My Lords, in this group of amendments we are considering the wider implications of the Government’s energy policy as set out in the Bill. We are again touching on issues to do with investor confidence. The amendments in this group relate to the need to preserve investor confidence in the UK’s energy system and energy infrastructure so that we can continue to see the good work we have seen over the past few decades of reinvestment in modern clean energy systems that will propel us into the remaining years of this century and clean up the energy system in view of our climate change obligations.
During the passage of this Bill and during the passage of the Energy Bill 2013, we had many debates about the right way to incentivise investment in clean
technology. As noble Lords are aware, the current policy is that contracts for difference administered by the Secretary of State are granted to contract owners to enable them to have a stable income. They have the wholesale price topped up to a strike price. That policy was put in place in the Energy Act 2013.
The first part of that Act relates to the setting of a decarbonisation target, which was seen as the clearest signal we could give that we will continue to move towards a cleaner energy system after 2020. The period after 2020 is important because until then we are propelled forward by EU targets, including specifically for renewable energy. In the consideration of energy policy beyond 2020, the European Union was persuaded, partly by Ministers from the UK Government, that it should no longer pursue renewables-only targets, and I supported the Government in that argument. We believed that we still needed to see decarbonisation in the power sector but that it was no longer necessary to state that it must be through a group of technologies classed as renewables and that a wider range of technologies could play a part. That is the situation we find ourselves in.
In the EU 2030 climate and energy package, there is no legally binding renewables target for member states from 2020. That leaves open what guidance there is that would give investors confidence that there will be a market or support for technologies that are not yet able to stand fully on their own two feet in competing in the market. The reason they are not able to stand fully on their own two feet is partly to do with the failure of another EU policy: the EU Emissions Trading Scheme. For many reasons which I will not bore the House with, the EU Emissions Trading Scheme has failings and has not been sending a strong enough carbon price signal to enable low-carbon technologies to compete with the more emitting technologies. So we have a potential signal in the form of the EU Emissions Trading Scheme, but that signal is not sufficient or stable enough to give investors confidence—hence the need for domestic policy and the UK Energy Act 2013 to supplement it.
We need something that supplements the contracts for difference process because it is held by the Secretary of State. One person administers oversight of the contracts that are awarded and the timing of the auctions of those contracts, and the department, in conjunction with the national grid, has to try to arrive at a set of technologies that it thinks will deliver our climate change targets. The problem is that it is very difficult to predict the future. Having spent time as I civil servant, I can say with confidence that it is very hard for the Civil Service to keep pace with all the information out there in the energy market, and that it would be far more sensible if we allowed the market to play more of a role in determining the mix of our energy.
I am a fervent believer in least-cost decarbonisation, and at the moment we run the risk of having a centralised system that is too political. There are too many levers in the hands of the Secretary of State and not enough in the private sector, which ultimately will have to raise the finance and do the projects. The Government are not doing that; they are simply governing the number of auctions they make available.
The amendments in this group attempt to address the problem of insufficient investor confidence in the period 2020 to 2030 in the light of the change in EU policy. Amendment 78S revisits an idea we looked at in Committee. I have retabled it because I believe it is a very important principle, and I hope that the Government are beginning to see its merit and take it seriously. It is that rather than have the administratively burdensome process of contracts for difference and the mechanisms underneath it, we should move to a simpler system where supply companies are responsible for delivering decarbonisation. They interface with customers and provide us with the electricity that keeps our businesses and homes powered, so they should take on the responsibility for selecting projects that will help decarbonise at least cost and do so through a framework in which they are given a target to reduce the carbon intensity of the power that they supply.
I think that this idea might be coming of age. Recently, OVO Energy, a welcome new entrant in the market, has declared itself to be coal free. I think that is probably the first example of a tariff that is structured to demonstrate a commitment to climate change by eliminating coal from the mix. OVO Energy has done that through the use of certificates that it purchases from gas stations. Through the certificates it can show that it is purchasing only gas and therefore keeping coal out of the mix and giving customers a low-cost option for demonstrating their concern about climate change. That announcement is based on the same principle as Amendment 78S, which is that suppliers are able, through their choice of who they purchase from, to drive markets. They can support gas and perhaps disfavour unabated coal through the use of market mechanisms.
