Energy Bill

Public Bill Committee, 29 January 2013.

Written evidence to be reported to the House

Clause 18 - Capacity agreements

Alan Whitehead (Labour, Southampton, Test)

I beg to move amendment 73, in clause 18, page 10, line 17, at end insert

‘or to verifiably reduce demand permanently’.

Edward Leigh (Conservative, Gainsborough)

With this it will be convenient to discuss the following:

Amendment 74, in clause 18, page 11, line 6, at end insert—

‘(6) Provisions in subsection (4) and (5) may also apply to a holder of an agreement to verifiably reduce demand permanently.’.

New clause 3—Electricity efficiency incentives—

‘(1) The Secretary of State must within one year of the passing of this Act make regulations establishing a scheme or schemes to make payments for the purpose of rewarding the installation of electricity saving measures.

(2) Prior to the making of regulations under this section, the Secretary of State must publish a report setting out the total potential for electricity demand reduction and the extent to which this potential will be achieved by Government policies including—

(a) the scheme or schemes; and

(b) other relevant programmes, regulation or expenditure.

(3) Regulations under this section must—

(a) specify the parties from and to whom payments may be made;

(b) make provision about the calculation of such payments;

(c) make provision about—

(i) the level;

(ii) the type;

(iii) the frequency; or

(iv) the duration;

of such payments, which may differ according to the measures installed or the parties from or to whom payments are made;

(d) make provision about the monitoring, verification and calculation of electricity savings.

(4) For the purposes of this section, electricity saving measures are defined as measures which achieve permanent and verifiable saving of electricity, which is their primary purpose.’.

Alan Whitehead (Labour, Southampton, Test)

The amendments and the new clause relate to an area about which I think every member of the Committee is concerned. Indeed, those members of this Committee who are also members of the Select Committee on Energy and Climate Change have expressed considerable concern about it in the report published on the scrutiny of the draft Energy Bill. I am referring to the question of demand-side reduction or energy efficiency. The concern stems, on all sides, from the recognition that as far as electricity production is concerned, the most efficient power station is the one that does not exist because the demand has been taken out of the system and therefore that power station is not used. The benefits of that demand-side reduction are very clear. The Department of Energy and Climate Change itself estimated that a 10% permanent reduction in electricity demand in our system could, by 2030, save electricity equivalent to that generated by five power stations.

The Bill, when it arose in draft form, unfortunately had nothing in it that drew attention to that potential for demand-side reduction; nor did it have in it any way of providing the Government with the power to institute measures that could make those permanent and verifiable reductions in demand in the system. Shortly after the draft Energy Bill was published and, indeed, on Second Reading of this Bill, the Secretary of State indicated that, on reflection, the Government felt that there should have been something in the Bill relating to demand-side reduction and that he was undertaking a consultation about whether there should be something in the Bill and, if so, what form it should take.

The consultation document has been produced and has suggested that there could be a number of different forms of facility for demand-side reduction in the Bill: a market-wide arrangement, possibly for providing an incentive for those people who verifiably reduce demand over a period, both in domestic properties and, particularly, in industry and commerce; methods of reducing capacity, perhaps through the capacity mechanism, in terms of providing incentives and rewards for particular ways of improving energy efficiency by changing the nature of how electricity is used; and decapacity mechanisms whereby new forms of motors and plants could be introduced on a much greater and verifiably more efficient basis of energy use. A range of things could between them produce that demand-side reduction on a permanent basis. Indeed the McKinsey report indicated that there was not just a considerable potential for cuts in electricity demand—it suggested that a 36% cut in commercial and industrial use could be possible by 2030—but that, as things stood at the moment, only about 37% of that demand reduction potential could be realised, and therefore the gain from new measures would be potentially immense.

As far as the Bill is concerned, there are no measures coming forward at the moment. There is the possibility, however, that following the consultation, the Government will place amendments in front of the Committee before the end of its deliberations. As far as I know, there is no guarantee that that will happen, and indeed the consultation indicated that it would be carried out on the basis that there would be a consideration of whether such measures should be introduced in the Bill and not that there would be. I was pleased to hear the Secretary of State suggest that measures should be introduced in the Bill, but where we stand on implementation is very uncertain.

It is important to have in the Bill at least an outline power for the Government to act. The amendments specify that there should be permanent and verifiable reductions in demand, placing a framework for new clause 3, which sets out not the exact nature of demand-side reduction measures, but that the Secretary of State should produce a definitive report within a year of the passing of the Act and that that report should set out how to establish such a scheme and make payments for the purpose of rewarding the installation of electricity-saving measures. That report and the regulations under the clause are not prescriptive. They give the Secretary of State a considerable amount of leeway to establish a scheme, or schemes, and possibly to reflect on one or more different methods of supplier obligation, of reward for particular measures or reward for overall verifiable reduction.

As I have emphasised, the clause specifies not a particular way of doing things, but that the Secretary of State should introduce a scheme or schemes at an early date. I hope that the amendments will be welcomed by the Government, because they set out in the Bill what is required and what the Secretary of State should have as a power. Clearly, much of the heavy lifting will be done at a later date, by which I mean looking exactly at where those measures might fall. Within the existing structure of the Bill, there will be the practical issues, as far as payments are concerned, of whether the measures should be in the contracts for difference system, falling under the levy control mechanism, or under capacity payments, falling outside the levy control mechanism. Such mechanisms represent different ways of doing things as far as demand-side reduction is concerned. I emphasise that that relates to a permanent and verifiable reduction, as is stated in the amendments, not to the category of measuring demand-side response. That response can also be assisted by capacity payments, but it relates to such things as interconnection and storage, which, although they make much more of the electricity that is produced, nevertheless do not themselves permanently and verifiably reduce demand.

The amendments would perform a modest service for the Government, by doing some of the work that I anticipate and hope they will introduce, and giving the Committee certainty that those things will happen. The Government would then have the relatively pleasurable task of deciding exactly where we go from here and exactly how to ensure that the considerable gains, or the relatively low-hanging fruit, of energy efficiency and demand-side reduction—as opposed as to concerns about ever-increasing capacity—are realised as an essential part of the Bill.

Peter Aldous (Conservative, Waveney)

I will not detain the Committee long. I added my name to new clause 3, which was tabled by the hon. Member for Southampton, Test, and I welcome the fact that he has raised this important issue. I did so on a probing and exploratory basis, so as to obtain the Minister’s assurance that the Government recognise the importance of demand-side measures. Supply and demand are two sides of the same coin: they need to be considered together and their policies co-ordinated, but demand is often overlooked. With apologies to the hon. Member for Liverpool, Wavertree and my hon. Friend the Member for South Thanet, boys do like building things—very often, the bigger the better.

I believe that this Government recognise that reform of the electricity market must include the vital role of demand-side measures in achieving the three overarching objectives of security of supply, decarbonisation and keeping down bills. Reducing demand is far cheaper than building new generating capacity. As reflected in the Government’s consultation on demand-reduction options, there is a need for a broad framework within which demand-side measures can be introduced, and a need for a strategic outlook to energy efficiency, as in Germany. At this stage, there is no need to go into the detail of such measures; that is for secondary legislation.

It is important not to pre-judge the consultation, which finishes on Thursday, although it is important that measures and incentives to reduce demand can be introduced quickly, as they will shortly bring downward pressure to bear on consumers’ bills. It is also important to have in mind the job-creating potential of such demand- reduction measures, particularly at the level of communities and of small and medium-sized enterprises, including the significant role in tackling youth unemployment and providing a stepping stone to the workplace.

I express those views on a probing and exploratory basis, and I would very much welcome an assurance that the Minister fully recognises the importance of having a joined-up approach, so as to bring forward both supply and demand-side measures as part of EMR.

Luciana Berger (Labour, Liverpool, Wavertree)

May I start by telling the hon. Gentleman that girls like building things, too? As a proud member of UCATT—the Union of Construction, Allied Trades and Technicians—I have a keen interest in such matters. I hope that my two female colleagues on the Committee share my view.

My hon. Friend the Member for Southampton, Test has given us an overview, so I will not detain the Committee by repeating what was said by him or by the hon. Member for Waveney. Instead, I congratulate my hon. Friend on his proposals and his long-standing work on demand reduction and energy efficiency not only for this Bill, but for the ten-minute rule Bill that he introduced in the House last week and for many years previously. At a time when rising energy bills are a prime concern for everyone across the country, there is a vital need to introduce measures to encourage people to use less energy.

My hon. Friend’s amendments have exposed a gaping hole in the Government’s current proposals—the present very unfortunate lack of demand-side measures. With these amendments my hon. Friend has put forward a sensible way for the Government to address this omission, which would allow for decapacity payments as part of the capacity market they are considering. I am sure that when the Minister makes his remarks he will tell us that we should not be alarmed, as the Government are currently in the process of consulting on demand reduction measures. We know that the consultation closes on Thursday, and we anticipate that the proposals will be brought forward as soon as practical after that process is complete, and indeed the Government are consulting. However, this is not the position we were told we could expect to be in at this stage of the Bill. The introduction to the draft Bill said that:

“we are currently reviewing the potential for incentivising further demand reduction in the electricity sector. This work will report over the summer, in time to fit with legislative timetables, should it be required.”

This rather prompts the question whether the Minister still thinks that demand-side measures are required, and if not, why not? If so, why have they not been included thus far in the Bill? This was an issue that was identified during pre-legislative scrutiny. When the Secretary of State was questioned by the Committee, he himself said that:

“there is a lot of work we should be doing and are doing on that.”.

In response, the Committee’s final report was particularly critical of the Government’s failure to bring forward demand-side measures. It said:

“It is completely unsatisfactory that DECC's work was not completed in time to be published alongside the draft Bill. This suggests that DECC is still failing to give enough priority to ensuring that demand-side measures contribute to our energy policy goals.”

The report also noted that this omission was particularly worrying given that other countries, such as Germany, aim to reduce electricity demand by 25% by 2050. I do hope that the Government will give this serious consideration, regardless of whether they decide to accept these amendments today. It is surely right that when we ask bill-payers to underwrite billions of pounds of investment in new energy generation, we also do what we can to ensure that less energy is used in the first place, and to better manage usage and smooth out demand.

I now move on to energy efficiency, on which my hon. Friend has laid out a number of options for the Government to consider. Certainly the Minister, the right hon. Member for Bexhill and Battle, has talked a good game on this in the past. Indeed, I know from our many exchanges across the Dispatch Box and in Committee during the previous Energy Bill that he shares the Opposition’s view on the crucial importance of energy efficiency. I say genuinely that while we have not always agreed on every detail of every policy, I have never doubted his personal commitment in this area. However, I must say to him and his colleague that despite his obvious passion, his Government currently do not have a record to match this.

Only last week in the House we discussed the issue of the budget for the Warm Front scheme, which came to an end last Saturday, and which was cut by two thirds and under-spent by £50 million in each of the past two years. Concerning the green deal which was launched yesterday, back in 2010 Ministers stated that this would create up to 100,000 jobs in the insulation industry by 2015, and would reach 14 million homes by 2020. Their own impact assessment shows that under the green deal the number of loft insulations will fall from 900,000 in 2012 to 150,000 this year, a decrease of 83%. The number of cavity walls being insulated will also go down, from 700,000 last year to 400,000 this year, a fall of 43%.

We have raised the challenges we see with the green deal many times, and we still think the Government need to rectify these issues. We have discussed the interest rate many times, and we think it is too high. There are also issues around hidden penalty payments, which could see consumers charged thousands of pounds for paying off their loans early. In previous sessions we discussed the issues around rising levels of fuel poverty, which again we do not think are currently being adequately addressed. The energy company obligation which the Government are bringing in alongside the green deal will lift just 250,000 homes out of fuel poverty by 2023, according to the Government’s own impact assessment. This is despite the Government’s own fuel poverty advisory group showing that 300,000 people were pushed into fuel poverty this winter alone.

The Minister and I have been over these issues in great detail on many occasions, and I am not seeking to revisit these debates with him this afternoon. The point I am seeking to make instead is that as well as looking at how these deficiencies can be rectified, the Government still need to go further and examine what further options are available. For example, there is huge potential in the area of electrical products. I spoke to one representative from the electrical products industry just this past week, who said that they despaired of the Government’s focus on simply the fabric of buildings, which was to the detriment of looking at other options such as electrical products.

We know from national consumption figures that in 2011 the domestic sector consumed 112 TW of electricity. Of this, 91 TW was domestic electrical products. DECC estimates that demand from domestic electrical products will increase by 12% by 2030. While DECC also estimates that there is potential for reducing domestic product consumption by 42% by 2020, the Government are yet to come forward with any details beyond existing policy of how they plan to achieve that. It is clear that there is much more, across a range of areas, that the Government could be doing—and indeed are going to need to do—to achieve our carbon emission targets.

To conclude, I hope that the Government gives this area real thought, and does so with all urgency. I hope that they take action to plug one of the gaping holes in the Bill by bringing forward demand-side measures. I hope that in his response, the Minister gives careful consideration to some of the arguments put forward by my honourable Friends. I also hope that the Minister can give us a bit more detail on what options the Government are considering as part of their consultation so that we can at least get some sense of the Department’s direction of travel on this very important issue.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

I congratulate the Member for Southampton, Test on his introduction to the new clause, and the peg it provides to highlight yet again that reducing demand for electricity is the best fit option to tackle our climate change, our energy challenge and our fuel poverty. However, people have always said that it is the best fit option, and we need to consider carefully how we actually achieve it—it has often been described as the low hanging fruit. When Martin O'Neill—now Lord O'Neill—chaired the Trade and Industry Committee and we were looking at energy matters, he would often introduce an item by saying that “The low hanging fruit is to reduce energy use”. It is clearly something that all sides are committed to and campaign for, taking part in warm homes week and in initiatives to promote it. However, it is still proving a great challenge. That is why I particularly welcome the recognition that, even if there were to be demand-side measures and a financial incentive, other measures would still need to be in place, particularly regulation on products and buildings. It is the combined effect that makes the difference to overall consumption.

In warm homes week, I helped to install cavity wall insulation in a semi-detached house. The installer was busy drilling holes down the wall between the two neighbours. That was to put a chain down to make sure that the neighbour did not get the cavity wall insulation because they did not want it; people still remember the “World in Action” documentary that said cavity wall insulation could be bad for their house. There is a long educational way to go, and a lot of incentive to go as well.

Electrical appliances were mentioned. Although getting a more efficient appliance into the house is a good thing, the use of the appliance is also important, and a financial incentive could well encourage people to see the benefits of such appliances. If someone buys a really efficient fridge-freezer for their kitchen, the question is what happens to the old freezer? Quite often, it is put into an outbuilding and used to store other goods, therefore increasing the house’s energy consumption.

It is important to have a raft of measures to reduce demand. I look forward to hearing the Minister’s remarks on how the Government plan to take the consultation forward. It is great that the consultation is happening, and we should recognise that, but on all sides of the House we must acknowledge that we have still to grasp fully the full potential of demand reduction.

Michael Weir (Scottish National Party, Angus)

I would like briefly to add my voice in support of new clause 3, which is a very good measure; I hope the Government will take on board the points that have been made and look at the new clause.

The hon. Members for Southampton, Test and for West Aberdeenshire and Kincardine both talked about low hanging fruit, but experience shows that that is not so easy to gather. We talk about the green deal and the energy company obligation, but, for example, previous attempts to get energy companies even to give away insulation have proved very difficult: people have been resistant to taking it for various reasons. I am not so sure that the fruit is that low hanging or easy to gather.

The Government’s consultation document on demand reduction makes the very good point that, as one would expect, when prices go up, energy use declines. However, it also makes the point that, for every 10% increase in price, electricity demand falls by only 1%. So we have a very long way to go in this area, even by way of price. That situation has led to the slight contradiction at the heart of the Bill: we talk about building new power plant and the jobs that that will create, but unless we also hit at demand reduction the Bill will not have the effect that is hoped for on carbon reduction.

The hon. Member for Liverpool, Wavertree raised the issue of energy efficient appliances. Speaking as someone who has unfortunately had to replace some of their appliances recently, I can say that that issue is not as simple as it sounds. When one goes to a shop to look at energy efficient appliances of any sort, one finds that they often cost very much more than appliances that are less energy efficient. Some of us, of course, would say, “Okay, we will pay the extra and buy the energy efficient appliance,” but not all of our constituents have that choice. We are in the middle of very difficult economic times, and many people are having to make difficult choices about how to spend their money. It does not matter how often it is pointed out to people that, with efficient appliances, they will use less electricity; when they are looking at the upfront cost of a new fridge, freezer or cooker they will often go for the lower-priced brands simply to get that lower price.

Luciana Berger (Labour, Liverpool, Wavertree)

Does the hon. Gentleman share my concern about the estimated 5.2 million cold appliances—including fridge-freezers—that people are using, are 15-plus years old and use four to five times more energy than a new product? It is particularly people on low incomes who have those older products and are therefore using four times more energy. They could save money but they do not know about the opportunities that are available to them.

Michael Weir (Scottish National Party, Angus)

The hon. Lady is correct. The problem that I am highlighting is that, if we go into a typical electrical shop in any of our constituencies, we will find that there is a vast gulf between the higher end of the market, which is very energy efficient but very expensive, and the lower end. Many of my constituents simply cannot afford to buy higher-end appliances. If we are looking at energy reduction, we must look at issues such as that. We cannot look just at insulating homes; we must look at whether there is a way to encourage people to start using energy efficient appliances or to help them to buy those appliances. I hope that the Government will look at that part of the consultation.

I was recently at a breakfast where we were discussing energy efficiency, and one person made the point that new televisions, for example—those massive flatscreen things that we often see in homes—use a tremendous amount of energy, even when they are on standby.

Laura Sandys (Conservative, South Thanet)

We both attended that meeting, at which it was discussed that when cheap televisions, in particular plasma televisions, are on standby, they cost a lot of money but offer no benefit to the consumer. There is an interesting question about behaviour change but also about labelling. Should we not be looking at a measure similar to miles per gallon, which provides information about the usage and cost of a product?

Michael Weir (Scottish National Party, Angus)

The hon. Lady makes a good point, and I hope that the Government will look at that. Televisions are a good example. She is right that we were told about the energy that they consume in standby mode. If we look at the other appliances that we have in our homes, how many of us have a Freeview box or a Sky box, for example? The television listings, or whatever they are called, are updated overnight while the box is on standby. If the television is switched off overnight and switched back on in the morning, the television listings will not be available. Those are simple issues but they need to be looked at, because such processes use up energy.

I was struck by the evidence given by Peter Smith from National Energy Action, who talked about an energy efficiency power plant at Guangdong in China. The Minister of State, Department of Energy and Climate Change, the right hon. Member for Bexhill and Battle, was also taken with the idea, and he made the point that it was a virtual power plant. Peter Smith replied:

“Yes, it is a virtual power plant, but the interesting thing from the perspective of the UK is that the Chinese have used the fact of the energy saving potential of the non-domestic sector to pay for extensive measures in the domestic sector, particularly the replacement of electric heating in big tower blocks”.––[Official Report, Energy Public Bill Committee, 17 January 2013; c. 153, Q428.]

In some situations, instead of building a new gas plant or wind farm, we might look at energy reduction through bringing together all those things. It is an innovative way of looking at the matter. I am a charitable soul, and I believe that the Government are looking at such questions through the consultation, but we must think outside the box to find ways of reducing energy. There are a lot of options out there, and we should look seriously at them.

Barry Gardiner (Labour, Brent North)

Is not it wonderful? What a way to start the week. Sweetness and light have broken out in the Committee—

Edward Leigh (Conservative, Gainsborough)

It is under my chairmanship.

Barry Gardiner (Labour, Brent North)

Indeed. We have started the week with an all-party consensus in the Committee, which is greatly to be welcomed. We have all seen the McKinsey cost curve, and we know that CCS is at the most expensive end of that curve, at about $60 per tonne of carbon saved. Towards the middle of the curve, a positive cost, which is estimated to be between $2 and $15 a tonne, is associated with REDD-plus. Some would say that it is far more expensive, but it is nowhere near as much as CCS. At the negative end of the cost curve, we find the savings. Society has most to gain from measures at that end of the cost curve, but none of them is in the Bill. Once again—as he has done before and as I am sure he will do many times over the next few weeks—my hon. Friend the Member for Southampton, Test has done the Committee a service, and it was great to have the support of the hon. Members for Waveney and for Richmond Park (Zac Goldsmith) for new clause 3.

