be made when machines were built and bought—the effect would build over time—we could make a major saving in the £80 million that the national grid uses in keeping power stations inefficient and well below capacity.

To make progress on this issue, the Government must set the framework. There must be a clear steer from them, because there is no argument for consumers to pick up those products or for manufacturers to make them. The Government have a role in setting out the strategy and the goals and encouraging the industry to implement the strategy. The industry could deliver it effectively.

At the risk of setting myself up to be ridiculed under the headline ''Fridges Save the Planet'', I believe that there is a danger that, because we cannot solve all the problems and because my proposal would make only a small contribution, we will reject it. The measure would be a small part of the overall solution, and I urge the Government to consider it and to go down the

route that I have described. They should consider it as a step forward. Collectively, we could make major inroads into the demand side of electricity use.

Laurence Robertson (Conservative, Tewkesbury)

I welcome you to the Committee, Mr. Gale.

Clause 129, which concerns the strategy for microgeneration, was put into the Bill in another place. A few minutes ago, we were given a copy of the Government's preferred amendment, which I presume will be moved on Report. To be fair, we have not had a chance to read through it in detail or to consider it. I am therefore tempted to stick with clause 129 for now. It can, of course, be revisited. I would probably suggest that my hon. Friends do the same.

The hon. Member for Milton Keynes, North-East (Brian White) made his customary well informed and enthusiastic speech, highlighting the need to reduce demand. That would be a useful outcome of clause 129. It is also important to promote the clause because of the new concept that it represents. We have macro-management of the electricity system—to describe it crudely—but also the important concept of microgeneration. According to my brief, microgeneration is when each and every householder will no longer only consume energy, but will produce it. That will engender among householders an interest, which has not existed previously because for 30 years we have had uninterrupted supply. Whenever anyone, including me, has switched a light on, it comes on without a problem. However, that situation is changing so we need a strategy for microgeneration and a requirement for the Secretary of State to implement that strategy.

I have not had a chance to study the proposed amendment. The Minister will propose it in good faith and we will consider it in good faith, but for now, I support clause 129. It is an extremely important part of the Bill and future energy strategy. I welcome its presence.

Andrew Stunell (Liberal Democrat, Hazel Grove)

May I welcome you to the Chair, Mr. Gale? We strongly support the principle of the microgeneration strategy set out in clause 129. Like the hon. Member for Tewkesbury (Mr. Robertson), we have not had the opportunity to examine the detail of the draft, which technically is not available. However, I welcome the fact that the Government seriously intend to pick up the idea of the microgeneration strategy. Having been critical of the Government and of Ministers in this Committee for an apparently leisurely approach to urgent and pressing issues, I am delighted that that is not the case on this occasion.

I shall briefly comment on the amendments proposed by the hon. Member for Milton Keynes, North-East. He introduced me to a new aspect of the situation, which is of great interest and I hope that the Minister will give an undertaking on it. The current waste and inefficiency, which is inherent in having a large and complex grid system with random generation and even more random consumer elements,

is difficult to manage and requires a good deal of money—some £80 million or £90 million a year—which could be better spent elsewhere.

The hon. Gentleman did not say much about new clause 2, which would insert a net metering requirement. I strongly support that concept and tabled similar amendments during the Utilities Bill—now the Utilities Act 2000. I hope that the Minister will be sympathetic to new clause 2 and will tell us that the working party on net metering, which has had different names over the past four years but has still produced no results, will produce evidence of progress. Perhaps he will guarantee that he will have something positive to say about that on Report.

Opportunities are being missed every day while the net metering requirement is not in statute. Estimates suggest that 1 million electricity meters are replaced every year as they come to the end of their economic life. They are replaced with the lowest cost item of basic metering equipment that can be purchased because the supply companies that own the meters, at least nominally, will retain them only for the next 28 days. We could all go home tonight and change our electricity supplier, and the ownership of the meter would change with it. Naturally, those companies have no commitment to installing anything more advanced or expensive than the most bog-standard meter.

A regulatory requirement for net metering would transform that position at a negligible cost to consumers or the electricity industry. The estimate I have had of the cost of an ex-works two-way net meter, compared with the bog-standard meter, is about £3 to £5 per item, which at 1 million units is £3 million to £5 million a year.

Brian White (Labour, North East Milton Keynes)

One of the first results of Ofgem having to look at regulatory impact assessments and to carry out environmental impact assessments, was that it changed the rules on net metering boxes to bring the cost down to that level. Before that, it was suggested that meters should be industrial plant size, costing about £500 to £1,000.

Andrew Stunell (Liberal Democrat, Hazel Grove)

The hon. Gentleman is right. Three or four years ago when I visited meter manufacturers, they were tearing their hair out over the situation they faced. Because electricity suppliers required the cheapest item available, almost 100 per cent. of the manufacture of the electricity meters installed in this country was transferred to India, at the expense of jobs and production here.

The more sophisticated meters—some costing £500 or £1,000, as the hon. Gentleman says, and which are required only in the most unusual, specialist circumstances, are now the only such product that can be manufactured in this country at a reasonable profit.

Alan Whitehead (Labour, Southampton, Test)

Does the hon. Gentleman agree that in addition to ensuring that net metering equipment is installed, with which I thoroughly agree, there is also the issue of how electricity companies charge on the result of that metering? A genuinely two-way tariff—equality of

charge in and equality of income out—is a key issue in the future of net metering. Does he hope, like me, that it will be part of the strategic view of micro-generation that the Government might consider following the adoption of the clause or its revision?

Andrew Stunell (Liberal Democrat, Hazel Grove)

I agree with the hon. Gentleman. The matter of tariffs has bedevilled those who pioneered the technology. I visited two or three projects in the United Kingdom that have gone the whole hog in installing a system and exporting electricity. Almost without exception, they report considerable difficulties in dealing with the electricity companies and establishing a fair and proper way to take their surplus electricity. New clause 2 rightly mentions the installation and the tariff system. I strongly support the net metering concept and I hope that the Government respond favourably to that new clause.

I want to pick up a couple of points made by the hon. Member for Milton Keynes, North-East. First, he described the symbolism of micro-generation— I would prefer to call it the cultural change—and what it can produce. It will be a powerful incentive to people to take the energy system seriously when they realise that they have some plant in their house that can generate electricity, reduce their bills and incidentally contribute to a reduction in global warming.

