Energy Bill
Public Bill Committee, 15 January 2013.
Edward Leigh (Conservative, Gainsborough)
Before we begin, I have a few preliminary announcements. As usual, hon. Members may remove their jackets. Will they please ensure that mobile phones, pagers and so on are turned off or switched to silent mode. As a rule, I and my fellow Chair do not intend to call starred amendments that have not been tabled with adequate notice. The required notice in Public Bill Committees is three working days, so amendments should be tabled by the rise of the House on Monday for consideration on a Thursday, and by the rise of the House on Thursday for consideration on a Tuesday.
Not everyone is familiar with the process of taking oral evidence in Public Bill Committees, so it might help if I briefly explain how we will proceed. The Committee will first be asked to consider the Programme Motion on the amendment paper, for which debate is limited to half an hour. We will then proceed to a motion to report written evidence, and then to a motion to permit the Committee to deliberate in private in advance of oral evidence sessions, which I hope we can take formally. Assuming that the second motion has been agreed to, the Committee will move into private session. When the Committee has deliberated, the witnesses and members of the public will be invited back into the room, and our oral evidence session will begin. If the Committee agrees the programme motion, it will hear oral evidence this morning. I call the Minister to move the programme motion in his name.
Edward Leigh (Conservative, Gainsborough)
Copies of memorandums that the Committee receives will be made available in the Committee Room.
Examination of Witnesses
Edward Leigh (Conservative, Gainsborough)
Good morning again, ladies and gentlemen. We will now start our oral evidence session, with Edward Davey, MP, the Secretary of State for Energy and Climate Change, and Philip Dunne, the Parliamentary Under-Secretary of State responsible for defence equipment, support and technology at the Ministry of Defence. Mr John Hayes is also here to answer questions, as is Emily Bourne.
Before calling the first Committee member to ask a question, I remind everyone that questions should be limited to matters within the scope of the Bill and that we must stick strictly to the timings in the programme motion to which the Committee has already agreed. I hope that I do not have to interrupt mid-sentence but, obviously, I will if I feel that people are speaking out of order, although, because I know the members of the Committee, I am sure that none will do so.
The first question will be asked by Tom Greatrex. I should say to the members of the public that we have already agreed some broad headings, so that we can have some continuity in our questioning. We will start with the need for electricity market reform.
Tom Greatrex (Labour, Rutherglen and Hamilton West)
I thank the Secretary of State and his Department for providing an impact assessment. He said on Second Reading that he would do so before we started in Committee and he managed to meet that by 18 hours, which is significantly better than the Department for Work and Pensions last week, so I congratulate him on that. May I start by asking the Secretary of State about the impact assessment. In table 19, there is a distributional analysis that looks at the impact both on consumers and on producers and indicates that the producer surplus, defined as the profitability of the generation sector, has increased significantly between the last impact assessment and this one. Can he tell us why?
Tom Greatrex (Labour, Rutherglen and Hamilton West)
That is very useful, but could I ask the Secretary of State this question. In terms of the second part of this—the impact and how that will potentially be passed on—what comfort can we offer consumers that the Bill will not result in a significantly increased rate of profit for big companies and to consumers not being any better off?
Edward Leigh (Conservative, Gainsborough)
Are there any other questions on that theme, on the overarching aims of the Bill, or on decarbonisation targets?
Barry Gardiner (Labour, Brent North)
Secretary of State, you have said that the 2030 or fifth carbon budget has yet to be set and, because of that, that it would be premature to fix a carbon intensity target, but the carbon intensity target does not do that job, does it? It is a means of providing certainty to investors in low-carbon infrastructure and making sure that the supply chain companies that are hesitant about investing in the UK under the current policy are given the clarity and certainty they need to do just that. If you are reluctant to set a target because you have not yet got the fifth carbon budget, why do you not set interim decarbonisation targets for 2020 and 2025 in line with the third and fourth carbon budgets, which have been set and about which there is less uncertainty? The technologies and actions necessary to hit those targets are available now. You could do that very easily, could you not?
Barry Gardiner (Labour, Brent North)
That is a side issue, so let us focus on the key question.
Barry Gardiner (Labour, Brent North)
No, I did not. I gave you alternatives, because you—
Edward Leigh (Conservative, Gainsborough)
Just let the Secretary of State answer, Mr Gardiner, and then you can come back in.
Edward Leigh (Conservative, Gainsborough)
We have a lot to get through, so we want short, snappy answers and questions. Everyone must speak up, because it is quite difficult for people at the back of the Gallery to hear what witnesses are saying. I will let Mr Gardiner in for a quick supplementary, then I will go to the Government Benches.
Barry Gardiner (Labour, Brent North)
Secretary of State, you have suggested that it is a series, but it is not; it is a choice. You have said that you have not got a carbon budget in place for 2030, but that you have one for 2025. You are saying that you want to delay taking a decision about a 2030 target, but you could now take a decision about a 2025 target. The reason for the carbon intensity target is to ensure that there is certainty for the sector.
Edward Leigh (Conservative, Gainsborough)
All right, that is enough for the moment. It is quite a lot already, so let the Secretary of State answer that.
Dan Byles (Conservative, North Warwickshire)
Further to that, Secretary of State, are you basically saying that although the 2030 decarbonisation target might be useful at some point to set a long-term direction, the decisions on investment now are more likely to be made on nuts and bolts, such as the CFD, the levy control framework, the counterparty, rather than on a long-term big picture target—in terms of investor confidence?
Dan Byles (Conservative, North Warwickshire)
But in discussions you have had with investors for example.
