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The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville): My Lords, I thank the noble Baroness for initiating this debate and those noble Lords who have spoken. Debates in this House on energy matters are always of the highest quality, and this has been no exception. I congratulate the noble Lord, Lord Goodlad, on his most excellent maiden speech, although I would not have expected anything less from a former Under-Secretary of State for the Department of Energy, an outstanding High Commissioner to Australia and a graduate of King's College Cambridge. I also congratulate the noble Lord, Lord O'Neill of Clackmannan, on his powerful and wide-ranging speech. In both cases we look forward to many more brilliant speeches in the future.
In the energy White Paper, published in 2003, the Government confirmed their strategic policy objectives for energy, including the maintenance of reliable energy supplies. The White Paper also re-affirmed the Government's belief that their role is to set the framework within which the market can operate. It is not to intervene in the market, except in extreme circumstances, or to dictate to the market, or to individual companies, the right way to operate.
The Government, the DTI and Ofgem establish a regulatory and commercial environment conducive to major new ventures, and to work with individual projects to identify, and help remove, avoidable non-commercial obstacles. Providing supply to meet demand is a commercial matter. We believe that approach has worked well, particularly in allowing companies to make informed decisions on investment.
As Great Britain moves towards increasing gas imports, we face a need for new gas import and storage infrastructureas well as diversity of sources, supply routes and import pointsand open and fair markets, enabling gas to get efficiently to where it is most needed.
I am pleased to say that three important new facilities to increase the amount of gas available to the UK market will be ready for this winter. The new liquefied natural gas import terminal at the Isle of Grain has already been commissioned; a new gas storage project at Humbly Grove in Hampshire will shortly commission; and a large increase in the import capacity of the interconnector from Belgium is due to commission in Novembera month early. There are several further major projects due in the next winter or so, including further LNG import terminals under development at Milford Haven at Canvey Island, and potentially in north Wales.
In other words, the Government's approach to security of supply is working and we are seeing at least £10 billion of private sector investment going into providing gas to UK markets in the next few years. There has in recent days been a great deal of debate about the number of days of gas storage that we have in this country. The noble Lords, Lord Woolmer and Lord Jenkin, and the noble Baroness, Lady Miller of Hendon, raised that issue. The figures need to be
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interpreted carefully. The number of days of gas storage that a country needs depends on whether it produces gas. Not surprisingly, those countries that have their own gas supplies tend not to have any storage facilities. In the case of the UK, we are moving from a position where swing production in the North Sea enables us to cover for fluctuations in the demand for gas to one where our capacity is much less. At the same time, the decline of North Sea gas has taken place faster than expected and we therefore have less gas storage at this point than we would ideally like to have.
However, it is unnecessarily alarmist to compare our situation with that of countries that have no natural gas supplies. Clearly, those countries have and continue to have much greater gas storage, because they have no capacity to use swing production to cover fluctuations in demand. I must say to the noble Lord, Lord Jenkin, that the speed of introducing new facilities lies entirely with industry; it is not dependent on any decision of government or the framework of government. It is not only in the gas sector that we have seen market participants signing up to long-term investment in energy infrastructure.
My department is currently considering applications for consent for the construction of more than 4 gigawatts generating capacity. That includes a 2,000 megawatt combined cycle gas turbine power station at Pembroke and a 1,220 megawatt CCGT at Drakelow. We have also seen the return to service of Killingholme power station and a further unit at Drakelow, both in time for this winter, in response to price signals indicating a need for additional capacity. As a result, we are going into the winter with a healthy level of electricity generating capacity of just over 20 per cent.
We are also seeing a commitment to a diverse, sustainable and secure energy supply from industry in response to government signals. Since the introduction of the renewables obligation in 2002, there has been a step-change in the amount of new renewable generating capacity. In 2004, 3.1 per cent of electricity supplies came from renewables obligation-eligible sources. That may seem small in absolute terms, but it is nearly double that of 2002, and is enough to supply more than 2 million households. In June this year, the UK passed the 1 gigawatt wind barrier. Although we recognise that wind energy will make the largest contribution towards the Government's 10 per cent target, we expect other low-carbon technologies, such as wave, tidal and solar PV to come to the fore after 2010.
To my noble friend Lord O'Neill, I say that the Government believe that there will be a continuing role for coal in meeting this country's needs for some years to come, provided that its potential environmental impacts can be managed satisfactorily. Coal-fired generation still supplies around a third of the UK's electricity needs, and this can rise to more than 40 per cent during the winter months. In recent years, UK coal producers have supplied about half the
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generators' needs, with a little more than half of that tonnage coming from deep mines and a little less than half from the surface mine sector.
The Government have demonstrated our support for the UK coal industry by making more than £200 million available as coal state aid since 2000. Despite this, the industry has still continued to contract as mines have closed owing to geological problems or exhaustion or because, even if more coal investment aid were available, mine operators could not afford to finance their share of the investment cost.
