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Baroness Miller of Hendon moved Amendment No. 113C:
- Page 86, line 34, at end insert—
The noble Baroness said: The amendment would ensure that future electricity demands will be met by establishing criteria for future generating plant capacity margins and placing the responsibility for meeting the desired margins with the regulator, Ofgem. It is plain that at present the regulator relies on short-term measures to regulate competition but fails to provide a favourable climate to stimulate medium-term investment in order to maintain satisfactory plant margins for the future.
Short-term tariff signals do not create confidence to invest for the future, especially when the investment climate for renewables is made so immediately attractive by generous subsidies. There is an inherent conflict in professing to rely on a free market to solve all the industry's problems while distorting competition for capital investment by providing subsidised purchase arrangements for the output of intermittent, renewable generation.
Adding to the deficiency of short-term tariff signals is the absence of any security in the plant capacity forecasts of individual generating companies. The declared commissioning dates for new plant are only indicative, carrying no obligation to implement on any time-scale, and there are many examples of abrupt postponement. There is no obligation on companies to give more than six months' notice of withdrawal of ageing plant from service. How, in those conditions, can any sensible view be taken of future generating plant margins?
We are losing the undoubted benefits of genuine competition by an amalgam of short-term regulation and the desire of government to impose measures incompatible with a free market. The Government have a responsibility to ensure that future supplies of electricity will be secure. It is important that the Government openly acknowledge and accept that responsibility. The amendment would make the targets explicit, and would place on the regulator, under the supervision of the Secretary of State, a duty to ensure that the targets are adequate and can be met.
Let me anticipate what I suspect will be the Minister's response by acknowledging that target plant margins must take account of a wide range of uncertainties. That simply makes it all the more
The importance to the nation of a reliable electricity supply requires no explanation on my part. I ask the Minister to accept the amendment, and, in so doing, to acknowledge that laissez-faire will simply not satisfy the country's needs and the Government's responsibilities. I beg to move.
Lord Tombs: I support the amendment moved by the noble Baroness, Lady Miller. It is high time that a sense of purpose was brought into what seems an area of considerable chaos. Noble Lords will know that I have raised the topic several times in the House—in the debate of 7 January, on 8 January in the preceding year, and in a Starred Question a fortnight ago.
Ofgem does not currently regard plant margins as important for the future. I quote as the authority for that the evidence given by Ofgem at a public hearing by the Select Committee on Science and Technology, which is looking at the practicability of renewable energy. It has no interest in future plant margins, as it thinks that the free market will sort them out. The timescale between investment in new plant and signals and tariffs is wide and not easily bridged. Some planning must be carried out.
At present, the only published figures on plant margin are those published by National Grid Transco, to which Ofgem pays very little attention, as it says. As I have pointed out, those figures are highly unreliable. A fortnight ago I asked for the firm capacity programmed to be installed in the years 2004, 2005 and 2006. I chose those years because they lie within the construction and installation period—manufacturing and building—and should therefore be fairly reliable. However, to my considerable surprise, the figures that the noble Lord, Lord Davies, gave me were 36 per cent lower than those published in the seven-year statement eight months earlier. That is a damning indictment of the way in which future capacity is being provided.
I strongly support the amendment. There is a duty to establish future plant margins. It is the only means known to the electricity industry of securing future supplies. Some certainty or deliberateness, at least, must enter the present chaotic situation.
Lord Ezra: The security of future electricity supplies is one of the most important elements of energy policy that we face. The noble Lord, Lord Tombs, has reminded us of the important debates that he has initiated and the Questions that he asked, in which a number of Members of the Committee have participated. We are very concerned about the future. We are uncertain about how future electricity demands will be met, in view of the fact that we will become increasingly dependent on gas imports as the present operators of coal plant and nuclear plant will be run down, and the Government have no policy for their replacement. Although renewables will make a contribution, it certainly will not be big enough to
Lord Davies of Oldham: I am grateful to noble Lords for reflecting the fact that we have had these discussions in the Chamber under various guises—during debates and at Question Time. I am concerned about the representations that have been made in support of the amendment, because, as noble Lords will recognise, we regard it as being directly contrary to government policy in the area. Therefore, we do not propose to accept it.
The amendment would impose on electricity generators a duty to maintain a reserve of generating capacity defined by the National Grid. But that scarcely reflects the nature, make-up and operation of the electricity market post-privatisation. As the noble Baroness knows, the National Grid has responsibility for balancing the supply of and demand for electricity on the high-voltage transmission network in England and Wales. But neither the National Grid nor the Government decide the level of the plant margin—that is, the surplus of total generating capacity over peak electricity demands—which is currently around 21.6 per cent.