I hope that the Government will fully support this, because it is completely in keeping with their principle of having the private sector play more of a role in decarbonisation. Time has gone by. We have all, in a rather amusing way, reflected on how odd it was that the Energy Act 2013 oversaw almost the full renationalisation of energy policy—not quite, but it felt like that at times—under a Conservative Government. I am hoping that as the Government get into their stride in their current role, they will see the merit of shifting to a more market-based system. Then we will be able to avoid the kind of arguments that we have just had to endure over Clause 66, which is symptomatic of the fact that the Government are now in the driving seat and that it is not a really comfortable place to be. I think that the Minister may agree.
I am hoping to hear from the Minister some words of encouragement and reassurance that the idea in Amendment 78S is being considered seriously by the department, because I think it offers a good solution to our dilemma over how to achieve the things we want—reducing our carbon emissions and making sure that the lights stay on. The suppliers could play an important role here.
Amendment 78T relates to the concerns that I expressed in a previous debate, so I will not reiterate them, that at the moment contracts for difference are suspended. “Suspended” may be a strong word but there has been no auction this year for contracts for difference, despite the fact that we would have anticipated
that there would have been by now if we had followed the pattern of previous years. We are left with something of a hiatus. We do not yet know whether the contract for difference auctions will be scheduled. I am sorry to keep asking this of the Minister, and I know I will get the same response, but it is important to have clarity on this. I hope that by the time the Bill reaches the other place we will have clarity, and certainly before it leaves that place I strongly encourage the Government to provide that clarity over what is happening to the contracts for difference regime.
Amendment 78T would require that auctions were held at least annually for as long as the carbon intensity of electricity was more than 100 grams per kilowatt hour. That is for as long as the contracts for difference regime continues: I am aware that should we adopt Amendment 78S, we would not very much need to carry on with Amendment 78T. This is designed to say that if we continued with the contracts for difference process, we would hold those auctions annually so that there would be certainty for investors and we would have a regular process by which people could plan—and that the guiding principle would be that we are trying to get our carbon intensity down to 100 grams. The reason for that, as noble Lords may know, is that our carbon intensity remains fairly stubbornly high at around 400 grams per kilowatt hour, despite all our good efforts in supporting renewable energy.
Renewable energy has actually made a considerable difference in displacing thermal power and reducing emissions—but instead, while that has been happening, we have burned more coal because coal prices have reduced relative to gas. That has meant that for every step we take forward on renewables we see ourselves taking a step back, because we are switching from gas, which is a phenomenally valuable and clean fuel that I am sure we will be using for some time, back to using inefficient old coal stations for prolonged periods. I am happy to say that the economics are shifting again and we are seeing coal playing much less of a role. That is partly to do with the introduction of the carbon price floor, which is helping gas to compete, but the truth of the matter is that we still have stubbornly high carbon intensity and we need to see it reducing. The reason why we need power in particular to reduce is that we need to have clean power in order to then power our vehicles and maybe provide heat to our homes in a low-carbon way. There is no point electrifying transport if our power remains dirty. It therefore seems logical and sensible that we should pursue power sector decarbonisation in a faster way and get that carbon intensity down to the point where electrification in those other sectors will then make complete sense.
I turn to Amendment 78UA. I must explain that this is a manuscript amendment, for which I apologise to the House. The reason is that we had tabled an original version in a previous Marshalled List but had been advised to change the wording. On reflection late last night, however—this has been one of those Bills on which we have been putting in rather late hours—we reverted to the original wording because I felt that the original wording should stand.
My apologies to the House if I descend into what may seem to be a level of detail that might perhaps not be of great interest to everybody. I suspect that
I should declare that I was partly involved in the drafting of the Climate Change Act as a civil servant in the Department for Energy and Climate Change, so this is an area that I know in some detail and feel quite strongly about. I shall attempt to explain what we are trying to do here in a way that I hope will hold people’s interest.
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The Climate Change Act, as we know, is a world-leading piece of legislation that I am immensely proud to have played a small part in. I am delighted that it received cross-party support when it was signed into law. At that period, the UK was at its best in demonstrating the degree of cross-party support for tackling climate change, and for the role that the UK could play in demonstrating leadership. The rationale we gave at the time was, “If we don’t lead, who will?”, and, “If we lead, others will follow”. That is exactly what happened: we passed our Act and, I am glad to say, over 100 countries have subsequently passed their own versions of climate change legislation. Not all of them have followed our model exactly, and some have been much more partial in the issues that they have taken on, but climate change legislation is now proliferating around the world and that is in large part to do with the UK. I pay tribute to all noble Lords and Members of the other House who helped the UK to display that leadership; it has been having a big impact.
