Energy: Gas Prices

My Lords, like other noble Lords I warmly congratulate my noble friend Lady O’Cathain on giving us the opportunity for this very useful debate today. The recent drastic increases in the price of gas are at least in part as a result of rising demand, the end of just over a decade of energy self-sufficiency, dramatic increases in the price of other energy sources such as oil and coal, and the introduction of significant environmental measures. These have been compounded by inefficiencies in European Union energy markets, some of which have not liberalised adequately, and by delays in the provision of new gas import infrastructure resulting from the time taken to secure approvals through the British land use planning system. The result has been not only rising gas prices for consumers but also high electricity prices, as more than one-third of our electricity comes from gas-fired power stations. This is the aspect on which I propose to focus. Alongside the alarm over rapid price rises, there has been, during the winter just ended, concern over the short-term security of our energy supplies. This has been exacerbated by events such as those between Russia and the Ukraine and by the fire at Milton Keynes. Many of the underlying challenges will remain over the longer term, but increased by the need to replace one-third of our generating capacity by 2020, by which date we could be importing 80 per cent or more of our gas needs, and also by the risk of a terrorist incident or a failure of emergency planning, and by the Government’s goal of a 60 per cent reduction of carbon emissions by 2050. The Government’s 2003 energy White Paper sought to set out how some of these challenges might be addressed but it has been found wanting at least in the following areas. First, energy prices have already significantly exceeded the Government’s projections for increases in prices by 2020. Secondly, the White Paper did not analyse in sufficient depth the implications of a shift towards large volumes of imported gas or the need to retain some flexible coal plant to provide reserves alongside an increasing proportion of largely intermittent renewable generation. Thirdly, the White Paper relied on very substantial energy efficiency gains and a major expansion of renewables to achieve the climate change objectives. A more effective government strategy is urgently needed. However, to change direction dramatically would only introduce new uncertainties, undermining commercial decisions taken in the past two years and increasing the degree of perceived political risk and hence the cost of future private sector investment in United Kingdom energy markets. A more effective strategy does not mean abandoning a market-based approach to meeting our country’s energy needs. A well functioning market remains essential to ensuring responsiveness to changing circumstances and to ensuring that prices can be set as efficiently as possible. The aim should be to enable market players to manage these sorts of risks better by removing the obstacles that currently prevent them from doing so. Nor should this be seen as an excuse for greater intervention in general by government, but as a better way of exercising responsibilities where government already has a legitimate role; for example, in foreign and fiscal policy, the use of target-based economic instruments, and by granting planning approval for energy infrastructure. As I have said in your Lordships’ House before, the Government need to act now in the following areas. They must work to minimise the regulatory risk which is discouraging investors from investing. The billions of pounds of new investment needed by 2010 must come from investors who are looking for commercial returns. A major deterrent for them is the lack of clarity in the policy framework and the risk of inappropriate government intervention. United Kingdom continental shelf production has peaked but there are still substantial opportunities to develop new gas production. To maximise the potential of that, the Government must avoid further precipitous changes to the fiscal regime. If the current rate of investment can be sustained, the United Kingdom could still be producing 25 per cent of its gas needs from the UK continental shelf in 2020. But if investment levels fall, the consequent degradation in infrastructure could dramatically reduce its contribution by that date. A further problem is that the framework for the pricing of carbon emissions under the European Union emissions trading scheme expires in 2012, which leaves the potential investor in plant—which after all will not come on stream until the middle of the next decade—without the key economic data that he needs to evaluate a project. The Government must promote a diversification of the energy sources we rely on, foster a wider range of renewable and low-carbon technology, and encourage an increase in energy research and development investment. We need to achieve greater energy efficiency. We also need to increase the take-up of low and lower carbon power generation. This should come from a wide range of different technologies to spread the risks, perhaps including a combination of nuclear, renewables, combined heat and power, clean coal and carbon capture and storage. There is a serious risk that government ends up selecting technologies that turn out not to be commercially viable without greater levels of subsidy than other technologies which are just as environmentally sound. European Union member states are required by various directives to liberalise their energy markets but, in some, political resistance is hindering implementation. In its dealings with the European Union the Government must prioritise energy market liberalisation. If other European Union countries remain behind us, as we rely increasingly on gas imports, we risk facing continually higher gas and therefore electricity prices than our neighbours. The Government must help make the economy more resilient to price rises by fostering increased efficiency of energy use. They must quickly streamline the process for determining planning applications for energy infrastructure projects and dramatically increasing fuel storage capacity. They must also promote stronger research, development and training to develop the engineering skills base for the energy industry. Our domestic strategy must be coupled with a diplomatic strategy. In future we are bound to rely more heavily on foreign supplies both from within and beyond the European Union. We therefore need to promote democracy and the principles of the market economy on an international basis. We must also develop diverse supply networks, to reduce reliance on supplies from troubled regions. Without taking those steps we are heading for serious problems, if not disaster. I hope that the Minister will be able to reassure your Lordships that all these matters are being dealt with by the energy review.