Luciana Berger (Labour, Liverpool, Wavertree)
Secretary of State, can you tell us please which companies or organisations have made representations to you that they do not want a 2030 decarbonisation target in the Bill, because I have not met one?
Luciana Berger (Labour, Liverpool, Wavertree)
Can you name them, please?
Gordon Henderson (Conservative, Sittingbourne and Sheppey)
Is it true that this Bill is about not only decarbonisation but energy security? There are very many people who actually think that that is the more important aspect of the Bill.
Julie Elliott (Labour, Sunderland Central)
Secretary of State, at the Liberal Democrat conference last year, you supported a motion that called for a target to be set between 50 mg and 100 mg for power plants built after 2030. Why does that commitment not appear in the Government’s Energy Bill?
Julie Elliott (Labour, Sunderland Central)
So you are saying that your position is different from what the Energy Bill is actually saying?
Julie Elliott (Labour, Sunderland Central)
It is a yes or no answer.
Edward Leigh (Conservative, Gainsborough)
Have we exhausted that subject? Does anyone want to ask a question on contracts for difference?
Michael Weir (Scottish National Party, Angus)
Certain of the witnesses have expressed concern about the lack of detail at the moment about how contracts for difference will actually work, as opposed to the well-understood ROC system. What discussions have you had and what progress have you made in assuring investors that they will produce the necessary income to allow investment to take place?
Michael Weir (Scottish National Party, Angus)
There is still concern from the written evidence that we have seen so far about the proposed closure of the ROC scheme, which is widely seen to be in 2017, although that is not said anywhere in the Bill. Is there scope for moving that date if there continues to be concerns or difficulties with CFDs?
Barry Gardiner (Labour, Brent North)
Obviously, in the case of building a new nuclear plant, the strike price has to be sufficient to incentivise that investment, does it not? If it is to be sufficient to incentivise that investment, you have to have clarity about what the construction cost of that investment is going to be. The problem is that a perverse incentive is built into this whole negotiation process. The company constructing that new plant has an incentive to inflate its expectation of what the price of construction will be, in order to get a higher strike price at the negotiation. I am sure that Mr Dunne will be familiar with this from the Ministry of Defence. We subsequently find out that it will not cost that much and, goodness me, the strike price is set at a nice level where they can get good profits back in. How are you tackling that perverse incentive?
Barry Gardiner (Labour, Brent North)
No, I am asking you in principle.
Barry Gardiner (Labour, Brent North)
So if the construction costs eventually do not come in, in such a way as simply to give a reasonable rate of return on capital, will there be a clawback mechanism in the CFD, so that the strike price will reduce over time? If not, why not, because that is in the public interest? The public will be paying that money and if you get your negotiations wrong, they will be paying it for 35 years.
Barry Gardiner (Labour, Brent North)
You have given a very nice lesson about what it is, but how about answering the question?
Edward Leigh (Conservative, Gainsborough)
Mr Gardiner, I think we will be absolutely fair. I will let Peter Aldous come in, and if there is time we can always come back later.
Peter Aldous (Conservative, Waveney)
Secretary of State, are you happy that the transition path from ROCs to CFDs is sufficiently clear to investors? Would you agree that timeliness with this change is of the utmost importance?
Phillip Lee (Conservative, Bracknell)
I know that between the draft Bill and the Bill before us there has been a change on the counterparty model; it is now a single counterparty model. Can you tell me, in discussions with industry since the publication of the draft Bill and now with the decision to go with a single counterparty model, whether the industry is happy with this? What is the likelihood of it investing now with that change?
Tom Greatrex (Labour, Rutherglen and Hamilton West)
You are right to flag up that this was an issue that came up in the pre-legislative scrutiny, but the Bill still allows there to be a multiparty counterparty, does it not? It is not explicit about it being a single counterparty.
Tom Greatrex (Labour, Rutherglen and Hamilton West)
But the Bill allows that still to happen. It is not explicit in the Bill.
Barry Gardiner (Labour, Brent North)
Allow to, but not determine.
Edward Leigh (Conservative, Gainsborough)
Emily Bourne wants to comment.
Tom Greatrex (Labour, Rutherglen and Hamilton West)
So it is not explicit in the Bill that it will be a single counterparty model? That is your policy intention, but it is not explicit in the Bill.
Tom Greatrex (Labour, Rutherglen and Hamilton West)
But people need certainty, and I am sure we will hear this again and again during the course of this discussion over the next few weeks. How does that provide certainty?
Edward Leigh (Conservative, Gainsborough)
I am going to move on now, because I want to get through as much as possible so we do not run out of time.
Alan Whitehead (Labour, Southampton, Test)
Secretary of State, you mentioned the need to make sure that there is as much downwards pressure on prices as possible, and that customers are best served by this Bill. With regard to capacity markets, in the impact assessments that you have published it is quite clear that the option of a strategic reserve—which I see was recently dropped from the final impact assessment—comes in at roughly half the price to 2030. It would therefore be half the cost to customers to 2030 of your favoured administrative capacity market, because money could be raised from customers to fund the capacity market. Why have you therefore rejected the idea of a strategic reserve as a capacity mechanism to ensure security of supply?
Alan Whitehead (Labour, Southampton, Test)
Do you, however, accept that as far as the administrative capacity market preferred model is concerned, there is also the question of gaming? When a company hears that you are to undertake a capacity auction, that in itself may deter investment, to the extent that people will not invest until such time as an auction is actually held, and that therefore brings the auction forward. I presume you now have the option to run the first auction in 2014, when originally it was proposed not to have auctions until the end of the decade?
