Energy Bill [HL]

My Lords, noble Lords will remember that at Second Reading I raised the whole question of gas storage and its contribution to a greater certainty of supply in the event of something untoward happening. I have tabled this amendment to strengthen the incentive to invest in more gas storage. I took account of what my noble friend said in response to the amendment, but I have now made it my business to gain a better understanding of the considerable complexities of this sector of the energy market. How to ensure security of gas supply has become increasingly important, particularly in the light of the anticipated running down of the UK’s own indigenous supplies from offshore sources. It is for this reason, no doubt, that the industry, successive Governments and the regulator have all rightly been very concerned to make as sure as they can that gas consumers will be assured of a continuous supply. Since Second Reading, Ofgem has published—on 11 January—a consultation paper headed Gas Security of Supply Significant Code Review. I will come back to that. However, several other important reports were published in earlier years. In May 2007 a long report was published by the consultant Oxera, headed An Assessment of the Potential Measures to Improve Gas Security of Supply. Three years later the previous Government commissioned a report, this time by the consultant Pöyry, headed GB Gas Security of Supply and Options for Improvement. In April the previous Government published a policy statement headed Gas Security of Supply. Last November there was a joint DECC and Ofgem report, Statutory Security of Supply Report. Noble Lords will be relieved to know that I do not intend to quote more than a tiny portion of those reports. It would have been quite an effort even to bring them to the Moses Room. The reports, which I hope I am summarising accurately, come down to this: although the risk of what one might describe as a ““black swan”” event—one of low probability but high impact—hitting the supply of gas to the UK market is very low, it is acknowledged by all that it is not impossible. It could be a combination of adverse events, such as pipeline accidents, import interruption or the withholding of supplies by overseas suppliers. The previous Government’s provisional conclusion, therefore, was that some additional measures are needed to deal with that remote possibility. The various reports examined and evaluated several options in great detail. The DECC policy statement of last April concentrated on five options. I will read the relevant two paragraphs from that April 2010 report to the Committee. On page 7, paragraph E.30 of the executive summary says, under the heading ““Enhanced financial incentives to balance demand and supply””: "““The Government supports Ofgem’s work with industry to examine the case for greater use of market prices with enhanced incentives in the balancing regime””—" one needs to hang on to those words— "““in particular by … unfreezing cash-out prices in an emergency; and … further finessing the cash-out regime in market conditions (outside an emergency)””." The next paragraph, under the heading ““Supplier obligations””, says: "““The Government is considering the case for strengthening shipper/supplier obligations, such as through Public Service Obligations””," or PSOs, as they are widely known in the business. Those are the two preferred options that have been considered. The earlier reports considered a number of other options. One is often described as sharpening the balancing mechanism—the balance between supply and demand—so that the effect would be more immediate. This would be done by modifying what is called the uniform network code, which is itself a massive document, running into several volumes of print. I confess at once that I have not studied it in detail. However, I can understand what it is saying. It is about strengthening the market mechanisms by changing the code so as to make it more effective and profitable and, if gas supply is interrupted, more costly to the supplier. The other option is to strengthen the existing public service obligation to require increased storage capacity, which could be done by giving Ofgem the power to amend the suppliers’ licences to require more investment in storage. What sharpening the balancing mechanism means in practice is to increase sharply the cost of the failure to deliver gas. Industrial and commercial customers could have a right to sue the supplier for those costs caused by an interruption, because they would be the ones who would be asked to interrupt their supplies. It is widely accepted that it is inconceivable that one should deliberately cut off the supply to domestic consumers, for all the obvious reasons. It is the industrial and commercial consumers who are asked to turn off their supply. That is the balancing mechanism. It is often not recognised that there is an existing public service obligation for gas. It has existed ever since the privatisation of the industry and constitutes an absolute guarantee of supply for a one in 50 winter, but is a guarantee to domestic consumers only. The obligation was originally placed on the supplier and is now placed on the transporters—the gas grid—and the local distributors. The cost is recovered from the consumer via the grid charges to the suppliers. The obligation is to guarantee three or four days of supply if demand exceeds supplies. Strengthening that existing PSO would be achieved by amending the licence of the suppliers to require them to have more than three or four days’ storage. They might go to 20 or even 30 days of storage. In Germany, the figure is 80 days and in France it is 90 days. I fully concede that the circumstances of those two countries have been very different, because the UK has its own indigenous source of supply. However, increasingly, we now rely on supplies piped from overseas. The argument now for approaching a storage figure more comparable with those of our neighbours seems to be a strong one. One might ask what the essential difference is between the two options. Under the supply mechanism—the one which includes strengthening the balancing mechanism—the remedy for an interruption would be a high cash penalty and the risk of having to pay cash compensation to the industrial and commercial consumers cut off. Under the PSO option, the existence of higher storage capacity would be intended to avoid the risk of interruption at all. This can be illustrated by explaining what the effect would be on a large industrial consumer of gas—for example, a very large baker such as Rank Hovis McDougall. The nub of the case is that RHM requires gas and not cash. If its business is interrupted because of the interruption of gas supplies and it is unable to bake bread for all its customers, including supermarkets that may be all round the country, it will lose its business. No amount of cash compensation for the short-term interruption of supply could possibly compensate. But surely there is also an argument of principle. Is it not better to prevent the failure of supply before the event, rather than to find suppliers and compensate customers after the event? This is the nub of the difference between the two solutions that the Government have been considering. Yet, the Government have come down in favour of strengthening the balancing mechanism via the uniform network code. That is the proposal in the consultation paper of 11 January this year entitled Gas Security of Supply Significant Code Review. Clause 77 allows Ofgem—in the Bill it is always called GEMA, something I get very confused about—to direct a modification of the uniform national code. My Amendment 34A provides an additional power. It is an addition and not an alternative to the strengthening of the balancing mechanism. It strengthens the PSO by giving Ofgem power to amend the licences to provide for an obligation for a higher level of storage. I stress that it is an addition. The amendment does not seek to remove the strengthening of the balancing mechanism, the power in Clause 77(1), but to add a new subsection. I see these two as complementary. My amendment merely empowers—it does not direct—Ofgem to act. One may ask, then, why the amendment is necessary. PSOs may become necessary. If the strengthening of the balancing mechanism is shown not to be enough to ensure gas supplies, then it may be necessary to reinforce them with an enhanced PSO. The amendment would ensure that it is on the statute book. It will be there as a power. I am assured that a great deal of the preparatory work would be done by Ofgem and by the companies, so that they would be ready, if it became necessary, to respond more quickly to a requirement to hold higher levels of storage. If one had to start from scratch, with no existing statute provision, it might take six or seven years before one could have the storage. If all the preparations had been made—as would be expected if this was actually in the Bill—it could be half, or less than half, that time. I think that this is a worthwhile amendment and I hope that my noble friend may be able to smile on it. I beg to move.