My Lords, I thank my noble friends for enabling me to lay out further a response to the amendment of my noble friend Lord Teverson, which aims to make energy efficiency a general consideration when carrying out key functions of electricity market reform. I also welcome the cross-party support expressed in this House for electricity demand reduction measures and energy efficiency generally.
While I support the sentiment behind the amendment, we consider energy efficiency to be more than just about the efficient use of electricity, on which the amendment appears to focus. Therefore, the danger of this amendment is that, in focusing on efficiency of electricity use, it risks diverting attention from the wider importance of energy efficiency, on which we are already committed to progressing. When exercising capacity market functions, proposed new paragraph (f) would require the Secretary of State to give priority to demand side management and demand reduction measures over increased electricity generating capacity wherever this was economically appropriate.
The capacity market is being designed to allow demand side response and permanent electricity demand reduction measures to participate in the capacity market. This is a proven way of delivering electricity demand reduction and is already working successfully in the United States. The auction process is a fundamental pillar of the capacity market and all resources that can contribute to security of supply. Demand side response, permanent demand reduction and generation, are able to compete against each other for support in the long term. This will ensure that demand side measures that deliver the same level of security of supply benefits as generation at a lower cost will always be rewarded at the expense of generation. Accordingly, I hope that my noble friend will see that proposed new paragraph (f) will not add to the practical effort of what is already envisaged for the capacity market.
Proposed new paragraph (g) of Amendment 51N would require the Government to measure the energy intensity of the UK economy per unit of GDP and to improve this progressively. Again, while I recognise the intention behind this amendment, it would duplicate the existing domestic and European policies, to which my noble friend referred, in the recently adopted EU energy efficiency directive, which is aimed at driving improvements in energy efficiency across the EU and contains, among other measures, two key targets for member states, to which my noble friend also referred.
The first is a non-binding national energy efficiency target for 2020, which is equivalent to reducing primary energy consumption by 20% by 2020. The second is a binding target to save 1.5% of additional energy per year, to be achieved between 2014 and 2020, through the deployment of an energy supplier obligation and/or equivalent policy measures.
The UK recently submitted its target to the European Commission under Article 3 of the directive. Under the target, the UK is projected to reduce final energy intensity by 26% between 2007 and 2020, maintaining our position as one of the least energy-intensive economies in Europe. In terms of domestic action, this Government have shown their commitment to supporting every opportunity for energy-efficiency measures. The policies that we have put in place, such as the Green Deal, will help households and businesses reduce demand by installing energy-efficiency improvements, with some or all of the cost paid for from the savings on their energy bills. In addition, the energy efficiency strategy sets out our plans for realising the significant untapped potential that remains in this key sector. Between the measures that we have put in place domestically and the new targets established through the directive, there is already considerable momentum that is contributing to making the UK economy more energy efficient.
Amendment 55ZA in the name of my noble friend Lord Roper, which aims to make an electricity demand reduction pilot compulsory, raises an issue that has come up a number of times at Second Reading: namely, that multiple pilots are necessary in order to test a variety of approaches. While I support my noble friend’s aim of ensuring that we test variations of the key elements associated with demand reduction projects, the Secretary of State already has the ability to design and run a pilot, or pilots, to test different approaches.
Clause 37 is simply a spending power to authorise the spending of money for such a purpose. I appreciate the concern that this amendment demonstrates about ensuring that sufficient funds are available for a demand reduction pilot. However, since it depends on the arrangements for the capacity agreements made in Clauses 22 and 24, funding the pilot in this way would have to wait until the affirmative regulations implementing the capacity market are in place. We considered this option but discounted it because the process would delay considerably the start of a pilot, and, as I have said, the Government are committed to taking forward a pilot with funds that are already available to it.
Before I ask my noble friend to withdraw his amendment, I will refer back to a few points raised during the debate. First, the noble Lord, Lord Cameron, referred to smart meters. I agree with him that increasing developments in new technologies—and the smart meter is one example—will ensure that consumers will have more control over how energy is being used. It is one of a number of measures that we are taking. He also asked why we are not getting on with a pilot. At the moment, there are a number of uncertainties. We are working out how a pilot would lead to a better understanding of the potential benefits of a financial incentive and of the market appetite for such an approach. We are considering detailed elements of how the design of that pilot, its monitoring and its
location would work. The noble Lord also mentioned that Germany has 33% of its grid powered by solar. I respond to that by saying that Germany also has much higher energy costs than the UK, of both gas and electricity. We are delivering a low-carbon energy mix, at least cost to the consumer: this is at the heart of what we are trying to achieve through the Bill.
My noble friend Lord Roper asked why DSR and EDR were not in the draft delivery plan. Proposals on demand-side response were detailed in the capacity market framework publication of 27 June. On electricity demand, we are committed to a piloting approach, as I have said already. This commitment—to the pilot—was included on page 15 of the draft delivery plan.
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I was glad that the noble Lord, Lord O’Neill, made his comments, because it allows me to remind him and the Committee that three years ago we inherited—if the noble Lord cares to remember—some of the most dire economic circumstances in the history of peacetime Britain. I also remind him that he did not leave much money when his party left government, and we are now having to work back from a legacy of underinvestment. I know the noble Lord will feel reassured to be reminded of that.
My noble friend Lord Dixon-Smith asked whether reducing electricity demand was unrealistic, and whether we should have a longer-term decarbonisation objective. I recognise my noble friend’s point, but reducing demand through efficiency is still a very valuable contribution, and it offers us a cheaper route for consumers.
The noble Lord, Lord Grantchester, asked about availability of funding for the EDR pilot. The spending review settlement announced on 26 June this year confirmed that the Government would allocate £75 million of capital for investment in innovative energy projects aimed at lowering the cost of deployment and technology —areas such as offshore renewable heat, carbon capture and storage—and at pilots to test approaches to permanently reducing demand for electricity.
I hope that my noble friends Lord Teverson and Lord Roper have found my explanations reassuring, and that on that basis my noble friend Lord Teverson will withdraw his amendment.