We must recognise that even a gas-fired micro-co-generation plant will raise the efficiency of combustion from approximately 70 per cent., with a reasonably efficient gas boiler, to something approaching 90 per cent. That will result in a reduction in carbon dioxide emissions and in the bills that the customer pays. It appears to be an unmitigated good, and therefore I am doubly pleased that the Government, in coming forward with this alternative clause, appear to have accepted that point as strongly as they have. We could be in the same position, in terms of energy and efficiency savings, as has already arisen through other regulatory steps such as the change to powering televisions in their stand-by mode.

I shall comment briefly on the dynamic-demand amendments. I do not know whether the Minister can take those matters on board at present, because all sorts of unforeseen technical issues may have to be resolved, but I would like an undertaking from him that they will be explored fully and promptly by his officials in consultation with the industry, with a view to introducing practical measures for implementation as soon as possible.

In that area, as with net metering, a regulatory push from the Government through legislation is needed to make the market perform and to produce the outcome that we all want. I look forward to what the Minister may have to say on that matter.

Colin Challen (Labour, Morley and Rothwell)

I welcome you to the Chair, Mr. Gale. Despite the fact that the blinds are often drawn in this Room, I am sure that you will bring light and clarity to our proceedings.

I also welcome the amendment that the Government have tabled, particularly as my proposals would have removed the word ''targets'' from the original clause 129. I wanted something to be saved from that clause,

which is vital, and it seems that there is consensus around the Room that micro-generation should become an important part of the Government's strategy.

My remarks will be brief, because much of the ground has already been covered. My first point concerns terminology. We refer to ''micro-generation'', but we should refer, at least in our own circles, to ''distributed generation systems'', because ''micro-generation'' might give the public at large the impression that we are discussing a small thing that makes a small contribution to the solutions that are needed to address climate change. Although ''micro-power'' and ''micro-generation'' are easy words to use, we must be careful not to convey it to the public or the industry that we do not see a great future for that way of distributing power.

Having said that, I note that in the past couple of months the Micropower Council was launched. That informed my view that we cannot yet talk about targets, because when an industry body is being formed as we are considering the Bill it would be premature to set targets. However, I agree with Dave Sowden, the council's acting chief executive, who said:

''With the right policy framework, microgeneration can help bring about genuine consumer engagement in tackling climate change.''

He went on to say that this Bill and this clause

''could be the spur to massive investment in microgeneration.''

I agree with both those statements, which is why I think that that the strategy—I hope we agree that it should be implemented—is so important.

I consider four things in the strategy significant. The first, which is mentioned in the Government's proposal, is working with the new industry body and, in particular, examining how the Government could support research and development. I was disappointed with paragraph 4.126 of the regulatory impact assessment, which states:

''While this measure may lead to increased demand for certain microgeneration units and so benefit a small number of UK manufacturers (although many manufacturers are not UK companies) there is a risk that it would detract from confidence in Government assurances''.

That is a conservative and cautious statement. The Government should be seen to support research and development, not only through the measures that they have already mentioned, but through a clear micro-generation strategy. If we had that, we could challenge that statement. Coincidentally, I came across a statement made by the Chancellor of the Exchequer to the European Scrutiny Committee on 20 April:

''There is a market failure in research and development''.

The Government must have a strategy for research and development in micro-generation. That strategy must also include the technical points that have already been mentioned, particularly by my hon. Friend the Member for Milton Keynes, North-East, such as dynamic demand management and net metering. There must be a clear steer from the Government.

Through the strategy we must consider how to promote micro-generation to the public. I hope that the Government work through Ministers from the Department for Environment, Food and Rural Affairs. DEFRA campaigns, such as, ''Are you doing your bit?'', would have greater cogency and purchase with the public if, as well as asking that question, they said, ''Would you like to earn some money as well?'' That would encourage people to get involved in finding solutions for climate change.

Development of new ownership structures in the generation industry should also be included in the strategy. Many people might think that that would be good for individual householders, as I am sure it would. However, my hon. Friend the Member for Waveney (Mr. Blizzard), the hon. Member for Hazel Grove (Mr. Stunell) and I went on the same visit to Germany a couple of years ago with the parliamentary renewable and sustainable energy group. We saw how the Germans were developing small co-operatively owned wind farms so that local communities could own a shared facility, which, if owned by only one or two people, may not be economic.

If we addressed the question of ownership, more people would be encouraged to withdraw objections to local wind farms. Powergen is offering a 25 per cent. inducement to consumers to support wind farms in their area. That may smack of desperation and trying to get the public involved in something that they are not happy with, but I welcome such inducements. Energy is so important to our lives; without it the economy would not exist or grow.

I do not see why individuals, collectives—an old-fashioned word—co-operatives or mutual ownership should not play an important part in the strategy to develop micro-generation. I thank the Government for proposing the amendment. It shows that they listen, particularly to their Back Benchers.

Robert Key (Conservative, Salisbury)

I strongly support the clause. From childhood, I have been interested in and familiar with micro-generation. In my constituency, there is an old micro-generating electricity plant on the River Avon at Heale house, which was designed in the '30s and is still in reasonable working order, though not used daily.

I would be grateful if the Minister and his advisers pored over something curious that I have discovered. Subsection (3) of clause 194, ''Short title, commencement and extent'', states:

''Subject to subsection (4) of this section, this Act extends to Northern Ireland.''

Subsection (4) lists the provisions that do not extend to Northern Ireland and does not include clause 129. Therefore, the clause extends to Northern Ireland. However, the Government's proposed amendment specifically states that the provision refers only to Great Britain. Is that an administrative oversight, a cock-up or a serious change of policy?

Michael Weir (Scottish National Party, Angus)

I mentioned microgeneration when we were discussing CHP. It is could benefit many rural and remote communities,

and there is increasing interest it as an alternative in many parts of Scotland. I agree with the hon. Member for Morley and Rothwell (Mr. Challen) about co-operative ownership—he must be the first Government MP in a long time to call for a degree of collectivisation.

I have a couple of queries about the clause. I do not agree with the hon. Gentleman about targets. The main difference between clause 129 as drafted and the amended version to which, we are told, we can look forward on Report, is the deletion of subsections (4) and (5). Those state:

''(4) The strategy shall include such targets for the generation of energy by microgeneration as in the opinion of the Secretary of State are practicable and cost effective.

