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Lord Ezra: My Lords, surely the noble Lord will accept that if clean coal technology with carbon extraction were to come onto the market he would support it.

Lord Patten: My Lords, I certainly believe in these forms of technology enabling electricity to be generated from coal or from anything else. The point which I am making is that the kind of proposals current in the industry at the moment concern people wishing to bring back into use mothballed coal plants and co-firing them with some renewables which count towards the renewables obligation. That would breathe new life into the mothballed assets of companies which have already been written down or written off entirely in the balance sheet.

I believe that policy makers should be aware of the unintended consequences of their apparently benign intentions, which is the line of thinking in the department which says, "Renewable energy is not developing very fast. People have come forward with the idea of co-firing, which will mean that we have a little more renewable biomass fired with coal. Therefore, we can say that we are burning more biomass and more renewable energy is coming". That might be produced for a year or so, but at the same time the genuine nascent renewables industry would be killed off in a very short time. That would be the unintended consequence of the benign intentions of policy makers. We have all seen that.

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It would be much better and at nil cost to taxpayers' funds, which I am always anxious to avoid, to kick-start innovative technologies and encourage new entrants, new companies and new investment into renewable energy without any Government support at all, by introducing differential banding under the renewables obligation for different forms of alternative energy regeneration from wind through biomass burning and back again. That would give much greater depth to the industry. Perhaps the Minister will have time to explain why we do not have this differential banding regime in place.

That having been said and that request made, perhaps I may end in the bi-partisan spirit which has rather overwhelmed me this afternoon. I do not doubt the Government's good intentions. I am a particular fan of Mr Brian Wilson and his brave approach. I applaud the spirit behind the Government's good intentions as regards many parts of energy generation. I applaud the spirit behind their target setting although I believe that they are pretty quixotic in quantum and that they will learn to rue having set them year by year.

As regards nuclear, alas—as I said, the noble Lord, Lord Sainsbury, well understands the science—I certainly doubt the courage of the Cabinet, even when collectively cheered on by the Minister to whom I have referred quite enough already. As regards alternative energy, I doubt that the members of the Cabinet fully understand the impact of some of their policies, be they co-firing or the lack of banding under the renewables obligations.

I greatly welcome the opportunity provided by the noble Lord, Lord Tombs, to take part in this debate. Should the Government decide to accede to the request of the noble Lord for a committee of inquiry, the Minister will easily find his number in the telephone directory. If the noble Lord demurs from the chairmanship of the committee, I should be happy to put my name forward. However, given the rather straight-faced look of the Minister, I believe that I am unlikely to receive that invitation.

4.30 p.m.

The Earl of Mar and Kellie: My Lords, the noble Lord, Lord Tombs, has provided us with a good opportunity to discuss the matter. So far we have heard many authoritative speeches. However, I fear that mine will probably not be among them. I have certainly noted the emphasis on the need for stable prices and security of a diverse supply of electrical energy. I have the privilege of owning some commercial woodland in Scotland which could be used as biomass.

I recently tabled a Question for Written Answer on the replacement of the generating capacity at Chapelcross nuclear power station in Dumfries which has been closed. I was most surprised when I received the answer that the Government had no policy for such a replacement and that it was being left to the market for new generating capacity to evolve. Noble Lords

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will be mindful that energy is a largely reserved matter in Scotland and is, therefore, a matter that we can debate in this Chamber.

I was almost astounded to read that a Labour government had no expectation of a power generating policy. That seems to be remarkably laissez-faire. In Scotland we have been generating power by various means for a considerable time. More power is generated in Scotland than is consumed in Scotland. So, electricity is an export along with whisky, computers and tourism.

Much to the chagrin of some political parties in Scotland, 42 per cent of electricity is generated by nuclear at Hunterston and Torness. Coal and gas stations supply just over 20 per cent each. Some 12 per cent comes from renewables and most of that is from various forms of hydro, which I am certain have not yet been mentioned today. Hydro accounts for 10 per cent of Scottish generation. New style renewables provide up to 2 per cent. There is good potential in and around Scotland for developing the various forms of modern technology. Wind is obviously in abundance and a new factory has been established at Machrihanish to produce aerogenerator equipment. Wave and tidal resources are naturally very available around Scotland. Solar potential, both wet and photovoltaic, is good though patchy. Biomass is distinctly possible but issues of transport and siting are involved. Combined heat and power is very possible.

The potential for micro generation at home is as good as anywhere else, but my fellow Scots are a fairly conservative bunch and are not yet in sufficiently pioneering mode for micro generation to be widespread. I fear that it is still viewed as being only for eccentrics. Evidence from pilot projects would help with that. So here there is a definite role for government to become involved.