Edward Leigh (Conservative, Gainsborough)
Mr Hayes, do you want to come in? We will then crack on.
Edward Leigh (Conservative, Gainsborough)
I think we have exhausted that subject, and we have to get through a busy agenda. We will now move on to conflicts of interest.
Albert Owen (Labour, Ynys Môn)
Secretary of State, why have you ruled out a new, independent and not-for-profit body as the delivery body for CFDs and the capacity market?
Albert Owen (Labour, Ynys Môn)
The safeguard in the Bill is that it will be overseen by Ofgem. There is the belt and braces, you could say, because you are not confident that it will act as independently as another body could, so you will have the option to move it at a later stage. Here is a body that has a commercial interest in the whole industry, whether it be gas or transmission, and it is the system operator. It is a private company. Do you not feel uncomfortable that there are bound to be conflicts of interest, which is why you have Ofgem to oversee it? Perhaps Ofgem could be the body to do the job, and its powers could be strengthened.
Albert Owen (Labour, Ynys Môn)
But that could be used by another body.
Albert Owen (Labour, Ynys Môn)
With respect, Secretary of State, Ofgem already gives National Grid a programme for its future programme and planning, and that will happen in the future. It will have a role and have that expertise, which another body could use more independently.
Albert Owen (Labour, Ynys Môn)
Final point. You have safeguards in the Bill. Do you have a plan B?
Albert Owen (Labour, Ynys Môn)
It is not.
Edward Leigh (Conservative, Gainsborough)
Order. I know that we are sedentary, but let us not have sedentary interventions. Let him answer.
Albert Owen (Labour, Ynys Môn)
What would that other body be?
Albert Owen (Labour, Ynys Môn)
But when the Select Committee, after taking evidence, proposed another body, you simply dismissed that because you had been looking at it for years, and the National Grid was the right body.
Edward Leigh (Conservative, Gainsborough)
Last point, Mr Hayes, and then we will move on.
Edward Leigh (Conservative, Gainsborough)
Okay. We are now going to move on to investment contracts.
Dan Byles (Conservative, North Warwickshire)
Before I move on, to be helpful to the Secretary of State on an earlier question, two companies opposed to the 2030 decarbonisation target are Centrica and RWE npower.
I have discussed with the Secretary of State before value for money, the impact on consumers and the fact that we need to decarbonise, but we cannot necessarily do so at any cost. What reassurances can you give us that the investment contracts will deliver value for money to the consumers, and what counterfactuals have you considered when looking at the impact on future consumer bills?
Dan Byles (Conservative, North Warwickshire)
Does that include looking ahead, for example, at a low gas scenario? Obviously, your model has various counterfactual prices.
Barry Gardiner (Labour, Brent North)
Can you provide further clarity on what will be included in the open-book scrutiny of developers’ documentation, and will it be available to Parliament at the same time that the contract is laid before Parliament?
Barry Gardiner (Labour, Brent North)
Clarify “as possible”. All that you have had available to you?
Edward Leigh (Conservative, Gainsborough)
Okay, let us move on to access to markets and liquidity.
Tom Greatrex (Labour, Rutherglen and Hamilton West)
I would like to ask the Secretary of State about community energy projects, because he has talked in the past about wanting to foster a community energy revolution. Will he explain why, contrary to the Select Committee’s report and other representations, he decided against increasing the threshold for the small-scale feed-in tariff above 5 MW?
Tom Greatrex (Labour, Rutherglen and Hamilton West)
This strategy will be after the Bill, though, so the opportunity to increase that threshold, if that were an appropriate thing to do, is therefore lost.
Tom Greatrex (Labour, Rutherglen and Hamilton West)
But the thresholds for where the small-scale tariff and the contract for difference come in are in the Bill, are they not?
Tom Greatrex (Labour, Rutherglen and Hamilton West)
Because that is what the threshold is. That is why they are below it. It does not follow that they would not be—
Edward Leigh (Conservative, Gainsborough)
Just let him answer the question.
Edward Leigh (Conservative, Gainsborough)
Okay. Let us not over-egg this particular pudding, because I am anxious that Mr Dunne should come in. He has been very quiet. Before we hit the guillotine, Luciana Berger would like to ask you about the Government pipeline and storage system.
Luciana Berger (Labour, Liverpool, Wavertree)
Thank you. I want to ask you a three-part question, Minister. Why do you believe that it might be desirable in the future to sell the Government pipeline and storage system? If that sale were to go ahead, what conditions would be put in place in the event of a sale that would guarantee military needs? You will be aware that in the impact assessments, there is very little detail available about this. The current operating costs of the GPSS are missing. It value and the likely costs that the Government would be charged to use it in the event of a sale are all redacted. I assume that that information has been redacted and not put into the public domain in order to protect commercial sensitivities, but can you provide members of the Committee with copies of the material on the proviso that it is not made public so that we can better scrutinise the Bill?
Edward Leigh (Conservative, Gainsborough)
Okay, Minister. Not too much longer, please.
Edward Leigh (Conservative, Gainsborough)
Do you want to ask a supplementary?
Luciana Berger (Labour, Liverpool, Wavertree)
I am keen that the Minister answers this question. If the Ministry decides to go ahead with the sale, what conditions will you put in place to ensure the military needs are met?
Peter Aldous (Conservative, Waveney)
If it is alright, I wanted to come back to the renewable obligation.
Edward Leigh (Conservative, Gainsborough)
Okay, is it a quick question? Ask your question, because we are running out of time.
Peter Aldous (Conservative, Waveney)
Just going back to the renewables obligation, Secretary of State, I would be interested to know how you arrived at 2017 as the date for closing the RO. If investors gave feedback that a longer period would be appropriate, would you consider that?
