Energy: Gas Prices

First, I congratulate the noble Baroness on securing this debate. Energy prices are clearly an extremely important issue, both for British industry and for British consumers, and I welcome this opportunity to put forward the Government’s position. As the noble Baroness and other noble Lords have so clearly outlined, we have recently seen significant increases in energy prices, which have impacted particularly on industrial consumers and the fuel poor. Domestic gas prices have risen by 35 per cent between March 2004 and March 2006, while domestic electricity prices have increased by 26 per cent. Industrial gas prices have more than doubled over the same period, while industrial electricity prices have almost doubled. Most prices in the UK have increased in percentage terms by more than those in France or Germany. However, for domestic prices, we still remain below prices in those countries in absolute terms and below the EU15 median prices, and our industrial prices are still around those in Germany, even after the increases. We have to ask why we have seen a position that is worse than those in most other European countries, even though in some cases that has only brought us level with them or slightly higher. Gas prices have been rising as a result of a tightening in the supply/demand balance as supplies from the North Sea decline and we become increasingly dependent on imported gas. We are in transition from a situation where net imports currently account for less than 10 per cent of annual gas demand to one where in 2010 a third of demand will be met from imports—in 2020, the proportion will be 80 per cent or more. To some extent, gas prices still follow oil prices, which have also been rising. Electricity prices are rising as well, partly as a result of increasing wholesale gas prices. However, there are other factors involved, including higher international coal prices, the recovery of wholesale electricity prices from unsustainably low levels, and the introduction of the EU Emissions Trading Scheme in 2005. The Government are well aware of the problems that higher energy prices create for the competitiveness of industry. That is why we have been working, and will continue to work, closely with industry and others to limit the impact of these price increases. Our discussions with the Energy Intensive Users Group and other groups have helped us to focus our efforts on maximising gas and electricity supplies, improving the operation of the market, encouraging demand-side response and pursuing fair access to markets across Europe. Over the summer, we will be pursuing a detailed work plan with Ofgem, National Grid, industry and others to ensure that we are in the best possible position ahead of next winter. In answer to the question put by the noble Baroness, Lady O’Cathain, we are doing everything that we can to help energy suppliers to get planning permission for storage facilities. Just last week, Alistair Darling announced the formation of a new Business Energy Forum to be co-chaired by Malcolm Wicks, the Minister for Energy, and Richard Lambert, the new Director-General of the CBI. This group will provide a high-level forum for discussion of a broad range of strategic energy issues, with an initial focus on security of supply for next winter. Ofgem has also recently published National Grid’s ““Winter Outlook”” consultation for the coming winter. This gives a detailed assessment of the supply/demand prospects and seeks views to help the market to prepare for next winter. We have also been supporting the European Commission in its efforts to enforce the energy liberalisation legislation and to investigate the operation of energy markets across the EU. We therefore welcome the dawn raids on the offices of utility companies in five member states on 17 May. To look ahead to next winter, gas supplies are again likely to be tight, maintaining pressure on prices. However, the market is responding to this challenge. For the coming winter, four major import projects are under construction and, looking beyond this winter, the market is already seeking to deliver some £10 billion of major gas supply infrastructure projects by 2010. If all these projects obtain planning consent and progress to schedule, we could more than double our storage capacity and more than triple our import capacity by 2010, helping to reduce upward pressure on UK gas and electricity prices. Looking further ahead than that becomes difficult, because one would not expect the projects that will cover the situation after this to be coming through yet. These new projects should provide the UK with important additional flexible sources of gas supply to meet winter peak demand. The Government are working on a comprehensive three-point programme to help these and future gas supply projects proceed: legislation, when parliamentary time permits, to establish a regime for the storage of gas in salt caverns offshore; a review of the onshore consents regimes; and a public information programme. I would like to say a word about why we are in this situation with the gas storage infrastructure. We would not have expected to have had this storage during the period when we were a major energy producer. Therefore, comparisons with other countries that have much greater gas storage are not sensible, because when you are a major producer you can cover the swings in demand from swings in demand on the producing side. Where there has been a failure—and it has to be said that this is mainly the responsibility of industry—it has been in predicting how rapidly we were moving from being a producer to importing. That has happened rather more quickly than people had expected and, on the other side, it has taken longer to get the storage facilities in place, which is why we have this short-term problem. Noble