The hon. Member for Waveney, in addition to leaving out one of the women on the Committee—I know that he apologised for doing so—said that the Minister had a boy’s problem with building things. It is the first time that I have ever known anyone stand up in Committee this early in the morning and suggest that the Minister has an erection dysfunction, but he seemed to get away with it.

Edward Leigh (Conservative, Gainsborough)

Order. I think we should move on now.

Barry Gardiner (Labour, Brent North)

What the Whips will say about it, I do not know. I want to pick up the theme started by the hon. Member for Angus. The key words in new clause 3 are “permanent” and “verifiable”, because we have to be sure that any emissions reductions will be permanent and verifiable. The point made about energy efficiency standards and product standards is absolutely key to that. We have seen the proposals that the Government have come out with on the green deal, but as yet we have not seen them come forward with proposals that are really compulsion, not simply incentivisation. It would be useful for them to do that in response to the amendment.

Laura Sandys (Conservative, South Thanet)

I just want to clarify that, when we talk about product standards, that is a competence held by the EU and not by the UK.

Barry Gardiner (Labour, Brent North)

The hon. Lady is correct that it is a competence held by the EU and not the UK, but our Government have capacities to influence the Commission’s work in that direction. That is something that we should be working on. Indeed, building standards for thermal efficiency is an area where we can insist on certain thermal insulation standards. So product standards are one part of it and building standards are another. As she rightly says, product standards are not within our gift—straight and simple—but other areas are.

Luciana Berger (Labour, Liverpool, Wavertree)

I listened carefully to the intervention from the hon. Member for South Thanet. Does my hon. Friend not agree that, although product standards are determined by the European Union, there are opportunities for the Government to go further and come up with voluntary agreements for the sector?

Barry Gardiner (Labour, Brent North)

My hon. Friend is entirely right, but I want to go further than simply encouraging industry to have voluntary standards because if we are to achieve the progress that we need in the time scale that we have for emissions reductions, it is vital that we take action at a European level to get agreed product standards. Earlier we discussed plasma screen televisions being left on standby. Such products are no longer acceptable; as long as we go on having products that simply sit there wasting electricity, all the resource that we put in at the other end to try to cope with the emissions that that electricity produced is being doubly lost. Why build a CCS power plant at enormous cost—billions of pounds—to cope with the standby mode of appliances that are not being used?

I am sure that the Minister knows the figures only too well: in America, there are 20 power stations operating full time simply to provide the electricity to keep America on standby mode. That is an absolute nonsense. Therefore, it really is important that the Government not only take on board the sense of the amendment, to which the Minister is invited to respond with the measures that he will take to reduce energy waste, but go further and think of the ways in which compulsion will become increasingly necessary.

Robert Buckland (Conservative, South Swindon)

I am listening carefully to the hon. Gentleman’s argument. He mentioned compulsion, and the point has already been made about the EU competency. Is there not a danger that however well intentioned Members’ aims may be today, we could, in effect, gold-plate the situation? That would not help the manufacturers of energy efficiency products such as a firm in Swindon that I visited recently that demonstrated, by its own energy efficiency measures, that thousands of pounds can be saved a year. Is there not the danger that, by going too far, we could damage the aims that we all share?

Barry Gardiner (Labour, Brent North)

The hon. Gentleman is absolutely right to talk about business competitiveness and gold-plating, but there is no issue about gold-plating here because there is no directive that we seek to go further on; I am not suggesting that. I suggest that the Government need to press for higher standards at a European level that can be brought in across the EU to reduce the amount of waste we are producing. Unless we have a real understanding that that is important and a commitment to going in that direction, we will not achieve the qualitative shift in output that all of us wish to see.

I do not wish to detain the Committee further. This is a probing amendment, and I am interested to see how the Minister responds. I know very well that he is serious and that he wants the whole of the green deal project and all that the Government are doing to succeed, but it was an omission to leave out such a matter. I hope that he will now take this forward with real gusto and try to make a difference that we all see.

Gregory Barker (Conservative, Bexhill and Battle)

We have had an excellent debate. I pay tribute to the hon. Member for Southampton, Test and my hon. Friend the Member for Waveney for tabling this probing amendment.

It is important that we get to discuss demand reduction, which is an essential part of the energy mix. There can be no proper discussion and scrutiny of electricity strategy or really forward-looking ambitious Government energy policy without the inclusion of our plans for demand reduction.

The hon. Gentleman speaks with genuine expertise and long-standing experience on this issue. I have heard him speak in the Chamber on a number of occasions. I only wish that, in the 13 years under the previous Government, his Front-Bench colleagues had listened to him a little more. He was one of the voices in the wilderness then on this agenda. I assure him that there is now a growing consensus that we cannot ignore the issue and that it does have a place, right up there, in the forefront of the policy mix.

Albert Owen (Labour, Ynys Môn)

The Minister is making a big error in thinking that energy efficiency came in with this Government. In Wales, we have been putting in loft installations for more than a decade, and Government policy has been pushing it. My hon. Friend has been in tune with that movement in Wales.

Gregory Barker (Conservative, Bexhill and Battle)

The hon. Gentleman makes a well intentioned error. We are talking about not thermal efficiency and building measures such as loft lagging, but demand reduction measures in the electricity markets. The overwhelming majority of homes in Britain are not heated by electricity; I think about 2 million homes are.

Albert Owen (Labour, Ynys Môn)

No gas in some areas.

Gregory Barker (Conservative, Bexhill and Battle)

The majority of UK homes are heated by gas or heating oil. Those measures, important as they are—we have already had a whole Bill devoted to them—are outside the electricity markets. We are debating how we properly recognise the role of demand reduction in the context of electricity market reform. On another occasion, I will happily debate the ambitions of the coalition Government to transform the thermal efficiency of our homes, but this is not the place to do that.

The question is how we can permanently seek those more efficient reductions in electricity demand. The amendment relates to the inclusion of electricity demand reduction as part of the capacity market. The new clause relates to the introduction of powers for the Secretary of State to establish a scheme to make payments to reward those who install measures to use less electricity.

I will discuss the detail of those later, but first let me reassure the hon. Members for Southampton, Test, for Angus, for Brent North and for Liverpool, Wavertree, and my hon. Friends the Members for Waveney and for West Aberdeenshire and Kincardine that the coalition is absolutely committed to being the first Government ever, in the context of the electricity markets, to bring forward radical demand reduction Government policies. I said that here in Westminster the night before the Bill was published and took a cross-party selection of colleagues through the Government strategy, which includes a comprehensive consultation, to arrive at a really robust response that will include legislation.

Given the expertise on both sides of the Committee, I do not need to labour the importance of increasing energy efficiency and changing how we use electricity, both as a country and an economy. Energy efficiency belongs at the heart of the low carbon economy that we are building. The coalition has a mission to seize the energy efficiency opportunity and to accelerate the deployment of 21st-century energy saving measures, some of which have been alluded to in the debate, and that is why we created the Energy Efficiency Deployment Office.

When we came into Government and inherited the Department of Energy and Climate Change from the now Leader of the Opposition, there was an office for renewable deployment, an office for nuclear deployment and one responsible for oil and gas. Those big energy interests were well represented in the hierarchy of the Department. There was, however, no office for energy efficiency. That was a failing not only of the previous Labour Government; there never had been such an office under any previous Government. That was one of the first things that I wanted to put right. I wanted to ensure that a strong, equal voice for energy efficiency existed within the context of policy making and the Department.

I am delighted that we created the Energy Efficiency Deployment Office, because energy efficiency can play a significant role in achieving a sustainable energy system for the UK. Not only that, it is a sure-fire way for homes and businesses to save money on energy bills while creating jobs in local economies. However, the Government do not just talk about energy efficiency; we are actually walking the walk and delivering real savings in the public sector.

Back in 2010, the coalition signed up to the commitment that the previous Labour Government had refused—namely, the 10:10 campaign. Conservative and Liberal Democrat colleagues alike committed the Government to cutting energy use and carbon emissions by 10% in their first 12 months of office. The previous Government did not make that commitment because the Ministers of the day told me that it could not be done—there was not the money, the buildings were too old, the systems were not there and it was not a real opportunity. However, not only did we meet that 10% in our first year in government, but we actually exceeded the Prime Minister’s target and cut carbon emissions across Government buildings by 13.8%.

Last year, we published our energy efficiency strategy, which sets the direction for energy efficiency policy for the coming decades. We identified four overarching barriers preventing the take-up of energy efficiency throughout the UK: embryonic markets; misaligned financial incentives; a lack of trusted information; and an undervaluing of energy efficiency.

Our energy efficiency strategy sets out the action that we are taking to address those real points. First, we are connecting energy efficiency knowledge and innovation with finance. Secondly, we are supporting energy efficiency innovation. Thirdly, we are harnessing the power of improved energy use information. Fourthly, we are encouraging collective action to act on this new and better information. We will be discussing all those when we launch our national energy efficiency mission on 4 February.

The specific case of electricity demand reduction is a vital element of our overall drive to improve efficiency. That is why my Department has been pushing forward that agenda as an integral part of electricity market reform. In the White Paper underpinning that programme, published in July 2011, we committed to undertaking an assessment of the potential for electricity demand reduction and the opportunities for Government to take meaningful action. We all know that there is significant potential for reductions in electricity use.

The hon. Member for Brent North rightly referred to the McKinsey curve. In DECC, we commissioned McKinsey to update and expand on that curve. The research is publicly available and it shows that within the British economy very specifically there are genuine opportunities below the abatement curve to make real cost-effective savings. However, to develop a robust approach to achieving that potential requires specific analysis, and that was the purpose of our initial commitment.

Barry Gardiner (Labour, Brent North)

Will the Minister confirm that precisely one of those areas is products and product standards? Therefore the need to address that section of the abatement curve is paramount because it is one of those in which the largest savings can be made.

Gregory Barker (Conservative, Bexhill and Battle)

The hon. Gentleman, as ever, speaks with a great deal of experience and knowledge in these matters. He is right. Products are a huge element. The DECC modelling shows that increased product standards form a key part of our energy efficiency strategy, but as my hon. Friend the Member for South Thanet said earlier, this is primarily driven from the European Union because of pan-European product standards.

We can do more. There are a number of specific sub-sectors and technologies within the cost curve which can be attacked through a range of different measures. One of the measures could be an element for demand reduction through the capacity market.

Albert Owen (Labour, Ynys Môn)

The Minister will recall that in the earlier debate my hon. Friend the Member for Brent North also said that we could influence these regulations at a European level. What are the Government doing to ensure that we do that, because Europe is not all bad?

Gregory Barker (Conservative, Bexhill and Battle)

The hon. Gentleman is absolutely right. Europe is not all bad and we play a very progressive role in areas where Europe should have a competency. There are plenty of areas where we think it is less than helpful to have Europe doing things that could be perfectly well done at a national level. But we certainly are extremely engaged in this whole area. The environment is an area where we feel that we have a strong part to play and we are one of the leading and respected European voices on this.

Luciana Berger (Labour, Liverpool, Wavertree)

Forgive me for bringing this up, but it will be useful to do so at this juncture. We heard from the Prime Minister at Prime Minister’s Question Time last week that one of the things he would like to amend is European legislation on the environment. Perhaps the Minister could share with us what the Prime Minister meant.

Gregory Barker (Conservative, Bexhill and Battle)

The hon. Lady invites me down an avenue where I would no doubt be ruled out of order. We will save that for another day.

Edward Leigh (Conservative, Gainsborough)

I am sure that if the Minister is skilful he can keep in order.

Gregory Barker (Conservative, Bexhill and Battle)

Thank you, Mr Leigh, for that very helpful ruling. I do not wish to bore you as I know this is not a matter that you take a great deal of interest in—

Edward Leigh (Conservative, Gainsborough)

I am always very interested in the Minister’s speeches.

Gregory Barker (Conservative, Bexhill and Battle)

I do not think it would be for me to second guess here in Committee the Prime Minister’s words at Prime Minister’s Question Time.

The analysis identified around 92 TWh of potential electricity demand reduction in 2030 that would not be realised through existing or planned policies. This would be equivalent to around 26% of total electricity consumption and includes significant contributions from the commercial sector, the industrial sector and the residential sector: 26% is a huge chunk if one considers just how diverse the energy mix is. That is greater, for example, than the current contribution to the electricity sector of all of our nuclear fleet. This potential lies in a wide range of areas. In the residential sector savings may be achieved through the use of more efficient appliances and products. Improved insulation and automatic lighting controls have the potential to provide a significant contribution in the commercial sector; and in the industrial sector, steps to improve the way motor and pump systems work, through replacing over-large motors with those of the correct size and applying control systems along with improved boilers, also have the potential to make savings. Reducing demand on this industrial scale will mean not only reduced bills for those taking action, but could also deliver substantial savings in terms of the overall cost of our energy system as well as drive up the economic competitiveness of UK plc.

Alan Whitehead (Labour, Southampton, Test)

I notice that the Minister’s speaking notes appear to be coming to an end. [ Interruption. ] The Minister is adept at disguising them. Before he runs out of speaking notes, will he confirm unequivocally that he has walked the walk down the corridor to see his scribes at work putting pen to paper on amendments that will come to this Committee concerned with demand-side reduction and putting into practice what he has been talking about this morning? Or will he stand at the doorway of merely considering whether one should have such demand-side reductions as suggested by the consultation paper?

Gregory Barker (Conservative, Bexhill and Battle)

I can honestly assure the hon. Gentleman that I am in no way lingering on the threshold or leaning on the lintel. I will come to that point specifically in my speech. If a 10% electricity demand reduction could be achieved, this could result in electricity system cost savings in the region of £4 billion in 2030; and the energy cost savings would more than compensate for the costs of making efficiency investment in those businesses, industries or even in those homes. An electricity saving of this magnitude could reduce UK electricity sector carbon emissions by 4.5 megatonnes of CO2 in 2030 and, roughly speaking, save electricity equivalent to that generated by five large power stations. However, achieving such reductions is not necessarily straightforward. If they deliver economic benefits, why are these actions not already being taken?

The consultation document we published last November sets out our analysis of the barriers that prevent take-up of demand reduction measures and suggests a variety of financial and non-financial measures for tackling these barriers and making concrete progress in reducing demand. We have been talking to a wide variety of stakeholders about these options during the past months and have already received a number of very helpful contributions, such as the Green Alliance report “Creating a Market for Electricity Savings”. As Opposition Members have been kind enough to say, I have taken a strong personal interest in the work in this area for a great deal of time. As we have developed policy within the Department I have chaired several working groups with key interested parties to drive forward policy creation in this area.

On Friday, for the first time, I chaired a meeting at 10 Downing street, pulling together some of the best brains in the electricity markets, from think tanks, NGOs, investors and manufacturers of systems controls, such as Siemens, Dow or Honeywell. We had a very productive session, but I would be kidding this Committee if I pretended that there was unanimity in terms of the conclusions on the clear way forward. The fact is—and probably the reason why no Government have captured this simple proposition before and put it into legislation—the detail is very difficult. There are a number of perverse or potential unintended consequences of framing this challenge in legislation and we are absolutely determined to get this right.

We are open to all options, including financial support measures, and will take final decisions in the context of responses received to our consultation, as well as our own further internal analysis. It would be wrong of me, and inadvisable for reasons that the Committee will understand, to pre-empt a formal consultation that we have begun. This obviously limits to some degree the response that I can give today.

Barry Gardiner (Labour, Brent North)

I remind the Minister that he has a history of pre-empting consultations, if he remembers solar and feed-in tariffs. On this occasion it might be positive if he did.

Gregory Barker (Conservative, Bexhill and Battle)

Now the hon. Gentleman accuses me of being premature, so I am not going to go any further down that road.

Edward Leigh (Conservative, Gainsborough)

I think we have had enough of this.

Gregory Barker (Conservative, Bexhill and Battle)

I can assure the Committee that work is progressing on a timetable that will allow us to consider amendments to the Energy Bill during its passage, should it be required to deliver the most effective policy option.

Luciana Berger (Labour, Liverpool, Wavertree)

Will the Minister explain the latter half of that sentence. Forgive me, I did not quite catch the exact terminology he used, but he indicated that it was not definite that amendments would be forthcoming. I think the spirit of the amendments being put forward today is in anticipation of the Government bringing forward either a new clause or other amendments.

Gregory Barker (Conservative, Bexhill and Battle)

Because the consultation has not closed and because a number of options are outlined in that consultation, which is a formal Government document, I have to be extremely careful in the way I choose my words. This is not something that comes particularly naturally to me, but on this occasion I have to be quite careful. I think that hon. Members, knowing my commitment to this agenda, knowing the work that is going on in the Department, knowing that this now is an agenda that is owned by the Prime Minister down, which is why we had that important meeting in 10 Downing street on Friday, knowing that the Secretary of State has been very clear that this is one of his personal areas of interest that he is determined to drive forward, will agree there is real intent to see a proper outcome to this work.

The Bill already enables the definition of capacity to include a wide range of technologies and approaches to providing reliable capacity. Clause 17(3) states that providing capacity can mean reducing demand for electricity and enables provision about the meaning of reducing demand for electricity to be set out in regulations. Amendments 73 and 74 are therefore not required to allow electricity demand reduction projects to participate in the capacity market. Other amendments could, however, be needed to ensure that the capacity market effectively promotes demand reduction projects. We will explore what may be needed legislatively should the inclusion of demand reduction in the capacity market be our favoured option.

New clause 3 proposes a broad enabling power to allow the Secretary of State to implement a financial incentive scheme for electricity demand reduction through secondary legislation. I very much support the intention behind the new clause. Our consultation document sets out a number of different approaches that could be taken to provide financial support to electricity demand reduction projects.

It would be inappropriate to take decisions on the specifics of any mechanism before we have been able to analyse responses to our consultation which closes tantalisingly shortly on 31 January. I hope hon. Members on both sides who, I know, are concerned that we use this Bill as an opportunity to ensure that we finally take the big step forward for demand reduction, will be reassured about the coalition Government’s commitment to take positive action to make a step change in electricity demand reduction. I hope they will be content that we are already considering what powers we will need to make those reductions and that we will return in this carry-over Bill to this issue at the appropriate time. On that basis, I ask that the amendment be withdrawn.

Alan Whitehead (Labour, Southampton, Test)

I am sort of reassured by the intention of the Minister. Indeed I know that he, like all hon. Members here this morning, is very concerned about, and committed to, this agenda, and that that informs what he considers to be the best thing to do in relation to the consultation. However, what he did not explicitly say was what exactly would come forward. Indeed, he significantly mentioned that this was a carry-over Bill, so it is conceivable that the intention itself could be carried over.

Gregory Barker (Conservative, Bexhill and Battle)

The hon. Gentleman is right. I did not explicitly state what should come forward, but I hope that I made it clear that that was not to do with a lack of determination on my part or the part of the coalition. The fact of the matter is that we are still in a consultation period, which does not close until 31 January. It is unfortunate that this clause was not debated a little later in the Committee’s proceedings, at which point we might have been able to be rather more explicit.

Alan Whitehead (Labour, Southampton, Test)

I should have thought that, under the circumstances, the best thing to do would be to hold over a possible vote on the clause until the end of the Committee proceedings. As it is a new clause, Mr Leigh, I believe that that is in order.

Edward Leigh (Conservative, Gainsborough)

We can do that on the new clause, but if the hon. Gentleman wants to press this amendment to a vote now, this is his opportunity.

Alan Whitehead (Labour, Southampton, Test)

I beg to seek leave to withdraw the amendment, but I should like to leave the new clause to the end of our proceedings. Indeed, let us earnestly hope that the consideration that is going on will have borne fruit by the time we get to that point.

Edward Leigh (Conservative, Gainsborough)

That will happen in any event, because the vote on the new clause will be taken later.