Edward Leigh (Conservative, Gainsborough)
Okay. Stop there because we are running out of time and Ian Lavery has not had a chance.
Ian Lavery (Labour, Wansbeck)
Thank you. First, I want to mention the emissions performance standard. In the Bill, the figure is 450 grams of CO2 per kWh. Will the Secretary of State or the Minister tell us how that figure was arrived at? Secondly, it was announced a couple of weeks ago that up to 30 unabated gas-fired power stations will be coming online. What impact will that have on the UK’s long-term climate change targets?
Ian Lavery (Labour, Wansbeck)
Is unabated gas low-carbon?
Ian Lavery (Labour, Wansbeck)
But is it low-carbon?
Ian Lavery (Labour, Wansbeck)
Is it low-carbon?
Edward Leigh (Conservative, Gainsborough)
One last question.
Graham Jones (Labour, Hyndburn)
I just want to ask you about the impact the energy prices for domestic consumers. I am just reading the briefing notes. The Prime Minister announced recently that the Energy Bill would include measures requiring energy companies to give customers their cheapest tariffs, but those measures are not yet in the Bill. Why is that?
Barry Gardiner (Labour, Brent North)
Secretary of State, the Committee on Climate Change progress report said that
“there is scope to reduce current emissions intensity by over 200g”
by applying a merit order, to reduce emissions from 486 grams in 2011 down to 273 grams; that is with existing capacity, changing nothing of the plant that is in place. Why is the merit order not in this Bill?
Edward Leigh (Conservative, Gainsborough)
You have 30 seconds.
Edward Leigh (Conservative, Gainsborough)
Good. That is a very brief answer. I am afraid that brings us to the end of the time allotted to the Committee to question these witnesses. I thank them on behalf of the Committee. We will now hear oral evidence from National Grid, ScottishPower, Centrica and E.ON UK.
Edward Leigh (Conservative, Gainsborough)
We now carry on with our public session, and welcome our new witnesses. Could you please introduce yourselves and briefly describe who you are and what you do?
Edward Leigh (Conservative, Gainsborough)
Thank you very much for coming this morning. Tom Greatrex has a question on contracts for difference.
Tom Greatrex (Labour, Rutherglen and Hamilton West)
It is really in relation in to the counterparty—I do not know whether you heard the Secretary of State’s evidence, but there was some discussion about the single counterparty model. Can I first ask whether you are satisfied that a single counterparty model will be workable, from what you know so far? Is there enough detail?
Tom Greatrex (Labour, Rutherglen and Hamilton West)
Mr Anderson, are you concerned—Ms Vaughan touched on this point—about the scope there is in the Bill to go back, effectively, to a multiparty counterparty if the single counterparty model does not work? How much impact does that make in terms of investment decisions, if the contract is one part of those, and the counterparty is allied to that?
Tom Greatrex (Labour, Rutherglen and Hamilton West)
Would it provide greater clarity if it was stated explicitly in the Bill that it was a single counterparty?
Michael Weir (Scottish National Party, Angus)
You heard what the Secretary of State had to say about the time scales for the introduction of contracts for difference and the closure of the ROCs scheme. Are you satisfied that investors will be confident enough for contracts for difference to get up and running within that time scale, to allow ROCs to be closed in 2017?
Michael Weir (Scottish National Party, Angus)
We heard, if I remember correctly, that it was anticipated that strike prices would be known by the end of this year at the latest. It is a pretty tight time scale to get contracts for difference up and running by 2014 if we do not get strike prices until later this year. What sort of slippage are you thinking about? If it slipped into the early part of next year, would that cause a problem?
Edward Leigh (Conservative, Gainsborough)
We need sharp answers now. We have a lot to get through, a lot of people are trying to come in.
Tom Greatrex (Labour, Rutherglen and Hamilton West)
Can I clarify something that I think you just said: that it is not necessarily about setting a date of 2017 or 2020, and that the period of time for which the two run in parallel is more important. Have I summarised your position correctly?
John Hayes (Conservative, South Holland and The Deepings)
But the principles laid down in the Bill are, in those terms, very good news.
Alan Whitehead (Labour, Southampton, Test)
The whole basis of the availability of contracts for difference is squeezed into the levy control mechanism, which we have been told will come to £7.6 billion by 2020. However, if you strip out the money going to existing new projects each year, that suggests that the available money for new entrants each year up to 2020 under CFD is no larger than under present arrangements. Is that something you feel comfortable with, in terms of the need to supply CFDs to ensure that future investment in low-carbon energy renewables is secured up to 2020?
Alan Whitehead (Labour, Southampton, Test)
Regarding the targets set for investment in low-carbon energy and the amount of deployment that it is suggested should be reached for low-carbon energy by 2020, what I was trying to get clear was that the LCF will not allow those targets to be reached.
Phillip Lee (Conservative, Bracknell)
Just to clarify, has investor confidence gone up or down since the changes to the counterparty model?
Luciana Berger (Labour, Liverpool, Wavertree)
We know that contracts for difference will be allocated initially on a first come, first served basis, before moving to the allocation rounds once a significant proportion of the budget available under the levy control framework has been allocated. What is the panel’s understanding of how the allocation rounds will work, and do you believe that further clarification is necessary?
Stephen Gilbert (Liberal Democrat, St Austell and Newquay)
The detail of the levy control framework, the move to a single counterparty model and the acceptance by the Government that there will be a strike price by the end of the year—all that is designed to build investor confidence. Is it achieving that aim?