The Climate Change Act as envisaged creates carbon budgets in order to manage our emissions. The reason why it does so is that we were very keen on trying to convey the fact that in many ways, just as Governments and Treasuries try to balance the books financially for public spending in terms of income and outgoings, carbon emissions are very similar: you could give yourself an allowance to emit, and then you could use sound budgetary principles to ensure that you stayed within that allotted amount. It was the area under the curve of the emissions that we were hoping would be managed well by the Government. The carbon budgets were created for a five-year period, and three carbon budgets were then to be set in law at any given period. We have now set the fourth carbon budget and are about to set the fifth.
As we drafted the Act we were very aware that it does not really matter where carbon dioxide is emitted—it could be emitted anywhere in the world and it would have the same effect—so if you reduce carbon dioxide anywhere in the world, you can make a difference. Hence trading in carbon emission reductions has been an accepted part of climate policy. We were mindful of this and ensured that the Climate Change Act as a whole incorporated an element of trading to allow the Government flexibility to meet their targets.
That was how I left the situation when I left the draft Bill team, and subsequently it has been enacted and implemented. Along the way, an interpretation of the legislation has been accepted that says that, for just less than half of our emissions, that flexibility should translate into not actually counting our emissions in terms of what is emitted from the smoke-stack. It is actually the contribution that power and heavy industry make that is counted in relation to an EU scheme.
Essentially, we are not required to reduce emissions at home as a result of carbon budgets; we can simply emit what we like and then settle the difference through the trading scheme at company level. This means that carbon budgets, while incredibly welcome, and they certainly provide confidence, do not actually have any influence over power sector decarbonisation in this country. That is a fact that few people properly understand; very often I get people coming up to me and saying, “Well, the Government can’t do that, can they, because of our carbon budgets”. If it relates to the power sector, I am afraid that the answer is yes, the Government can; strictly, the Government can do whatever they like because it is not the actual emissions that we emit that count towards our budgets.
I am sure that noble Lords will be glad to know that I am now getting to the point. Amendment 78UA seeks to turn the fifth carbon budget into a much more useful guide for investors, and certainly a much more useful guide for investors in the power sector, by making it no longer the case that those trading emissions from Europe count towards the meeting of our domestic targets. In doing so, we would be moving towards the system that other countries in Europe adopt, which is to measure our actual emissions. That would provide the backdrop and the backstop that we need to ensure that we continue from 2020 to 2030 in our efforts to decarbonise the power sector. This is, therefore, a simple surgical change in legislation, but it would have the effect of shoring up investor confidence and making sure that we decarbonise the power sector.
For those reasons—its simplicity, and that in this instance I feel confident that the Government will not say that it falls foul of their manifesto commitments, because it is not a new target on the power sector, as it is simply an accounting procedure within the existing Climate Change Act regulations—this is something we could come together on and agree. We could do so now because we will see the fifth carbon budget recommendations being made later in the year, before the end of the year, and next spring we will have the debate on the fifth carbon budget. It is therefore right and proper that we now consider on what basis we want that fifth carbon budget to be made. That budget covers exactly that 2018 to 2032 period, which is so crucial for investor confidence. This is, therefore, a timely moment for us to consider this.
I have also tabled this because I, like many people, I think, assumed that we might see with the fifth carbon budget the setting of a decarbonisation target as was set out in the Energy Act 2013. However, in the course of the Bill, it has become clear—I am grateful to the Minister for clarifying—that the Government do not intend to set the decarbonisation target for the power sector for 2030. The Government are perfectly within their right to choose to do so. However, here is another way of creating that investor certainty, solving some quite difficult accounting issues that the Committee on Climate Change has to do to do this net accounting—it is not an easy job to work out what the EU portion of our trading budget should be; it is a bit of a headache. With Amendment 78UA, we have the opportunity to do something quite precise but impactful, which would have the effect, as I say, of creating a much higher
degree of investor confidence. This is certainly the right time to think about this, before we go on to debate the level of the fifth carbon budget.
I hope that I have explained this, and not gone on for too long. The three amendments here are all designed to enable us to have a debate about the bigger picture of how we will proceed in helping investors to plan for the future. I look forward to the Minister’s response, but certainly on Amendment 78UA we should seize the moment, because now is a good time for us to do this.