I recognise that noble Lords have the right, and indeed the duty, to express concerns if they think that margins are too low. But it is sometimes difficult when different figures for the margin are quoted. The Government have been consistent in regard to the figures. When the figure was below 20 per cent we said that, given that it was below that figure, clear signals were being sent out to the market that there might be demand for additional electricity. The figures increased from the lowest level of 15.9 per cent to 21.6 per cent in a matter of months.
That is a reflection of the market working as we expect it to do. It also reflects the market that was the policy aim and the achievement of the party opposite when it was in power. I find it strange that Conservatives should now say, "We recognise the enormous defects of what we have created, and we are so panic-stricken about that situation, that it is now necessary to have an absolutely strategic change". I do not believe that that is so. I do not believe that the experience of this winter or of preceding years has proved that to be necessary. I do not think that I am being unfair to the Opposition; I am always accused of being excessively fair. Although I concede that sometimes it may be a useful rod with which to lacerate Ministers' backs, by suggesting that everything is going wrong, and the lights are going out the day after tomorrow, the experience of the past few years, including this winter, has not proved that to be so. A potential—I put it in broad terms—demand was identified for increased electricity consumption, to which the market appears to have responded with proper alacrity and entirely responsibly.
I hear what the noble Lord, Lord Tombs, says about the "duff" report of the seven–year statement—I remember his phrase so graphically—and he reiterated that point today. I am genuinely concerned if he contends that the figures expressed are not in his terms sufficiently accurate or effective to present the position. But 21.6 per cent has been the broad figure that we have debated generally over the past few months. The sole exception was the occasion on which the noble Baroness threw me by quoting the figure of 5 per cent, which had been given in a reputable magazine. When we studied it afterwards, the figure seemed to apply to a different concept of the margin altogether. Against a background in which I had comfortably operated within the framework of a margin upwards of 16 per cent, the figure of 5 per cent threw me. Those are the facts of the situation. The current margin is 21.6 per cent.
The margin is determined collectively by the electricity market. I do not see how an arbitrary excess capacity guarantees sufficient capacity to meet demand. It is highly unlikely to guarantee electricity supplies at least cost to the economy and to consumers. After all, that was the rationale behind the policy changes introduced by the previous administration.
The National Grid company has a licence condition to publish its seven-year statement. I reiterate that others outside the House, including those responsible for the seven-year statement, will listen very carefully to the criticisms by the noble Lord, Lord Tombs. It is its job to present the position as accurately as possible, and it is in its interests to do so. On the basis of what it says, it indicates to the market the opportunities for further generation. But the statement is not a plan; it does not contain a specific target, and it was never intended that it should. It provides a range of scenarios reflecting the fact that there are always great unknowns in such a market.
We all know that the greatest single variable is economic growth and the rate of energy consumption. The Chancellor gets economic growth wrong. In all his modesty, he frequently underestimates economic growth and then has to come to the House of Commons and say, "Unfortunately, I got it wrong; we are actually doing better than I had predicted". We all recognise that those are built-in factors in any statement that seeks to outline the future.
Generators and suppliers are incentivised by facing large costs to contract between each other to ensure that there is balance between supply and demand. Rather than having a set wholesale price, the market system allows for companies to contract over various timeframes. This is an efficient system and it allows them to react to changes in demand, and, I maintain, it also produces an efficient plant margin. The current system also means that, should changes be needed to the way it operates, they can be suggested and very quickly implemented by the participants, through changes in the industry codes. Surely, this is the flexibility that we all need and of which we have taken advantage during the course of this past winter. It shows that strategies can be adapted as needed.
Last year the grid signalled to the electricity market that it needed a bigger safety cushion of generation to help it to manage exceptional circumstances this winter. The market responded by bringing back into play mothballed capacities. I contend that this is evidence of the system working well. That is not to say that under any circumstances with regard to these issues the Government should appear complacent. I do not want to sound complacent about this position. I want to identify as accurately as I can whether we have structures in place that are effective in meeting potential demand. As I, and my noble friend Lord Sainsbury, have indicated in replies to questions that have been addressed in the House, the Government—the department—continues to work with Ofgem, through the joint energy security of supply working group, to monitor developments. We do not stand idly by and hope that things are going well. We monitor because we recognise that signals need to be sent out in time for there to be a response.
I say to the Committee that I hear the anxieties. I am particularly concerned about the quality of information, which needs to be addressed. However, in broad terms, this is a structure that has worked well for the economy and the consumer over recent years and, despite the anxieties articulated, I maintain that this is the structure that will work well in the future. On that basis, I ask for the amendment to be withdrawn.
Earl Attlee: The Minister is always helpful and interesting. He said that the market can signal for existing plants to be brought on-line, but how does it signal the need for new plant to be built?
"( ) The Secretary of State shall ensure that seven-year forecasts of plant margin shall be published together with the target plant margin for each year. He shall require Ofgem to demonstrate to his satisfaction that the terms of generation licences and the wholesale tariff structure will ensure that the targets will be met."
5.30 p.m.
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