Peter Aldous (Conservative, Waveney)
I very much have the feeling that timing is of the essence—the timing of strike prices—involving a clear narrative coming through, with the detail therefore being provided as necessary. We have just heard the answer about you getting more confidence; what are your views on the decarbonisation target?
Barry Gardiner (Labour, Brent North)
Mr Winser, between gas and renewable energy—this may seem an obvious question—which has greater capacity to affect or to set marginal power prices in the market?
Barry Gardiner (Labour, Brent North)
The way in which gas and renewables respond to an inadequate marginal price is, obviously, by curtailing output. But that does not save costs for renewables as it does for gas, does it? Renewables actually lose revenue if they decide not to go for what is a lower than normal, less attractive price. Is that not right?
Barry Gardiner (Labour, Brent North)
But if gas did not want to bid at a particular time, it would simply respond by not bidding. That option is less available to renewables because, actually, they would be cutting off their nose to spite their face.
Barry Gardiner (Labour, Brent North)
Yes, but of course it would not be consuming the fuel, which is the largest part of the input cost for gas. That is the point that I was making. The new impact assessment for the Bill, which came out yesterday with revised emissions pathways in annexe C, says that the decarbonisation trajectory requires a significant increase in the carbon price up to 2030; but actually, a high carbon prices does not incentivise switching from gas to renewables because of what we just talked about, does it?
Edward Leigh (Conservative, Gainsborough)
Who wants to answer that? One of you has got to.
Barry Gardiner (Labour, Brent North)
It is really directed to Mr Winser, because he is the grid.
Edward Leigh (Conservative, Gainsborough)
Try to make it short.
Barry Gardiner (Labour, Brent North)
My point is this: the idea that a decarbonisation trajectory requires a “significant increase” in the carbon price up to 2030 does not show that a high carbon price does not incentivise the switch from gas to renewables. It does not do that because of the limited capacity that renewables have to influence and respond to marginal prices in the market.
Edward Leigh (Conservative, Gainsborough)
Do you understand that question?
Barry Gardiner (Labour, Brent North)
So would you go for a merit order, as recommended by the CCC, which it says can reduce our carbon intensity by 200 grams per kWh? If not, why not?
Mel Stride (Conservative, Central Devon)
In the previous session we had some discussion about the relative merits of the capacity market proposals in the Bill compared with the strategic reserve as an alternative. Could we have your comments on that? Specifically, have you made any assessment of the cost to consumers of the capacity market compared with a strategic reserve?
John Hayes (Conservative, South Holland and The Deepings)
Just to be clear, the market direction you describe, particularly around gas, is essential if we are going to achieve our ambitions for renewables. These two things are inseparable—gas, with its flexibility, plays its part in building a market that works and, in those terms, the capacity market proposals are welcome.
John Hayes (Conservative, South Holland and The Deepings)
So it is welcome.
Mel Stride (Conservative, Central Devon)
So your view would be that a strategic reserve would be more expensive as an approach than the proposals set out in the Bill.
Ian Lavery (Labour, Wansbeck)
The emissions performance standard has been set at 450 grams of CO2 per kWh. Do you think that is appropriate? Secondly, the Government announced only a few weeks ago that up to 30 gas-fired power stations could be brought on line unabated. Is it your view that that would have any impact on long-term climate change targets? In fact, might it even have an impact on the decarbonisation target, if indeed the Government come up with one?
Gordon Henderson (Conservative, Sittingbourne and Sheppey)
Centrica has stated that that the Bill should mark the start of an “honest conversation” with consumers about the long-term outlook for energy prices and their drivers. As part of that honest conversation, do you agree that any steps to decarbonise the power supply and to improve energy security would have an impact on prices—as followed, for instance, from the policies of the previous Government—but that the long-term benefits make urgent action essential? Furthermore, do you agree that one of those benefits will be an increase in employment?
Luciana Berger (Labour, Liverpool, Wavertree)
Just for the record, may I ask Mr Anderson to tell us his position on the decarbonisation target and whether he believes that it should be on the face of the Bill?
Luciana Berger (Labour, Liverpool, Wavertree)
You are not against the decarbonisation target.
Dan Byles (Conservative, North Warwickshire)
Speaking of the decarbonisation target, which seems to be a particular bone of contention, I am quite interested in Centrica’s view, because it put out a press release in November saying that it was opposed to it and urging the Government not to implement such a target.
Dan Byles (Conservative, North Warwickshire)
I want to explore what you said about it not being a priority, because during the Energy and Climate Change Committee’s pre-legislative scrutiny, we heard from Climate Change Capital and the Low Carbon Finance Group, both of which said, in effect, “For God’s sake, don’t delay the Energy Bill arguing over the 2030 decarbonisation target. The important things are contracts for difference and the levy control framework—the nuts and bolts.” Do you all broadly agree with that?
Gregory Barker (Conservative, Bexhill and Battle)
I have two quick questions. First, if the 2030 decarbonisation target were added to the Bill at this stage, do you anticipate that that would add an additional cost to consumers? Secondly, on the emissions performance standard and grandfathering, the grandfathering goes out some considerable way, so over what period of time do you anticipate that new-build gas-fired power stations would be amortised?
Gregory Barker (Conservative, Bexhill and Battle)
Could you expand a bit more on what you would require and on what you would define as the correct decision?
Gregory Barker (Conservative, Bexhill and Battle)
I did not get an answer to the second question. Over what period would you amortise the new gas-fired power stations?
Edward Leigh (Conservative, Gainsborough)
How are you going to come back on that? Will you write?
Edward Leigh (Conservative, Gainsborough)
I think that you have to write to the entire Committee.