(5) It shall be the duty of the Secretary of State to take reasonable steps to—

(a) implement the strategy, and

(b) ensure that any targets included in the strategy are met.''

The revised clause would water down that down, stating that the Secretary of State must take reasonable steps to secure the implementation of the strategy in the form in which it has most recently been published. Any reference to targets completely vanishes. We seem to be returning to the debate in the Committee's first sitting, when targets in relation to carbon were removed from the Bill. The same arguments apply in the present case. It is all very well having a strategy for microgeneration, but if there is no benchmark by which to measure its success, can any meaningful progress be made?

I appreciate what the hon. Gentleman said about the association having just been formed, but we are talking about a strategy under a new clause that is 18 months from being published. We are in danger of having a completely meaningless strategy, because there are no targets in it and there is no obligation on the Secretary of State.

Colin Challen (Labour, Morley and Rothwell)

Does the hon. Gentleman recognise that in those 18 months we could work with the brand new industry body to work out what is needed? If we set targets straight away but do not have the indigenous industry to deliver them, will not we merely suck in exports from elsewhere? Does he really think that is a good idea?

Michael Weir (Scottish National Party, Angus)

No, I do not think that is necessarily the case. We are 18 months away from the publication of a strategy and the targets, whatever they may be—the clause as it stands does not say what they are—could start modestly and build up, but at least they would be a benchmark against which to measure the strategy. At present, it is meaningless. There is no duty on the Secretary of State to implement the strategy: under the new clause, his or her duty is to secure implementation—a different form of words that may well mean that the Secretary of State gets out of any obligation to do much about the strategy. Although I welcome the fact that the Government have moved to some degree in that they are willing to consider a strategy, I fear that under the amended clause we will have a strategy without any teeth. Clause 129 is slightly better, although not perfect.

Anne McIntosh (Conservative, Vale of York)

I warmly welcome you to the Chair, Mr. Gale. It is a pleasure to serve under your chairmanship.

I refer the Minister to his Department's earlier renewables obligation preliminary consultation, which was published under a former Secretary of State for Trade and Industry, the right hon. Member for Tyneside, North (Mr. Byers). That shows how long ago it was. The document is silent on the subject of microgeneration; I wonder if that shows how much the Minister is committed to it. Was it was a deliberate omission from the consultation?

Although he had not managed to draft an amendment, the Under-Secretary felt that it was justified to leave clauses 100 and 101 clauses in the Bill until Report. I have not had an opportunity to read through the amendment that has been thrust before us unofficially this afternoon, or to consult relevant partners in the industry on it. I therefore argue that although it is helpful, as other hon. Members have said, to have sight of the proposed revised clause, the clause 129 should remain part of the Bill as it stands, at least until Report.

Andrew Stunell (Liberal Democrat, Hazel Grove)

Does the hon. Lady agree that there is a risk of losing the bird in the hand in favour of the two in the bush that might fly away before we reach Report?

Anne McIntosh (Conservative, Vale of York)

Indeed. Without bringing our feathered friends into this, I would greatly prefer to leave clause 129 in the Bill. I pay tribute to the hon. Gentleman's noble Friend in the other place who did the groundwork, with support from my noble Friends, to secure it. Removing the clause, which has enjoyed a great deal of support, would be regrettable.

What discussions has the Minister had with that relatively new industry body, the Micropower Council, which was launched in London on 23 April. It has introduced an action plan to encourage consumers to recognise the energy efficiency benefits of microgeneration in the domestic setting. The Minister risks causing a great deal of upset among the relevant industry bodies. There are huge benefits from microgeneration. I shall not rehearse them all here, but they relate to CO2 reduction, securing a safe supply, security and reliability in terms of adequate and affordable home heating and, in relation to the employment market and industry, ensuring the competitiveness of the UK.

This morning, the hon. Member for Milton Keynes, North-East expressed dismay that every time a member of the Committee made a suggestion, the Minister said that we should wait until the review in 2005-06. I humbly submit that clause 129 is an extremely helpful addition to the Bill, and I oppose its removal at this stage. I think that the Minister will accept that his draft is deficient in certain aspects, because it will remove certain aspects of the original clause.

Clause 129 is also important for the campaign for warm homes—which has been very successful—and would contribute to domestic as well as industrial energy efficiency. I imagine that a number of small businesses and households would benefit from it.

Nigel Griffiths (Labour, Edinburgh South)

I, too, welcome you to the Chair, Mr. Gale. The hon. Member for Vale of York (Miss McIntosh) put a question to me directly, and I shall answer it directly. She asked me what the Government's commitment was to microgeneration. Our commitment is £35 million through funding the major photovoltaics demonstration programme and the clear skies initiative, which provides grants towards the cost of residential and community renewables projects. That £35 million commitment is to a Labour Government programme; that programme did not exist before. I am pleased that she has given me an opportunity to spell out the present Government's commitment and to contrast it with the Conservative Government's lack of commitment.

I have no doubt that microgeneration has an important part to play in reducing greenhouse gas emissions. The distributed generation co-ordination group established by the DTI and Ofgem is considering the integration of microgeneration. We recently legislated to make it easier for small renewables generating stations to receive renewables obligation certificates, and I am sure that the new body that the hon. Lady mentioned warmly welcomed that. The Committee will be keen to know that the micro-CHP trials are under way, under the low carbon innovation programme, with the co-operation of the Carbon Trust, again in partnership with the Energy Saving Trust. I pay tribute to the Energy Saving Trust and all the work that it is doing to help us to achieve a wider use of microgeneration. The Committee will also be pleased to know that the Chancellor announced in the Budget that VAT might be reduced for micro-CHP in 2005. I am sure that he will welcome detailed representations from hon. Members and others before then.

Clause 129 would, as has been said, impose on the Secretary of State a duty to draw up a microgeneration strategy and to set relevant targets. I have some detailed concerns about the clause. It needs to establish the purpose of a strategy rather more clearly—it is feared that the references to new and renewable sources of energy are confusing. Careful consideration should be given to the definition of microgeneration in order to ensure that any strategy has a clear scope. Those issues can be addressed through drafting.