The noble Lords, Lord Woolmer and Lord Jenkin of Roding, raised the question of EU liberalisation. They are of course right that that is a key issue. Although our markets are working reasonably well, prices on the continent are not fully market-reflective, as so few of the energy markets in the EU are functioning properly. That is why making European energy markets work properly is a key priority for the UK presidency.
Looking to this winter, there are concerns over gas supplies, and the Government are taking those concerns very seriously. There has also been a lot of coverage about forecasts of a cold winter. It is important to be clear what the forecasts are predicting. Reports are not suggesting that there will be a one in 50 winter of the sort last experienced in 196263, but that there is a 65 per cent chance that it will be similar to that of 199596. As I have explained, the gas market is likely to be tighter than in recent winters. Under normal weather conditions, however, there are sufficient gas supplies and electricity generation to meet demand.
Analysis shows that even in the severest winters the market can maintain supplies due to demand switching away from gas, including switching to coal for electricity production, switching to alternative fuels for some other large industrial users, or for choosing to sell gas back to the market if that makes more commercial sense than burning it. For example, under the one in 10 winter scenario suggested as a possibility by the Met Office, 70 per cent of the demand-side response could potentially be met if the electricity generating sector moved to different fuels.
The Secretary of State has also written to key UK gas producers and terminal, operators reinforcing the need for them to do all they can to maximise gas production this winter and to work closely with each other should a supply emergency arise.Also, let us not forget that generators and electricity suppliers have strong financial incentives to meet their customers' needs through the existence of half-hourly energy imbalance prices. Generators that produce less electricity than contracted are "cashed out" by paying the relevant imbalance price on the difference between their physical and contracted generation. Those prices are based on the average balancing costs that the National Grid incurs in balancing the system and can be very high. For example, during the unexpected cold spell of early March 2005, the price that generators paid for being "short" peaked was £223 per megawatt hour. There are huge incentives for the generators to make certain that they can supply the system.
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Under all credible scenarios, however, the energy market will be able to deliver supplies to domestic consumers. That is the short-term situation. Looking forward, we need to ensure that our energy remains secure, affordable and sustainable. The changes that we need to prepare for are: the closure of our existing nuclear power stations as they come to the end of their lives over the next 20 years, the need to reduce our emissions by 2050 to meet the challenge of climate change, and becoming a net importer of gas as supplies in the North Sea decline.
The 2003 energy White Paper set out a policy of "keeping the nuclear option open" so that new build could be considered in depth in the future. In the mean time, we have brought forward skills and research initiatives as part of that policy, including the Cogent Sector Skills Council, licensed in 2004 to take a strategic view and ensure that current and future skills needs are met.
The Government continue to believe that the goals set out in the energy White Paper provide the right framework for our energy policy, but it is only right that we examine our detailed policy initiatives within that framework.
The Prime Minister announced last month that the Government will publish proposals on the future of energy policy next year, and that that will need to consider all options, including emerging technologies from renewables to carbon capture and storage and civil nuclear power. In the context of the importance of tackling climate change and an increasing reliance on imported fossil fuels, civil nuclear power, a source of low-carbon electricity, is clearly an option that we will need to look at with particular care.
The noble Baroness, Lady O'Cathain, offered me the opportunity of gaining the approval of the whole House by agreeing that nuclear is a renewable source of energyit clearly is so. I am very happy to agree that nuclear is a renewable source of energy. However, it has other problems such as safety and environmental impact, as the noble Baroness, Lady Miller of Chilthorne Domer, reminded us. Also, we do not see new nuclear build or any other single technology as a "silver bullet" solution to our future energy needs.
Debates on energy, in my experience, often sound rather like discussions on football clubs: everyone has their favourite energy source, and everyone believes that other people's favourites are complete rubbish. If we consider that, in energy policy, we have a number of different objectives that must be traded off and recognise that there is considerable economic, political and technological uncertainty, we will see that almost any sensible energy policy is based on wide diversity of energy sources. I agree with my noble friend Lord Woolmer of Leeds and the noble Lords, Lord Hannay of Chiswick and Lord Redesdale, about the need for balance. It is a question of how you balance different energy sources as you go forward and as your knowledge of the current situation changes.
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The Prime Minister has also made it clear that there cannot be a new generation of nuclear power stations if we do not deal with the issues relating to cost and acceptability that develop or that lie around the issue of waste and how you tackle it. As we said in the energy White Paper, before any decision is taken to proceed with the building of new nuclear power stations there would need to be the fullest public consultation and the publication of a further White Paper setting out our proposals.
Noble Lords made other important points that I would like to answer. Some noble Lords raised the question of costs. Everyone has their own figures, which usually favour their own technology. One of the tasks of the review will be to produce objective, transparent figures that allow for comparison to be made between different energy sources. I do not agree with the noble Lord, Lord Tombs, that the question of the handling of nuclear waste and a decision to build a new fleet of nuclear stations can be totally separated. If nuclear power is to be accepted by people, they need to know that we have a solution to nuclear waste. I had hoped that we would have learnt the lesson from the past that taking new technologies and pushing them forward without any consideration of the concerns that people have about them is a foolish way to proceed. People have real concerns, and one of those concerns is about what happens with nuclear waste. If we push forward without taking account of those concerns and without a solution for them, we will get into real trouble.
