My Lords, I am grateful to the Minister for introducing these three statutory instruments. The first was correctly described as a minor and technical amendment to enable the certification of biomass. We are fully supportive of that instrument.
Moving on to the second and third instruments, I have some concerns about the policy that is being introduced to exempt heavy industrial emitters from the costs of the CFD. It is not really fair to describe this as a small amendment when it has quite a wide significance. We have sat in this Room and the Chamber debating the significance of the EMR over many months on the Energy Bill. It is a significant intervention into the markets. It introduces a level of intervention into those markets which will cause rather large sums of money to change hands between suppliers and the recipients of contracts for difference. Now we see that the distribution of that cost burden is being moved far more on to consumers and away from heavy industry, and I have a concern about that.
It was only last week that we sat in this Room and discussed fuel poverty, and the outrage that so many people currently suffer from poorly insulated homes and are unable to pay their bills. The inequality of the economy exacerbates their poverty, meaning that they are classed as fuel poor. Any Government ought now to introduce a test so that any policy change is thoroughly scrutinised for its impact on poorer communities. In fact, I see in the impact assessment that some attempt at acknowledging this is made. It says:
“As low income households typically spend a higher proportion of their income on electricity, lower income households are disproportionately affected by an electricity price increase”.
This move to insulate heavy industry and shift the burden will have an impact, which will grow over time as the potential sums of money being spent under the CFD mechanism grow. I seek reassurance from the Minister about what is to be done to compensate for the impact of this policy by improving the level of intervention we are making on fuel poverty. There ought now to be a rule that anything which puts the burden of decarbonisation disproportionately on to consumers must take into account the impact on fuel poverty. I note that there was obviously a consultation exercise and that papers say that 47 responses were received. How many of those were from consumer groups or those associated with the fuel poor? What did they think of this policy mechanism?
I am of course not blind to the reason behind the proposal, which is to try to ensure that we do not see the flight of industrial manufacturing jobs from this country. That is because of the fact that they are facing increasing costs for a number of reasons, not least the financial crisis raising the cost of capital. It means that there is a potential that we will see more jobs lost in the heavy industrial sectors as we face the pressure of globalisation, coupled with the need to invest in our energy infrastructure. There needs to be a solution but I am not convinced that simply handing out exemptions and compensation payments for evermore is going to give us that answer. The answer has to be in providing incentives for heavy industry to invest in decarbonisation. One of the problems with energy policy, at the UK and EU levels, has been that we have focused so much on the power sector, almost to the
exclusion of the industrial sectors. This has left them in a situation where they face increasing costs, as a result of carbon prices, but have no incentive to invest in decarbonisation. I am sure that those who can will invest in CFDs if they have on-site power generation, but if they do not and are simply receiving electricity or process emissions and have a heat load, few incentives are available to them. There is no equivalent to the RHI that allows them to invest in carbon capture and storage. We have been very slow to realise that carbon capture and storage is a technology needed as much by the industrial sector as the power sector.
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What is the department doing to ensure that we move quickly to provide incentives for industrial players properly to invest in decarbonisation? Otherwise, I fear that we will always be in a game of catch up, where policies are introduced but exemptions have to be made, introducing great levels of complexity, form filling and definitions, which means that energy policy in the UK gets ever more complex and full of red tape. We should really be thinking about how we structurally help industry to invest in the UK in a new industrial revolution based on decarbonised energy systems. That has to involve CCS for industry.
Those are my concerns with that SI. Moving to the capacity mechanism regulations, it will come as no surprise to the Minister that I have concerns about the capacity mechanism, which I have raised on numerous occasions. I am pleased, however, to see that this intervention will allow interconnectors to be eligible to bid in the capacity mechanism. That was raised by noble Lords during the passage of the Energy Bill. A Lords committee report on interconnectors recommended looking at them with a higher degree of interest.
It is lamentable that this has come as an afterthought and as a result of the EU stipulating as one of its state aid qualifications that we must do it. The department was asked to do it a long time ago, but said it was impossible or dragged its heels. Finally, it is being introduced, but rather later than it need have been and only really as a result of the EU making it a condition of state aid. The provision is overdue, but I am pleased to see it there.
There is a general question mark about the capacity mechanism. The more we give away three-year contracts for old coal, as we did in the capacity auction in December 2014, the more we squeeze out cleaner and more enduring solutions. By that I mean interconnectors—and gas investments where they can be profitably brought on stream. If we are to continue to make changes to the capacity mechanism—I was interested to hear the noble Baroness refer to further reforms to it—we need to look again at how it interacts with our low-carbon objectives. It cannot be sensible to be giving old coal money to stay open at the same time as we are charging everyone money to close and replace coal. Something must be built into the capacity mechanism to prevent us locking into high-carbon infrastructure. We need to reconsider the provision of three-year contracts for coal.
There is also a question about small-scale gas generation. The noble Baroness will be aware that in the auction in December, a range of smaller gas-generating
plant qualified for 15-year contracts. Those small gas plants are scaled exactly to avoid any form of carbon price, avoid entry into the ETS and therefore avoid any payment of carbon pricing of their externalities—of pollution. At the moment, the number bidding in totals about a gigawatt, which is not an insignificant amount of capacity. Will we see more of that? Will the next capacity auction see yet more small-scale gas bidding without a carbon price? That is distorting competition. If they are not facing a carbon price but other gas generators are, that is a distortion. Yet again, the capacity mechanism is not dovetailing with the other objectives of the Government’s energy policy. We need to look again at that.
It will also come as no surprise that I think we need to look at whether an energy performance standard needs to be applied to stations qualifying that would help us control their CO2
. That concludes my comments on those three statutory instruments. I look forward to the response from the noble Baroness.