Tom Greatrex (Labour, Rutherglen and Hamilton West)

I beg to move amendment 58, in clause 18, page 10, line 41, at end insert—

‘( ) Provision falling with subsection (4)(j) includes the termination or variation of a capacity agreement in circumstances where the operation of a generating plant is being used to undermine the efficient operation of the capacity market.’.

Edward Leigh (Conservative, Gainsborough)

With this it will be convenient to discuss the following:

Amendment 59, in clause 18, page 11, line 9, at end insert—

‘( ) Provision made by virtue of subsection (4)(c) must include provision ensuring that plant which has already entered into a contract by virtue of section 6 will not be eligible to act as a capacity provider.’.

Amendment 63, in clause 22, page 12, line 36, leave out—

‘relating to restrictions on the use of generating plant.’.

Amendment 65, in clause 24, page 13, line 29, at end insert—

‘(e) about the identity of the public body or any other person;

(f) the powers of the public body or any other person;

(g) the terms of reference of the public body or any other person; and

(h) about how the public body or any other person is funded.’.

Tom Greatrex (Labour, Rutherglen and Hamilton West)

Amendments 58 and 63 are complementary. They are designed to assist the Government in tightening the provision in the Bill, which, as drafted, provides the Secretary of State with significant powers and has provoked a number of questions that I am sure the Minister is aware of. Amendment 63 removes clause 22(3)(b), which gives the Secretary of State the power to restrict the use of generating plant. That clause gives the Secretary of State the power to impose requirements on parties to a capacity agreement

“relating to restrictions on the use of generating plant.”

The explanatory notes advise the following:

“In relation to restrictions on the use of generation plant and participation in a capacity auction, the Secretary of State could, for example, prevent any part of a generating plant to which a capacity agreement does not apply to be used in a way that undermined the efficient operation of the capacity market.”

I understand the purpose of the provision. There is the potential, as the explanatory notes outline, for generators to attempt—for lack of a more eloquent phrase—to game the system. I have no doubt the Minister will produce a more eloquent phrase with an appropriate quotation alongside it. There is the possibility that one part of a generating plant may be shut off or slowed down to attract greater payments for the part of the plant subject to a capacity agreement. That would be unfair and ultimately, as we have discussed, it would be the consumer who pays. Generators would receive greater subsidy for producing less electricity. I understand and support the Government’s intention, but my concern is that the measure designed to prevent this from happening goes wider than it needs to, and it could perhaps be tightened.

Amendment 63 seeks to remove the power of the Secretary of State to restrict the use of a generating plant. This provision would be replaced by amendment 58, which would allow the Secretary of State to terminate or vary a capacity agreement where the

“operation of a generating plant is being used to undermine the efficient operation of the capacity market.”

The wording of clause 22, to which amendment 63 applies, is very broad and potentially wide-ranging, in that it would allow the Secretary of State effectively to close down a generating plant for any number of reasons unrelated to the capacity market. Given the Government’s intention as set out in the explanatory notes, I contend that the amendment would maintain greater consistency and ensure that those in the industry do not misunderstand that intention.

Perhaps the Minister could confirm whether he agrees that the provision as drafted would allow the Secretary of State that breadth of power. I am sure he will refer, rightly, to the Government’s intention and the explanatory notes, but as we have discussed before, there is a difference between what is in the Bill and what the explanatory notes suggest the provision’s purpose is, and it is important for clarity that the two be as consistent as possible. I ask the Minister to reflect on amendments 58 and 63, which would help to clarify the Government’s intention without causing fear and suspicion among those who have been examining the Bill in recent weeks.

The purpose of amendment 59 is to ensure that generating plant does not receive double subsidy—in essence, the consumer should not be paying twice for the same electricity being generated. The Government have stated that they will prevent plant that is receiving support through CFDs from being eligible for support through either the small scale feed-in tariff or the renewables obligation during the period when both are in existence. That is an entirely sensible and appropriate position, but there seems to be less clarity in relation to the capacity market.

In future, plant receiving capacity payments could be eligible to enter into a CFD, or vice versa. This issue could well arise in respect of CCS plant. Plant that will hopefully be fitted with CCS technology in future could be eligible under CFD, and subsequently eligible for capacity market payments. Amendment 59 allows the Minister to clarify the Government’s stated policy intention, and to say whether he will support the amendment or commit to tabling his own at a later stage.

Amendment 65 is a probing amendment to tease out detail about the enforcement body to be set up under clause 24 to ensure obligations or requirements imposed by capacity agreements are met. Can the Minister give a little more detail on the enforcement body and how it will be funded? Will it be supported by his Department, or will the funding come from capacity payments and therefore from consumers? Has he assessed the likely cost of this body? There appears to be no detail in the Bill’s accompanying documents about the identity of this body. Clause 24 (2) notes that it will be a

“Public body or any other person”,

which leaves scope for just about any organisation or individual to act as the enforcement body. Can the Minister shed further light on this? I do not dispute the need for an enforcement body; it seems a sensible approach and will hopefully give investors and potential investors the confidence that the obligations and requirements under the capacity market will be met. However, it would be useful to have further detail on how it will operate and be established in practice.

Michael Weir (Scottish National Party, Angus)

I just want to make a couple of points, particularly with reference to amendment 59. Most of the discussion about capacity has revolved around bringing on line gas plant, for example, and insufficient electricity being generated by other means. However, other technologies may play a part. As has been pointed out to me, pump storage of electricity may play a part within the system of CFDs and capacity mechanisms. As Members are no doubt aware, that technology is used—particularly in Scandinavia—to address some of the problems associated with the intermittency of wind generation. As I understand the process, any excess electricity that is generated but not immediately used to pump water is later released to produce hydro power when insufficient energy is otherwise available. There is a proposal to use that technology in connection with wind farms in Scotland, but it is not clear to me how it fits into the Government’s plans for EMR. The technical update from DECC refers to storage, but it gives no greater detail.

The hon. Member for Rutherglen and Hamilton West’s amendment causes me some concern, because it is not clear how electricity generated by such means will be viewed. In the examples he quoted, where a plant for pump storage is related to a wind farm, there can be an argument as to whether the electricity subsequently produced is the same as that generated by the wind farm. If it had received CFDs, would it then be eligible for capacity payments?

Alternatively, one could argue that, when the energy is released, new hydro energy is being created that may be available for capacity payments. But if the plants are related, amendment 59 could prevent pump storage from being considered for capacity payments and, as such, could stand in the way of the development of this technology, which may not play a huge part in EMR but could be important in respect of wind farms. I ask the Minister to consider the pump storage issue, and the hon. Gentleman to consider whether his amendment may have this—I am sure unintended—consequence.

John Hayes (Conservative, South Holland and The Deepings)

How wonderful it is to welcome you to the Chair and to serve under you once again, Mr Leigh. I am grateful to the shadow Ministers for their amendments, which raise important issues related to terminating or varying capacity arrangements and the interaction between the contracts for difference and capacity market, placing restrictions on the capacity market’s enforcement and dispute resolution process.

Amendment 58 relates to terminating or varying capacity agreements. In essence, as the Committee knows, the purpose of this part of the Bill is to deliver an efficient capacity market that will bring forward reliable capacity. That is very important because there are concerns about whether there will be sufficient capacity to meet demand.

Committee members will be familiar with Ofgem’s report to Government suggesting that spare capacity will tighten significantly over the next decade. There is some suggestion that that may be an overestimate of the problem, given the role of interconnectors, on which DECC analysis puts greater emphasis. None the less, the trend identified by Ofgem—that spare capacity could shrink from 14% to 4% in the winter of 2015-16—broadly reflects our own analysis, and the Committee will be familiar with the Ofgem document and my Department’s response. This part of the Bill and the amendments are pertinent to all that analysis.

It is also worth saying that that problem may be exacerbated by coal going off stream more quickly than anticipated and new gas-generating capacity coming on stream more slowly than anticipated. These are vital matters that deserve the Committee’s attention and consideration, thus the significance of the amendments.

I think that hon. Members on both sides of the Committee will agree that it is right that any plant that is operated in such a way as to undermine the intentions of the capacity market should face having its capacity agreement terminated. Clause 18(4) establishes that the conditions where capacity agreements may be “terminated or varied” will be set out in regulations, which will address that important issue. It is important to point out that any regulations made under this aspect of the Bill have to be for the purpose set out in clause 17(1), namely

“providing capacity to meet the demands of consumers for the supply of electricity”.

That effectively acts as a limit on the breadth of the power under clause 22(3)(b) on requirements

“relating to restrictions on the use of generating plant”.

Turning to the interaction between CFDs and the capacity market, and amendment 59, the Bill’s intention is to enable a range of technologies specific to the capacity market to contribute towards providing us with reliable capacity. However, as the shadow Minister said, not all technologies are suitable for inclusion at the outset. Although we recognise his point, this is not something that will be set in stone. He mentioned CCS, which I will come to in a moment. The essence of the restriction is to prevent technologies from bidding in the capacity market and receiving other financial support, which the shadow Minister recognised and pointed out. We therefore made it clear that a CFD plant—a plant that is receiving extra financial support in respect of CFDs—is not part of the capacity market. They are excluded while the CFD is being administratively set. As has been pointed out, that is to avoid overpayment and, by so doing, to protect the interests of consumers.

So the essence of the first phase of the CFDs is to avoid overpayment while the price is set. Thus the capacity market will be limited. As the process evolves, particularly as we move to auctions, it may be appropriate to allow plant that is in receipt of CFDs to participate if that will result in better outcomes for capacity and consumers. The hon. Gentleman has a long-standing interest in CCS and I have no doubt that it will inform our consideration over time. Neither I nor the Government —although, in this context, I am the Government—have a fixed view about that, but we will consider the role of CCS in the capacity market, and I might say more about that later. The hon. Gentleman is absolutely right, however, that the flexibility that is implicit in the position that we have adopted would allow us to take an open-minded view about the role of technologies such as CCS in the capacity market over time. The interaction between the provision of CFDs and the operation of the capacity market is something that we need to keep under review. As I said, we need to retain the option for CFD plant to participate.

Amendment 63 concerns the power to place restrictions on the use of generating plant. The purpose of the provision is to ensure that opportunities for exercising market power and gaming can be minimised, which the hon. Gentleman mentioned. C. S. Lewis said:

“We are all fallen and…all very hard to live with”.

Of course, because we are fallen, there is the potential for people to game the system in their interest, rather than the national interest, which is of course what drives all of us. We are unusually virtuous in that regard, although fallen—I do want to emphasise that. There will be people who might try to manipulate the system to their advantage, and the obvious way of doing that, which we have mentioned before, is by withholding capacity from the system and then bidding to be part of the market. We want to minimise that possibility, because the behaviour I have described would not only limit the effectiveness of the capacity market, but drive up prices for consumers, so the knock-on effect would be unhelpful in at least two ways.

In the course of the work on designing the capacity market, it has been clear that it is imperative to have visibility of the range and type of capacity available through the system, irrespective of whether that capacity intends to participate in the mechanism. For example, we need to ensure that we can address gaming opportunities whereby plant may notify its intent to close to drive up prices in exactly the way that I have said. We are requesting powers to make regulations to cater for that situation.

I have made this point to the Committee before, but it is important to put on record again that the detailed design of the capacity market will be published in May. That will add to the detail we have already published, including that published alongside the Bill, of which the hon. Gentleman will be aware. We are proposing to consult on implementing the regulations and code changes in the autumn. I am confident that there will be opportunities to look at this issue in considerably more detail during the passage of the Bill, and it is right that there should be.

We are determined to get the design right. We are basing it not only on our analysis and the work that we are doing with Ofgem, but on best practice in places where capacity markets have been implemented. The hon. Gentleman and the Committee will know that the capacity market mechanism has been employed in north and south America, so we want to look at how those markets have operated in respect of both gaming and protecting against that eventuality. France is considering putting a capacity market in place, so we will watch that process with interest, too, because it is important that the capacity market not only is constructed in a way that maximises its value, but evolves over time to reflect our analysis of its effects.

That brings me to the enforcement and dispute resolution process, which again the hon. Gentleman raised when speaking to his amendments. The effective operation of the capacity market is dependent on participants having clearly defined obligations, backed up by a competent enforcement regime and a transparent appeals process. In principle, we intend to utilise existing enforcement powers and dispute resolution processes where appropriate. Details on the enforcement of the penalty regime and dispute resolution are set out in subsections (1) and (2) of clause 24. We envisage that existing arrangements will be appropriate to cover the funding of any person who is given enforcement or dispute resolution functions under clause 24, which could include Ofgem, courts, tribunals or arbitration services. It is therefore proposed that no additional provisions will be required in regulations.

I want to emphasise that there are good existing mechanisms for dealing with such potential challenges, so we do not want to introduce unnecessary further legislation, or indeed regulation. Ofgem has an existing enforcement role in the energy market. As I said, we are working through the detail of the design of the capacity market, with further information to be published in May, including on the role that Ofgem will play. We are working with Ofgem, and I want to be clear then about how it can use its existing powers in the particular regard that the hon. Gentleman mentioned, which is implicit in the amendments.

I therefore ask the hon. Gentleman to withdraw the amendment, on the basis that, I hope, the explanation has been agreeable to him and appropriate to his questions.

Michael Weir (Scottish National Party, Angus)

The Minister has not addressed the issue I raised about pump storage. Can he give us any information on that?

John Hayes (Conservative, South Holland and The Deepings)

I did not really understand what the hon. Gentleman was talking about, so I did not respond to him, but that was not meant as a discourtesy. He made an important point about wind that I did not really grasp, so I am inclined, with his indulgence and yours, Mr Leigh, to consider the matter further and write to him. The point was important, albeit tangential to the principal arguments around the amendments, and it is worthy of a proper response, so I do not want to give him a casual or inadequate one now.

Tom Greatrex (Labour, Rutherglen and Hamilton West)

Amendment 59 was tabled as a probing amendment. Its aim was to tease out how the capacity market and CFDs might interact. I mentioned CCS and the hon. Member for Angus mentioned pump storage, but the point is similar. One form of generation and supply might end up being applicable to both, and we need to be conscious of where costs will arise. I have no intention of pressing the amendment to a Division.

With regard to the other amendments, it might be helpful for all members of the Committee if, as the work continues, the Minister shares with us the aspects of different American and south American capacity markets in which he is interested, because that would inform us of how the Government’s views are developing and the direction they are taking. We will no doubt come on to talk about the capacity market in more detail when we consider subsequent clauses.

John Hayes (Conservative, South Holland and The Deepings)

That proposal delights me in two respects. Not only will it give me a chance to continue my habit of writing to the Committee during its progress, which I think is the right thing to do, but it will test my officials, which is important too, for the hon. Gentleman has allowed me to ask them to explore south America in rather more detail.

Tom Greatrex (Labour, Rutherglen and Hamilton West)

I am glad to have been of service to the Minister by helping him to keep his officials on their toes. I welcome the frequent e-mails that have emerged from his office over the past few weeks. When the Committee finishes, I do not know how I will live without them.

On a serious point, as the Government work towards the detailed operation of the capacity market, it is important that they bear the points made in this group of amendments in mind. I hope that the Minister will keep members of the Committee informed, because it is vital that the capacity market works in a way that addresses our concerns. I beg to ask leave to withdraw the amendment.

Clause 19 - Capacity auctions

Tom Greatrex (Labour, Rutherglen and Hamilton West)

I do not intend to detain the Committee for long on the clause, but there are a couple of relevant points that arise from our previous consideration. The Minister has referred to the Ofgem capacity assessment report from late last year and the rather alarming 4% capacity figure, which helped to focus attention on the importance of these issues, even if the coverage might not have been completely accurate. The Minister has set out why the figure might well be 4%, and one reason is that gas capacity is coming on stream more slowly than he might have anticipated. Part of the explanation behind that is tied to the lack of detail about the capacity market, because people are holding off making decisions. In fact, I think that DECC information shows that construction has not started on 13 CCGT plants that have received planning permission. Those plants would represent a significant amount of capacity, so whatever discussions we might have in our consideration about the appropriate amount of gas capacity, there is certainly evidence that people are holding off from taking things forward, partly because they want more detail in the Bill about the capacity market.

I appreciate that the Minister set out the timetable in which the relevant detail will emerge, but he will be aware of concerns expressed by the CBI and SSE in oral and written evidence about the lack of detail, particularly regarding whether a capacity market will be introduced. We are talking as though it will happen, but the decision has yet to be taken. I understand that it will be taken later this year, with an auction potentially next year.

The format of the auction, how it will be decided, how much will be allocated, the eligibility rules for generators and how the payments will be funded are significant issues. I anticipate that the Minister will tell us that the detail will come later this year, but I wanted to flag up the fact that there are significant gaps in the detail that will need to be filled if the capacity market is ever to emerge and to get up and running.

John Hayes (Conservative, South Holland and The Deepings)

I do not want to delay the Committee unduly on this, as the hon. Gentleman suggested I should not. He is right to say that clarity on the detail will trigger certainty about investment. The plan, as he will know, is to run the first capacity market auction in 2014 to deliver in 2018-19; that is how the Government are minded, currently.

The hon. Gentleman is right to say that it is important that we do not, therefore, delay further investment in new capacity, and he is also right about sticking to the timetable I described for publication of more detail. Although the work is challenging, and he has invited me to consider South America in more detail, it is none the less important for us to signal our intent and reinforce it with more information. That will certainly happen along the lines that I described.

The hon. Gentleman will be interested to know that north America, particularly New England, also has considerable experience of capacity markets and how they evolve. There is a history in north America in particular of capacity markets evolving and responding to changed circumstances. Of course we are looking at that, too; but he is right that investment depends to some degree on that clarity. Grandfathering arrangements will help with that as well.

I think our intentions with respect to the clause are clear from the Bill and the explanatory notes, so rather than exhaustively describing the basis of our intentions I shall perhaps just say something about auctions.

The auction will determine the level of payment that capacity providers will receive. That is well established. Doing that through an auction will enable the lowest long-term sustainable price for providing the amount of capacity required to be achieved. That is broadly the approach used in the United States, which is why I mentioned its experience. We need to be clear—we began this work, of course, some time ago—about what has happened in the United States and what the response was.

The clause enables regulations to make provision for decisions on the timing of capacity auctions; on the amount of capacity to be contracted for—which of course depends on some of the analysis I described earlier—on the process by which the auction is to be run; and on appeals relating to capacity, for example from bidders who are unsuccessful in the auction. A final decision on the timing that we are minded to pursue will depend on a refreshed analysis of capacity. That will be informed by updated advice from the authority and the national system operator, which will consider economic growth, recent investment decisions, the role of interconnection and energy efficiency, some of which my right hon. Friend the Member for Bexhill and Battle spoke about in terms of demand reduction.

We expect the decision on how much capacity to contract through the auction to be taken by Ministers, four years ahead of the delivery year when capacity will be expected to be in place. We expect that decision to be taken with reference to a reliability standard, in order to ensure that we strike the right balance between system reliability and cost to consumers. That is something we discuss regularly; indeed, I attended a meeting with my officials on exactly that subject yesterday. More information will be provided and it is likely to offer considerable comfort to generators that are making investment decisions. We will take the decision about timing on the best possible analysis of trends that are likely to affect supply and demand. The clause sets out the means by which we do all that.

Clause 20 - Settlement body

Tom Greatrex (Labour, Rutherglen and Hamilton West)

I beg to move amendment 62, in clause 20, page 12, line 20, at end insert—

‘( ) Provision made by virtue of this section must provide for—

(a) the identity of a settlement body;

(b) the powers of a settlement body;

(c) the terms of reference of a settlement body; and

(d) the funding arrangements of a settlement body.

( ) The settlement body must report annually to Parliament.’.

I do not want to detain the Committee long on this probing amendment, through which I seek to obtain further clarity about the settlement body, or information on when such clarity will be provided. I presume that the settlement body is intended to perform a function similar to that of the CFD counterparty. Effectively, it will be a middleman—or middle person—between capacity providers that generate electricity and suppliers that pay for it. Of course, consumers ultimately pay.