Edward Leigh (Conservative, Gainsborough)
To all of us—we really look forward to it.
Alan Whitehead (Labour, Southampton, Test)
As utility companies, all of you are effectively withdrawing from providing power purchase agreements for independent generators, as far as I understand it. Is that right?
Alan Whitehead (Labour, Southampton, Test)
Indeed, in the absence of any sort of obligation after 2017, the likelihood is that any CFDs retained by independent generators will be heavily discounted in order to sell their energy, so the idea that they, in replacing PPAs, set the actual price appears to be somewhat wide of the mark. Is that right?
Alan Whitehead (Labour, Southampton, Test)
Will you write to the Committee about those solutions?
Alan Whitehead (Labour, Southampton, Test)
How many gas-fired power stations are mothballed at the moment?
Alan Whitehead (Labour, Southampton, Test)
Are they likely to be able to provide power again?
Alan Whitehead (Labour, Southampton, Test)
So it is not true that you would have to purchase a new gas-fired power station to provide for a strategic reserve, is it? You could actually purchase a mothballed power station.
Alan Whitehead (Labour, Southampton, Test)
So the view that it would be very costly to develop a strategic reserve by means of purchasing new power stations does not really stack up, as far as finance is concerned?
Alan Whitehead (Labour, Southampton, Test)
Even though it says something like that in the impact assessment.
Phillip Lee (Conservative, Bracknell)
To clarify, have your companies made any assessment of the impact of setting a 2030 decarbonisation target on consumer bills?
Phillip Lee (Conservative, Bracknell)
Do you think that it is likely that bills will go up or down if we set a 2030 decarbonisation target?
Phillip Lee (Conservative, Bracknell)
In which case what is the point of a decarbonisation target?
Phillip Lee (Conservative, Bracknell)
So in general you think that targets have more to do with spin than reality?
Stephen Gilbert (Liberal Democrat, St Austell and Newquay)
We have talked a lot about levy frameworks targets. I want to draw the Committee’s attention to part 5 of the Bill relating to consumer redress provisions that would enable Ofgem to require energy companies to pay compensation directly to consumers. As energy companies, do you welcome those provisions?
Stephen Gilbert (Liberal Democrat, St Austell and Newquay)
Could you explain briefly how you think the proposed reforms in part 5 improve the situation for consumers compared with where we are now?
Stephen Gilbert (Liberal Democrat, St Austell and Newquay)
Do you agree with that, Mr Anderson?
Graham Jones (Labour, Hyndburn)
The Secretary of State just said that on 5 February he will bring forward a Government amendment to ensure that customers do receive the cheapest tariff, as laid out by the Prime Minister. How do you see that working?
Graham Jones (Labour, Hyndburn)
Sara, you seemed to suggest that people would be put on the lowest cost within particular tariffs; the lowest tariff of type but not necessarily the lowest tariff. They may have to switch tariffs in order to get a lower price. Would that be a fair summary of what you just said?
Graham Jones (Labour, Hyndburn)
On that point, I was going to raise the issue of prepayment meters, which you have probably started to discuss. How are you going to offer the cheapest tariff for people on prepayment meters, for example?
Graham Jones (Labour, Hyndburn)
So you are saying that there is access to market issues, ie somebody who can get online obviously has access to a cheaper rate than somebody who cannot get online and has a prepayment meter. There are access to market issues, in terms of accessing the lowest tariff.
Peter Aldous (Conservative, Waveney)
Coming back to the decarbonisation target, I have a feeling that a clear framework, a set direction of travel and timeliness are important to you as energy companies. Have you had any discussions with your manufacturers and supply chain companies? Obviously, we will hear from them themselves, but have you had any feedback from them on that point?
Gregory Barker (Conservative, Bexhill and Battle)
There seemed to be a little confusion in your answers, particularly Mr Anderson, about the tariff issue in that you were confusing the Government’s proposals, which are not to have one tariff. The Government’s proposals are to have a set of core tariffs across a set of limited payment options. That is not the same as saying that there should be one tariff.
Gregory Barker (Conservative, Bexhill and Battle)
Accepting that, it is not nearly as complex as you suggested.
Gregory Barker (Conservative, Bexhill and Battle)
To correct you again, “the cheapest tariff” is not what we saying. There is a slight qualification: it is the core tariff, of their payment type. We do not propose to put people who on pre-payment meters on to an internet tariff.
Gregory Barker (Conservative, Bexhill and Battle)
The simplest way of putting it is to say “the cheapest tariff for them”. The intent behind the policy is to improve consumer choice and competition between the energy companies so we can compare like with like.
Gregory Barker (Conservative, Bexhill and Battle)
The Ofgem proposals are a good start, as are the Government’s proposals. I am surprised that you find it so complicated.
Albert Owen (Labour, Ynys Môn)
Just before I move on to potential conflicts of interest, can I just deal with this tariff and your answer, Mr Anderson. It was my understanding that the Government did say “the cheapest tariff” when they made their initial announcement. That may change. Can I ask Ms Vaughan and Ms Wheeler, with regard to what Mr Anderson said about a potential sunset clause in the Bill, whether you favour that because we are not really sure where we will end up on this journey?
Albert Owen (Labour, Ynys Môn)
On this specifically when we are talking about tariffs?
Albert Owen (Labour, Ynys Môn)
We have not had the full details. We are out to consultation. But we could be scrutinising a Bill when we do not know the full details until the last minute. We could rush it through and get it wrong. Is that why you think there should be a sunset clause there, Mr Anderson?