Although it is widely agreed that there should be a clause to highlight the benefits of microgeneration, there are fundamental problems with one aspect of the clause added by their lordships: the requirement for the strategy to include targets. The objections to that have clear foundation. A specific target for small-scale generation of electricity could cut unhelpfully across other commitments in the White Paper, because

microgeneration incorporates micro-CHP and small-scale generation from renewables, and renewable energy and CHP are already the subjects of separate targets. The principle of targets has been accepted in a number of areas relating to generation, but the nature of generation means that the setting of further targets in areas for which targets have already been set might cause confusion.

A clear strategy for microgeneration has benefits, and legislation is not required to achieve them. However, to the extent that a legal duty to establish a strategy would give the industry and potential investors confidence, we are prepared to look at the clause with the intention of proposing an amended version on Report. One has been drafted so that everybody has the opportunity to study it before that stage.

Amendments Nos. 212, 213 and 214 would remove the need for the Secretary of State to set targets for microgeneration. However, I am advised that they do not address some of the other technical difficulties with the clause as drafted. I hope that my hon. Friend the Member for Morley and Rothwell will consider not pressing the amendment.

Amendments 200 to 205 would require the microgeneration strategy to consider dynamic demand control. That is only one of a number of issues that could be covered by the strategy. There is a reluctance to specify in legislation every issue that might be considered by a strategy, and that is not felt to be necessary at this stage. There is also concern that by specifying some of the issues to be considered, it might seem as though other equally relevant issues will be overlooked or downgraded.

Brian White (Labour, North East Milton Keynes)

Accepting that the issue does not need to be in the Bill, will the Minister assure us that the Department will look at it and promote it as one small part of the strategy?

Nigel Griffiths (Labour, Edinburgh South)

I do not have any hesitation in repeating my opening sentiments. The Department of Trade and Industry recognises the importance of microgeneration, and because it cuts across other Government-supported programmes it is an issue and must be an integral part of our thinking in developing a strategy. I hope that that reassures my hon. Friend and I am grateful to him for highlighting the key microgeneration issues so articulately.

Andrew Stunell (Liberal Democrat, Hazel Grove)

On the issue of dynamic demand control, I am sure that the Minister recognises that that is not limited to microgeneration in homes or premises. It could apply to everybody's home as soon as they buy a new fridge. We are talking about an issue with a potentially wider application, and therefore greater impact sooner. I hope that he follows through on the remarks he has made so far.

Nigel Griffiths (Labour, Edinburgh South)

Yes, I certainly believe that it is important to explore the role of dynamic demand management as part of the strategy. I am happy to give that commitment. We are actively considering the

complete role, and there will certainly be an opportunity during the consultation period to consider when dynamic demand management will play a role and how it can play a role in meeting our carbon reduction aims. I am grateful to the hon. Gentleman for raising that point and allowing me to set out the Government's position clearly.

New clause 2 intends to ensure that microgenerating capacities exporting renewable electricity to the local distribution network have net metering facilities made available by their supplier. I am advised that if legislation required electricity suppliers to pay the same price for electricity as that at which they sell electricity, they would in effect be required to buy the product at a price above that obtainable elsewhere. That has serious implications for other electricity consumers and whether they will be willing to bear the additional costs.

We are keen to ensure that all small-scale generation is treated equitably and receives full value for the electricity it exports. However, if net metering allows electricity exports from customers' homes to be rewarded at the price at which electricity is imported, there will be concern that it is economically unsound and will undermine the arguments for promoting such electricity generation.

Another problem with net metering is that it does not recognise the time-varying nature of electricity value, which is much higher in the peak hours than in the middle of the night when demand is lower. Net metering appears to take no account of that, effectively pricing power used at midnight at the same level as power used at peak time. Several electricity suppliers have offered a limited deal on net metering, often for electricity from solar energy or photovoltaics. I strongly support that—as, I am sure, do all hon. Members—and I want to encourage other suppliers to follow that lead, but it is one thing to encourage voluntary development and quite another to make it compulsory, given the uncertainties and problems that I have outlined.

The amendment could impose an unprofitable or loss-making requirement on companies supplying electricity to certain households. This whole area needs to be explored and debated in more detail before we can accept such an amendment. I urge hon. Members not to press the amendments or new clause 2, and I propose that clause 129 should not stand part of the Bill.

Brian White (Labour, North East Milton Keynes)

In my haste to move the amendment, I passed over my notes on new clause 2, so I am indebted to the hon. Member for Hazel Grove for making the case that I should have made and which I signally failed to do. However, I will take up the Minister's comments on net metering and enlighten him, after the sitting, as to why some fears on which his arguments are based are unjustified.

On clause 129, I welcome the Minister's commitment regarding the draft clause, which it would be helpful to see. It is important to recognise that the coalescing series of small changes could bring the necessary cultural change.

In seeking to withdraw my amendment, I make a plea to the Minister that this should not become another missed opportunity.

Robert Key (Conservative, Salisbury)

The hon. Gentleman may have noted that I made a serious point about Northern Ireland, but that it seems to have slipped the Minister's mind. Will he be so kind as to invite the Minister to answer?

Brian White (Labour, North East Milton Keynes)

If the Minister wishes to intervene, I am happy to give way.

Nigel Griffiths (Labour, Edinburgh South)

I am grateful for the opportunity to respond. I meant no discourtesy and I apologise for not covering that point in what was rather a dense brief. The hon. Member for Salisbury (Mr. Key) asked whether the measure will extend to Northern Ireland. When we bring back the revised clause on Report, we will amend clause 194 to clarify the fact that it does not apply to Northern Ireland. It does not apply because this is a devolved issue. We have discussed the matter with our Northern Irish colleagues and kept them informed of our strategy.

Brian White (Labour, North East Milton Keynes)

As I was saying, I make a plea to the Minister that this does not become another missed opportunity. This morning, I mentioned that micro-CHP has been put on hold by British Gas. There are tremendous opportunities for the Department for International Development and developing countries, as well as for our industry and manufacturing base, and I urge the Minister to recognise that fact when he introduces the revised clause on Report. However, I will pursue the matter outside the Committee and enlighten him on why microgeneration does not hold the fears that he articulated. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 6, Noes 12.