Can the Minister shed any light on exactly who the settlement body will be? Will it be a public body like the CFD counterparty, at arm’s length from Government? Will it be underpinned by Government, or is it intended to be an entirely private organisation, given the functioning of the capacity market that he has just touched on? If so, what guarantees are there that payments will be made to and from capacity providers and suppliers? As with the enforcement body in clause 24, it is not clear whether the settlement body will be funded through general taxation or as part of the wider capacity payment mechanism. I hope he can provide, if not clarity on that point, at least some indication of the Government’s direction of travel.

John Hayes (Conservative, South Holland and The Deepings)

I, too, will be reasonably brief. The settlement body is obviously an important part of the process. It is how we pay capacity providers effectively for their capacity and charge suppliers enough to fund those payments. By doing so properly, the settlement body is vital to ensuring that participants are confident that the revenue flows in the capacity market are funded and secure.

The Government intend to consult widely on the regulations and codes that we seek to implement in relation to the capacity market. Those regulations will include provisions that deal with the role, responsibilities and functions of the settlement body, and they will set out the appropriate reporting arrangements for the settlement body. Although it is a matter for further consultation, the reporting arrangements are likely to follow existing industry precedents and provide a report to all capacity market participants and the authority. Given that that aligns with existing electricity market practices and given that the capacity market will be subject to periodic reviews, following which the Secretary of State must lay a report before Parliament, we do not propose that the settlement body itself should report to Parliament.

I will say one more thing in relation the hon. Gentleman’s question. We have not yet determined which body or organisation will be the settlement body under the new enduring customer arrangements. A range of options exists and we are still considering the appropriate way forward. One option would be to realise potential efficiencies by using existing systems and data already present in the wholesale electricity market. Elexon delivers a role similar to the envisaged settlement body within that market. However, there are other options and there may be other agencies with the capability to carry out the settlement body’s functions. The hon. Gentleman will appreciate that we could feasibly consider carrying out a procurement process for the role.

The important thing is that we make our further thoughts available as soon as possible. Given that we are going to report in May on the capacity market design, and in response to the hon. Gentleman’s questions, I will make a commitment to the Committee that in May we will also report on our thinking in this area as part of that report on the design. As the hon. Gentleman rightly said, we need to know more about this, so we will report on our emerging thinking on the settlement body.

Ian Lavery (Labour, Wansbeck)

The details on the settlement body seem sketchy, to say the least.

John Hayes (Conservative, South Holland and The Deepings)

Sketchy?

Ian Lavery (Labour, Wansbeck)

Yes. Will the Minister clarify what powers the settlement body is likely to have?

John Hayes (Conservative, South Holland and The Deepings)

Essentially, the settlement body’s powers, as I said at the outset, are there to ensure that those involved in the process are confident about engagement and the funding of their engagement. We are consulting further on this. I am delighted that the hon. Gentleman has intervened; we have heard too little from him, and I always like to hear from him during these considerations.

The point the shadow Minister made was about the capabilities of the body to fulfil that function. He asked if it would be an entirely private body and what would it look and feel like—not so much a question of its function as its ability to ensure that that function is delivered effectively. It is important that we are clear about the function in relation to the design of the capacity market; but I am also conceding that it is important that we give more detail, become less sketchy and draw our thinking into sharp focus, in the way the hon. Member for Wansbeck suggests, regarding who that body might be. I am more than happy to provide the greater clarity that the hon. Gentleman and the shadow Minister understandably want to see, at the same time as the design details are made available, in May.

Clause 22 - Other requirements

Tom Greatrex (Labour, Rutherglen and Hamilton West)

I will be brief on this clause, on which I hope the Minister can shed a little light. We touched on some of the issues relating to it when discussing some of the amendments tabled to clause 18.

Clause 22(1) states:

“Electricity capacity regulations may impose requirements otherwise than under a capacity agreement.”

One reading of that is that gives the Government the power to make capacity market regulations about anything other than the capacity market. Another way of saying that is that capacity regulations can impose requirements about anything. That interpretation is strengthened by subsection (2)(c), which states that the requirements may be imposed on

“any other person who is, or has ceased to be, a capacity provider.”

Regulations can therefore impose requirements about anything on capacity providers or those who were once, but who are no longer, capacity providers.

The Minister will accept that, on that reading, the powers sound particularly broad and that that has raised questions. Will he therefore provide a little more clarity on the intent behind subsections (1) and (2)(c)? As they stand, they seem very broad, and many people will note what he says about them. We may wish to amend the clause at a later stage to clarify the issue in the interests of the working of the EMR. I would be grateful if the Minister responded to that question.

John Hayes (Conservative, South Holland and The Deepings)

That is an excellent point, and I am delighted to be able to respond. The intention is not for these powers to be permissive. The hon. Gentleman will appreciate that the regulations have to be for the purpose of providing capacity to meet the demands of consumers, and that is made clear in clause 17(1). These powers are therefore limited by that overarching responsibility in respect of regulations.

However, clause 22(3) will enable regulations to include provisions to allow for action to be taken in exceptional circumstances—this is the point I think the hon. Gentleman seeks to draw from me—should capacity providers attempt to drive up the price of capacity by bidding in non-existent plant or deliberately withholding capacity from the auction. Such considerations mirror the approach taken in international examples of capacity markets of the kind I mentioned earlier to mitigate gaming potential. The power is therefore sufficiently broad to deal with such circumstances, but sufficiently limited to reflect the specific overarching requirement in clause 17.

The hon. Gentleman makes a good point, but I am entirely comfortable in assuring the Committee that clause 22, in those terms, fulfils its function, but without giving powers that could reasonably be regarded as excessive. Its provisions are there to ensure that functions are exercised appropriately. As such, they are necessary to direct the function of the capacity market to its intent.

Clause 29 - Modifications of transmission and other licences: business separation

John Hayes (Conservative, South Holland and The Deepings)

I beg to move amendment 8, that clauses 29 to 32 of the Bill be transferred to end of line 4 on page 20.

Edward Leigh (Conservative, Gainsborough)

With this it will be convenient to consider Government amendments 1, 2, 9 and 3 to 7. We are making excellent progress.

John Hayes (Conservative, South Holland and The Deepings)

For which, second only to you, Mr Leigh, I take the bulk of the credit. The shadow Minister invited me to draw on a rich lexicon in the way we inspire our affairs. It was Sir Henry Royce, the founder of Rolls-Royce, who said:

“Strive for perfection in everything you do. Take the best that exists and make it better”.

This is what we are doing with these Government amendments. When the Government amend legislation, that is precisely the instinct that drives all they do.

The amendments are minor changes to correct an inconsistency in the Bill and ensure that it works to best effect. Their intention is to ensure that provisions in the Bill relating to the system operator’s role as an EMR delivery body—the result of the provisions on conflict of interest—are defined as intended and cover any role the system operator has in relation to investment contracts. The Bill as introduced applies these provisions only to CFD and capacity market chapters. The amendments also give effect to consequential changes to the ordering of the chapters and schedules within the Bill, which will be reflected in the Bill when it is reprinted for Report.

With that remarkably brief, though I hope appropriately erudite, explanation, I beg to move these amendments.

Tom Greatrex (Labour, Rutherglen and Hamilton West)

I beg to move amendment 76, in clause 29, page 15, line 36, leave out from ‘if’ to end of line 37 and insert

‘the body acting by virtue of section 4(2) is a holder of a licence to distribute electricity by virtue of section 6(1)(a) to (e) of the Electricity Act 1989.’.

Edward Leigh (Conservative, Gainsborough)

With this it will be convenient to discuss amendment 77, in clause 30, page 17, line 20, at end insert—

‘(e) the Secretary of State must report annually to Parliament on the performance of the national system operator.’.

Tom Greatrex (Labour, Rutherglen and Hamilton West)

We have made significant progress in the last few minutes and I may slow that down a little, but I hope not too much. Last week, in relation to a probing amendment from my hon. Friend the Member for Southampton, Test, we discussed the National Grid as the system operator.

There was some good discussion around whether we would have started from here and the potential concerns. The Minister will be aware that, while National Grid says that it will undertake the role as required, it is no secret that there was anxiety within National Grid about how exactly it is envisaged this would work. I am sure the detail will bring more comfort.

The Minister referred to the importance of ensuring that National Grid—which is, after all, a listed company––in regard to a lot of its activities overseas as well as in the UK, should not come into conflict over the interaction of that part of its activities and its acting as the system operator. That is a very important part of this Bill if National Grid is to be the system operator.

Amendment 76 is, what I call, the Chinese wall amendment. It is designed to ensure that there is an unbreakable force between the two arms of the same business and that strict business separation measures are in place in the situation where the body acting as the national system operator also holds a licence to distribute electricity.

Business separation measures are not new. They have been around for a long time and the term was popularised after the 1929 stock market crash. The most famous business separation law is the Glass-Steagall Act 1933, which imposed strict separation measures on commercial and other banking. Those issues have been raised in discussions in the recent past. Separation measures are also important in the legal industry. In some cases, they are so strong that the same legal firm cannot represent both parties in a dispute. Business operation measures are not new and are important in that regard.

The National Grid currently has a role in the transmission network, carbon capture and storage businesses, interconnection and offshore wind transmission. Those are commercial interests where National Grid acts like any other company and seeks to make a profit for its shareholders. However, because of National Grid’s significant commercial interests, it is important to ensure that it operates and acts completely independently as system operator. The Government have said on a number of occasions that it is important that there is a degree of separation between those two businesses, but as we also know from activities in other sectors, there have been times when the good guidance and the intent have not necessarily been followed through. I am not casting any aspersions on National Grid or anyone associated with it, but we have seen that in financial services in recent times. It is important for the Government and for this legislation that those safeguards are properly in place.

It would be helpful to reflect for a moment on the role of the system operator and what it actually entails. Annex D, which is published alongside the Bill, details the institutional framework for the delivery of EMR. It says:

“The System Operator (SO) is responsible for making sure that electricity supply and demand stay in balance and the system remains within safe operating limits. The SO role is defined by the SO conditions of the transmission licence. In addition to these licence requirements, the SO must meet minimum standards and obligations as set out in legislation, such as its obligation under the Electricity Act 1989 to develop and maintain an efficient, coordinated and economical system of electricity transmission and to facilitate competition in the supply and generation of electricity.”

It is an important and influential role, involving both CFDs and the capacity market. Along with the CFD counterparty, it is probably the central role in ensuring that EMR is delivered effectively, so it is important that this does not go wrong. As the Minister is aware, the Select Committee looked at the issue during its pre-legislative scrutiny and recommended that a new independent, not-for-profit body be set up to act as system operator, arguing that it is not appropriate for a private company, which is ultimately motivated by profit-making, to act as the delivery body.

The Select Committee’s position was reached unanimously, so I expect that all members, across all parties, will have shared those concerns outlined during the pre-legislative scrutiny. Although I have some sympathy with the argument, what should happen is that rather than establish a new body, there should be rigorous business separation measures in place to ensure that there is no contamination between the two parts of National Grid’s operation.

I am inclined to agree with the Government’s view that National Grid is the right body to act as system operator provided that those separation measures are in place. Our amendment would remove from the Secretary of State the obligation of imposing business separation measures if he deems it necessary and impose an obligation on him to do so where the system operator also holds a distribution licence. That does not mean that there is a requirement for unnecessary separation measures, but it makes it clear that if the system operator is National Grid, the Secretary of State must act. That is in the interests of the Government, of the generation industry and of the consumer. Those separation measures need to apply to all aspects of National Grid’s operations, from the people involved to the IT and accounting systems, the physical location of the commercial and system operator arms and much more.

In relation to the individuals involved, will the Minister use his response to confirm that there will be no crossover between individuals responsible for National Grid’s commercial arm and the system operator functions, say how far up National Grid’s chain of command that will extend and, in particular, explain how that it will all interact at board room level? The Government launched a consultation at the end of November on potential conflict of interest concerns in relation to National Grid’s EMR delivery role, which closes, I think, this week. Will the Minister update the Committee on that?

Albert Owen (Labour, Ynys Môn)

My hon. Friend is making a powerful point. He referred to the Energy and Climate Change Committee; when we looked at this matter, those safeguards were not in place and the consultation was not under way, so we need to go down a gentler route. Is he as concerned as I am that the system operator will be looking not only at the UK perspective? The letter kindly provided by the Minister last week showed that Greenwire’s proposals from Ireland will also be overseen by the grid. There could then be conflicts with not only national issues, but some international supergrid matters.

Tom Greatrex (Labour, Rutherglen and Hamilton West)

I thank my hon. Friend. He makes an important and topical point that I am sure that the Minister heard and will want to respond to because it underlines the importance of ensuring that separation measures are in place from the start and that it is not left to discretion or for something to be done later. If measures are set up from the start, people will be clear about how things will operate and they can have confidence and clarity.

I want to press on the Minister the need for measures to be in place, but also for them to be seen to be in place because that is vital for confidence and clarity. There needs to be confidence that the process is fair and transparent and that there is no risk of any commercial organisation, or individuals within a commercial organisation, motivated by various matters, gaining an unfair advantage in other aspects of the business that they are a part of. The measure is vital in ensuring that EMR delivery is absolutely clear with real transparency and clarity, so I seriously and genuinely ask the Minister to look at the amendment in detail and not to seek to dismiss it as something that is not required. There is a real difference between the amendment and the Bill as it stands; the amendment would give the Government much greater clarity and certainty and would leave us in a much better position.

Alan Whitehead (Labour, Southampton, Test)

I also do not want to detain the Committee long, but I emphasise in the context of both our debate on the principle of National Grid being the system operator and of our debate on capacity payments how important it is to consider not just whether the Secretary of State might undertake measures to ensure that there is proper separation of function, but to make sure that he does undertake measures to ensure that there is separation of function if National Grid is to be the system operator. That is because in the specific instance that may arise, which we discussed in the previous debate, it is more than possible that capacity payments, for example, may relate to interconnection. Indeed, that was specifically mentioned in that debate.

National Grid has not just a general function relating to interconnection, but it is a partner in a functioning interconnection activity, the BritNed interconnector. At first sight, if one wanted to make a not entirely fair analogy, it is as if one were setting up J Sainsbury plc as the planning and building authority for all supermarkets in an area where Tesco and Asda may also have applications to run supermarkets. In those circumstances, we would clearly raise big questions about whether that was the appropriate way to do things, and if so how to ensure that an active operator of a system is not tempted, or even unconsciously swayed, when other operators come along and want licensing arrangements and perhaps support arrangements for their interconnectors to be considered fairly and straightforwardly.

I share the view of my hon. Friend the Member for Rutherglen and Hamilton West that this is not reflection on National Grid as an organisation. It is a reputable body that undertakes its functions with great skill and fairness. The principle is to ensure that when conflicts might arise, everything possible is done to ensure that someone cannot morally come along later and say that they were not treated fairly under the procedures.

There is also the issue of legal challenges involving conflict of interest arising later if clear assurances are not put in the Bill now. I ask the Minister to consider the amendment seriously. It would strengthen his hand by ensuring that what has come forward, as was acknowledged by my hon. Friend the Member for Ynys Môn in respect of the Select Committee, is as good as it can be. We all want a system regulator that is seen to be fair as well as acting fairly in this important area of energy market regulation.

Albert Owen (Labour, Ynys Môn)

This amendment is important, as was the contribution of my hon. Friend the Member for Southampton, Test. The Select Committee was concerned about the matter for some time during its inquiry, but we understand that the Government have moved to introduce safeguards. The amendment would add extra protection. It is in the Government’s interest to have the separation of power clause in the Bill, and in the interest of National Grid as the systems operator. It needs the assurance that there is no perception that the operator makes the decisions about connection of important new generation to the grid.

The Minister did not deal adequately with the comment of the hon. Member for Angus, who talked about some of the more difficult operations offshore and in remote areas when connecting to the grid. Cost could be a determining factor, and if a company such as the systems operator of National Grid has an obligation to shareholders as well as the national interest, there may be a conflict and that may sometimes be blurred. The separation of powers that my hon. Friend advocates in the amendment would help to achieve greater transparency and fairness, and I am sure that all members of the Committee want that.

Barry Gardiner (Labour, Brent North)

Will the Minister respond to this particular question: to whom will directors of National Grid have a primary legal obligation? Will it be to their shareholders or the commitment in the Bill to the Government and consumers?

John Hayes (Conservative, South Holland and The Deepings)

What a useful debate this has been. Ruskin said that quality is never an accident, but always the result of intelligent effort. Such endeavour characterises the work not only of this Committee, but of the Government in ensuring that the relationship that has been discussed.

Barry Gardiner (Labour, Brent North)

I just want to clarify whether the Minister or Ruskin are seeking to disprove the theory of evolution in that remark.

John Hayes (Conservative, South Holland and The Deepings)

That is not a matter I want to discuss at great length, except to say that it is a theory.

Edward Leigh (Conservative, Gainsborough)

No, the Minister may not discuss it at great length, although it would be quite fun.

John Hayes (Conservative, South Holland and The Deepings)

Mr Leigh, I know you think I am fun, but I like to be reminded of the fact from time to time.

Edward Leigh (Conservative, Gainsborough)

Vanity is not your problem; it is theirs.

John Hayes (Conservative, South Holland and The Deepings)

The debate about the role of National Grid as the systems operator has been ongoing since the draft Bill was published. We have been reminded today that the Select Committee—of which there are a number of members present—made a point about this in its scrutiny of that draft Bill. It raised, in recommendation 43 of its first report of session 2012-13 in response to the draft Energy Bill, doubts about the potential conflict of interest of the National Grid providing this function. It highlighted its fear about the cost to consumers, and I am therefore anxious to assure the Committee that the work we are doing on this is open-minded. We do think that the synergies National Grid brings are of profound importance, and that has led us to our conclusion. However, it is right that having come to that conclusion, we consult on the range of issues associated with both the Select Committee’s observations and the observations that have been made here today. I hope to be able to deal with those in my reasonably brief remarks, but I do not want them to be insufficiently expansive to cover this matter in the depth that it deserves.

There are strong synergies between the system operator’s existing role in the economic and official branding of the electricity system and what is proposed under EMR. For example, there are strong links between a capacity market and the existing range of balancing services that the operator provides. It is almost fair to say that if it was not to be National Grid offering this function, it would have be a reinvention of something that looked very like National Grid, given its understanding of capacity and the central role of capacity in broad considerations around EMR. That reinvention would be necessary because of the technical expertise that currently sits with National Grid, as well as its financial and commercial skills, without which it would be hard to deliver the capacity market in an efficient and effective way. To take an example, modelling future supply-demand trends is something the system operator will be obliged to do in order to come to decisions about the delivery of auctions. It would be very difficult to imagine another body providing that function, given that National Grid is uniquely placed to understand the implications of different technology mixes brought on by EMR, and that that is so central to the success of these reforms.

Albert Owen (Labour, Ynys Môn)

The Committee did consider this when we were taking our evidence, and we arrived at the conclusion that it would be a not-for-profit, independent company, but that it could still draw on the expertise of National Grid and of many other experts in the field when we have new generators. It is purely the financial issues and shareholder responsibilities that put pressure on the systems operator, is the main concern that the Committee had.

John Hayes (Conservative, South Holland and The Deepings)

Yes, I appreciate that. I was not suggesting for a moment that the Select Committee was not mindful of the important skills that are necessary for this function to be delivered properly. However, the coincidence of those skills with those of the existing system operator is so profound that National Grid would be best placed to deal with the associated challenges, providing—I emphasise this—that we take account of the concerns that were highlighted by the Select Committee, and that have been highlighted again today, about potential conflicts, and I want to address that in some detail.

Before I do that, however, I want to emphasise the character of the system operator’s role. The system operator will provide technical analysis requiring the skills I mentioned and run some of the mechanistic process I also mentioned, such as auctions, under rules set out by the Government. Separately, I emphasise that decisions about such matters will be taken by the Government, not the system operator. However, the system operator is vital to the advice the Government receive and the processes resulting from their decisions.