Albert Owen (Labour, Ynys Môn)
Can I move on to a potential conflict of interest that might arise from National Grid’s role as the delivery body? Do the three representatives of the energy companies see any potential conflicts of interest there?
Albert Owen (Labour, Ynys Môn)
Can you help us out? The purpose of our evidence sessions is for our witnesses to inform us. In what area do you think there would be a need for—
Albert Owen (Labour, Ynys Môn)
And you think that that should be in the Bill. Do you think that we should amend the Bill accordingly, for safeguards?
Albert Owen (Labour, Ynys Môn)
Or are the provisions outlined in the Bill sufficient?
Albert Owen (Labour, Ynys Môn)
Mr Winser, we have had evidence sessions before and asked the same questions, and, on the evidence we received, the Committee believed that there should be an independent body that was a not-for-profit organisation. How can you reassure the Committee that your interest is not profit first?
Edward Leigh (Conservative, Gainsborough)
We are running out of time, and you have given the four roles.
Albert Owen (Labour, Ynys Môn)
But your primary interest is profit to your shareholders, not the national interest, is it not? So do you understand why there is this perceived conflict of interest?
Albert Owen (Labour, Ynys Môn)
With respect, I am referring specifically to the Bill here. Are you comfortable with the clauses that the Government have put into this Bill, whereby the Secretary of State would have the power to appoint another body?
Barry Gardiner (Labour, Brent North)
Mr Winser, when it was originally suggested that the Government would be the counterparty, and then the Treasury said no, the Government came up with a second idea, which was that you, the National Grid, would be the counterparty, and you said no. Now you are saying yes. Why did you say no then, and why have you changed your mind?
Edward Leigh (Conservative, Gainsborough)
May I stop you there? I want Mike to have one last question—in less than a minute.
Michael Weir (Scottish National Party, Angus)
I have a quick question on the capacity market. The Government have said that they are minded to run the first capacity auction in 2014. Does that give you the encouragement to invest in new plant?
Edward Leigh (Conservative, Gainsborough)
Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions of these particular witnesses. On behalf of the Committee, I thank them.
Examination of Witness
Edward Leigh (Conservative, Gainsborough)
We now come to our final session. Will our witness please introduce himself?
Edward Leigh (Conservative, Gainsborough)
Tom Greatrex will start. Perhaps you will tell us which part of the Bill you want to ask about.
Tom Greatrex (Labour, Rutherglen and Hamilton West)
I want to ask about part four: the strategy and policy statements section of the Bill. I want to ask Mr Wright whether he agrees that there is a need for greater clarity around Ofgem’s statutory duties and where precisely he thinks that need for clarity is.
Tom Greatrex (Labour, Rutherglen and Hamilton West)
How do you envisage that not compromising your independence? You talked about the importance of your independence alongside it. What safeguards would there be to ensure that your independence was not compromised, while those duties are still set out in more detail?
John Hayes (Conservative, South Holland and The Deepings)
You will know that it is central to the Government’s ambitions to make the market more plural and liquid, and you have done a great deal of work already on this. Can you say a word about the work, and do you welcome the fact that the Government have powers to go further, should that be necessary?
Edward Leigh (Conservative, Gainsborough)
We used to ask questions like that in the law. You can still answer it, even though it is a leading question.
Barry Gardiner (Labour, Brent North)
You talked about introducing more liquidity into the market and the measures that you have taken to do that. Of course, there is a reason for introducing that greater liquidity: ultimately, the hope is that, through greater competition, there will be a lowering of prices. What evidence have you seen that that has actually resulted? It is not outputs but outcomes that matter here, is it not?
Barry Gardiner (Labour, Brent North)
My point to you is this: you said that the 20% figure that you were aiming for was going to do the trick. Now, 1%, or less than 1% for the non-big six does not sound like it has done the trick and it certainly does not sound—to any of us—as if it has lowered domestic prices. Having seen the ineffectiveness—I will not say total ineffectiveness—of that and your failure to achieve your objective, how do you now propose to go further and extend that beyond the 20% that you originally proposed?
Barry Gardiner (Labour, Brent North)
But some of us were saying, back then, that 20% was not going to be enough. You are now saying that it has not proved to be enough, so why do you not now go the whole hog and really try to shake this market up?
Barry Gardiner (Labour, Brent North)
I never did—that was you guys.
Barry Gardiner (Labour, Brent North)
How long are you going to give yourselves?
Barry Gardiner (Labour, Brent North)
I would be interested in seeing the evidence on that, if you could send that to the Committee, to show where it is that small suppliers are offering the best prices in the market and how that is feeding through into domestic bills.
Peter Aldous (Conservative, Waveney)
The Bill will give Ofgem a major role to play in improving liquidity, improving access for smaller suppliers and ensuring value for money to consumers, with powers of redress against energy companies. Do you think that your duties, powers and responsibilities have the necessary clarity at the moment? Will the proposed strategy and policy statement help improve that?
Alan Whitehead (Labour, Southampton, Test)
On consumer prices, the Bill’s content appears to have some pressure on prices. Consumers will, for example, pay for the issue of contracts for difference. I imagine that you would be pleased, in terms of your role as regulator relating to consumer prices, that there is a levy control mechanism as far as CFDs are concerned.
Alan Whitehead (Labour, Southampton, Test)
So I imagine under those circumstances, you must be rather concerned that the capacity mechanism payments are outside the levy control framework.
Alan Whitehead (Labour, Southampton, Test)
Would you, for example, favour some form of capacity mechanism that increased consumer prices by about £1 per bill through to 2030, as opposed to £11 per bill by 2030 via a different mechanism?