Clause 130 - ''New trading and transmission arrangements''

Anne McIntosh (Conservative, Vale of York)

I want to question the Minister briefly on the application of the measure to Scotland. I understand that concern has been raised about the implications of the forced sale of the Government's golden share in BAA plc. I understand that golden shares are held in two Scottish companies Scottish and Southern Energy, and Scottish Power. Is he aware of whether there would be implications if a similar action were brought before the Competition Commission or the European Court of Justice?

I misread the helpful Library note that relates to the application of this clause to Scotland. It was rather alarming on the state of household bills in Scotland. I thought that it said that hills had been lowered in Scotland at a lesser rate than in England. In fact, it said that household bills had decreased at a lower rate in Scotland than in England and Wales. I am sure that the Minister, representing the constituency that he does, will be alarmed that the liberalisation and the new arrangements have not percolated through to Scotland as quickly as to England and Wales. Perhaps he can explain, in the context of the clause, how that advantage to Scotland will be extended more quickly.

Nigel Griffiths (Labour, Edinburgh South)

Let me deal with the hon. Lady's point. The British electricity trading and transmission arrangements will create a single wholesale electricity market for Great Britain, which will have a single transmission system operator that is independent of any interests in generation and in supply. This is based on the arrangements that prevail in England and Wales. They formed the basis for consultation and seem to have served both business and domestic consumers well.

The clause defines what is meant by new trading and transmission arrangements—a phrase used in clauses 131, 134 and 136—and limits the powers given to the Secretary of State. I hope that that explanation of the position in England and Wales—we believe that it should be the position throughout the United Kingdom—is adequate for hon. Members.

Question put and agreed to.

Clause 130 ordered to stand part of the Bill.

Clauses 131 and 132 ordered to stand part of the Bill.

Clause 133 - Transmission licences

Andrew Stunell (Liberal Democrat, Hazel Grove)

I beg to move amendment No. 215, in

clause 133, page 104, line 38, at end insert—

'(1A) After subsection (2) of that section insert—

''(2A) The same person may not be the holder of both a transmission licence in which the conditions relating to the carrying out of the system operator function by such person are in force and a transmission licence in which the conditions relating to the carrying out of the system provider function by such person are in force. For the avoidance of doubt, a holding company and the subsidiaries of that holding company (as such expressions are defined in section 736 of the Companies Act 1985) shall be regarded, for the purposes of this section, as different persons.

(2B) The holder of a transmission licence shall not, except to the extent permitted by or under such licence in respect of ancillary or incidental activities, conduct any business or carry out any activity other than that of participating in the transmission of electricity.''.'.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss the following:

Amendment No. 216, in

clause 133, page 105, line 11, at end add—

'(2B) Without prejudice to the generality of paragraph (a) of subsection (1), conditions included in a transmission licence by virtue of that paragraph may include such provision in a licence to give effect to section 6(2B) as appear to the Authority to be necessary or expedient.'.

Amendment No. 217, in

clause 139, page 107, line 5, at end insert—

'''system operator'' means a person engaged in the activity described in section 4(3A)(a) of the 1989 Act;

''system provider'' means a person engaged in the activity described in section 4(3A)(b) of the 1989 Act; and'.

Andrew Stunell (Liberal Democrat, Hazel Grove)

We are moving into a somewhat technical area in which one needs to have either a thick anorak or a great deal of time to understand the issues.

The clause relates to the issuing of transmission licences. The worry that my hon. Friends and I have about the clause is that potentially it puts a good deal of power and leverage in the hands of the system operator, which is essentially, at the moment, the National Grid Company. The purpose of the amendment is to say that a transmission licence cannot be issued to somebody who is, at the same time, the system operator. It is designed to ensure that the strong leverage that could be operated by the NGC, or by some other company with the system operator function, is inhibited or limited and cannot under any circumstances hold the system to ransom.

I should say by way of introduction that in response to the hon. Member for Vale of York in the clause 130 debate, the Minister somewhat skated over the controversial and difficult background that NETA has had in England and Wales. By implication, he suggested that everything was for the best in the best of all possible worlds, and all we needed to do was join Scotland and everything would be fine. For NETA, everything is not for the best in the best of all possible worlds. It has required constant tweaking and has created a large number of problems for operators at both ends of the grid. The Minister will say that NETA has led to a substantial reduction in prices. I certainly would not deny that, although not all of those price reductions have been passed on to consumers, as one might have expected if the market were working as well as Ministers have sometimes stated.

In extending the BETTA system to Scotland, it is important not to build in potential weaknesses; in particular, it is important to avoid a situation in which one operator—or the operator of one particular function, which is the systems operator—does not get unreasonable power or leverage within the system. That is the purpose of amendment No. 215, which states that the same person may not be both the holder of a transmission licence as a system operator and the provider in the general sense.

I will be interested to hear what the Minister has to say about the amendment. I hope that he will not pretend that there is no issue to address. I am prepared for him to say that there may be deficiencies and all the usual difficulties that occur when the Opposition draft amendments. However, I hope that he will not minimise the risk that a systems operator might gain unreasonable leverage over the way in which the whole transmission network operates. My hon. Friend the Member for Lewes (Norman Baker) and I have proposed the two amendments to explore the issue and to hear the Minister's assurances that our fears will be appropriately addressed on Report.

Anne McIntosh (Conservative, Vale of York)

I have followed with interest the words of the hon. Member for Hazel Grove. I was also disappointed that the Minister made light of the difficulties experienced with the introduction of NETA. To support my argument, I pray in aid the National Audit Office report, which damningly concluded:

''The market based NETA arrangements are more costly than the central Pool arrangements.''

It continued:

''There is a continuing though reduced risk that participants in NETA may manipulate prices to their advantage.''

It also stated:

''Ofgem make their regulatory decisions transparent and this will continue to be a vital part of their work.''

The NAO put forward a positive conclusion in seeing the need for continued regulation, and the report firmly recommended that Ofgem should continue to review why domestic consumers who have not switched supplier have benefited much less from falling wholesale prices. Indeed, a number of other conclusions support the argument of the hon. Member for Hazel Grove.

Although the Vale of York, which I represent, does not contain many hills or mountains—as the name suggests—I must point out that, in common with Scotland, the rest of the county, which is the largest in the country, has hills. According to the Library note, bills north of the border have not fallen by as much as those in England and Wales. It is curious that bills have fallen faster in Wales than in Scotland, since Wales is also a mountainous and hilly region. Perhaps the Minister has an explanation for that that has escaped me. The high cost of distribution in Scotland is a significant factor. If that is a concern for the Minister, what does he propose to do about it?