The intention in amendment 77 is that the Government report to Parliament on the performance of the system operator to ensure that what it does is right and proper, cost-effective and mindful of the cost to consumers, and transparent and accountable. I am sympathetic to the intentions behind the amendment. As I made clear earlier in our consideration, I am mindful of the continuing concentration by members of the Committee on accountability and transparency, and I am minded further to consider the issue during the Bill’s passage. We might act in advance of that stage to provide further comfort in that regard. This is one of those areas—the way the system operator’s role relates to the success of EMR and how that is reported—where we could perhaps do more. Amendment 77 is a helpful further catalyst for that thinking.

Amendment 76 raises the issue of how to manage conflicts of interest between the system operator’s current role and its role in delivering EMR. The Committee will recall that the issue was raised in our evidence sessions with National Grid, not least by the hon. Member for Ynys Môn, who has been diligent and consistent in his scrutiny of this matter. The witness from National Grid said:

“we have a lot of experience of managing…perceived or actual conflict issues. We have 20 years of experience and a number of partitions in our business already.”––[Official Report, Energy Public Bill Committee, 15 January 2013; c. 36, Q114.]

He offered further detailed advice about how National Grid already deals with some of the tensions that lie at the heart of the arguments that have been made to support the amendments.

Albert Owen (Labour, Ynys Môn)

On that evidence session, we were all trying to get as much in as we could, and there were a lot of us. However, when I pressed the witness about the shareholder interest and the national interest, he said that the shareholder interest was a priority to the company.

John Hayes (Conservative, South Holland and The Deepings)

Yes, I was just reading that as the hon. Gentleman intervened as I thought he might say that. As hon. Members will remember, the gentleman from National Grid—Mr Nick Winser—identified four ways in which it currently manages conflicts of interest. I will not go through them exhaustively because they are already on the record. It is not unreasonable to say that even with the further questioning that the hon. Gentleman offered then, and has reprised today, National Grid was confident that it was capable of handling that potential conflict. That provides some comfort. It could be argued that he would say that anyway, but he did not just say it, he drew on evidence to support that assertion.

Let me deal with some specific matters that have been raised in our consideration this morning. The hon. Member for Ynys Môn raised the issue of interconnection, particularly with Greenwire. The consultation does consider this. We will discuss a range of issues with the Welsh Assembly Government. We will specifically look at the matter he raised in respect of our further work on how this will be managed. The hon. Member for Brent North asked to whom the directors have a primary obligation, a question also raised by the hon. Member for Ynys Môn. The systems operator will be legally obliged under its licence to carry out its role, either as part of the licence or in secondary legislation. In fact there will be an interaction between the two in practice.

There will be a legal requirement which will be enforceable by Ofgem in the same way that National Grid’s existing statutory obligations are enforced and in the same way that existing licence requirements are detailed. There will be a clear legal obligation to carry out those aspects of its work that relate to its role as systems operator above and beyond any other consideration. It should be borne in mind that in terms of interconnection National Grid’s business is already separated from its transmission business. So that is why Mr Winser could be confident about that aspect of the questioning to which he was subjected.

Barry Gardiner (Labour, Brent North)

Earlier this morning the Minister referred with his usual sagacity and perspicacity to the human capacity for gaming. Can he envisage any circumstance in which National Grid, when not actually confronted with a conflict of interest at that point, could look to take a course of action which might avoid it being confronted with a conflict of interest in the future, but which would be to its shareholders’ advantage and avoid a situation arising in which it would either have to or fail to meet its public obligations?

John Hayes (Conservative, South Holland and The Deepings)

That inquiry involved so many silky changes of tense that I think I will have to deal with it in a moment when I have said a little more about the amendments.

Edward Leigh (Conservative, Gainsborough)

You have about 30 seconds.

John Hayes (Conservative, South Holland and The Deepings)

I will attempt to come to terms with both its grammar and its content.

The relationship between the Department and Ofgem in these matters is such that we are currently consulting on potential conflicts of interest and how they should be mitigated and managed. Ofgem is involved in that because of its existing regulatory role.

Edward Leigh (Conservative, Gainsborough)

Order. It gives me great delight to interrupt the Minister.

Jimmy Hood (Labour, Lanark and Hamilton East)

I remind the Committee that with this we are discussing amendment 77, in clause 30, page 17, line 20, at end insert—

‘(e) the Secretary of State must report annually to Parliament on the performance of the national system operator.’.

John Hayes (Conservative, South Holland and The Deepings)

May I say what a delight it is to serve under your chairmanship, Mr Hood? It is all the more joyful for being a surprise.

I was responding to a number of contributions on the potential conflict of interest relating to the role of the systems operator and National Grid. To that end I will pick up where I left off by drawing the Committee’s attention to the fact that our consultation on that matter closes today. The consultation reflects the Government’s recognition that these matters are to be taken seriously. But the queries that have been made by members of the Committee today, building on the discussions that have taken place since the publication of the draft Bill, are both understandable and welcome. Through scrutiny the Bill can be put into the place it needs to be, particularly this part which establishes this critical relationship and gives effect to the changes we are bringing about in respect of the electricity marketplace.

To that end we are consulting. The work we are doing with Ofgem takes account of both the synergies associated with National Grid and the new duties that it will have, but also the issues that need to be addressed in respect of conflicts of interest. We will report on the outcome of that consultation in spring and if necessary the Government can use their powers in clause 29, as the shadow Minister described, to put into place further business separation measures within National Grid’s business. I do not want to go back to the genesis of business separation in 1929, or at least not at this juncture. Suffice it to say, the Government are open to taking further steps should that become necessary. I mentioned earlier, Mr Hood, and I mention it again only to bring you up to speed with our discussion, that Ofgem has a range of existing powers to tackle conflicts of interest as well.

I am confident on that basis that we can, with sureness, building on existing good practice, recognising that this is a dynamic set of circumstances, understanding that we will need to be mindful of the results of the consultation, move ahead with appropriate confidence in our scrutiny of the Bill. I listened closely to what was said this morning. Ultimately, of course, we have powers under clause 30 to enable the Government to transfer EMR functions away from the systems operator altogether. That would be in unforeseen and unexpected circumstances, but none the less the powers are there. I hope that with those explanations and reassurances, the hon. Gentleman will withdraw the amendment.

Tom Greatrex (Labour, Rutherglen and Hamilton West)

It is a pleasure to serve under your chairmanship, Mr Hood. It means that all parts of Hamilton are represented on this Committee. You will have no trouble with my native Lanarkshire accent during the rest of our discussions. I am grateful for the Minister’s response, particularly in relation to amendment 77. I take on board his acceptance of the broad thrust of seeking to ensure that Parliament is fully informed and the operation of the system operator is made available to those with an interest and to the public. I look forward to seeing the product of that reflection later in the Bill, so I will be content not to press amendment 77.

In relation to amendment 76, I listened carefully to what the Minister said, both before we broke and in concluding his remarks just now. He again referred to the consultation, which closes this week, and I accept that it is not reasonable to expect him to anticipate the conclusion. However, I am slightly concerned that he again referred to it being published in spring. Given that we have referred before to how Whitehall springs can end up being quite late in the year, I am not absolutely convinced that we are going to get what we need. I understand what the Minister says about clause 30 and the powers, but that is about after something has gone wrong. This amendment is about ensuring that there is real clarity about the separation within National Grid before anything even starts. So it is not about seeking to use powers to react to a situation, but anticipating and preventing a situation. As I have said before, I do not believe that anybody involved in National Grid as a body would have any malign intent, but there is always the danger that somebody might take it upon themselves if there are not the right protections in place.

That is why this amendment is important. There are other issues that we will come on to discuss and which we have discussed where there is a degree of philosophical and political difference between us. This amendment is actually about helping the Government and ensuring that, as this system is established, there is no room for any ambiguity. It is as important about transparency and confidence before anything begins as much as being able to rectify a situation. Having said that, it would be unfair to push this prior to the consultation closing, but I want to put on record that if the Minister has not been able to provide further reassurances by Report stage, we may well come back to this issue at that point. With that I beg leave to withdraw amendment 76.

Clause 30 - Power to transfer EMR functions

Clause 32 - Energy administration orders

Schedule 3 - Investment contracts

Tom Greatrex (Labour, Rutherglen and Hamilton West)

I beg to move amendment 78, in schedule 3, page 99, line 40, at end insert—

‘(3A) Provision by virtue of subsection (1)(c) must include provision about a panel of independent experts to advise on the amounts to be paid;

(a) a panel of independent experts must include a consumer representative;

(b) advice provided by a panel of independent experts must be laid before Parliament.’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss the following:

Amendment 79, in schedule 3, page 100, line 4, at end insert—

(c) within three days of the contract being entered into.’.

Amendment 80, in schedule 3, page 100, line 27, leave out

‘in the opinion of the Secretary of State, materially’

and insert

‘in the opinion of the independent panel of experts,’.

Amendment 81, in schedule 3, page 100, line 44, leave out sub-paragraph (4).

Amendment 75, in schedule 3, page 101, line 14, leave out sub-paragraphs (c) and (d) and insert—

‘(c) not information which relates to liabilities or risks that would be placed on energy consumers or on the public balance sheet.’.

Amendment 82, in schedule 3, page 103, line 15, leave out ‘may’ and insert ‘must’.

Amendment 83, in schedule 3, page 103, line 27, at end insert—

(e) an annual report by the Secretary of State laid before Parliament on the impact of provisions under this section on consumer bills;

(b) the issuing of notices exempting energy intensive industries from the provisions under this section.’.

Amendment 84, in schedule 3, page 104, line 18, leave out sub-paragraph (4).

Amendment 85, in schedule 3, page 104, line 48, at end insert—

(h) for the information provided by virtue of sub-paragraphs (a) to (c) to be laid before Parliament.’.

Amendment 86, in schedule 3, page 105, line 12, at end insert—

‘( ) Any advice offered or determinations made by virtue of this paragraph must be laid before Parliament within one month of the offering of advice or making of a determination.’.

Amendment 87, in schedule 3, page 105, line 32, at end insert—

(e) any person who is a holder of a licence to supply electricity under section 6(1)(d) of EA 1989,

(b) any person who is a holder of a licence under Article 10(1)(b) or (c) of the Electricity (Northern Ireland) Order 1992 (S.I. 1992/231 (N.I.1)) (transmission or supply licence),

(c) the Committee on Climate Change,

(d) the Panel of independent experts.’.

Amendment 88, in schedule 3, page 106, line 9, after ‘may’, insert ‘only’.

Amendment 89, in schedule 3, page 106, line 9, leave out

‘as well as consultation after,’.

Amendment 90, in schedule 3, page 106, line 38, at end insert—

‘(4) Provision by virtue of sub-paragraph (1) must be laid before Parliament within three working days of any direction.’.

Amendment 91, in schedule 3, page 106, line 38, at end insert—

‘( ) Provision by virtue of sub-paragraph (3)(b) should be accompanied by a statement to Parliament outlining the reasons for any variation or termination of an investment contract.’.

Amendment 92, in schedule 3, page 107, line 7, at end insert—

‘( ) The Secretary of State must make a statement to Parliament setting out the compatibility of sub-paragraph (1) with paragraph 14.’.

Amendment 93, in schedule 3, page 108, line 29 at end insert—

‘( ) Provision made by virtue of this paragraph must be laid before Parliament before the agreement of any compensation.

( ) The Secretary of State must set out the reasons why he/she believes the person subject to a scheme by virtue of this paragraph has been adversely affected.

( ) Provision made by virtue of this paragraph must identify the source of compensation paid by the Secretary of State.’.

Amendment 94, in schedule 3, page 109, line 33, at end insert—

‘(5) The Secretary of State must report annually to Parliament on expenditure incurred by virtue of subsection setting out—

(a) the reason for the expenditure;

(b) a statement by the Secretary of State on the value for money of this expenditure.’.

Tom Greatrex (Labour, Rutherglen and Hamilton West)

A number of these amendments replicate earlier amendments to part 2 of the Bill on contractor difference, so although I am moving the group of amendments, I will restrict my remarks to those that are slightly different— amendments 79, 80 and 81. I am sure others will then seek to contribute, particularly in relation to amendment 75, although I may say a few words on that as well.

Amendment 79 is designed to ensure that investment contracts agreed between the Secretary of State and a generator are laid before Parliament within three days of the contracted being entered into. Paragraph 1(1) of schedule 3 sets out that the investment contract must be laid before Parliament in accordance with sub-paragraph (4), which goes on to note:

“A contract is laid before Parliament in accordance with this sub-paragraph if it is laid by the Secretary of State at any time after the introduction into Parliament of the Bill that becomes this Act”.

Sub-paragraph (7) sets out when the investment contract must be published, stating:

“The Secretary of State must publish an investment contract in the form in which it was laid before Parliament as soon as reasonably practicable after it is laid.”

My concern about this provision is the lack of a specific time scale, other than when the Secretary of State determines is reasonably practicable. Both reasonability and practicability are not always objective judgments, so it is important that we set out when the investment contracts should be laid before Parliament. The drafting of the Bill in this respect is broad, and it is so broad that the Secretary of State—or a future Secretary of State—could conceivably not publish the contract for months or even years, on the grounds that it is not in his or her judgement reasonably practicable.

To be clear, we are talking here about the investment contract as a whole, not just the publication of the strike price, which we have discussed before, agreed between the Government and the generator. Although the strike price is a key element of the contract, and we have talked previously about the importance of that, there is a lot more detail involved that should be scrutinised by Members of this House and be available to the public. Publishing the investment contract within three days of it being entered into, either by the Secretary of State or the investment contract counterparty, will help to provide transparency over what has been agreed, and allow the Government to be held to account for that agreement.

I should be grateful if the Minister addressed this point directly in his remarks in relation to this amendment, and if he could provide further information of what commitment he is willing to make in terms of publishing an investment contract. I am sure that will be of assistance to members of the Committee. We are regularly—almost daily—reading speculation about a potential investment contract and deal that may well be concluded soon between the Government and EDF. I would not expect the Minister to go into any detail on that while negotiations are under way, but the issue is not just the strike price; some aspects of how the contract will be delivered are as significant, and could have a big impact on whether the contract meets the test of broad public acceptability. It is important to meet that test, particularly in relation to significant developments that will attract significant funding, some of which, as we have discussed before, will come through a mechanism that is underwritten by the public.

Like other amendments we have tabled to the schedule, amendments 80 and 81 would increase transparency and public confidence in the investment contract process. Paragraph 2 of schedule 3 gives the Secretary of State the power to change an investment contract after it has been agreed and has entered into force. Paragraph 2(l)(b) states that an investment contract is a varied investment contract, and therefore must be laid before Parliament, if the variation

“will, in the opinion of the Secretary of State, materially increase the likely cost to consumers of electricity.”

That provision gives significant scope for the Secretary of State to determine what course of action is taken. Under it, if the Secretary of State does not believe a variation will materially increase the burden on consumers, that variation need not be published. However, the Bill does not define “materially”. Does that mean an extra £1 on consumer bills? Does it mean an extra £10 a year? What is a material increase? Paragraph 2 needs to be tightened up, because what counts as a material increase for the Secretary of State may be quite different to what counts as such for many of our constituents, or for people involved in other parts of the energy industry.

Our amendment would take that power out of the hands of the Secretary of State and hand it to the panel of independent experts to determine not whether the variation would materially increase the burden of consumers, but simply whether there would be any increase. Consumers deserve to know exactly what they will be paying for; if that means an extra amount each year because of changes made by the Secretary of State and the generator, consumers should know that. The reason there is so little trust in the energy industry and so much misinformation about the cost of certain generating types is the lack of clarity about what people are paying for. Our amendment would rectify that to a certain extent.

Barry Gardiner (Labour, Brent North)

My hon. Friend is speaking about a lack of clarity; can he clarify for me the interpretation of paragraph 1(1)(a) of the schedule as it relates to section 6(3)? Sub-paragraph (1)(a) states:

“In this Schedule an ‘investment contract’ means a contract with an electricity generator which…is entered into by the Secretary of State, whether before or after this Schedule comes into force”—

Jimmy Hood (Labour, Lanark and Hamilton East)

Order. The hon. Gentleman is taking too long with his intervention.

Tom Greatrex (Labour, Rutherglen and Hamilton West)

I think I can anticipate the direction in which my hon. Friend was going. It is important because the schedule governs the investment contracts, and a significant amount of investment is going into those contracts. We must be absolutely clear about how transparently the contracts work. I was coming on to discuss that.

We need to have absolute clarity. A number of provisions in the schedule appear to be very broadly defined, which undermines transparency and clarity. My point is not a partisan one; we want that transparency and clarity to ensure that the investment that is required in our energy infrastructure takes place, and does so in the most appropriate way.

Albert Owen (Labour, Ynys Môn)

My hon. Friend is quite right to point out the importance of transparency. In his earlier remarks, he also mentioned the burden on the consumer; the consumer has the right to know, as much as Parliament does, why bills are going up and the consequences of that.

Tom Greatrex (Labour, Rutherglen and Hamilton West)

My hon. Friend is absolutely right. Tabling amendments that seek to ensure that information is published to Parliament is a way of trying to get that information into the wider public domain. He is absolutely right to raise the impact on the public; our role here in scrutinising the Bill, and afterwards in scrutinising its effects, is to bring issues to public attention. With an issue such at this, which has caused huge concern among the public, it is absolutely right to make that point.

Amendment 81 would prevent variations that are provided for within the terms of the original contract from escaping parliamentary scrutiny. Paragraph 2(4) of schedule 3 states:

“This paragraph does not apply in respect of a variation which is made in accordance with the terms of an investment contract.”

As I have said before and others will come on to say, the terms of an investment contract are absolutely crucial. The ability to evade the requirement to provide information, because it is made in accordance with the terms of the investment contract, underlines even more the case for amendment 79 and for publishing the investment contract as soon as possible and with as much accompanying information as possible.

Michael Weir (Scottish National Party, Angus)

The hon. Gentleman makes a good case. It worries me that the explanatory notes state that were the strike price to be increased, that need not be made public. That is a fundamental difficulty.

Tom Greatrex (Labour, Rutherglen and Hamilton West)

The hon. Gentleman and I have different views about nuclear power, but we probably share our position on the importance of transparency. Potential changes to the strike price are crucial. If we are going to have, as has already started, ongoing public speculation about current discussions on trying to agree a strike price, it would be remiss were a figure to be agreed and subsequently changed without any information being made more widely available to Parliament or the public or if the terms of a contract allow that to happen. I therefore agree with the hon. Gentleman.

As I was about to say, the provision’s effect is that where the original investment contract provides for the contract to be changed, that would not be classed as a variation and there would therefore be no need to publish the changes. That is not a wise or sensible move, for the reasons of transparency that have been outlined and for reasons of trust. Will the Minister say what the cost would be of publishing the information required by the amendments? Is the task of publishing any changes so onerous that the costs are disproportionate and would outweigh any benefits? I struggle to see how that would be the case. If it is not the case, I can see no reason why the variation should not be published to ensure full transparency for consumers, for Parliament and for the public.

Barry Gardiner (Labour, Brent North)

Will my hon. Friend clarify whether, given that it has been defined that such a change would not constitute a variation, it would be the case that a Minister responding to a written question in Parliament would be able to claim that there had been no variations to the contract?

Tom Greatrex (Labour, Rutherglen and Hamilton West)

My hon. Friend’s point is precisely why we are seeking such information from the Minister. If a variation to a contract prevented information from being made available to the public, it would be hard for the important scrutiny role to continue. The precise definitions of changes and variations are, as I am sure the Minister is picking up, of huge concern at least to those hon. Members who have made interventions.

Alan Whitehead (Labour, Southampton, Test)

Will my hon. Friend also consider whether the non-disclosure of a change in strike price affects the levy control framework total for the strike price quantum over a period? If such changes are not revealed, how would that be calculated within the ceiling for the levy control framework over a period of time?

Tom Greatrex (Labour, Rutherglen and Hamilton West)

My hon. Friend makes an excellent point. We discussed earlier the allocation process and how and when that was supposed to start. How do people know when that 50% has been reached for a change in the strike price that will affect the overall levy control framework? That is an important point and I hope the Minister will respond to it.