The issues of transport and voltage drop are relevant in a country with plenty of land and a sparsity of population. I am undoubtedly in favour of more hydro schemes but I recognise that most of the existing ones are situated a long way from our cities. However, this is a proven technology. It is clean and it is easily absorbed into the landscape as an asset. Some other renewables are not so acceptable in the landscape.

In an ideal world the generating station would be situated on the edge of the town or city, which does away with the voltage drop problem. That is difficult to arrange but it may not be as difficult as we think. It probably depends on getting the right economies of scale.

If one considers a biomass generator on the edge of a town, one has to accept that it needs to be surrounded by an industrial scale forest to provide the fuel without exorbitant transport costs. I am in favour of such an approach for only 45 per cent of commercially produced timber goes to the sawmill. The lop and top is anything up to 55 per cent. However, I also recognise that Scotland is a land of small woods, and that we object to wall-to-wall plantations. A multitude of small woods is a valuable

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landscape asset and is a very marketable tourism asset as well. We need to make a judgment between biomass generation and tourism and recreation.

Energy generation in Scotland is an issue with which government could be more involved. I know that the siting of generation plants is more the responsibility of the Scottish Parliament and local planning authorities but it would be helpful if a more positive steer came from the United Kingdom Government. It is, of course, deducible that the United Kingdom Government favour generators that do not produce greenhouse gases to meet Kyoto targets. I wish that the Government would agree that they favour nuclear, hydro and modern renewables and that they are less in favour of coal, gas and oil.

Assistance could be given towards small-scale generators and towards micro generation to encourage its take-up by citizens who see themselves as normal. More schemes akin to the biomass district heating plant in Lochgilphead would help to normalise those new approaches, as would that which is proposed on the Isle of Arran.

Government could promote various types of generation and pilot new ones. Why will they not do so? I look forward to the White Paper.

4.37 p.m.

Baroness Miller of Hendon: My Lords, I congratulate the noble Lord, Lord Tombs, on being successful in the ballot and thank him for introducing this important debate. I congratulate him also on the way in which he promoted the debate, drawing enormously on his expertise and experience. Like the noble Lord, Lord Stoddart of Swindon, and the noble Earl, Lord Mar and Kellie, I wish to mention the excellence and experience of those noble Lords who have already spoken. I very much hope that not only the Minister but also Members of another place will treasure that expertise and experience.

The New Electricity Trading Arrangements (NETA) were introduced in March 2001 by Ofgem and the DTI. They seem to have been successful in increasing competition and reducing wholesale prices by 40 per cent compared with 1998. One of the main reasons for the fall in prices is that there was a significant degree of generating overcapacity. Of course, some overcapacity is certainly needed not only to meet peak demand but also to allow for the fact that inevitably some plant will be out of action from time to time because of breakdowns and the need for servicing. It is estimated that there is 22 per cent more capacity than is needed to meet peak demand.

Currently the wholesale prices of electricity have actually fallen below production costs by as much as 5 to 7 per megawatt hour, which has caused grave financial problems to various generators, as the noble Lord, Lord Tombs, mentioned. I had intended to discuss the problems of British Energy but my noble friend Lord Jenkin of Roding has already done so and, as time is running on, I shall not mention that.

The problems of electricity generators have resulted in the renegotiation of contracts with BNFL, which will cost the Government between 150 million and

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250 million a year for the next 10 years. I say that quickly, but that amounts to some 1.5 billion to 2 billion, and that is only for the next 10 years—and even that may not be the end of the road. There will be a further knock-on effect on the struggling British coal industry. Powergen has so far mothballed two of its plants, and is seeking a credit line of no less than 9.3 billion. TXU Europe has been cut adrift by its American parent and is in danger of insolvency. The German company Innogy is under pressure to mothball capacity.

We in the Conservative Party strongly believe in the market governing prices and supply, but we are also concerned about the continuity of supply of this essential utility. On 18th November 2002, the noble Lord, Lord Ezra, asked whether the problems being encountered by generators would lead to difficulties in supply. In a supplementary question, I raised the matter of the Californian experience, in which uneconomic pricing and the insolvency of Enron resulted in widespread electricity blackouts. I received reassuring replies from the Minister, who told me that,


    "it is likely that generating capacity will be taken over by another supplier".—[Official Report, 18/11/02; col. 134.]

The noble Lord, Lord Ezra, was told about the many plants that had mothballed. He commented today, as did the noble Lord, Lord Stoddart, that it takes some time to take plants out of mothballing.