The Minister will be only too aware of my hostility to overhead line transmission, an issue that north Yorkshire and Scotland share. We are told that it is too expensive for lines to go underground where there are hills. Oil companies, such as BP, managed to put ethanol pipes underground while the overhead line was going up. Since they were covering a similar route, it was curious that electricity lines could not have been laid at the same time as a pipeline carrying ethanol. It can be done if there is the will to do so.

I do not support the whole thrust of the amendments from the hon. Member for Hazel Grove, but he raised interesting issues. The Minister would do well to respond to the concerns raised in the NAO's report.

Nigel Griffiths (Labour, Edinburgh South)

Let us examine some facts. Both the system operator and the transmission owner functions are already monopoly activities and, as such, are subject to heavy regulatory oversight. Ofgem has given detailed consideration to that. It believes that the National Grid Company has made significant savings by making use of the synergies available by undertaking the system operator and transmission owner functions together. Indeed, the NGC calculates that, during the past nine years, that measure has benefited electricity consumers to the tune of some £55 million a year. The regulator has successfully made incentives part of the price control regime for NGC, which has brought further significant benefits.

It would be much harder properly to incentivise a company or division of a company that simply operated the networks but owned no assets. We need to be careful about putting at risk arrangements that have proved to be very successful in improving efficiency and that have ensured cost savings to customers. We are aware of concern about the possible discrimination against transmission owners not owned by the NGC. Non-discrimination will be addressed explicitly in a licence condition in NGC's licence.

Ofgem and the DTI are advancing proposals for further targeted regulatory arrangements to ring-fence the information submitted by other transmission licensees when preparing their own connection offer. That is another concern that has been voiced to and by hon. Members, and I hope that what I have said is evidence that we are addressing that. A draft text for consultation is being produced and I hope that it will be available shortly. Both Ofgem and the DTI firmly believe that the best way to address concerns about discrimination is through licence conditions, which is why we reject the amendments.

Hon. Members voiced concerns about NETA that I would have been happy to address if they had pressed me. However, they sat down and said nothing, so I am glad to have the opportunity to respond and to prove that there is no complacency. The pool mechanism was a price-setting mechanism that was open to price manipulation by significant players, and it hid overcapacity in the market and the significant decrease in wholesale electricity prices following the introduction of the new regulatory regime. The introduction of NETA was the market response to that overcapacity. I am sure that hon. Members will accept that NETA has benefited consumers, which is the point that I sought to make in connection with another clause. I hope that I have clarified that point and persuaded the hon. Gentleman to withdraw the amendment.

Anne McIntosh (Conservative, Vale of York)

The Minister does not seem to have responded to my comment about the higher distribution costs of electricity. Does he believe that those costs have anything to do with the fact that no single company in England owns more than 20 per

cent. of capacity, but that the capacity in Scotland is largely in the hands of Scottish Power and Scottish and Southern Energy? Is not the effect on prices compounded by the difference in the market?

Nigel Griffiths (Labour, Edinburgh South)

Yes.

Andrew Stunell (Liberal Democrat, Hazel Grove)

The Minister has made a robust defence, but it is not as solid as he made it sound. As he knows, the prices came down before NETA came into operation, no doubt in prospect of NETA's introduction. I notice that the £55 million saving is an NGC estimate. I am not disputing either of those facts. I am simply pointing out that we have created a monopoly, as the Minister very fairly said, which can be kept in check only by legislation along the lines that my hon. Friend the Member for Lewes and I have put forward today or by very firm regulation.

Two potential problems have been pointed out—two of the mechanisms by which the leverage that I spoke of might become effective. One would be discrimination by the NGC or the system operator for new entrants who were taking up transmission licences. It is some comfort to know that the Minister has recognised that and that Ofgem will keep an eye on the situation, but it shows the need for vigilance and for a firm approach by the regulator to the question of the abuses that might arise.

I think that I understood the Minister to say that he was also consulting on what I might interpret as Chinese walls in the matter of provision of information by potential licensees, to prevent information from being transmitted to the NGC or the system operator if it might subsequently be used to the disadvantage of the incoming transmission operator. That is of some comfort, but the very fact that those issues must be dealt with is a clear signal that we are setting up a potentially risky situation, in which there is scope for an operator to abuse the power that the transmission licences will afford.

Nevertheless, having explained our concerns and heard something from the Minister about the action that he intends Ofgem to take to safeguard the system from the abuses that we have identified, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Anne Picking (East Lothian) (Lab): I beg to move amendment No. 93, in

clause 133, page 105, line 11, at end add—

'(4) In section 7 (licence conditions: general), after subsection (3A) insert—

''(3B) Conditions included in a transmission licence by virtue of subsection (1)(a) shall require the holder to—

(a) maintain accounting and reporting arrangements which enable accounts to be prepared, and

(b) prepare and submit to GEMA, on an annual basis, accounts,

for the business engaging in that activity so that the revenues, costs, assets, liabilities, reserves and provisions of, or reasonably attributable to, the business engaging in that activity are separately identifiable from those of any other business of the transmission licence holder.''.'.

I shall be relatively brief and not delay proceedings, because I am one of those Scots who want to support the British team.

Amendment No. 93 would add to clause 133 by placing a duty on a company undertaking the role of independent GB system operator to publish separate regulatory accounts for its transmission-owning business. One of the key principles supporting BETTA is the introduction of an independent operator to ensure that all generators participating in the UK market are treated equally. The Government have also already indicated that they are minded to appoint the NGC, currently the UK's largest transmission operator, as the GB system operator.

That is not necessarily a problem. As the largest transmission operator, the NGC clearly has the skills necessary to operate the market and in terms of fair access to the network for generators it has no conflict of interest as it does not own any generation capacity. However, it is also important to bear in mind that that the GB system operator will have a unique and monopolistic role in the new market, and although it may be independent of generators and suppliers, it is obviously not independent of all transmission licensees. Therefore, it is vital that there is sufficient transparency between the NGC, as the GB system operator, and the NGC as a transmission owner.