There are a number of concerns about paragraph 7 of schedule 3, which deals with the supplier obligation. The wording of paragraphs 7(1), 7(3) and 7(4), which deal with the payment of sums by electricity suppliers, is rather loose and fails to clarify that investors will receive the moneys due to them. Paragraphs 7(1) and 7(3) provide that regulations “may” make provision for payments by electricity suppliers or require them to provide collateral, rather than specifying that they “must”. Will the Minister explain to the Committee why the word “may” has been used rather than “must”?

A further concern is the language of paragraph 7 about suppliers’ obligation to pay. Paragraph 7(1) merely enables payments to be made under investment contracts without stating explicitly that full payment should be made in good time. The wording of other legislation may be instructive here. Section 214(6) of the Financial Services and Markets Act 2000 states:

“The scheme may provide for the scheme manager to have power…to make a full payment of compensation to the claimant”.

Regulation 17(2) of the Regulated Covered Bonds Regulations 2008 states:

“The arrangements must provide for…timely payment of claims attaching to the bond to the regulated covered bond holder”.

Those examples show that other legislation is explicit to that degree. Will the Minister respond to the concern that the language in schedule 7 is not as tight as that in other, similar legislation?

I turn briefly to amendment 75. I am sure that my hon. Friend the Member for Brent North will want to speak to his amendment, but I want to make a couple of points. I hope that Members on both sides of the Committee will look on the amendment favourably. Whether in the Energy and Climate Change Committee, during pre-legislative scrutiny or during the evidence sessions of this Committee, almost every member of the Committee has said that they favour transparency in any agreement between the Government and a generator. That point is most often made in explicit reference to discussions between the Government and EDF. During pre-legislative scrutiny of the Bill, the Secretary of State said in evidence to the Energy and Climate Change Committee:

“We will be held to account for the outcome of those negotiations and there will be real transparency about the agreement that is reached.”

I am sure that my hon. Friend will expand on these points in greater detail, but during the oral evidence session on 17 January, the UK chief executive of EDF, Vincent de Rivas, was more explicit than he had been about how important he believes transparency to be. He said:

“I am in favour of transparency for us and for all.”––[Official Report, Energy Public Bill Committee, 17 January 2013; c. 124, Q357.]

He said that, I believe, because he understands that for his business and his company, transparency is absolutely important. There cannot be any second-guessing of what he and the company have agreed to with the Government. Of course, if something is agreed with the Government, it is underwritten by the public. He may have gone off his script slightly, because he is usually very careful about what he says, but I believe that he said that because it became clear to him during the oral evidence session that the matter was significant.

I want to get across that Mr de Rivas does not seek to block full transparency, and I hope the Government do not either. Those of us who see a place for new nuclear as part of our continuing and future generation mix—not everyone on the Committee does—do not want people to be able to undermine that case, not by using available information but by second-guessing what information has not been made available or casting aspersions on it. It is important for as much of that information to be published as possible, as soon as possible, so that there is full transparency. That enables people to make a judgment. Based on that information, their judgment may well be different from views they held in the past, but at least it will be made on the basis of evidence and information that is clear and irrefutable. That is why these amendments are so crucial.

I have heard the Minister talk about the importance of these issues on a number of occasions. They remain important, and here is an opportunity to ensure that the Bill is tighter in relation to them. That would do a service to the Government and to the wider energy agenda for years to come. In the light of that, I hope the Minister will look favourably on these amendments.

Barry Gardiner (Labour, Brent North)

I, too, welcome your presence in the Chair this afternoon, Mr Hood. I have already experienced being brought to order by your ruling. Somebody on Radio 4 coined the word “trepidatiously” recently, so I will use it as well; I am in trepidation of your rulings this afternoon, Mr Hood.

I want to speak to amendment 75, which stands in my name, but before I do, I wish to get clarity on a point I was pursuing earlier in relation to paragraph 1(1)(a) of schedule 3. It defines an investment contract, which it says

“means a contract with an electricity generator which…is entered into by the Secretary of State, whether before or after this Schedule comes into force, on or before the earlier of 31st December 2015 and the date on which a definition of an ‘eligible generator’ first comes into force by virtue of section 6(3)”.

I looked at paragraph 6(3) of the schedule, but I came to the conclusion that it could not possibly relate to that, because that is about regulations for the purposes of investment contracts. It states:

“Regulations may…include incidental, supplementary and consequential provision”—

and so on. I therefore concluded that it must be referring back to clause 6(3) of the Bill, but I found there no provision for a date. I may simply be failing to understand the provisions, but it would certainly help me—and it may help other Members—if the Minister clarified the position, because clause 6(3) simply says:

“Regulations must make provision defining who is an ‘eligible generator’ for the purposes of a direction under this section.”

The other issue I want to touch on briefly before discussing my amendment is paragraph 1(1)(b), which states that if an investment contract relates to an electricity-generating station in Northern Ireland, it is

“entered into with the consent of the Department of Enterprise, Trade and Investment.”

I spent more than a year as a Minister in that Department, and it struck me that that rather writes into stone its nomenclature. Does the Minister propose at some stage to table a brief amendment adding “or its successor”? Of course, the nomenclature of that Department is no longer in our gift but, as I understand it, that of the Northern Ireland Assembly.

John Hayes (Conservative, South Holland and The Deepings)

Perhaps we can clear that up immediately. I will certainly take a look at that and if there is a need to change the language to take account of the hon. Gentleman’s point, we will do so.

Barry Gardiner (Labour, Brent North)

Those were simply housekeeping points, if I may put it that way, rather than substantive amendments to be made to the Bill.

I now come to the substantive element. What is absolutely fundamental to the success of the Bill is trust. We have spoken many times in Committee about the need for investors to have confidence, to have trust in how the Government propose to carry out their affairs in respect of energy and how they propose to incentivise the industry. Both sides of the Committee have recognised that that trust is an essential precondition of getting the investment into our energy infrastructure that is so vital over the next few years. If we are to avoid the problems envisaged by Ofgem in 2017 and 2018, we need that new investment to come through, and it will only come through if there is clarity and trust.

Ian Lavery (Labour, Wansbeck)

The issue of trust and confidence in the Bill is essential, especially the confidence of the consumer. Does my hon. Friend agree that it is also essential that transparency is at the centre of the Bill with regard to CFDs and the strike price, and that changes in the strike price should be published as matter of course?

Barry Gardiner (Labour, Brent North)

Indeed. I do not know whether my hon. Friend was peeking over my shoulder, Mr Hood, but he has certainly taken some of the words out of my mouth. He is absolutely right: transparency is a key feature. It is a key mechanism by which this Bill will be able to work—if indeed it does. Therefore, it is in all our interests to ensure that transparency is not just implicit in the Bill, but explicit. Amendment 75 seeks to get to the heart of that, in that the schedule contains a provision that proposes not disclosing to the public information that they would anticipate having a right to know.

My hon. Friend the Member for Rutherglen and Hamilton West referred to the witness statement from Vincent de Rivaz, the chief executive of EDF. The key thing about the relationship between a nuclear supplier and the Government is this. We have a technology which demands huge up-front investment. The construction costs of the nuclear industry are enormous. Thereafter, it can run without having to purchase coal, biomass or gas, and therefore its running costs will be relatively low. The major component for an investor in nuclear is the up-front construction costs. I put to Mr de Rivaz the very problem that I think the Minister recognises: the perverse incentive. I do not in any way accuse EDF or any other potential nuclear supplier of this, but anyone who wished to gain in this area could artificially inflate the level of their construction estimate and affect the negotiations around the strike price.

Both parties agree that the strike price has to be based on a fair return on the capital investment that the investor is going to make in that technology. There is no doubt about that, and the Minister nods in agreement. Therefore, it is absolutely essential that there be transparency in that area, because if that construction cost were to be overestimated, ultimately, the public—the consumer—would be paying more than they ought to for a period of 35 to 40 years.

I speak as somebody who is absolutely solidly behind the nuclear industry. I have no brief against the nuclear industry. High up-front construction costs happen to be a feature of nuclear, but this is in no way intended to be an anti-nuclear statement. It is simply to say that the public have the right to expect full, absolute clarity and transparency about the costs involved, the negotiations that go on, and the way in which that strike price was reached. I was heartened, as I know many other members of the Committee were, when we heard the evidence from Vincent de Rivaz, as he, too, insisted that there should be transparency and clarity on those issues. The amendment seeks to ensure that there is such clarity and transparency, not only about the nuclear industry, construction risk and so on, but I think that it perhaps crystallises and is the best example of the sort of information that the clauses, as they stand, might preclude.

The way in which the Government have constructed the clause is interesting, as they have used a mechanism in paragraph 3—to get the full effect of how this functions, it is important to see the double negative that operates here—that states:

“For the purposes of paragraphs 1 and 2, ‘confidential information’ means specified information to which sub-paragraph (3) applies and in relation to which it is an initial term of the contract that it should not be disclosed.”

The paragraph continues:

“This sub-paragraph applies to information if it is…not the strike price or the reference price”

We have a double negative—“not be disclosed” and “not the strike price”—which allows that to be disclosed.

However, in sub-paragraphs (3)(c) and (d), the Government have opted not to use the double negative, which is why, in my formulation of the amendment, I have tried to adopt the very technique and mechanism that the Government have used in paragraph 3(3)(a) of the schedule, by stating:

“not information which relates to liabilities or risks that would be placed on energy consumers or on the public balance sheet.’

What are we doing here? We are trying not to interfere with the commercial process, but we are attempting to say that, if the public are going to pay the price—and they would expect to know why they are paying the price that they are—the Bill should be explicit about making that information transparent and about saying that those things ought to be disclosed. The amendment uses the technique of the double negative that the Government have already adopted in the formulation of the clause. In that respect, it provides consistency with the way in which the rest of the clause has been constructed.

My hon. Friend the Member for Rutherglen and Hamilton West made a number of other small but very important points on the schedule. There is the use of the word “may”, when it might be more appropriate to use “must”. The Minister, in responding to my hon. Friend, should think carefully about what should be permissive here, and what ought to be clear in the Bill—when something “must” happen. A clause that we are discussing relates to payments to the Secretary of State, and there must be regulations about that. They absolutely have to happen. Clarity is the essential thread that runs through everything that my hon. Friend on the Front Bench and other hon. Friends have said this afternoon. I know that the Minister agrees with the principle. He has said it before and set it out clearly in his response to the debate.

Ian Lavery (Labour, Wansbeck)

The amendment would basically allow the Secretary of State to redact any confidential information on the investment contract. Would my hon. Friend give some examples of where that would be acceptable?

Barry Gardiner (Labour, Brent North)

My hon. Friend sets me an intellectual challenge, which I was not anticipating, but I would always wish to try to give him satisfaction. Where would it be acceptable for the Secretary of State to redact information? Let us approach it in that way. It is right that the Secretary of State should be able to redact information where there is going to be a breach of trust and where there will be commercial sensitivities. In many ways, the clauses that I seek to excise from the Bill are good examples of situations in which it may be necessary to redact information.

Rather than give examples of where it would be right to redact information, we should operate on a principle of maximum transparency. The Bill should quite clearly set out the principle that the public have the right to know what they are paying for, either through their bills or on the Government’s balance sheet. That should be there clearly so that that right is there. To do it the other way round is to make the particular, rather than the general, the subject of the Bill. It is precisely there that we will find that legislation creeps—I do not accuse the Minister or, indeed, the Government of that—and finds other ways of covering up information.

The schedule states that one of the provisions would be simply that, if it were included in the original contract, it should not be disclosed. That cannot be a reason. Simply that it was included in the original contract can never be a reason. It is much better that we have the principle there, so that anybody can then challenge the Government on the level of withholding information, rather than try to put something in place, not with the double negative, but with the single negative, as the Government have done.

John Hayes (Conservative, South Holland and The Deepings)

I know that the hon. Gentleman is moving to the conclusion of his remarks and I do not wish to delay him, but for the sake of speeding up our affairs, he has mentioned breach of confidence and commercial sensitivity, and I am sure that, in response to the earlier intervention, he will acknowledge that what is legally defined as a trade secret would also be included. So if we are dealing with those three areas, we can probably settle the matter quickly.

Barry Gardiner (Labour, Brent North)

I am always delighted to know that the Minister is prepared to settle the matter quickly. We certainly can—by means of a vote. If the Government are saying that they will vote with us on this one, I would be only too delighted to sit down and settle it immediately. However, I do not see that look on the face of the hon. Member for Orpington that leads me to conclude that such brevity will be the order of the day. However I can always hope, and on that hope I will resume my seat.

Michael Weir (Scottish National Party, Angus)

I want to make a few brief points. The hon. Member for Rutherglen and Hamilton West quite rightly said that I was no supporter of nuclear power, and many of the provisions go around the problem with nuclear power. Other potential developers may be affected, however, particularly in the case of large-scale offshore wind. I raised the question of how we set the initial strike prices for new technologies, which may have an impact here. My concern about the provisions is how they will be perceived if they are enacted in their current form. As we all know, renewable technologies, particularly wind, have been plagued by endless arguments about the true cost of the technology and of the power to the individual.

When Vincent de Rivaz gave evidence to the Committee, he talked about the negotiations with the Government on the contract:

“What matters is that the first contract of this magnitude is a perfect example of fairness—fair for the customer, for the consumers, and fair for the investors and the policy makers. I believe that it is in within our reach to achieve that fairness in this first contract for difference. It will create a precedent, indeed, but a very positive one for others.”––[Official Report, Energy Public Bill Committee, 17 January 2013; c. 121, Q346.]

That is true, and it is interesting that he talks about creating a precedent. What sort of precedent will be created if there is a strike price in the contract that can be varied, and if the strike price is subsequently varied without it being made public? What sort of confidence does that give consumers that they are getting the best deal? There may be perfectly good reasons for the variation in the strike price, but if there are, they should be made public. The public should be aware of how the strike price has been varied and the impact that that will have on their bills. It is a question of transparency. As I said earlier, it is interesting that the example given is the variation of the strike price. That worries me greatly.

Alan Whitehead (Labour, Southampton, Test)

In looking at all the amendments, I think we need to consider how the schedule will work. I have some concerns about the architecture of the schedule, and they relate to several amendments, especially those that deal with variations on investment contracts. I am also concerned about how the provisions in schedule 3 will work with the wider provisions on contracts for difference in general. We are discussing a specialised series of provisions relating to a specialised form of contract for difference, which has a whole schedule to itself, on the basis of decisions that will be reached before contracts for difference as a whole come in. I would welcome some explanation from the Minister of exactly how the architecture will work. Ideally, that explanation should assuage my considerable concerns about whether the architecture will work as described, and whether it will be transparent and fair to everybody.

The explanatory note states that investment contracts, and thus related CFDs,

“are intended to be entered into during a relatively short period of time and are therefore a transitional measure for before the enduring regime is fully implemented.”

Investment decisions and contracts will be discussed, and although investment contracts will predominantly relate to nuclear power, they can be applied to other forms of low-carbon energy for the future and provide investment instruments on a wider basis. Because those investment instruments are to be entered into before CFDs as a whole become available, theoretically the strike price is known at that point. Therefore what will also be known is how the quantum of CFDs that have been provided by that particular investment instrument will flow into the wider provisions relating to CFDs, once they become available and once we get into the normal regime, initially of allocation, and subsequently of auctioning and then, within the allocation and auctioning of CFDs in general, relating those processes to the levy control framework within which all those CFDs will sit. Not only will those CFDs as a whole sit within that levy control framework, once those have been agreed, but the investment instrument CFDs that have been agreed will flow into that overall framework and will subsequently be a part of that. The rationale, so I understand—

Jimmy Hood (Labour, Lanark and Hamilton East)

Order. I observe a number of conversations taking place on the Government Benches. It is not right. I ask Members to pay attention to the hon. Gentleman who has the floor and is speaking about his amendment.

Alan Whitehead (Labour, Southampton, Test)

Thank you, Mr Hood. I appreciate that what I am setting out this afternoon may not be the most riveting of subjects. Nevertheless, it is important in terms of how we understand the overall schedule. When those investment instruments, and the CFDs arising from them, have been decided upon, it is important that the maximum amount of information is known about those CFDs and all the circumstances surrounding them because, among other things, the deal that is made at the time those investment instruments are concluded is potentially crucial for how CFDs work overall.

The architecture of the schedule promotes a starting advantage for those CFDs that have been decided by an investment instrument. They are put to the front of the queue and concluded before CFDs as a whole have started. They are then “droppable-inable”, if such a term exists, to the process as it goes on. They may well be dropped in from that investment instrument in a particular year or they may be held effectively by the agreement that has been made on the basis of the investment instrument over a number of years. In terms of the levy control framework, the availability of particular CFDs at any one time and, indeed, in any one year is potentially crucial for other investors who have not taken part in the investment instrument process. They will want to know whether the CFDs that they have negotiated as part of the wider process can start at the time that they thought they could start.

If they are misled, misguided or ill informed about this process, it could be crucial for their own investment. They may think they have sorted everything out as far as their contracts are concerned, they have all their potential link-ups with the National Grid sorted out, they have the supply chain sorted and they are ready to go. They know they have an out-date, they know that is when their CFDs are going to start and they know in outline that within the levy control framework there will be a certain amount of CFDs available per year, without busting the terms of that framework, as it goes up to 2015 and within the total that is now in front of us for 2020. Over that period, in principle, it will be of very considerable interest to a number of large developers who are not within the investment instrument landscape that they are reasonably secure about what is happening in their landscape.

As I see it, there is one obvious problem and one less obvious problem with the architecture of the schedule. When an investment instrument is decided on—it depends on negotiations not just on the strike price, but on the further terms of the investment instrument—it is not entirely clear whether that instrument can crash into the wider CFD pool at a time determined by the agreement and not the subsequent considerations of how the CFDs will work. If that is the case, it seems rather important that everyone know everything about that initial investment contract, so they can at least factor in that matter, difficult though it may be for them.

Barry Gardiner (Labour, Brent North)

I am trying to follow my hon. Friend, but I fear that I am not managing to keep pace with him. Is the key problem the investment decision that a subsequent investor must make and their information—or lack thereof—about the previous contracts and the strike price agreed; or is it when they apply to start with their own CFDs in the market?

Alan Whitehead (Labour, Southampton, Test)

My understanding is that it may well be the latter. It is clear in the schedule that the strike price set at the time of the agreement of the original investment contract cannot be redacted and not disclosed. It will be laid before the House, and we will know what it is. That is not the issue; the issue is other circumstances surrounding the agreement of that investment contract, which might relate not to the strike price but to the circumstances in which the investment contract can be deployed.

Those circumstances might be deemed commercially sensitive. Let us say that a large multinational company is setting up a nuclear power plant, and that it has negotiated a strike price, which is public and transparent, and an investment contract before everybody else, which, among other things, gives it comfort—that is part of the schedule’s purpose—that the company will indeed get its CFDs when the power plant starts operating.

However, if the company were to say during those negotiations, “I don’t honestly think the power plant is going to operate before 2024,” that might be regarded as confidential information because of what other operators might do with it. Therefore, in relation to the provisions not related to the strike price, it is more than possible that there will be inadequate information for other people outside that investment instrument landscape to act on because of the mystery surrounding the intentions of the people within the investment contract landscape, which may have been decided by agreement to be commercially sensitive. For example, exactly when will the power station produce? Will it be subject to delays that the company does not wish to disclose? Is there a target that can feasibly be reached, but the investors are not certain of it? Those issues seem to be covered by the schedule as redactable pieces of information, over and above the question of the strike price or the reference price.

Barry Gardiner (Labour, Brent North)

Is it therefore my hon. Friend’s contention that, as drafted, the Bill builds an inability to educate oneself into the market, so that, although it is available, information that one would properly wish to take account of in one’s own subsequent investment decisions or the structuring of one’s commercial operations is being withheld, and that that will improperly impair the functioning of the market?

Alan Whitehead (Labour, Southampton, Test)

I do not say to my hon. Friend that information is going to be improperly withheld, or that the situation he describes will inevitably happen; but the architecture of the schedule is such that that is possible, and it is also possible to advantage someone who has received an investment contract. That person may have perfectly proper concerns about what will happen to them, but, as CFDs are currently proposed, other people will be considerably disadvantaged. It is important that we get the whole architecture right for all CFDs.