Alan Whitehead (Labour, Southampton, Test)
So you see no role for Ofgem in considering what might be the balance of benefit for consumers, as far as prices are concerned, over the period from these sorts of issues.
Laura Sandys (Conservative, South Thanet)
Issues around consumer redress and the pressure in the Bill towards lowest tariffs are things that Ofgem is obviously looking at. Do you feel that the Bill actually strengthens your proposition, as a regulator, on those particular measures and enhances your ability actually to take forward some of your thinking?
Michael Weir (Scottish National Party, Angus)
May I ask you about the contracts for difference system? Clearly, the key to its success or otherwise is setting the right strike price, about which we have heard a lot from other witnesses. Although it will be set by the market in the longer term, it will initially be set administratively. With nuclear, I understand that it will be set by negotiation with the developers. How confident are you as a regulator that the initial strike price will be robust and will reflect market realities, because whatever it is will send a signal to the markets for future negotiations?
Michael Weir (Scottish National Party, Angus)
No.
Michael Weir (Scottish National Party, Angus)
Are you confident that what is proposed at present will reflect the market reality? You raised the nuclear question, but if, as I understand it, you are having a negotiation between developers of one nuclear—Hinkley, as I understand it—and the Government, that is presumably going to set a strike price not based on market realities, but on what the developer says will be the cost of developing that station.
Dan Byles (Conservative, North Warwickshire)
I think it is fair to say that Ofgem threw a hand grenade into the debate in October with your report that capacity was likely to fall from 14% to about 4% in as little as three years’ time. How confident are you that the Bill will take us back to a more comfortable level of capacity in a reasonable time frame?
Edward Leigh (Conservative, Gainsborough)
We have only two minutes left.
Albert Owen (Labour, Ynys Môn)
You mentioned that your retail market review complements what the Government are bringing forward. Why did it take you so long to do it? When we questioned them on this in the Select Committee, the Government basically said that you were taking so long that the Prime Minister had to make that statement. Can you comment on that, please?
Edward Leigh (Conservative, Gainsborough)
One minute—last question.
Peter Aldous (Conservative, Waveney)
Do you have concerns about the impact of the Bill on energy prices for industry, with specific reference to energy-intensive industries?
Edward Leigh (Conservative, Gainsborough)
I am afraid that that brings us to the end of our time. Hugh Bayley will chair the Committee this afternoon—he is a much tougher man than me, so be careful. I thank the witness and all the Members.
Examination of Witnesses
Hugh Bayley (Labour, York Central)
We will now hear evidence from the Low Carbon Finance Group and the CBI. I invite each of our witnesses to introduce themselves for the record.
Hugh Bayley (Labour, York Central)
Thank you both for coming to give evidence to the Committee. Before I call the first Member to ask a question, I remind Members that questions should be limited to matters within the scope of the Bill, and I remind everyone, including the witnesses, that we have to stick absolutely rigidly to the timings, which means that this first group of questions will end at 2.45 pm. According to the headings on the briefing that has been given to Members, the first group of questions relates to the need for electricity market reform. Who would like to catch my eye? Minister, John Hayes.
John Hayes (Conservative, South Holland and The Deepings)
I will just kick things off, Chairman, at your discretion.
Gentlemen, thank you for coming. You know that there is a critique of public policy suggesting that Governments have been slow to reform the electricity market and that that has inhibited investment. In your judgment, how far does the Bill—what we hope will become the Act—provide the greater clarity and certainty that is likely to lead to investment decisions being made?
Tom Greatrex (Labour, Rutherglen and Hamilton West)
Mr Burglass, in the context of attracting investment, we hear frequently that people are putting off investment decisions, awaiting clarity, and the Minister’s question was seeking to see whether the Bill provides clarity. Can you give us an indication, from the financiers’ perspective, of how much of the detail that is still to come with the Bill is integral to providing clarity in making decisions? How much will people still hold off, do you think, with the gaps that there still are in the Bill?
Tom Greatrex (Labour, Rutherglen and Hamilton West)
May I pick up on the point you made about the comfort provided to people continuing to operate under the renewables obligation through the transition period? Is it your view then that many of those people who potentially or may well be investing are happy with the 2017 date, or is it about the period of time between 2014 and 2017? In other words, if the Bill continues on time, 2017 is fine, or is there a feeling that the transition should be for a longer period?
Tom Greatrex (Labour, Rutherglen and Hamilton West)
So, to make sure I have got that right, you are saying that that is tied to the period until the new regime comes in. If there is a delay, you might seek to extend the transitional period, but without it you think it is workable.
Hugh Bayley (Labour, York Central)
Three further hon. Members want to ask general, opening questions, and I remind the Committee that we have a long list of topics to try to cover.
Laura Sandys (Conservative, South Thanet)
I want to extend the previous question. When you start to look at the time frame—I understand that you are expecting to fill in some of the more granular aspects through this process—will the framework also enable long-term commitments from the supply chain and not just from the straightforward financing side? I am particularly interested in the CBI’s view of the supply chain being enabled by the framework to make those long-term investments.
Peter Aldous (Conservative, Waveney)
I want to follow that up. You have both expressed the view that time is of the essence. Are there any specific time lines that we need to meet going forward or specific deadlines for specific issues to be addressed?
Michael Weir (Scottish National Party, Angus)
We were told this morning that the setting of the strike price is crucial to the contract for difference, and that the initial price would be set in the summer, with the final price being set by the year end. Given what you are saying about slippage, if we are looking to close RO in 2017, how much margin for error do you think there is in that—for example, if the strike price is not set by the end of the year?