Lords may be aware of the parliamentary Statement of need for additional gas supply infrastructure that was tabled in another place last week. It sets out clearly the fact that we need the right gas supply infrastructure in place to help us to manage this increasing dependence on gas imports. We need a planning consents regime that enables timely consent decisions and helps to balance the need of local residents with the national need for reliable gas supplies. The Government will be working hard on this point. We recognise that energy-intensive industries—such as the chemicals, metals, glass, paper and construction sectors—have been particularly hard hit by the rapid increase in gas prices. Clearly, the rise in energy prices is also having an impact on the figures for fuel poverty. Analysis suggests that the total number of vulnerable households in fuel poverty is likely to rise by around 1 million in England between 2003 and 2006. That is why the Government have increased the funding to fuel poverty programmes, which help the most vulnerable in society to lower their energy bills. We are making available an additional £300 million in the period 2005 to 2008 to provide heating and insulation measures to vulnerable households. The Government have also pledged to continue winter fuel payments for the length of this Parliament. In the short term, we have taken all the actions that we can to protect industry and consumers from these price increases. However, the rapid increase in prices emphasises the difficulty of predicting price changes and technological developments in the energy industry. This in turn emphasises the value of maintaining a diverse range of energy sources and the desirability of having the flexibility to switch between them. In her opening speech, the noble Baroness quite rightly raised the question of the implications of these gas price increases. It is clear to me that they point to the desirability of having a diverse range of sources of energy and of having the flexibility to move between these. My generation has for 40 years heard people predicting what will happen with different sources, and the only constant factor is that those predictions have been consistently wrong. Therefore, the argument is to have a robust and flexible system. There are two other implications for energy policy that I believe we can draw from the current situation. First, we should not see energy policy as a battle between energy sources. It should not be seen as a beauty contest between coal, oil, gas, nuclear, combined heat and power and renewables, with supporters cheering on their favourite energy source. I was delighted to find a point of agreement with the noble Lord, Lord Patten, that this really is the key issue. To have these battles, where people say that the solution to all our problems is tidal or wind or nuclear, is the one thing that is obviously wrong. Almost certainly, the best energy policy at any one time is likely to involve a mix of energy sources. Energy efficiency must also be a priority for us. Secondly, it is essential—and here I agree with the noble Lord, Lord De Mauley—that we maintain a strong research and development energy programme so that we can rebalance our portfolio of energy sources over time in response to technological and price changes. These are the sort of points that will be picked up in the energy review, which will consider both how we can achieve our three objectives of energy security, sustainability and lowest cost to the consumer, and how we can create a robust and flexible system of supply. I shall now address a number of other major points raised by noble Lords in the debate. The noble Baroness, Lady O’Cathain, asked who is running the energy review, and the answer is that it is the DTI. As I explained earlier in the week, what the Prime Minister said at the CBI dinner is what he said last year. One may query whether it is sensible to go on saying the same things every year to the CBI. I always find the Prime Minister’s speeches inspiring, but I have to say that this particular speech seemed to me a statement of the blindingly obvious. If people do not understand that nuclear energy, renewables and energy efficiency are high on our agenda, particularly during the period in which we are moving from being a producer of gas to an importer, they have not been paying attention to the debate. These are absolutely obvious issues and ones that will be considered in the energy review. As always, I agree with much of what the noble Lord, Lord Owen, has said. I agree strongly with him about the benefits of a market-oriented energy policy and that, in future, geopolitics will become an increasingly major issue in relation to energy. If we think that in the future there will be a free market around the world in energy, we have lost the plot, as my children would say. The fact is that geopolitics will become more important. While the importance of a liberal market in Europe is clear, we must make a distinction between on the one hand liberal markets and on the other hand people and countries taking policy decisions that they need to have a certain amount of gas storage and therefore buying on long-term contracts to secure supply. That is not anti-competitive; rather, it is simply a sensible decision. We need to be clear on what basis we are buying gas in the market. It is to be certain that we take the long-term view and put a proper weight on security. What are the implications of this? I believe strongly that there is no point in expecting countries to behave in an idealistic way. Again, an appropriate response to an increased amount of geopolitical interference in energy markets is to have diversified sources. I also agree with the noble Lord, Lord Owen, that the short lead-time LNG import project using the very innovative