There are worse problems to follow. Although it is stated that the investment contracts are intended to be entered into during a relatively short period, that is not the case for variations: as I read the schedule, it allows a variation on an investment contract to come into play at a time and date after the overall process has started, even though the original possibility of there being a variation had been agreed at the time of the original contract. That is what seems important to me about paragraph 2(4), which states:

“This paragraph does not apply”—

that is, the paragraph about disclosure, and laying matters before Parliament in particular—

“in respect of a variation which is made in accordance with the terms of an investment contract.”

What the schedule appears to say is that any variation on an investment contract must be laid before Parliament unless it is not that, and if it is not, a number of other things that apply to a variation that is laid before Parliament also do not apply. But a variation can take place at a date that is substantially removed from when the original investment contract was put in place. That substantially removed date may be right in the middle of the operation of the general CFD pool arrangements, as those go forward, and right in the middle of the decisions that are being made by those investors who are outside the investment contract landscape.

Barry Gardiner (Labour, Brent North)

Once again, my hon. Friend has put his finger on something of fundamental importance: he has shown the Committee that the schedule is a lawyer’s paradise. Am I right in thinking that, if I were a lawyer constructing the initial contract, I would be most sensible to build into it a subsequent variation that is allowed under paragraph 2 of the schedule, to make sure that my competitors in the market were maximally disadvantaged by not being able to predict or see quite how it was that the strike price that I have negotiated had been achieved?

Alan Whitehead (Labour, Southampton, Test)

My hon. Friend perhaps discounts the normal generosity and clear-sightedness of most investors who would be engaged in such contracts, but yes, he is right: that is an example of the possible temptations to game, which we have discussed previously in Committee, that could be inherent in some of the arrangements established by the Bill. I am not saying that that is a very likely proposition; nevertheless, one of the things we have to do in legislation is to make sure that unlikely things are accounted for, and it certainly seems to me that there are problems in that respect.

I have mentioned two problems; the third problem relates to the construction of the counterparty. As far as this schedule is concerned, it appears to be the case that the counterparty may be the same one as that for CFDs in general, but it may be different one; it may be a counterparty specifically for the purpose of these investment instruments. Since these investment instruments are being drawn up in advance of CFDs in general, it may be the case that a counterparty for these investment instruments is determined before a counterparty is determined for CFDs in general. Whether there should be one or multiple counterparties was debated before, and we seemed to reach the—frankly, rather lame—conclusion that although there might not be one counterparty, there would be one counterparty per contract, and therefore people would be clear about their particular contract relating to a particular counterparty and they would have that degree of certainty as far as that was concerned, even if there was not one counterparty for all CFD considerations.

This does seem to get a little serious here in as much as if we have one counterparty coming in for investment instruments, and another coming on stream for overall CFDs, and the idea that the counterparty arrangements relating to the investment instruments can crash into the general pool at one particular stage, what is the determination of equality between those two counterparty arrangements? How can those streams be successfully joined together as far as potentially different counterparty arrangements are concerned, when different things appear to be called the same things, that is a contract for difference? Is there a problem, or might there be a problem, relating to what arrangements have been made concerning an investment instrument counterparty generically? What instruments might have been made concerning a general CFD counterparty generically? Do those things actually match up? Are they, and will they be, compatible with each other? If they are not compatible with each other, is it not the case that an advantage that has been conferred, possibly by arrangements not disclosed in these investment instruments, may actually run on into a period when those are supposed to be equal in terms of what judgments are made on the timing, deployment and auctioning arrangements for contracts for difference in the general market.

Hon. Members will by now have completely glazed over, if they had not glazed over before this exposition. But, it is an important point that we need to get that architecture right. It may be that the detail of this particular schedule is such that there are answers hidden away in corners to the particular concerns and issues that I have raised. I cannot immediately see how some of those problems can easily be avoided, particularly in the context of variations of CFDs, which do not even have to be laid before Parliament, and which can take place within the terms beyond which the investment instruments should have wound themselves up, as it were, once the main CFD activity gets under way.

I would very much welcome the thoughts of the Minister on a number of these issues, and whether—if they cannot be easily explained and resolved today—we can actually hear further should inspiration come outside this Committee on how these problems might be resolved, either within the way the schedule is constructed, or whether something like some of the amendments tabled today could help—I think they do—with the resolution of a number of those issues. It is important that we get it right, and we have one shot at getting this right. If it does not work over a period of time, we will very much live to regret it in terms of future investment, not just in relation to investment instruments, but the much wider basis of investment within CFDs generally.

John Hayes (Conservative, South Holland and The Deepings)

This has been an important discussion about the issue of transparency, which is a recurring theme in our considerations. In many aspects of life, opacity is underrated. Our relationship with the divine, for example, is shrouded in a desirable mystery. Love itself, of course, is better for being opaque in many ways. In the exercise of Government, however, particularly in relation to the Bill, transparency is very important. I am not yet clear—the scrutiny of the Committee has been helpful in making me ask such questions—that we have gone far enough in that regard. That is why I welcome the contributions of both Opposition and Government Members in ensuring that not only the checks and balances, but also the reporting functions and lines of accountability that permeate the Bill, are sufficient for the House, the wider public and the interests of both Government and business to prevail in a way that provides palpable evidence of both the Bill’s efficacy and proper practice—good governance. I recognise that the amendments are helpful in exploring those issues.

I want to deal with a couple of technical points. The hon. Member for Brent North, with his typical courtesy, described them as minor, but that was an understatement as they are important. Let me be clear about the issue in Northern Ireland that he raised. We have used the proper way to refer to its Departments. We took advice from its legislative counsel on that specific point, so we can be comfortable that we are in the right place in that regard, but it is helpful that he raised the matter.

With regard to the reference to section 6(3) in schedule 3, which the hon. Gentleman discussed at some length, it is true that no date is specified, the effect therefore being that there is a long-stop date of 31 December 2015, but regulations can be made earlier. In essence, the provision, as drafted, provides a final date or safeguard. The purpose of that is to avoid an overlap between the transitional arrangements and the main scheme—CFDs. I thought that I had dealt with his point, but it is clear that I have not entirely satisfied him.

Barry Gardiner (Labour, Brent North)

My continuing scepticism is around paragraph 1(1)(a) of schedule 3, which states that

“the date on which a definition…comes into force by virtue of section 6(3)”.

My reading of section 6(3)—meaning clause 6(3) in the Bill—is that no provision is made for that coming into force. It defines, but does not make provision for the coming into force of that definition. I was therefore not entirely clear whether that clause can carry the weight that has been put on it.

John Hayes (Conservative, South Holland and The Deepings)

For the sake of clarity, let me say that I will of course ask my officials to look at that matter specifically and at whether the drafting is adequate for its purpose. It was useful to have that discussion, and I am grateful to the hon. Gentleman for raising the issue. If we need to do more, we will do it.

I move on to the fundamental issues associated with the amendments and the debate we have had. All such issues come back to the issue of clarity and transparency. I want to be a bit more specific about that. This is about both the reporting function, which I mentioned a moment ago, and the drafting of what we do being sufficiently clear so as not to lead to unintended consequences. That was the theme taken up by the hon. Member for Southampton, Test and I will deal with some of the particular points he raised in a moment.

As I said, my own thinking on this, as it should be, is being informed by our consideration and there is a need to be absolutely confident that the Bill is in the place that it needs to be in this respect. If we need to do more—not just on particular issues such as those I just mentioned but on the general issue of transparency—we will take that away and give it further serious consideration.

I am mindful, in that regard, of the comments made about one of the intended consequences: the effect on costs and, particularly, the cost of consumer bills. I understand that this is about not merely the proper scrutiny of Government by this place but the effectiveness of the reform. In fact, the reform itself is effected by the clarity that has been called for by a number of hon. Members.

I hope that that commitment to transparency in the round provides reassurance on a number of these amendments, because a repeating theme emerges; they each deal with aspects of the Bill, but there is a consistently emerging theme of transparency that has provoked and informed those amendments and my responses to them.

I want to deal specifically with the matters around investment contracts and also to respond to some of the matters raised by the shadow Minister. Let me deal first with investment contracts and particularly with amendment 75, which a number of speeches focused on. The amendment, tabled by the hon. Member for Brent North, concerns the important question of what information is removed from investment contracts that are laid before Parliament.

We have had an exchange on that already, which I hope will allow me to be rather more concise than I might have been otherwise. I think that the Committee generally acknowledges that, on those matters that in any other circumstances would be defined as trade secrets—that is a legal definition, not something that I am making up as I go along—it would not necessarily be in the Government’s interest, or the wider interest, to publish. Of course, there is also the issue of law.

Secondly, the hon. Gentleman, in an exchange with his hon. Friend the Member for Wansbeck, spoke about the commercial interests that may sit outside the normal definition of trade secrets, but where, as he acknowledged, the commercial interests of the company might be compromised. Those details may be redacted from any publication of the kind that we are discussing, and I think that it was widely agreed that that is right.

Thirdly, there are the matters that I believe the hon. Gentleman described as breaches of trust—[Interruption.].

Jimmy Hood (Labour, Lanark and Hamilton East)

Order. The lady cannot walk into the middle of the Committee, whether she is a police officer or not.

John Hayes (Conservative, South Holland and The Deepings)

I will resist the temptation to add to that.

What the hon. Member for Brent North described as breaches of trust, I might describe as breaches of confidence. They might be actionable breaches of trust or confidence. I think we would agree that such things might be redacted.

The Government fundamentally believe that the vast majority of information in investment contracts should be disclosed, in particular information about likely cost to the consumer, the point raised by the shadow Minister. That is why a defining and unusual feature of an investment contract in the Bill is that it is laid before Parliament. It is not normal practice for legislation to suggest that contracts that are entered into are laid before Parliament.

It is possible that some contracts may contain detailed financial information belonging to a generator that falls into one or more of the categories that I have just described. Disclosure of such information could significantly harm the interests of a generator. One result of that would be to discourage businesses from entering into that kind of relationship. If they felt that the Bill did not provide adequate protection of their interests in the way I have described, it is unlikely that they would want to be involved in negotiations that might lead to an undesirable outcome for them in respect of their competitive, business and shareholder interest. We would all again acknowledge that.

If the effect of not putting into place these protections was to undermine the process, making it harder for Government to negotiate investment contracts that represent value for money for consumers, it might well be that we cut off our nose to spite our face. On that note, I give way.

Ian Lavery (Labour, Wansbeck)

Is there not a danger that so much information could be redacted or classed as confidential that publishing any report at all would be non-transparent?

John Hayes (Conservative, South Holland and The Deepings)

That is precisely why we are having this discussion and why Government are considering the matters and why the Bill explores exactly walking the line that the hon. Gentleman describes, providing enough information so that the House and the wider public can be confident that the deal being struck is the right one while on the other hand not putting in place impediments that prohibit or discourage the engagement of those businesses that we need to negotiate the contracts that will lead to the investment essential to serve the public interest. There is a tension between two different manifestations of that public interest, which the Government are attempting, using all their resources and considerable skills, to navigate with the diligent and generous involvement of Members of this Committee, particularly the hon. Member for Brent North, to whom I give way.

Barry Gardiner (Labour, Brent North)

I understand all that the Minister says and I appreciate the commercial sensitivities and the need not, as he put it, to cut off one’s nose to spite one’s face. Schedule 3 paragraph 2(2)(b) says, regarding the Secretary of State laying the information before Parliament,

“after the Secretary of State has excluded from the contract”.

Will the Minister clarify? Is it intended that that exclusion should be by redaction, by putting a black pen through it, thus making it clear that something has been excluded at that point? That is very different from taking the matter out altogether, so that the information reads as if it were never a part of it. If he means redaction, it should say redaction. However, I do not think the Minister does mean that, which leads one into precisely the sort of problems I anticipated. I will sit down.

John Hayes (Conservative, South Holland and The Deepings)

That is an interesting point. Again, I do not want the Opposition to think for a moment that I am excessively soft. I do not want to think that generosity is the only thing that characterises my ministerial style. On that note, I will take it away and look at it again. It is an interesting point, because its essence concerns whether people have a feel—for example—for the volume of information that is being published compared with the volume that is not. It should be clear that the redactions—to use the word again—are marginal, and based on the three specific areas I described that are reinforced in the legislation; a trade secret, a commercial interest that could be prejudiced, or a breach of confidence. If this is clear it would imbue what we do with a degree of clarity and popular confidence. I think people would have confidence in the process.

These three areas are not weak tests. For example, prejudice cannot be trivial or insignificant in its effect, as those members of the Committee who take an interest in the law will understand; I suppose we all by nature take an interest in the law. Prejudice means a real and substantial negative impact on a person or an organisation.

The amendment proposed would remove these last two grounds. Given that the hon. Gentleman acknowledged in his speech that the last two grounds had some merit, I am not clear that this particular amendment is the best way of proceeding with his mission. It would also require that any information related to liability or risk to consumers were disclosed. The problem is that that encompasses a very broad set of information, quite possibly including detailed financial information of the very kind that I mentioned, which falls into one or more of the three categories that I mentioned a moment ago.

Barry Gardiner (Labour, Brent North)

May I help the Minister?

John Hayes (Conservative, South Holland and The Deepings)

I am happy to give way, although I want to make some progress.

Barry Gardiner (Labour, Brent North)

I am sure we all do. On that point, there is still capacity within sub-paragraph (3)(b), and also in sub-paragraph (2). If those things were indeed trade secrets and subject to the strictures that he has observed, they could have been specified in the initial terms of the contract and in that way excluded from disclosure. I believe that the rest of the paragraph is strong enough to provide the powers that he requires in those specific incidents, if it was initially specified as such rather than leaving it up to his later determination.

John Hayes (Conservative, South Holland and The Deepings)

That may be true, but I am not wholly convinced by that argument. I am sympathetic to the broad thrust of the argument that the Bill needs to be very clear, and to emphasise the transparent disclosure of the appropriate kind of information. However, the risk of drawing into that consideration a subject as broad as consumer interest, which could be interpreted by many people in many ways, is probably one that no Government would be entirely comfortable with. I am not entirely convinced by that argument, despite my generosity in more general terms, which is becoming famous.

Amendment 79, which is tabled by the shadow Ministers, deals with the matter of when a contract is laid before Parliament, and proposes that it be laid within three days of being entered into. Let me deal with the points raised by the hon. Member for Rutherglen and Hamilton West. He asked what a material increase in cost price was. For the purposes of our legislation, “material” is usually defined as anything other than insignificant or trivial; in other words, the threshold is very low.

The hon. Gentleman asked why we suggested publishing a contract as soon as reasonably practicable, and said that the tests of reasonableness and practicability were excessively open-ended. The reason why we want some flexibility is that a contract could not be laid before Parliament during a recess. The problem with a period of three days is that it would have to be three parliamentary days, which becomes somewhat complex.

We are not saying for one moment that the question of when we publish the contract should be left to the Secretary of State’s discretion. Indeed, paragraph 1(7) of schedule 3 makes it clear that there is an obligation to publish when reasonably practicable. Although there is flexibility, the Secretary of State’s power is not permissive. That, of course, is a question of fact and is widely used in statute. Again, it is not something invented for the purposes of the Bill. It is more common in statute not to specify time limits of the kind suggested in the amendment, although I hear what the hon. Member for Rutherglen and Hamilton West said. It is a question of getting the balance right between practicality and urgency, but I put it on record that I believe that that should be done with appropriate alacrity. In those terms, “reasonably practicable” should mean “as soon as possible”.

I reinforce the point that beyond my own assurance, it is in the interests of the Government and contractors to lay such contracts with speed. It is not in the interests of Government or the businesses involved to delay. They will want those matters on the record as soon as possible after the deal is signed. That was reinforced by the evidence from Vincent de Rivaz of EDF, who wanted the system to deliver not only quickly but transparently.

Amendment 81 relates to the requirement that a contract be re-laid in Parliament if it is amended in a way that materially increases the costs to consumers. The amendment would remove the clarification in paragraph (4) that the requirement does not apply to variations occurring in accordance with the terms of the contract. I understand the intention behind the amendment, but I do not think that it is necessary or practical. A contract may stipulate that certain elements, such as the strike price, must be adjusted from time to time according to a process set out in the contract: for example, due to the application of the inflation index or qualifying changes in law. Again, that type of provision is common in commercial contracts, particularly those involving infrastructure or investment. The effect of the amendment would be that a contract would cease to be an investment contract for the purposes of the Bill whenever it was likely that costs to consumers would increase, following the operation mechanisms set out in the contract.

In practical terms, that would mean that funds to make payments under the contract could not be raised under the supplier obligation regulations until the contract had been re-laid before Parliament, rendering the contract inoperable. Given what I said a few moments ago about the practicalities of laying such contracts before Parliament, that could prove an undesirable obstacle. Although I accept that it is an unintended consequence of the amendment, it is a consequence none the less.

The matters that I have described should be apparent from the contract laid before Parliament, which will detail elements likely to change under the mechanisms specified. The overall purpose of this paragraph is to ensure that where the parties to the contract agree to vary it in a way not provided for under the terms of the contract, and it would be likely to increase the costs to consumers, the amended contract must be laid before Parliament again.

Both by the tests of practicality and necessity, the amendment should be withdrawn. I say that, rather than “rejected”, because I do not want to be unnecessarily antagonistic.

Michael Weir (Scottish National Party, Angus)

I am interested in what the Minister said about the adjustment of the strike price. He suggested that the only way it would be adjusted is if it were in the contract, perhaps via an inflationary index. Is this not an important point for consumers? Every time energy prices go up, there is an outcry, for obvious reasons. In effect, the Minister is saying that if there is an inflation adjustment, consumers will not be told when it comes into being, because it is not laid before Parliament and made public. Is that not providing a hammer to hit consumers with?

John Hayes (Conservative, South Holland and The Deepings)

The business we are in—of reforming the market—is designed to create sufficient confidence to facilitate investment around a negotiated strike price which is specific to a particular generating area, or for enabling a particular project. The essence of that negotiation is that we take into account a range of variables, which might include modelling the likely effect of inflation, as one would expect in any commercial negotiation of this scale and kind. I am sure the hon. Member for Angus is not suggesting that we unravel the whole principle of long-term contracted prices on the basis that it is the only way of creating the kind of responsiveness to circumstances that he describes. That would be incompatible with getting the level of certainty necessary to stimulate investment. I am at a loss to know what the hon. Gentleman wants.

Michael Weir (Scottish National Party, Angus)

The point is that I would have thought anybody negotiating a strike price—for whom it is effectively a long-term contract, the object of which is to create certainty over the long term regarding the price being paid—would take into account inflation projections at the outset. It should not need to be changed on any sort of basis later in the contract, apart, perhaps, when there is unexpected massive inflation, which is unlikely in current circumstances. The Minister is opening up an unnecessary difficulty.

John Hayes (Conservative, South Holland and The Deepings)

Clearly, in the process of negotiating one is driven by the economics. The nature of the business of negotiating a strike price is that at the heart of the Government’s position is the desire to protect both taxpayer and consumer interests. The essence of the negotiation, implicit in the Government’s position, is defending the consumer and the taxpayer. The fact that we will then provide in this part of the Bill both the detail of that strike price and the business that has gone into arriving at it, indicates that we are not shy about the marriage between the commercial interest of the developer and the public interest, which we will champion. I do not think there is any obfuscation about the salience of public interest in this.

It may be that the hon. Gentleman has a streak of cynicism running through him.

Mr Weir indicated dissent.

John Hayes (Conservative, South Holland and The Deepings)

I say that kindly. It may be that the hon. Gentleman is less subtle about the noble purpose in which we are all engaged than I am. Perhaps I am an idealist, but my idealism is tempered by the street wisdom that I have gained through my political life and in the rest of my life. The Government, although they can have noble ambitions, also have a dose of street wisdom sufficient to ensure that they get the best possible deal for consumers. I just hope that the hon. Gentleman will understand that that is the direction in which we are heading.