It is worth noting that, in examining the draft Electricity (Trading and Transmission) Bill, the Trade and Industry Committee picked up that very point, stating:

''We agree that it will be essential to clearly distinguish the roles of the system operator and transmission owner and to ensure that NGC in its role of system operator acts independently of the company's interests as a transmission asset owner.''

Scottish Power, one of the other two transmission owners, has expressed concern to me that sufficient transparency does not exist within the current proposals. There is thus potential for the GB system operator to discriminate against Scottish Power or Scottish Hydro-Electric in favour of its own transmission business. My amendment would provide that degree of transparency by ensuring that the National Grid Company's transmission business would have to publish separate regulatory accounts from the GB system operator.

Calum MacDonald (Labour, Na h-Eileanan an Iar)

I would like to add a brief word of support to my hon. Friend's amendment. I, too, have had the benefit of the briefing from Scottish Power, in which the concern was expressed that the twin roles of operator and owner of the system were insufficiently distinguished in the current legislative arrangements. Scottish Power made the fair point that it currently occupies the same dual role—it is operator and owner of a large part of the system in Scotland, as is Scottish and Southern Energy Group. However, whereas in Scotland, such

companies are currently required to publish separate accounts for each part of the business, that will not be required of the National Grid Company.

Scottish Power said that publishing the separate accounts, as it is currently required to do, is a fairly simple operation, and does not cost much in additional personnel or work time. However, it gives everyone the confidence that the two roles are being carried out properly and that there is sufficient transparency for other system owners to know that the system is operating properly. Given that publication of separate accounts engenders that greater confidence and transparency, and that it is not costly to carry out, it seems that Scottish Power makes a fair point in asking the Government to examine the matter. I hope that the Minister will respond positively to Scottish Power's concerns.

Andrew Stunell (Liberal Democrat, Hazel Grove)

Obviously, in the light of the amendments that I moved before, I am happy to support the amendment under discussion. It is more modest in its directing effect, but creates greater transparency, which I believe is of great importance. In extending NETA to Scotland and creating a new system, we should at least not make worse the reporting requirements that currently exist for the Scottish transmission and system operators, so that there is no loss of transparency, which would be the effect of the legislation as currently drafted.

Paddy Tipping (Labour, Sherwood)

During discussion of the previous group of amendments, the hon. Gentleman suggested that we needed thick anoraks, but he now tells us that we need more modest anoraks. However, what we actually need are transparent anoraks. I have much sympathy with the points made by all hon. Members during the debate. The amendment would require the systems operator—the NGC—to prepare its accounts in a different way, so that the transmission costs are separated from the ownership costs—[Interruption.]

Roger Gale (Conservative, North Thanet)

Order. I have been as patient as I can. If hon. Members wish to have a private conversation, will they please leave the Room and have it outside?

Paddy Tipping (Labour, Sherwood)

If the accounts were prepared in that way, they would separate the costs of running the systems from the asset costs. That would put no great onus or responsibilities on the operator, but would bring greater transparency and trust to the system. The Department is well aware of the issue—the Minister, in a previous discussion, talked about the licences that were to be introduced. It is important that the Minister gives us an assurance about the transparency that we all seek.

Nigel Griffiths (Labour, Edinburgh South)

I hope that I will be able to do so. My hon. Friend the Member for East Lothian (Anne Picking) set out clearly the rationale behind the amendment. However, I preface my remarks by saying that the position in Scotland was always different. Scottish Power, through its commercial operations, chose to establish and publish separate accounts. It is not required to do so for its system operator,

transmission owner roles; it publishes separate accounts when it has businesses that require different licences—transmission and distribution. However, having set up publishing mechanisms at an earlier stage, it is not as simple as saying that it must be easy for others to do so. I appreciate that there must be transparency, which is important. Whether it has given companies in Scotland the ability—I choose my words carefully—to make more money, I will not say. Certainly, higher prices have been reflected in those practices. Therefore when people pray in aid the practices in Scotland, I treat them on the basis of the evidence, which is that the consumers have apparently not benefited as much as they have in other parts of the country.

As hon. Members have stressed repeatedly, it is a heavily regulated area, and Scottish Power has been one of the most vociferous complainants about the regulation, so it cannot be all wrong. Ofgem closely monitors those areas where it is felt that the consumer might at first be taken advantage of. I recognise the genuineness of the arguments, but I am not convinced that the benefit to customers of accepting the requirement in the amendment would outweigh the bureaucracy involved.

Ofgem, spurred on by the NAO and the excellent work done by the Trade and Industry Committee, is keeping these matters under constant review. I am advised that the potential bureaucracy in the proposal is outweighed by the fact that enough mechanisms are already in place to ensure that consumers are protected.

Paddy Tipping (Labour, Sherwood)

The Minister prayed in aid the Trade and Industry Committee. In its last report on the issue, the Select Committee recommended the course of action that we advocate.

Nigel Griffiths (Labour, Edinburgh South)

I listened to my hon. Friend's earlier summary of the Trade and Industry Committee's report. I am advised that the report stated that if properly drafted, the licence conditions and the industry code—I understand it is in draft— should be sufficient to achieve the appropriate degree of separation. Obviously, the Department of Trade and Industry examined the Select Committee's evidence in detail when available and the conclusion has been reached that the amendment would not bring better safeguards to companies, at a proportionate cost, despite the briefing of Scottish Power, the genuine views of hon. Members and the evidence taken by the Select Committee.

Andrew Stunell (Liberal Democrat, Hazel Grove)

Perhaps it would help the Minister if I read out the Trade and Industry Committee's response to the Government's response:

''We stressed that the GB transmission System Operator (GBSO) should act independently, not only from electricity generators and suppliers but also from transmission owners. Such explicit legal separation of these interests will be necessary especially if, as expected, the owner of the transmission system . . . the National Grid Company, is appointed as GB system operator.''

Does he acknowledge that that Committee accepts that NGC will be the system operator, but makes it clear that there should be an explicit legal separation? Should not the accounts, therefore, be separated as well?

Nigel Griffiths (Labour, Edinburgh South)

Ofgem investigated the recommendation and the concerns voiced by Scottish Power. I am advised that it was unable to locate sufficient evidence to justify either setting a licensing condition that would require the GBSO—NGC—to submit separate accounts or breaking NGC into separate companies. The regulator, having looked at the matter, and being aware of the concerns and taking them seriously, does not accept the logic of the hon. Gentleman's case. We are confident that Ofgem maintains a review of these matters and would not hesitate to recommend action if it felt that necessary. It has not found evidence of a need to take action in that area. On that basis, I urge the Committee not to accept amendment No. 93.