US technology of on-ship regasification now taking place on Teesside is extremely important. If it is successful, it is something to be expanded in the future. In response to the noble Lord, Lord Jenkin, we welcome the plans to reopen and reaccess the indigenous coal reserves at Hatfield and to initiate the construction of a planned 430-megawatt carbon and hydrogen capture-ready integrated gasification combined cycle power plant adjacent to the mine. It is a highly desirable and entrepreneurial project and we would be happy to give it our active encouragement if under scrutiny it is as valuable as it looks at first sight. The noble Lord, Lord Patten, asked whether the renewables figures that we have given for 2010 and 2020 are targets. They are clear targets, but it is not entirely within the hands of government to produce them, because they depend on whether people come forward with projects. However, it should be remembered that we now have, either with agreement or in the planning process, more than enough projects to achieve the 2010 target. If we do not reach the 10 per cent target, that would not be because it is impossible physically to do so or that there are engineering reasons against it; it would be simply because we could not get agreement within the planning system to move fast enough. I should also say to the noble Lord that I have never heard anyone propose a change in the machinery of government without first prefacing their remarks with the comment that they do not believe that the machinery of government changes or alters anything. People maintain that the machinery of government is bad for everyone else, except for their own particular project. As elsewhere, this is about getting the policies right, which is what we will do with the energy review. The noble Lord, Lord Dixon-Smith, clearly indicated that there will be huge technological and price changes in this market and that many factors can affect it. Again, that makes the case for diversity. I agree also with the noble Lord, Lord De Mauley, about diversity. We are not in the business of picking technologies. We are in the business of making the market for energy work, although it is right and proper that we should, when considering the environmental impact, provide incentives for people to produce energy that does not have an undesirable effect on the environment. The noble Lord, Lord Redesdale, asked whether meetings have been taking place about the supply of gas over next winter. Of course such meetings have been taking place. Ofgem has just produced a paper on the outlook for 2006–07, we have published a Statement on the need for infrastructure, and discussions are taking place. If such things were not being done, I am sure that the Opposition parties would even now be saying that that showed a dangerous complacency on the part of the Government. The noble Lord can be certain that we are holding meetings and that there is nothing sinister about that; it simply reflects a modicum of competence. I stress the point that, while we welcome competition, we should not confuse competition with people, companies or countries making long-term supply agreements, because that is about security, which is extremely important. I agree that in the DTI summer normally comes to an end in December, but in this case the energy review will be produced in July; we are clearly committed to that. I should also say that the review will take a very clear market approach and that it will be for energy companies to take investment decisions whichever the energy source concerned, although, as I have said, we always need to consider whether it is appropriate to provide incentives that push people in particular directions. I also make the point to the noble Lord, Lord Redesdale, that if you do not believe that there is a silver bullet, you have to ask why you would then want to get rid of some of the other bullets so that you had to rely on just one of them—renewables—to deal with this problem. On dynamic demand, I shall write in response to the question he asked. The noble Baroness, Lady Miller, also made the case for diversity and reminded us about dealings with OPEC. It is my view that the situation will be worse in the future. It used to be a question of OPEC versus the western countries, which usually had a common interest. We are now moving into a world where Russia is using energy as part of a geopolitical situation and China is coming into the market with huge and voracious energy needs. Given that, we cannot see this as a world other than one that will be dominated by geopolitics. We need to make certain that our policy takes account of that and we recognise that energy security plays a key part. In conclusion, over the past two years gas prices have risen significantly, which has had serious implications for the competitiveness of UK industry and for fuel poverty. Supplies of gas next winter will be tight and it is likely that the pressure on prices, in particular winter prices, will continue. New gas infrastructure is coming on line which will significantly strengthen our import infrastructure over the next couple of years, doubling our storage capacity by 2012. In the short term, we need to take steps to move through our transition from a gas producer to a country that imports 80 to 90 per cent of its needs. In the longer term, the energy review will help us to create a robust system of energy supply that is flexible enough to switch between energy sources. Also in the future, geopolitics are likely to play an increasing role in energy supply, so we cannot afford to be too reliant on one source of energy or on supplies from one country. The task that the energy review has been set is therefore not an easy one, but when it reports in July I am sure that it will set out a clear strategy for the way forward.