We are having the debate today on the premise that there is an absence of a strategic decision mechanism for the electricity supply industry. We on these Benches believe that in a sense there is one with which we should not interfere. On the one hand, it is right and proper that the market should govern prices, the number of identity of suppliers and the sources of fuel. On the other, it appears that Ofgem is doing a good job in regulating prices in the network monopolies of distribution and transmission and in ensuring continuity of supply, which are its essential functions. It is also right that we have abolished the old mechanism whereby there was only one monopoly supplier and uncompetitive prices were a hidden stealth tax imposed by—and I freely admit this—successive governments.

From the investor's point of view, it is equally right that the regulation of the industry should be in totally independent hands, and not subject to the political vacillation of successive governments or of Treasury policy.

The Conservative Party's energy policy was succinctly set out by my honourable friend the Member for Maldon and Chelmsford East, in a debate in another place on 20th June 2002. He indicated that our four key objectives were economic efficiency, security of supply, environmental benefit and relief of fuel poverty. With the exception, to some extent, of economic efficiency, the other essential and worthy objectives cannot be the sole responsibility of the commercial concerns, supplying an essential utility to industry and private consumers at prices that are in effect controlled by the regulator, however lightly.

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The delivery of our electricity supplies, whether in the form of the power stations, the Grid or the power lines in the street leading to our homes, offices and factories, are as much part of our national infrastructure as are the roads, the railways, the water and sewage systems. It is the responsibility of the Government, as well as that of the generating and supply industry, to ensure that the essential framework is there, because of the national policy decisions that are required. My noble friend Lord Jenkin of Roding made that point.

Diversity of supplies is essential. With finite natural resources of our own, we cannot allow ourselves to be dependent on only one type of fuel or one supplier. Our energy is currently produced in approximately equal thirds of gas, nuclear power and coal, with a mere couple of per cent of renewable sources. So what of the future? What percentage of our electricity should come from coal, for example—and, indeed, which coal? There are billions of tonnes lying under the British isles that are mostly uneconomical to extract because it is cheaper to import it from abroad, sometimes even from the other side of the world.

The next four paragraphs of my notes relate to Drax, but my noble friend Lord Jenkin and the noble Lord, Lord Tombs, discussed that so thoroughly that I shall not bore your Lordships by repeating what they said.

What percentage of our electricity should come from gas? Our current North Sea reserves are estimated to last for about 11 years at the year 2000 rate of consumption. It is believed, although "hoped" might be a better word, that there are further as yet undiscovered reserves. However, by 2005 we shall certainly have to start importing some gas. At some time in the future, our own gas will run out, and we will then be entirely dependent on overseas sources of supply. To that extent, we could be in the hands of far from stable suppliers. We shall also have to compete with the many other gas users for the available supplies. As was pointed out during "Utility Week", on 2nd November 2001, the United Kingdom will no longer be self-sufficient in oil and gas later this decade.

The use of coal and gas as fuel for generating electricity results in the production of acid rain, sulphur and nitrogen, contributes to global warming and is directly contrary to the Government's environmental targets.

Then there is nuclear power. I have heard many noble Lords say that this is a cleaner source, without quite as many unhealthy emissions. However, the nuclear industry has its own costing problems, not merely because of the necessity of operational safety factors but because of the decommissioning costs. The nuclear industry has to factor those in, whereas the gas, coal and oil industries do not have to internalise the cost of dealing with the pollution that they cause.

Since 1995, both Conservative and Labour governments have said that building nuclear power stations must be a commercial decision, but it can be done only if there is a governmental willingness that it

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should happen, including ensuring that planning consent is given after due public inquiry. The commercial decision then would be for the industry to decide whether to take up the opportunity offered by the Government's policy. Even when the commercial decision is made, it must be borne in mind, as the noble Lord, Lord Ezra, said, that, what with one thing and another, it takes a long time from deciding to build a nuclear power station and bringing it into commission. One way or t'other, some decisions need to be taken now, or certainly very soon.

The Conservative Party's policy on nuclear power was stated by my honourable friend the Member for South Suffolk, in another place on 22nd October 2002. He said that a future Conservative Government,


    "would not take a decision to replace nuclear with nuclear; nor would they rule out new nuclear-generated electricity if, with the legacy costs provided for and the associated risk accounted for, it proved to be the most economic way of continuing to meet the global requirement of addressing climate change".—[Official Report, Commons, 22/10/02; col. 223.]

