Energy: Gas Prices

My Lords, I join the noble Lord, Lord Owen, in thanking my noble friend Lady O’Cathain for resisting the temptation to abandon her balloted Motion. As she rightly said, we have had many energy debates in recent weeks, but that is hardly surprising. Energy is at the top of the agenda and it is right that this House should have regular opportunities to express its view. The noble Baroness took us on a tour d’horizon of the energy situation as regards how it affects the supplies of gas. I hope that the Minister will be able to answer her questions. I am delighted that the noble Lord, Lord Owen, has joined in the debate. Manifestly, he speaks from a deep knowledge of the subject. I am sure that all of us have benefited greatly from what he has said. I reacted, in particular, to two points. First, there is the hope that somehow there will be an early liberalisation of the markets in Europe. He has quite rightly said that the psychological attitude is very difficult. Recently, I have had the opportunity of talking to people in Kraftwerk Union (KWU) and in EDF Energy and they have endorsed that entirely. Another point is that in Germany much of the revenues that are based on oil and gas taxation accrue to the Länder and that is a very important aspect of their finances. Ofgem has been seeking liberalisation, and Commissioner Neelie Kroes is now pursuing it with commendable energy—she is a tough lady. However, the House must not be under any illusions: this will be a long time coming. The noble Lord, Lord Owen, was absolutely right about that. The Motion asks us to look at gas prices. My noble friend Lady O’Cathain described what has been happening. One can go back not more than three years to the malign impact of NETA—New Electricity Trading Arrangements—when Ofgem squeezed the price to the point where generators were being driven out of business. I remember the noble Lord, Lord Sainsbury, in a debate on British Energy, telling me that the trouble with British Energy was that it did not have a retail arm to bear its losses. Of course, many of the other generators did. So the effect of the low wholesale price of electricity at that time—much of it, of course, coming from gas—never fed through to the domestic customers at all and the domestic customers bore the costs of the losses on the generating side of the businesses. However, now that the wholesale price of oil and gas has risen very sharply, as both previous speakers have emphasised, that has been reflected in very sharp rises in prices for retail consumers and what has to be a sharp increase in fuel poverty. This debate is a good occasion to consider those problems. I would like to draw attention to the response by Ofgem to the consultation paper. A whole chapter addresses fuel poverty. I mention, in particular, paragraphs 5.12, 5.13 and 5.14, but I shall not read them out. That all seems to be very sensible; in fact, the whole of chapter 5 of the Ofgem response seems to be—I say this not always as an admirer of Ofgem; in the past I have been very critical of it—plumb right. I hope that the Government in their response and when they announce the results of their review will pay close attention. Ofgem does not support increasing prices to other consumers to bear the costs of helping those suffering fuel poverty. I think they are absolutely right in that. On a number of occasions, we have debated the way in which the ROC system—the renewables obligation certificate system—is not a subsidy paid by the Government, but a subsidy paid by all of us in our bills. We amended the Utilities Bill to say that that should appear on everyone’s individual bill but in the other place the Government insisted on taking out the amendment. Ofgem has always been clear, and it says so clearly in its response, that the subsidies should fall on taxpayers generally. We have had some of that with the additional help to pensioners before the election and no additional help after the election, which has been widely seen as a cynical electoral ploy. But Ofgem also says, at paragraph 5.22 of the report that,"““paying benefits in the form of vouchers so that they count as money off the fuel bill, rather than income, and therefore have a greater impact on the statistical measure of fuel poverty, simply adds to administration costs and consumer confusion””." I hope that in their response to the consultation the Government will take close account of that. Ofgem’s view is that consumers should pay the cost of the gas and electricity that they buy at the appropriate price and should not be subsidising other people through their bills.       