I was pleased to hear the noble Lord, Lord Wakeham, quote the Prime Minister's remark that it was only through science and technology that we would find a solution to climate change. It is foolish to believe that China and India will in any way cut back their growth to solve climate change. Certainly, the USA will not do so, and I doubt very much that any political party will go to the people of this country and suggest to them that they should cut back their standard of living to deal with climate change. That means that science and technology must provide the solution with regard to new sources of energy.
My noble friend Lord Tomlinson raised the question of the timing of the energy review. I am afraid that I cannot give any better indication of when the new proposals on energy will come out, but the terms of reference and method of operation of the study are being worked on and will be announced shortly.
Several noble Lords were concerned about the UK's future dependence on imports, especially those from politically unstable countries. Becoming a net importer of gas is not itself a threat to security. All other G7 economies, apart from Canada, have been net importers for years, and imports of gas have proved reliable historically. Major suppliers, such as Norway, could not by any stretch of the imagination be described as "unsafe". Here again, one should point to the inevitable economic, political and technological uncertainty. We must have balance against other energy sources that will give us more security.
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The noble Lord, Lord Crickhowell, raised the important and difficult question of the safety of LNG port facilities. I am not familiar with the issues involved, and I shall write to the noble Lord as soon as I have the answer.
The noble Baroness, Lady Byford, referred to Sir Ben Gill's report and the Government's response. The report inevitably covers the activities of Defra and the DTI. The departments will work together on considering the recommendations and taking them forward.
The noble Lord, Lord Skelmersdale, spoke about the report of the Institution of Civil Engineers. I am an honorary fellow of the Institution of Civil Engineers, so I asked about the report. Let me say again what I hope I have said before. When I was faced with a question from this House on whether it was likely that we would reach the 10 per cent target, I did what I thought anyone in those circumstances would do. I got hold of the figures, looked at all the projects in the pipeline and looked at the probabilities and timing of each of those projects to see whether it was realistic to think that we could get to the 10 per cent target. To my surprise it looked possible.
When the Institution of Civil Engineers said, "It is absolutely impossible", clearly one asked: "Do you think that the figures we have, the probabilities, are all wrong, because this is a matter of judgment about probabilities, timings, and so on?". It said, frankly and clearly, that it was not based on any detailed calculations. That was simply the consensus of its members. My point is that, in those circumstances, I like to rely on the figures and my judgment of them, rather than simply a consensus view which is not evidence-based.
I was delighted to hear the noble Earl, Lord Liverpool, raise the issue of fusion. Not many people take a great interest in that subject. I must admit that that is some way off. We have just agreed the site of the world project at Cadarache. If, in parallel to that, we do the IFNIF project, which is about materials, the best calculation would be that we might in 35 years' time have commercial electricity. In spite of that time difference, it is a sensible thing to do. If it came off, it would transform the world's ability to produce energy without producing waste. It is still some way off, but it is a very important project.
My noble friend Lord Haworth raised the key and simple argument which the energy review will have to consider. Simply, if we run down nuclear power stations, by 2020 we take out 20 per cent of our clean energy sources. If you are very optimisticyou would have to be very optimisticyou might get renewables to 20 per cent. But that would simply mean that we have gone 20 years without making any impact on our emissions. If you care about climate change, you have to ask yourself whether that is an acceptable situation or whether you should bring in nuclear, which, again, depends on judgments about the safety and cost of doing so.
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The noble Lord, Lord Jenkin, raised transmission system upgrades. The Government are very aware that the timely completion of upgrades to electricity infrastructure is crucial in achieving the 2010 target. We therefore welcome the £560 million of investment approved by Ofgem last December. The DTI, Ofgem and transmission operators are working together via the Transmission Issues Working Group to facilitate the timely delivery of the necessary upgrades. My noble friend Lord Berkeley, the noble Lord, Lord Redesdale, and the noble Baroness, Lady Miller of Hendon, rightly raised energy efficiency. The energy White Paper placed energy efficiency at the heart of the Government's long-term energy strategy, identifying it as the cheapest, cleanest and safest way of addressing all our energy objectives, including security of supply.
I am sure that noble Lords will welcome the news that we have made good progress so far. For example, around 10 million households, six million of which are on low incomes, have benefited from energy-saving measures over the past three-year phase of the energy efficiency commitment. We expect even greater progress to be made in the current phase of the commitment, which will see activity increased to a level that is broadly twice that of the first phase. A number of other important issues were raised by noble Lords, and I will write to them.
I said at the start of this debate that the Government believe that they should set a clear, consistent framework for industry, with incentives for it to deliver on the Government's public policy objectives. We also understand that in an uncertain economic and technological world, a diversity of energy sources is essential. The House can be assured that the Government will continue to deliver a clear, consistent framework, which will enable industry to meet the UK's demand for energy and achieve the Government's environmental, energy security and low-cost objectives.
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