My Lords, in speaking to Amendment 52B, I shall speak also to the other amendments in this group. They deal with the distribution network operators, which very little of the rest of the Bill explicitly does. In a formal sense, the distribution network operators look very similar to the structure both pre- and post-privatisation but, in a real sense, they have been through exactly the process referred to by the noble Lord, Lord Jenkin, and my noble friend Lord O’Neill. Formally speaking, there are about 13 companies which actually are limited to six, most of which are part of vertically integrated monoliths. I am not sure whether in this context competition is operating effectively. It is also true that DNOs are the part of the structure which has the most direct link with business consumers and household consumers. They are a key part of Ofgem’s universe in terms of its price regulation and have a vital role in delivering what most consumers would regard as security of supply—that their own lights do not go out. They are also an important part of making the whole electricity market system more efficient.
However, DNOs largely are a passive part of the system. They are a conduit for electricity rather than a lever for policy and innovation, and simply pass electricity from, say, the national grid to the ultimate user. Therefore, to a large extent they are a regional monopoly in each case but not entirely. They have hardly been mentioned in this debate and are hardly explicitly referred to in the Bill or in our discussions in Committee. The role of DNOs in the policy objectives, which the reform is intended to deliver, and the other outputs we have sought to achieve in this debate, is vital. They will be vital in terms of moving to smart grids, and in what we have just discussed in relation to electricity demand reduction and in demand response mechanisms. They also are vital in relating the whole of the system to an increased use of decentralised energy, decentralised generation, district heating and other forms of embedded energy. They therefore need to be seen as a key aspect of the capacity system and of the delivery of energy to consumers. Reducing demand and increasing the efficiency of the total distribution system plays its part in the inefficiency referred to by the noble Lord, Lord Teverson. Yet that dimension hardly features here.
In a different part of the jungle, things are going on. Ofgem is conducting a price-related review of the DNO structure. It requires strategic business plans in the context of RIIO, which a year or so ago Ofgem was always using as the term for the brave new world. It uses a slightly different system now but it is part of that approach from Ofgem. In March this year it issued a strategy document for the DNOs—which, incidentally, I think I am right in saying implied a serious move away from the kind of RPI minus X approach, which the noble Lord, Lord Jenkin, was extolling just now—and that process has been going on. Only at the beginning of this month, on 1 July, did it issue a consultation paper about the strategic business plans that were required under that previous strategy. Incidentally, that strategy extends the period of the review from five to eight years and is therefore dealing with the period from 2015 to 2023. In terms of what the Government and the industry are intending to deliver and the changes that we are intending to require, that period is absolutely vital. The consultation was six pages long but it cross-referred to the individual strategic business plans of each of the companies, some of which amounted to 400 or 500 pages, if not more. However, the deadline for the response to that was 2 August—that is, the paper was issued a fortnight ago and a reply is required by tomorrow fortnight.
Meanwhile, we are dealing with the broader aspects of capacity mechanisms and the whole of electricity market reform. Presumably Ofgem, after the close of that consultation, will finalise its view of the DNO structure for a period of eight years. Although all the DNO companies seem to have produced strategic plans, it is somewhat difficult to see how they could have done so for that eight-year period without knowing what was coming out of the process that we are discussing here today and have discussed over the past few sessions, and indeed what is going to come in the statutory instruments and the follow-through after the Bill has passed into legislation.
It is also a bit odd that we should move to an eight-year period when other aspects of electricity market reform may well have different time periods attached to them. The only conclusion from that would be that the department and Ofgem do not expect everything in the Bill, as well as all the intentions and strategies laid out under the Bill, to have much impact on the way that the DNO sector operates. That cannot be right and it cannot be the Government’s intention. In fact, whole new capacity mechanisms, including those that we have debated in connection with energy demand reduction, must have an impact on the DNOs’ operation. This document on the market reform delivery plan ought to have a dimension which is specifically related to the DNOs, but I cannot see it in there—it is 70-odd pages of big print and I did try to flick through it last night. However, it must have serious implications for the DNOs.
I tried to look at one of these business plans. My own company, Western Power Distribution, supplies consumers in the south-west and has a good level of consumer performance, although it has since merged with some other companies. It has produced a plan totalling 704 pages which sets out everything about its investment, its expenditure, its price approach, its customer services—some of it is quite good, although some of it is a bit unambitious; its carbon saving, for example, is only 5% over those eight years, which is slightly less than we are expecting of the system as a whole—its approach to leakages and other environmental considerations, and its social obligations, including a worthy reference to fuel poverty. However, what it does not do is to say anything about its place in the restructuring of the electricity market as a whole. That I find very odd. There is nothing, for example, on the demand reduction side; there is nothing about the effect of smart users at the user end; and there is nothing about the move to smarter grids at the other end.
On present progress, quite apart from the process started by this consultation on the electricity market reform delivery plan, after 2 August Ofgem will presumably be endorsing those business plans or otherwise within the context in which they were set and without fully taking into account what is happening in the rest of the Bill and the rest of the Government’s intentions. So the times are out of joint and these amendments are a modest attempt to try to put them back into a degree of conjunction.
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Amendment 52B places a requirement on the Secretary of State to ensure that the DNOs’ future plans, which must include those that are already been scrutinised by Ofgem, reflect the new post-EMR landscape, meaning that the plans that Ofgem is looking at now would need to be altered to reflect that. Amendment 55ZZC simply requires the Secretary of State to take into account the role of the DNOs when designing demand reduction and demand response packages.
These are quite modest amendments but they seek to remind the Government, the companies and Ofgem that the DNO sector must be part of this whole reform and that the wider electricity market reform must take
account of what the DNOs are doing, including their ambitions for carbon reduction, energy efficiency, energy demand reduction and energy security. This is a gentle nudge in that direction but the Government’s overall approach is seriously out of kilter. I beg to move.