Anne Picking (Labour, East Lothian)

With those tenuous reassurances, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 133 ordered to stand part of the Bill.

Clauses 134 and 135 ordered to stand part of the Bill.

Schedule 17 agreed to.

Clause 136 ordered to stand part of the Bill.

Clause 137 - Duties to provide information etc. to Secretary of State

Anne McIntosh (Conservative, Vale of York)

I would appreciate a little more information from the Minister as to how the measure will apply. We are mindful of the fact that there is an effective duopoly in Scotland, if not a monopoly, but I understand that a merger was mooted at one stage and might be back on the table once the Bill leaves the House.

Against that background, I want to draw the Minister on the Government's responsibilities under the European electricity and gas directives as well as the European regulation on cross-border trade in electricity. I understand that political agreement was reached at the Energy Council on 25 November 2002, so I therefore assume that those measures are now part of European law and have been incorporated within the legal systems of Scotland, England and Wales.

The directives require independent regulation; transparent, non-discriminatory access to infrastructure; the unbundling of vertically integrated monopolies; and that all consumers choose their electricity and gas suppliers by July 2007. I commend the Government's performance in certain respects—they are actually ahead—and we have a much more

liberalised market than other member states. Let me express my enthusiasm for these European provisions, but not too loudly in case I wake my hon. Friend the Member for Tewkesbury.

Many companies in Britain, not just Scottish ones, will benefit from the further liberalisation of the energy market. I hope that the Government pursue that, although I hope also that the Minister will remember that I am not minded to have a European input on security of supply. However, there is a big role for liberalisation and for the Commission, and I hope that the Government push the Commission and the Council of Ministers in that regard.

I want to draw the Minister out on the unbundling of vertically integrated monopolies. Does he think the duopoly and potential monopoly in Scotland will require the Government to unbundle the present arrangements? The Government have accepted that prices are higher as there is less competition in Scotland. Looking forward, what duties does he think the Gas and Electricity Markets Authority will have to provide the Secretary of State with that information? Does he believe that the European legislation to which I have referred will apply under the clause?

Nigel Griffiths (Labour, Edinburgh South)

If that legislation does not apply, I will write to the hon. Lady and other members of the Committee. I am glad it has been acknowledged that we are in pole position in terms of the European directive, which we shall probably be in a better position to implement than anyone else. If a detailed note on how we are implementing it is required I can provide it, but I do not think that one is.

In the furtherance of openness and ensuring that details are completed, the clause requires GEMA to provide the Secretary of State with a copy of any application it receives for a transmissions licence under clause 136. Clause 137 requires GEMA and any holder of an electricity licence under the Electricity Act 1989 to provide the Secretary of State with information required to carry out any of her or his functions under chapter 1. Subsection (4) states:

''Section 105(1) of the Utilities Act 2000 . . . (general restrictions on disclosure of information) does not apply to a disclosure made in pursuance of this section.''

BETTA was introduced so that all generators and suppliers would have access to the transmission system on equal terms. Scotland will be compliant after BETTA and so will not require, one would hope, any further intervention. I hope that that satisfies the hon. Member for Vale of York.

Anne McIntosh (Conservative, Vale of York)

Is the Minister minded to respond to my question about the duopoly? There is an extant duopoly, consisting of two power companies in Scotland. It is a matter of record that there was a proposal for a merger between them and that GEMA administers prices in Scotland. Could European legislation be interpreted under the clause to the effect that such a vertically integrated duopoly—or monopoly, were that to exist—has to be unbundled?

Nigel Griffiths (Labour, Edinburgh South)

I am advised that further unbundling will not be required.

Question put and agreed to.

Clause 137 ordered to stand part of the Bill.

Clause 138 ordered to stand part of the Bill.

Schedule 18 agreed to.

Clauses 139 and 140 ordered to stand part of the Bill.

Schedule 19 agreed to.

Clauses 141 to 143 ordered to stand part of the Bill.

Clause 144 - Consequential amendments of the 1989 Act

Clause 154 - Powers of court

Laurence Robertson (Conservative, Tewkesbury)

We are discussing applications for energy administration orders. Under subsection (2)(a) to (c), the Government have three grounds for taking over a company—that it cannot pay its debts; that it is likely not to be able to pay its debts; or that

''it would be just and equitable . . . to wind up the company in the public interest.''

The latter is a wide-ranging provision. Will the Minister explain how that fits with the other provisions of the clause, which is about companies going into liquidation or administration?

The Minister for Energy, E-Commerce and Postal Services (Mr. Stephen Timms): I am pleased that you are chairing our deliberations this afternoon, Mr. Gale.

The clause sets out the powers of the court when hearing an application for an energy administration order. An application may be made by the Secretary of State or, with her consent, by Ofgem. The court may make the order only if it is satisfied that one of three situations applies, each of which is taken from existing insolvency law. First, the company must be unable to pay its debts. Secondly, it is likely to be unable to do so—that is, it is facing insolvency. Thirdly, on the point raised by the hon. Gentleman, the company could be wound up in the public interest on petition by the Secretary of State under section 124A of the Insolvency Act 1986.

The third situation is tied back to existing powers in the Insolvency Act that allow the Secretary of State to wind up a company if it is in the public interest to do so. Section 124A applies if a company is being investigated under various pieces of legislation, including the Financial Services and Markets Act 2000, the Companies Act and the Criminal Justice Act 1987. When it is expedient and in the public interest, the Secretary of State may seek a winding-up order in respect of the company if it is just and equitable to do so. However, if the company in question is a protected energy company, that could lead to an interruption in supply. The provisions will therefore allow the Secretary of State, in situations of that kind, to apply for an energy administration order instead of a winding-up order. The purpose is to protect the public interest.

Question put and agreed to.

Clause 154 ordered to stand part of the Bill.

Clauses 155 and 156 ordered to stand part of the Bill.

Further consideration adjourned.—[Charlotte Atkins.]

Adjourned accordingly at fourteen minutes past Four o'clock till Tuesday 22 June at five minutes to Nine o'clock.