My Lords, like the noble Lord, Lord Deben, when I read this I thought that it was a very elegantly phrased and simple set of provisions that are very easy to understand and could go a long way to sorting things out. Having thought about it a bit more, I am still quite attracted to it, but that is not to say that it is necessarily the only way in which the problem could be solved—or, indeed, the right way. What we really want is an acknowledgement from the Government that, rather than thinking about the past—
sadly I do not have the benefit of those many years of pre-privatisation—we should really be thinking about the future and acknowledging that the Bill signifies a massive change of direction. As a result of that, it is appropriate that we think again about our competitiveness regime. It will come as no surprise that, from our side, we believe that we need a new regulator to do that—one with real teeth and independence, and one which is not scared to hear from the incumbent, saying, “You don’t like that? We’ll change it for you”. That is the modus operandi of Ofgem, I am sad to say. There are many ways in which we can address the issue.
In answer to the question from the noble Lord, Lord Oxburgh, about how much competition is competition, six companies might be appropriate if it were not for the fact that the vertical integration of generation and supply gives them an enormous advantage in this market. That is what needs to be looked at—and that is why the noble Lord, Lord Berkeley, can be congratulated on his precise and laser-like vision in getting to the nub of it. It is possible to force the integrated companies to operate in a less integrated way, but it is what they do with the DNOs, as my noble friend pointed out. Many of the big six are owners of DNOs. But there are regulations and laws that mean that they have to have a very firm Chinese wall between those parts of their industry, which is precisely because they are natural monopolies and will gain enormous advantage by knowing what is going on in the other parts of the business. So there is a precedent for keeping the corporate structure the same but having clear delineations between the different parts of the business.
Why is this more important in future? One reason that has been oft-cited for allowing vertical integration to continue is that it keeps the cost of capital low. If you are a vertically integrated company and you have a supply base of millions of customers, you can borrow against it very easily and get nice low-cost capital. That was true until this Bill, which completely removes the risk of new generation and potentially gives companies a many decades-long contract against which they can borrow. So the old arguments for vertical integration are falling away, and we should now be reconsidering the logic of allowing it to continue. There are many examples where vertical integration can act against the interests of consumers and of more plurality, competition and lower costs in the market. I shall choose just two.
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Noble Lords will have heard me speak of my concern about the existing coal-fired generation on the system. The coal stations that still exist are equally distributed among the big six, and there are a couple of independents. We hope that some form of carbon pricing will force them off the system. It is clear that if the big six—it is the big five in this case because Centrica is immune—opt in to one of those coal-fired stations, internalise the carbon price and pass it on, they will not be disadvantaged relative to their competitors, so they can simply ride rough-shod over that pricing signal and keep those assets open. They will do that because those assets have made them a lot of money and will make them a lot of money. They were built in the 1960s and are simply cash cows now. There is a failure of competition
in the generation market. Such is the vested interest in those existing assets and in sweating them for as long as possible that generators are now acting in an almost monopolistic way and will keep those assets as long as they can and squeeze out as much as they can any competition that would force them off the grid.
My other example is perhaps more relevant to the discussions that we will go on to on the capacity market. We are introducing a massive intervention into this market. The normal rules of competition are being swept aside in the interests of keeping the lights on. I am not saying that that is wrong, and we will discuss it in detail. Let me give the Committee an example of how this could change the way the electricity industry operates. Owners of capacity will receive a payment from supplier. In many cases, that will be the same person. How much you pay will be determined by the proportion of consumer demand that you represent as a supplier at the point of the highest peak. At the point where the system is under stress, you split it according to the percentage of consumers that you represent, and you have to pay for that amount.
If you did not have vertical integration, so that supply companies were just supply companies, there would be a natural incentive to smooth out that peak to bring down your percentage of demand during those periods. That would be a fantastic solution and would help to solve the much pondered-over problem of how you get supply companies to see a financial incentive for reducing demand. It will not happen because we have vertical integration. That price signal, that incentive, that almost brilliant natural market for demand reduction will be counterweighted by the fact that supply companies own the generating capacity too, so why is it in their interest to reduce the capacity when they are getting capacity payments on the other side? That is an illustration of how this Bill fundamentally changes the market conditions in ways that I do not think the Government have thought through. I do not think the industry has probably thought them through; in fact, it cannot because it does not have the details.
I am not exaggerating. This is a huge shift in the way the electricity market works. If we do not do anything, we will lose out on some potential excellent gains in efficiency for the consumer. We must address competitiveness in this market. The time has come to split the vertical integrators, to create a wall between generation and supply and to bring in a new regulator to deliver that. I am very supportive of this amendment. I do not know whether it is the only way, but I am looking forward to the Minister’s response.