On renewables and the points made by the hon. Member for Southampton, Test, we intend to issue an update on FID—final investment decision—enabling for renewables shortly. That will include a process of ensuring investment contracts for renewable projects after publication of both the draft strike prices and the contract for the enduring regime in July 2013. The electricity market reform programme has been designed to stimulate investment in carbon capture and storage—as he knows—renewables and new nuclear. The Government are also committed to pursuing a legally binding target for generation from renewable sources by 2020, as he also knows.

The overall budget for low-carbon support has been set to accommodate the Government’s diversification and decarbonisation objectives. Agreeing an investment contract for nuclear does not detract from the Government’s commitment to other technologies through the mechanisms set out in the EMR. That is the essence of the point the hon. Gentleman made. I understand why he makes that point, and it is true that at the very back end of the levy control framework period, some of that resource—that £7.6 billion—might be dedicated to nuclear. Of course, the build time for nuclear is such that it would be at the back end. Similarly with carbon capture and storage, it is possible, as he implied, that that might happen. However, he should not assume for a moment that that undermines or dilutes our commitment to renewables as an important part of the mix that we regard as vital to create a resilient, sustainable generating resource.

Alan Whitehead (Labour, Southampton, Test)

The Minister may not have got the full thrust of what I was trying to point out, which is that third tension in terms of fairness—between what is happening with investment instruments, and with the pool of CFDs outside investment instruments. I of course accept that there will be nuclear investment instruments. There may well be CCS investment instruments. It is a question of ensuring that both ends of that arrangement are fair to each other, and what I have suggested, among other things, is that that fairness could be compromised by the schedule’s particular architecture.

John Hayes (Conservative, South Holland and The Deepings)

I understand that. Perhaps I can best summarise the position by saying that the investment contract is equivalent to having been allocated a CFD. There is no further allocation by the Secretary of State or the national system operator under chapter 2 of part 1. The regulation-making and other powers in schedule 3 are very similar to those in chapter 2 of part 1. That is so that these arrangements are applied consistently, across CFDs and investment contracts. This is certainly a worry that has been expressed.

If the hon. Gentleman is not confident about the detail of what I have said, I will be more than happy to deal with him directly on those queries. I hope that all members of the Committee feel that I am focusing on their specific concerns, particularly in relation to these technical aspects of the Bill, in a way that gives them certainty that the Government are considering these matters properly. I will therefore come back to the hon. Member for Southampton, Test on the specifics if what I have said so far is not sufficient to persuade him of the virtue of our case.

As I have said, I consider that the other amendments tabled to schedule 3 fall within the category of general transparency and visibility to Parliament, which I have already said I am committed to considering further ahead of consideration on Report.

I think that I have dealt with most of the matters that were raised. On the cost of publication, it is not necessarily costly to publish. The point is that the provision in paragraph 2 affects the definition of contracts. I have asked my officials to look at the likely cost of publication but I do not think it should be a barrier to the desire for transparency or clarity that lies at the heart of what we want to do. I hope that hon. Members are reassured about my commitments and that the amendment will be withdrawn.

Barry Gardiner (Labour, Brent North)

I have listened carefully to the Minister. He has been on his feet a long time and is taking a great deal of trouble and care to respond to the points that we have made. I am afraid that at this stage I am not prepared to withdraw the amendment. I would like to press it to a vote because I think the principle is important to establish.

Tom Greatrex (Labour, Rutherglen and Hamilton West)

The hon. Member for Angus is right. This is not just about nuclear. The reason that we got on to talking about nuclear is because that is probably the issue that is most current. As my hon. Friend the Member for Southampton, Test said, it affects a number of other things as well. I am conscious that the Minister has spent some time trying to respond in detail to the points that have been raised. He rightly described it as an important debate but talked about the importance of balance and walking the line. It is appropriate that we try to get this right. I take his point in relation to amendments 78 and 79. I will seek to withdraw amendment 78 and I will not press amendments 79 and 80, but I will press amendments 81 and 83. I beg to ask leave to withdraw the amendment.

Clause 34 - Power to modify licence conditions etc: market participation and liquidity

Luciana Berger (Labour, Liverpool, Wavertree)

It is a pleasure to serve under your chairmanship this afternoon, Mr Hood.

Clause 34 is important. It enables the Secretary of State to modify licence conditions and electricity industry codes, such as the balancing and settlement code. Those powers can be used to facilitate participation in the market by licence holders and others or to promote liquidity.

Out of the Energy Bill’s 126 clauses, this is the only one that addresses liquidity in the energy market. Even then, it does not propose any concrete action. All it provides is a backstop power, with no information about how or when the Government would use it to encourage market participation or improve liquidity. I hope that the Minister may enlighten us as to what exactly the clause would, and would not, allow the Secretary of State to do, and what the Government’s intention is for including the clause but without any details about how they will use it.

After all, the case for reforming our energy market is well documented. Energy bills are soaring. I find myself making this point often, but it is important to reiterate: since 2010, energy bills have increased by £300 per household, driving up inflation and contributing to the cost of living crisis that afflicts millions of families across the country. The energy market is dominated by just six companies; in fact, 99% of households get their energy from one of the big six.

That lack of competition means that energy prices are higher than they might otherwise be. A recent report by the Institute for Public Policy Research suggests that, with more competition in the market, bills could be £70 less a year. In addition, switching between energy suppliers reached its lowest level in the first quarter of 2012, not because customers are happy with their energy providers, but because there has been a loss of faith in the energy market. At a time when energy bills have increased sharply and when complaints against energy suppliers are at near-record levels, it is not credible to suggest that people are staying with their existing supplier because they are satisfied.

Unlike most retailers, energy companies sell us a product that we all have to buy in order to keep warm, to cook, to clean or to watch TV. People cannot opt out of buying electricity or gas if they want to look after themselves. There is, therefore, a strong case for arguing that energy needs regulation of a different order to almost all other goods and services and that even consumers who do not want to engage with the market should be protected from being ripped off. At the moment, any attempt to accurately estimate the true cost of energy supply is hampered by the lack of publicly available information. All the big six energy companies both generate and retail power, which means the cost to them of the energy they generate is not reflected in the wholesale price. Such vertically integrated companies have every reason to keep wholesale prices high, as it enables them to remain profitable while claiming that their retail margins are low. The wholesale market is only an indication of energy prices, not a definitive guide, because electricity is predominantly bought and sold through bilateral trades that are not made public. Prices and levels of profit should be set by a properly functioning competitive market, but there are strong grounds for believing that liberalisation has not led to such a market. The domination of the six businesses does not, in itself, indicate that competition in the market is ineffective. However, the fact that no new entrant since liberalisation has achieved anything like the scale of operations to challenge the big six suggests there are significant barriers for newcomers.

Energy companies frequently assert that electricity and gas prices in the UK are among the lowest in Europe—there is a Government Back-Bench Member who is keen to make that point at the many opportunities that we have in Parliament—but that fact is true only when tax is included, because UK tax levels for gas and electricity are comparatively low. However, tax is a Government instrument, not a feature of market efficiency, and when tax is not included, the UK sadly compares much less favourably. In 2011, UK electricity prices in pence per kWh were 5.3% higher than the EU15 and G7 median and 19.1% higher than the EU27 median. UK gas prices, also in pence per kWh, still compare favourably, although in 2011 the UK gas price, excluding tax, went above the EU27 median for the first time. Although international comparisons are an imperfect measure of market efficiency, they do suggest that there may be scope for greater efficiencies.

If pricing is competitive, wholesale cost falls should be passed on as quickly as cost increases. In 2011, Ofgem found evidence that energy suppliers were slower in passing on reductions in wholesale energy costs than they were in passing on increases. Analysis by the consumer watchdog Consumer Focus also found a gap between the price energy companies buy electricity and gas at and what they sell it to the public for. Its research shows that even though the wholesale prices of electricity and gas have both fallen since 2008, retail prices for both are still significantly higher in 2012 compared with 2008.

To ensure that people are paying a fair price for the energy they use, we need to tackle the root cause of the problem, and to do that we need a radical overhaul of our energy market. I use the phrase “our energy market” very carefully, because the spirit of our interventions and discussions on clause 34 is intended to provoke the Government to look carefully at how we can better reclaim our energy market so that it will work for all citizens, and not just for the energy companies. We like to call it a one-nation energy market.

It is time to open up the market, so that there is more competition and greater transparency. I want to share with the Committee something that I know the Minister has heard before, but it is important to put it on the record so that he can respond to it. We would force the energy companies to pool the power they generate and make it available to any retailer in an attempt to open up the market and to put downward pressure on prices. Energy companies always cite wholesale prices as the reason for bills going up, but bills never get reduced by the same extent or at the same speed when the wholesale price falls. The Bill could have scrapped the old model of unaccountable markets and secret deals and created a new, open, competitive market for energy by introducing a pool.

We have heard Government be hostile to the idea of a pool. Their rationale is that it did not work in the past, but the market has changed, and it is important to note that when the pool was last in operation, there were effectively just two generators—people often refer to it as the power duopoly—and the pool was one-sided, with just the generators placing bids. Today, there are many more generators, so the issues we saw with the dominance of National Power and PowerGen in price setting in the previous pool would be much less of a problem, particularly if the pool was two-sided and both buyers and sellers could bid into it, as happens with the Nord Pool in northern Europe. The Nord Pool receives purchase orders from those who want to buy power, sells offers from those who want to sell and aggregates the orders and the offers to arrive at a price for each hour.

A pool would have three clear advantages over the current market arrangements. First, it would increase transparency, which is a word that we have heard many times over the past five days. I am sure that we will continue to discuss that theme over the rest of the Committee. At the moment, no one really knows what the true cost of energy is, because most of it is bought and sold through bilateral trades that are never made public. If all the energy had to be traded through an open pool, those secret under-the-counter deals would end. Companies would no longer be allowed to self-supply, and we could establish a robust market reference price. If energy companies tried to blame wholesale costs for putting up bills, we would be able to see for ourselves whether that was true. When it comes to setting strike prices and reference prices for contracts for difference, as proposed in part 1 of the Bill, we would be in a much stronger position to set the right price, which is vital to ensure that consumers get a fair deal.

The second advantage of a pool is that it would increase competition. If energy companies had to sell all their generation and buy all their supply through an open pool, anyone could compete on price, to generate power or sell it to the public. That would encourage new entrants to enter the market, provide fairer access for independent generators and community and co-operative energy schemes, increase competition and put downward pressure on prices.

Thirdly, a pool would increase liquidity. We hear a lot about liquidity and while there have been some improvements in liquidity on the day-ahead market, one of the biggest barriers to effective competition is the lack of liquidity on the forwards market. In order to compete, firms must be able to buy energy a week ahead, a month ahead, a year ahead or even further ahead than that, to ensure they are not over-exposed to sudden changes in the price of energy. Many smaller suppliers struggle to access longer-term contracts. The big vertically integrated companies are in a better position because they can effectively hedge their supply against their own generation. By introducing a pool we would effectively ban self-supply, whereby energy companies can generate energy and sell it to themselves, so if any company wanted a longer-term deal, they would have to secure it through the open market.

Professor Dieter Helm gave evidence to the Committee in support of a pool, saying:

“I have always thought that the original pool, at privatisation, was an extremely transparent, liquid and open market, which encouraged entry because anyone could buy or sell at the pool prices…So yes, I think going back to the pool would be a great thing to do.”––[Official Report, Energy Public Bill Committee, 15 January 2013; c. 69, Q212.]

Does the Minister agree that there is no better way to improve liquidity than to insist that everything is sold in an open marketplace? If not, will he set out an alternative for us, or confirm that clause 34 would give the Secretary of State the power to introduce a pool along the lines I have set out?

The Bill offers the opportunity radically to reform our energy market so that it is fairer, more transparent and more competitive. So far, the Government have failed to seize that opportunity, but perhaps clause 34 offers them the chance to do so. I look forward to the Minister’s setting out in his remarks whether the Government are willing to do so. If they are not, will he share with the Committee exactly how he expects the back-stop power in clause 34(3) to be implemented, and how it might encourage market participation and improve liquidity?

Barry Gardiner (Labour, Brent North)

I am delighted to follow my hon. Friend the Member for Liverpool, Wavertree, who raised several significant points. The Minister must respond on vertical integration in electricity companies, which has been so deleterious to new entrants to the market, and on the importance of freeing up the market to much better scrutiny and competition, which a pool structure such as my hon. Friend outlined would provide.

My hon. Friend made important points about how customers’ bills on the continent are inflated by the element of duty that is placed on them, and about how important it is to have a clear sight of the base energy costs in the bills that customers face. It has always been an absolute mystery to me how supply companies, which are also nuclear companies on their generating side, can justify higher prices when the market goes up by saying, “Oh, well, it is the price of gas that has inflated the market,” when they were not based on that. The very fact of their vertical integration means that most of their generation capacity is being passed on to them on the supply side. There are real problems here, and the Minister needs to acknowledge that fact and show how the Bill will cope with those problems.

I have other concerns about clause 34. I initially accused the Minister of being like Henry VIII, and the clause contains real powers that one would assume the regulator would have. We need to know why the Secretary of State is appropriating those powers. This is a centralising, not a decentralising, Bill. In many ways, it reflects the nature of the Government; they talk about localism and decentralisation, but accumulate more power at the centre. We have seen that in education and local government policy, and we are seeing it in energy policy as well. The Minister needs to respond very clearly as to why he feels these powers are necessary, and why the alternative that my hon. Friend put forward is not one that he considers viable.

John Hayes (Conservative, South Holland and The Deepings)

The power in this clause is not a Henry VIII power, just to deal with that at the outset. The cause advanced by the hon. Lady and the hon. Gentlemen is one which finds much favour with the Government. This Government take liquidity in the energy marketplace extremely seriously. As the hon. Lady said, liquidity is an important feature of the competitive market for three reasons: first, risk management; secondly, routes to market; and thirdly, reference prices. I shall deal with those in turn. The first means that generators and suppliers can sell and buy power ahead of delivery hedged against price, volume and imbalance risks. The second provides a liquid wholesale market, independent generators and independent aggregators with a root market for their power. Without these, generators rely primarily on power purchase agreements, as the Committee knows, and it is very difficult for independent generators and aggregators to manage their risks and offer PPAs.

Thirdly, transparent and robust prices along the trading curve that reflect demand and supply fundamental provide participants and potential entrants with investment and operation signals which allow them to make assessments about their engagement and investment plans. A liquid market is highly desirable, and the net effect of a liquid market is likely to create greater competition, as the hon. Lady said, which is in turn likely to create downward pressure on prices. That is why the architects of privatisation believed that a plural market would emerge that would not only create the means by which innovation could play, but exactly that downward pressure on prices.

The hon. Lady is also right that the market is insufficiently liquid at present. If one compares the wholesale market liquidity of the UK market with most other energy markets in Europe—not just in energy but also in other commodities—GB liquidity is lower. That is particularly true in forward markets, and I will come to the significance of that in a moment. If she is right about that, the issue becomes “What should we do about it?” and this part of the Bill creates the opportunity to take more radical action to deal with this pressing problem. I am proud of the fact that the Government take the view that this is urgent and are prepared to put in the Bill powers to take action beyond the measures we have already encouraged through the work Ofgem is doing in studying these matters.

Forward market liquidity is a key concern as it removes hedging and risk management opportunities for independent participants, as the hon. Lady implied. Liquidity in the prompt market, with day and day ahead is less of a concern as volumes are relatively small and participants say that the market generally meets their needs. It is probably also fair to point out that that day ahead short term liquidity has actually increased rather than decreased over the last 18 months or so. Therefore, it is the forward market liquidity challenge that we face, and it is to that end that, as the Committee knows, Ofgem ran a consultation in December. At that juncture it acknowledged, probably in clearer terms than any time previously, that

“Given the importance of meeting our objectives, we now have a firm preference for intervention to improve liquidity.”

It went on to say:

“We therefore intend to make a decision on whether to proceed with an intervention—and the shape of any intervention—ahead of summer 2013. If we decide to proceed with intervention, we would aim to modify licence conditions by the end of 2013.”

That is a much more proactive and positive tone than we have previously seen in consultations by Ofgem on this subject. It increases confidence that Ofgem is determined to deliver some kind of intervention to aid liquidity. The proposals that emerged from that early consultation were certainly rather firmer and more decisive than anything that had previously emerged. It is clear that Ofgem is treating the matter with the seriousness that the hon. Lady recommends. I have more to say specifically on Ofgem but, before I do so, I would be delighted to hear from the hon. Gentleman.

Barry Gardiner (Labour, Brent North)

I recently spoke with Ofgem on that point. While it has taken measures to increase liquidity, it should be judged not on its output but its outcomes. The outcomes are not good. It has not managed to increase competition substantially in the market. The competition it has managed to increase has not substantially reduced customers’ prices. That is the objective, but I am afraid the medicine so far from Ofgem is not working.

John Hayes (Conservative, South Holland and The Deepings)

I had anticipated that intervention, which is why I said I was about to say more. The hon. Gentleman prompts me. I am grateful for this provocative debate, as the hon. Lady described it, because I share the enthusiasm of those who want a more plural and liquid market, for the reasons I have set out. Following the publication in December of some initial thoughts, Ofgem consulted in February on a proposed mandatory auction of power in the market. The proposal in essence was that the six large vertically integrated companies would auction 25% of their generation capacity, and among the auction would be a range of base-load and peak-load products in the forward market.

There was considerable pushback on those proposals, not least from the organisations they were designed to benefit. To that end, Ofgem reconsidered its position and is consulting on a package of licence conditions to secure and promote recent industry-led developments. The latest consultation is due to close on 13 February. The essence of that consultation comprises three measures. First, there are the minimum day-ahead auction volumes. In other words, obligated parties would have to trade at least 30% of their generation capacity through day-ahead auction platforms. Secondly, there are fair and reasonable trading terms. Obligated parties would have to offer fair and reasonable terms when negotiating trading agreements with independent suppliers, for example, credit and collateral requirements. Thirdly, there are trading obligations, which are the mandatory market maker. Obligated parties would have to market-make along the forward curve, while offering bids and offers in a range of forward projects.

I do not want to anticipate the outcome of the conversation. If ever evidence were required of fresh and innovative thinking about liquidity, we have it in Ofgem’s determination to consult on a range of new and powerful measures that would change the landscape in terms of the relationship between the big six vertically integrated companies and others in the market, and so assist liquidity. The powers that we seek in the Bill are above and beyond the actions that Ofgem is taking, with our strong encouragement. I think that the clause stands up on that basis.

Let me say a word about the pool. I do not need to remind the Committee, although I feel obliged to do so, of the condemnation of the pool by the National Audit Office in 2003. Members will have it to hand but for their edification and assistance I will quote from that report. It said:

“the centralised arrangements of the pool carried with them a risk that some generators could manipulate the market and Ofgem consider that this risk materialised through much of the period of the Pool’s operation to the detriment of consumer interests.”

You know, Mr Hood, that the consumer interest drives all the Government do. We could not possibly take any such risk. In addition, the key issue for independent generators and suppliers is managing their risks. They need to sell or buy forward power to hedge against price and volume risk. The pool does not address forward market liquidity and could even have a detrimental effect on that risk management profile. So reverting to the pool would create significant disruption at a time when we are trying to encourage new investment into the UK. I will take a brief intervention and then I will wrap up because I think the case is made.

Alan Whitehead (Labour, Southampton, Test)

Is the Minister willing to set out the nature of the pool that the NAO commented on in its 2003 report and what its working consisted of?

John Hayes (Conservative, South Holland and The Deepings)

It is true that the market structure has changed. I accept that. That is the point that the hon. Lady made but the difference in respect of the forward market is far less significant. The fundamental problems with a pool in respect of the forward market remain. It is also out of line with the assumptions of most other countries. I know that Ireland has a pool system, but I am not sure I know of any other major economy that does. I might be wrong about that. I just think there are better ways to promote transparency and competition along the lines Ofgem is considering. For me to have a lengthy debate on what we are not going to do is undesirable, unnecessary and unwarranted. I commend the clause to the Committee.