I think that that means that the Conservative Party would take the decision—I do not think that the word "not" was originally there. It must have been typed in by my secretary. Many noble Lords asked about that. Will the Minister answer the question of my noble friend Lord Jenkin as to why the nuclear industry still has to pay the climate change levy? Everyone is interested in that. I remember asking that question myself, and the Minister said that it was cost neutral, but it is worth asking again.

Finally, I come to the policy on renewable energy sources. As the Trade and Industry Select Committee pointed out almost a year ago, successive governments have claimed to support the development of renewable energy sources for more than 25 years. However, those sources have their own difficulties. Wind farms on land are deemed by their neighbours to be too noisy and by neighbours and environmentalists to be unsightly, while seafarers regard offshore sites as a hazard to shipping and an impediment to what remains of the fishing industry. The noble Lord, Lord Ezra, pointed that out, and my noble friend Lady Wilcox is saying it from a sedentary position. Either way, the amount of electricity produced would be too small, too intermittent and too costly.

As to tidal power, despite the large sums poured into research—that was not intended as a pun—the engineering problems have proved so far to be insurmountable. Unless global warming results in some future climate change in the United Kingdom, solar power is also totally out of the question in this country. My noble friend Lord Jenkin and the noble Lord, Lord Ezra, have discussed combined heat and power, and I shall not go into it again. Nuclear fusion—the creation of energy by fusion of hydrogen atoms—is well into the distance.

We believe that the electricity industry will work best if governed by the market. As to the sources of supply of the raw materials for generating electricity and distributing power to consumers, and inevitably the amount that is charged for it, we support the regulator and his work. But the industry cannot

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operate on its own, utterly divorced from input from the Government. It most certainly cannot operate in a strategic environment that changes as often as the weather. At one time there was a so-called "dash for gas", and then, in an attempt to prop up the indigenous coal industry, new gas-fired power stations were barred. At one time, nuclear power stations were seen as the future of total power self-sufficiency. However, perhaps because some Labour politicians opposed them root and branch until the realities of office sunk in, they gave them only a grudging nod of approval. As I have said already, renewable energy sources have been sought by successive governments, but none of them has been prepared to put in the funding and to say that, if and when it proves practical, those development costs will be written off so that the power can be generated economically.

I remind the House very briefly of the report of the European Union Committee of this House dated 14th February 2002. It said:


    "We see no fundamental conflict between liberalisation and energy security. Indeed in our view, liberalisation can help promote security by promoting more flexible and diverse markets".

Ofgem's statement of its corporate strategy for 2003 to 2006 includes,


    "monitoring the wholesale electricity market as it develops so that electricity supplies remain secure and the market continues to be competitive".

We endorse that and its other objectives.

What is required is for the Government to lay down the framework, and then minimise their day-to-day involvement by leaving it to Ofgem—the regulator—to ensure the continuance of those flexible and diverse markets not for the short term, which can take care of itself, but for the medium and long term. That must be a realistic market that allows the industry to develop and operate for the benefit of its customers, determines what fuel sources are to be used, in what proportions and from what sources, and determines to what extent the Government accept the responsibility of ensuring that the infrastructure—especially that part affecting the environment—is in place.

In common with other Members of your Lordships' House and, I have no doubt, the entire power industry, I hope that the Government will take the opportunity afforded by the debate to tell us exactly what their commitment to the objectives is and how and when they intend to bring them about.

4.53 p.m.

The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville): My Lords, I thank the noble Lord, Lord Tombs, for his speech and others for their contributions and insights. I am very conscious of the fact that they are based on knowledge of the energy and electricity industry at the highest levels.

I begin by recognising the considerable achievements of the electricity industry both while it was in the public sector and in the private sector. The nationalised industry, particularly in the post-war

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years, had huge achievements, not least in bringing electricity to virtually everyone in our country. Before privatisation, the main investment decisions were taken at the centre by the government and the Electricity Council and its associated boards. While that approach had strengths, it also lent itself to investment decisions which were supply rather than demand-driven, and to decisions being made on a political rather than on a market basis.

I was surprised that the noble Lord saw nothing wrong in the performance of the nationalised industry. In a sense, I was disappointed by his speech, because he did not really deal with the question that I thought he would raise; that is, that of strategic decision-making or what the noble Lord, Lord Jenkin, called a co-ordinated policy framework, which we should have. He seemed to hark back to an overall large corporate approach that market forces played no part in. That was also the approach of the noble Lord, Lord Ezra, who said that we should somehow go back to planning our energy policy on a national basis rather than seeing a role for both market forces and a co-ordinated policy framework.


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