The second leg of my noble friend’s Motion asks us to look at the implications of gas prices for energy policy. Here I listened to the noble Lord, Lord Owen, with huge interest. My views on nuclear energy are well known and I am delighted that the Prime Minister has joined the club. As I said the other day, he seems to have pre-empted the decision. I know that the Minister said that that was not so, so we have to wait and see, but I do not want to bore the House with further arguments in favour of nuclear energy. However, I will ask one question on nuclear policy. A number of us on this side of the House have had the advantage of recent discussions with some of the university people involved with the training of nuclear scientists and undertaking the research necessary to keep this country—as they sometimes say—an informed buyer. We need to spend more on fission nuclear research. There is a clear view on that point. They asked for a proper national nuclear laboratory, which is essentially a matter of providing facilities. Some investment is needed in fission nuclear research facilities that will keep us up to date. The core of that could be the BNFL company Nexia Solutions. By itself, there is wide recognition that that is not enough. There are a number of other bodies in the public sector and companies in the private sector that should be able to contribute to a proper national nuclear laboratory. I hope that the Minister will be able to say something about that matter. I turn to clean coal. I am being persuaded by a number of sources that for a variety of reasons producing gas, electricity and even hydrogen from clean coal processes must be part of the future policy for energy in this country. There is an enormous amount of research going on, some of which the Government have supported, but in that context I would like to draw the House’s attention to a project that came to my attention at a recent meeting of the Parliamentary and Scientific Committee, a body that from time to time can produce some interesting information. This project is called Powerfuel. The Powerfuel project is intended in 2007 to reopen the Hatfield colliery near Doncaster. It is sometimes referred to as the Hatfield project. It will gain access to the huge 27 million tonne Barnsley seam, one of the thickest ever coal seams in this country at 2.5 metres thick, and it will mine that coal. It will build a 430 megawatt power plant using integrated gasification combined cycle technology (IGCC). That technology was referred to in the Government’s consultation document but, as I have pointed out before, only in a footnote in an appendix. However, it represents the future. Hatfield colliery had to be mothballed two years ago. Some will know the promoter, Richard Budge, who was known originally as a very enterprising opencast coal producer who masterminded the buy out of British Coal in the mid-1990s. In the past few weeks he has done a deal with the second largest Russian coal company, Kuzbassrarezugol (KRU). That company deals not only with oil and gas but is huge in coal. KRU has now taken a 51 per cent share in Powerfuel plc. That is providing the funding to develop the power plant. The plant will be full carbon capture and storage, with a CO2 pipeline running along the railway line to the North Sea. Powerfuel aims to store the CO2 in the Brent oilfield. That will have the advantage of delaying the shutdown of Brent, perhaps by up to 15 years, and by using the CO2 for enhanced oil recovery will generate substantial revenues for the Treasury. The integrated gasification process creates 99.5 per cent pure hydrogen as the main driver for the generator. Of course, some hydrogen—perhaps up to 5 per cent—could be filtered off with little or no impact on generation. The projected cost of the electricity as it leaves the plant will be the same as current mainstream power prices, and that is calculated without taking any credit for the CO2 or for carbon credits. It will, of course, be significantly cheaper—up to a third of the cost—than current renewable sources. If you assume a credit for the CO2 used in enhanced oil recovery, the power becomes among the cheapest fuel sources in the UK. The promoters are satisfied that the technology will use market forces to raise the capital to replace the existing fleet of dirty coal-fired power stations with 100 per cent clean coal power stations—my next point will perhaps be of most interest to the noble Lord, Lord Sainsbury—without any financial help from the Government. It is not the same as the BP project at Peterhead in Scotland, where I understand that government support is being sought. I am told that Richard Budge and his colleagues are keeping the energy review team regularly in touch with the proposals as they develop. As I have said, they are looking not for financial help but for active encouragement to get ahead with this investment and—as so many other responses to the review have requested—for a clear, long-term structure for the energy industries and for a firm policy on carbon; a ““contract for carbon””, as I have called it in previous debates. The relevance of this to my noble friend’s Motion is that the more we can secure UK resources to generate carbon free energy, the less we shall be dependent on high priced gas from overseas and the quicker we shall achieve our CO2 reduction targets. I hope that the Minister will give a fair wind to the Powerfuel project.